Question 1

The gross profit percentage is calculated by

Accepted Answer

Gross profit percentage is calculated by dividing the gross profit on sales by net sales. This gives a percentage that represents how much profit is made on each dollar of sales after accounting for the cost of goods sold.

Question 2

Which of the following criteria does not have to be met in order to be able to value inventory above cost?

Accepted Answer

The sale must already have occurred is not a criteria that needs to be met in order to value inventory above cost. However, the other three criteria (A, B, and C) must be met.

Question 3

Which of the following statements with respect to the gross profit method of estimating inventory is not correct?

Accepted Answer

The gross profit method is not intended to eliminate the need for performing an actual inventory count. Instead, it is used as an alternative way to estimate ending inventory and can be used as a tool to verify the results of the physical inventory count.

Question 4

If a unit of inventory has declined in value below original cost, but the market value exceeds net realizable value, the amount to be used for purposes of inventory valuation is

Accepted Answer

According to the lower of cost or market rule in accounting, when the market value of inventory is lower than its original cost, the inventory should be written down to its market value. However, if the market value exceeds the net realizable value, the inventory should be valued at the net realizable value. This ensures that inventory is not overstated on the balance sheet.

Question 5

At the end of its accounting year, Getz Corporation's physical inventory count indicated that 543,345 units of inventory, costing $1.50 each were on hand.The company's perpetual inventory system reported a balance of $817,135. The year end adjusting entry is:

Accepted Answer

Since the physical inventory count and perpetual inventory system do not match, there is a difference of $273,790 ($817,135 - ($1.50 x 543,345)) in the recorded inventory balance. This difference is recorded in a contra inventory account called "inventory over and short." The adjusting entry to account for this difference is to debit "inventory over and short" and credit inventory. Therefore, the correct answer is B.

Question 6

Which statement is true about the retail inventory method?

Accepted Answer

The retail inventory method can be used to estimate inventories for both interim and annual statements. Additionally, auditors may use the method in their audit procedures. Therefore, none of the statements are true.

Question 7

To produce an inventory valuation which approximates the lower of average cost and market using the conventional retail inventory method, the calculation of the ratio of cost to retail should

Accepted Answer

The answer of To produce an inventory valuation which approximates...

Question 8

Which of the following does not correctly describe the implications of an executory contract on the accounting entries and/or disclosures to be made by the purchaser and/or seller?

Accepted Answer

Executory contracts typically do not result in the recognition of assets or liabilities at inception because neither party has performed. Recognition occurs as performance takes place.

Question 9

Which statement is true about the gross profit method of inventory valuation?

Accepted Answer

The gross profit method of inventory valuation assumes that past percentages of gross profit are appropriate for the current period. It cannot be used as a substitute for the annual physical count of inventory, it uses both mark-ups and markdowns, and it is not specifically designed to approximate inventory valuation at the lower of cost and market.

Question 10

Assume that no correcting entries were made at December 31, 2010, or December 31, 2011 and that no additional errors occurred in 2011.Ignoring income taxes, by how much will working capital, at December 31, 2011 be overstated or understated?

Accepted Answer

If no correcting entries were made and no additional errors occurred, the working capital would not be affected by any errors from previous years, thus it remains unchanged.

Question 11

Which of the following formulas is used to determine a company's inventory turnover?

Accepted Answer

Inventory turnover is calculated by dividing the cost of goods sold by the average inventory for the period. Therefore, formula A (Cost of goods sold / Average inventory) is the correct formula for calculating inventory turnover.

Question 12

Assume that no correcting entries were made at December 31, 2010.Ignoring income taxes, by how much will retained earnings at December 31, 2011 be overstated or understated?

Accepted Answer

The answer of Assume that no correcting entries were made...

Question 13

If a material amount of inventory has been ordered through a formal purchase contract at the balance sheet date for future delivery at firm prices,

Accepted Answer

The fact that a material amount of inventory has been ordered through a formal purchase contract for future delivery at firm prices is important information for financial statement users and must be disclosed in the financial statements to avoid any potential misinterpretation of the company's financial position. This is in accordance with the disclosure requirements of the applicable accounting standards. The disclosure is not dependent on whether prices have risen or declined since the date of the order, nor is an appropriation of retained earnings necessary.

Question 14

An inventory method which is designed to approximate inventory valuation at the lower of average cost and market is

Accepted Answer

The answer of An inventory method which is designed to...

Question 15

When the conventional retail inventory method is used, markdowns are commonly ignored in the calculation of the cost to retail ratio because

Accepted Answer

Markdowns are ignored in the cost to retail ratio to better approximate the lower of cost and market value, ensuring inventory is not overstated.

Question 16

Which of the following statements with respect to the impact of inventory errors is not correct?
All else being equal,

Accepted Answer

An overstatement of ending inventory will result in an overstatement of income because it reduces the cost of goods sold, thus increasing net income.

Question 17

The following information is available for Kobold Company for 2010:  The cost of goods sold is equal to 400% of selling expenses.What is the cost of goods available for sale?

Accepted Answer

We can use the following formula to calculate the cost of goods available for sale:
Beginning Inventory + Purchases = Cost of Goods Available for Sale
Unfortunately, we do not have information on either the beginning inventory or purchases. However, we do know that the cost of goods sold is equal to 400% of selling expenses. Let X be the selling expenses, then the cost of goods sold is 4X.

We also know that the cost of goods sold can be calculated using the following formula:
Beginning Inventory + Purchases - Ending Inventory = Cost of Goods Sold

Assuming that there is no ending inventory, we can rewrite this formula as:
Beginning Inventory + Purchases = Cost of Goods Sold

Since we know that Cost of Goods Sold = 4X, we can substitute and get:
Beginning Inventory + Purchases = 4X

We can then use this equation along with the formula for Cost of Goods Available for Sale to solve for it:
Beginning Inventory + Purchases = Cost of Goods Available for Sale
Beginning Inventory + Purchases = 4X
Cost of Goods Available for Sale = 4X (since there is no beginning inventory)

Therefore, the cost of goods available for sale is equal to 4 times the selling expenses. If we assume that selling expenses are $187,500 (based on the information given in the table), then the cost of goods available for sale would be $750,000 (4 times $187,500). Therefore, the correct answer is Choice C.

Question 18

The gross profit method of inventory valuation is invalid when

Accepted Answer

The answer of The gross profit method of inventory valuation...

Question 19

Assume that the proper correcting entries were made at December 31, 2010.By how much will 2011 income before taxes be overstated or understated?

Accepted Answer

The answer of Assume that the proper correcting entries were...

Question 20

Which statement is not true about the gross profit method of inventory valuation?

Accepted Answer

The answer of Which statement is not true about the...

Quiz 8: Inventory