Question 1

Which of the following is used for market when valuing inventory at lower-of-cost-or-market?

Accepted Answer

Market value for inventory is usually determined by using the current replacement price. This means valuing inventory at the lower of cost or market involves comparing the cost of the inventory with the current replacement price. If the current replacement price is below the cost, then the inventory value is written down to market value.

Question 2

Williams Company had the following balances and transactions during 2013.  What would the company's inventory amount be on the December 31, 2013 balance sheet if the perpetual LIFO method is used? (Answers are rounded to the nearest dollar.)

Accepted Answer

Using the perpetual LIFO method, we start with the most recent purchases and work backwards. Therefore, the ending inventory would consist of the last two purchases: 300 units at $4.00 and 200 units at $5.00. Using LIFO, we would assume that the last units purchased are the first ones sold, so we would value the ending inventory as 200 units at $5.00 and 100 units at $4.00, for a total of $1,100.

Question 3

Better Buy has six CD players in inventory on December 31. The players were purchased in November for $170. Price lists from Better Buy's supplier indicate that the same CD player would now cost the company $168. The current sales price for each of the CD players is $320. What would be the amount reported as Inventory on the balance sheet?

Accepted Answer

A) Calculations: 6 × $168 = $1,008

Question 4

One hundred units of inventory on hand at the end of the year are recorded at their cost of $10 each using LIFO. Current replacement cost is $11.00. What amount would be reported as Inventory on the balance sheet?

Accepted Answer

A) Calculations: 100 × $10 = $1,000

Question 5

Williams Company had the following balances and transactions during 2013.  What would the company's inventory amount be on the December 31, 2013 balance sheet if the perpetual FIFO method is used? (Answers are rounded to the nearest dollar.)

Accepted Answer

The answer of Williams Company had the following balances and...

Question 6

Better Buy has six CD players in inventory on December 31. The players were purchased in November for $170. Price lists from Better Buy's supplier indicate that the same CD player would now cost the company $175. The current sales price for each of the CD players is $320. What would be the amount reported as Inventory on the balance sheet?

Accepted Answer

C) Calculations: 6 × $170 = $1,020

Question 7

Better Buy has six CD players in inventory on December 31. The players were purchased in November for $170. Price lists from Better Buy's supplier indicate that the same CD player would now cost the company $168. The current sales price for each of the CD players is $320. The adjustment would have what effect on Cost of goods sold?

Accepted Answer

The adjustment would increase the cost of goods sold by $12 ($168 cost to replace - $170 original cost = -$2, which is added to the cost of goods sold).

Question 8

Which of the following amounts would be reported for Inventory on the balance sheet if the cost of an item is $80, the current selling price is $100 and the current replacement cost is $75?

Accepted Answer

Inventory is reported at the lower of cost or market value. In this scenario, the market value is the replacement cost of $75, which is lower than the cost of $80. Therefore, the amount reported for Inventory on the balance sheet would be $75.

Question 9

Which of the following assets must be reported at the lower-of-cost-or-market?

Accepted Answer

Inventory must be reported at the lower-of-cost-or-market, meaning that if the market value of the inventory falls below its recorded cost, the value of the inventory must be adjusted downward to reflect the market value. This is known as the lower-of-cost-or-market (LCM) rule. The other assets listed do not have to be reported using the LCM rule.

Question 10

One hundred units of inventory on hand at the end of the year are recorded at their cost of $10 each using LIFO. Current replacement cost is $8.00. How would the Gross profit be affected by the adjusting entry needed under lower-of-cost-or-market?

Accepted Answer

The adjusting entry needed under lower-of-cost-or-market would require the inventory on hand to be written down to the lower of its cost of $10 or its replacement cost of $8. This would result in a decrease in the value of inventory by $2 per unit, or a total decrease of $200 (100 units x $2). Since cost of goods sold would increase by $200, gross profit would decrease by the same amount. Therefore, the correct answer is D.

Question 11

Williams Company had the following balances and transactions during 2013.  What would the company's inventory amount be on the December 31, 2013 balance sheet if the perpetual average-costing method is used? (Answers are rounded to the nearest dollar.)

Accepted Answer

The answer of Williams Company had the following balances and...

Question 12

Williams Company had the following balances and transactions during 2013.  What would the company's inventory amount be on the December 31, 2013 balance sheet if the perpetual FIFO method is used? (Answers are rounded to the nearest dollar.)

Accepted Answer

Using perpetual FIFO method:
- Beginning inventory: $400
- Purchases:
  - January 3: $500 (total cost of $100 + $120 + $280)
  - March 8: $300 (total cost of $90 + $60 + $150)
  - September 21: $600 (total cost of $180 + $240 + $180)
- Cost of goods available for sale: $1,800
- Sales:
  - February 18: sold 20 units (20 units x $12) = $240 ; COGS = 20 units x $10 = $200
  - May 3: sold 10 units (10 units x $18) = $180 ; COGS = 10 units x $10 = $100
  - November 15: sold 30 units (30 units x $16) = $480 ; COGS = 30 units x $20 = $600
- Ending inventory: 
  - 10 units x $10 (cost of the March 8 purchase) = $100
  - 5 units x $20 (cost of the September 21 purchase) = $100
  - Total ending inventory value: $200
- Cost of goods sold: $900
- Inventory amount on December 31, 2013 balance sheet: $1,800 - $900 = $900 ; plus ending inventory of $200 = $1,100 (rounded to the nearest dollar)

Question 13

One hundred units of inventory on hand at the end of the year are recorded at their cost of $10 each using LIFO. Current replacement cost is $8.00. What amount would be reported as Inventory on the balance sheet?

Accepted Answer

Under LIFO (last in, first out) inventory method, the latest units purchased are assumed to be sold first. In this question, we have 100 units of inventory on hand at the end of the year. As per LIFO, the cost of the last purchase is the cost of the ending inventory. Therefore, the cost of 100 units would be $10 each, which is equal to $1,000 in total. However, the current replacement cost is given as $8.00. Therefore, the Inventory should be reported at the lower of the cost or market value, which in this case is $8.00. Hence, the amount that should be reported as Inventory on the balance sheet would be 100 x $8.00 = $800.00 (Option C).

Question 14

Better Buy has six CD players in inventory on December 31. The players were purchased in November for $170. Price lists from Better Buy's supplier indicate that the same CD player would now cost the company $168. The current sales price for each of the CD players is $320. The adjustment would have what effect on Gross profit?

Accepted Answer

If Better Buy makes the adjustment, they will decrease the cost of goods sold from $170 to $168, resulting in a $2 increase in gross profit per unit sold. However, since they only have 6 units in inventory, the total increase in gross profit will be $2 x 6 = $12. Thus, the correct answer is C.

Question 15

Twenty units of inventory on hand at the end of the year are recorded at their cost of $5.00 per unit using FIFO. Current replacement cost is $4.50 per unit. What amount would be reported as inventory on the balance sheet?

Accepted Answer

Using the lower of cost or market rule, the value of inventory would be reported at the current replacement cost of $4.50 per unit. Therefore, the total inventory value would be 20 units x $4.50 = $90.00.

Question 16

Williams Company had the following balances and transactions during 2013.  What would the company's inventory amount be on the December 31, 2013 balance sheet if the perpetual LIFO method is used? (Answers are rounded to the nearest dollar.)

Accepted Answer

The answer of Williams Company had the following balances and...

Question 17

One hundred units of inventory on hand at the end of the year are recorded at their cost of $10 each using LIFO. Current replacement cost is $8.00. How would the Cost of goods sold be affected by the adjusting entry needed under lower-of-cost-or-market?

Accepted Answer

C) Calculations: 100 × 2 = $200

Question 18

Williams Company had the following balances and transactions during 2013.  What would the company's inventory amount be on the December 31, 2013 balance sheet if the perpetual average-costing method is used? (Answers are rounded to the nearest dollar.)

Accepted Answer

The perpetual average-costing method recalculates the average cost of inventory after each purchase, so we need to calculate the weighted average cost per unit for all purchases made in 2013:

(4 x $200) + (6 x $100) + (5 x $50) = $1,900 
15 units

The weighted average cost per unit is $126.67.

To find the ending inventory amount, we need to multiply the number of units on hand by the average cost per unit:

(8 units x $126.67 per unit = $1,013.36

Rounding to the nearest dollar, the answer is $1,150 (choice B).

Question 19

When a company uses the perpetual inventory method, which of the following would be the entry to adjust inventory to lower-of-cost-or-market?

Accepted Answer

When a company uses the perpetual inventory method, inventory values are constantly updated as purchases and sales occur. The lower-of-cost-or-market rule requires that if the market value of inventory falls below its cost, the value of inventory should be written down to market value. The entry to adjust inventory to lower-of-cost-or-market would therefore be a debit to Cost of Goods Sold for the amount of the write-down and a credit to Inventory for the same amount, as shown in option C.

Question 20

If the historical cost of inventory falls below replacement cost, the business must write down the inventory cost.

Accepted Answer

According to generally accepted accounting principles (GAAP), if the historical cost of inventory is less than the replacement cost, there is no need to write down the inventory cost. Write-downs typically occur when the market value falls below the historical cost, not the other way around.

Quiz 6: Merchandising Inventory

Which of the following is used for market when valuing inventory at lower-of-cost-or-market?

Williams Company had the following balances and transactions during 2013. What would the company's inventory amount be on the December 31, 2013 balance sheet if the perpetual LIFO method is used? (Answers are rounded to the nearest dollar.)

One hundred units of inventory on hand at the end of the year are recorded at their cost of $10 each using LIFO. Current replacement cost is $11.00. What amount would be reported as Inventory on the balance sheet?

Williams Company had the following balances and transactions during 2013. What would the company's inventory amount be on the December 31, 2013 balance sheet if the perpetual FIFO method is used? (Answers are rounded to the nearest dollar.)

Which of the following amounts would be reported for Inventory on the balance sheet if the cost of an item is $80, the current selling price is $100 and the current replacement cost is $75?

Which of the following assets must be reported at the lower-of-cost-or-market?

One hundred units of inventory on hand at the end of the year are recorded at their cost of $10 each using LIFO. Current replacement cost is $8.00. How would the Gross profit be affected by the adjusting entry needed under lower-of-cost-or-market?

Williams Company had the following balances and transactions during 2013. What would the company's inventory amount be on the December 31, 2013 balance sheet if the perpetual average-costing method is used? (Answers are rounded to the nearest dollar.)

Williams Company had the following balances and transactions during 2013. What would the company's inventory amount be on the December 31, 2013 balance sheet if the perpetual FIFO method is used? (Answers are rounded to the nearest dollar.)

One hundred units of inventory on hand at the end of the year are recorded at their cost of $10 each using LIFO. Current replacement cost is $8.00. What amount would be reported as Inventory on the balance sheet?

Twenty units of inventory on hand at the end of the year are recorded at their cost of $5.00 per unit using FIFO. Current replacement cost is $4.50 per unit. What amount would be reported as inventory on the balance sheet?

Williams Company had the following balances and transactions during 2013. What would the company's inventory amount be on the December 31, 2013 balance sheet if the perpetual LIFO method is used? (Answers are rounded to the nearest dollar.)

One hundred units of inventory on hand at the end of the year are recorded at their cost of $10 each using LIFO. Current replacement cost is $8.00. How would the Cost of goods sold be affected by the adjusting entry needed under lower-of-cost-or-market?

Williams Company had the following balances and transactions during 2013. What would the company's inventory amount be on the December 31, 2013 balance sheet if the perpetual average-costing method is used? (Answers are rounded to the nearest dollar.)

When a company uses the perpetual inventory method, which of the following would be the entry to adjust inventory to lower-of-cost-or-market?

If the historical cost of inventory falls below replacement cost, the business must write down the inventory cost.