Question 1

The ending inventory for this year is understated. This error would cause:

Accepted Answer

An understated ending inventory would cause the cost of goods sold to be overstated, which in turn would cause the period's net income to be understated. This happens because the cost of goods sold is calculated as beginning inventory plus purchases minus ending inventory. If the ending inventory is understated, the cost of goods sold will be overstated, resulting in a lower net income. This error would not impact period end assets.

Question 2

The beginning inventory of this year is overstated. This error would cause:

Accepted Answer

If the beginning inventory is overstated, the cost of goods sold (COGS) will be overstated, leading to an understatement of the period's net income.

Question 3

To use the retail method to estimate inventory, you need to know the goods available for sale at retail.

Accepted Answer

The retail method uses the retail value of the goods available for sale and the cost-to-retail ratio to estimate the cost of inventory. Therefore, it is important to know the goods available for sale at retail.

Question 4

St. Paul Corporation had a beginning inventory of $2,500 which would retail for $4,000. They made $9,000 in purchases which would retail at $14,400. The sales for the period were $15,000. What is the estimated cost of ending inventory under the retail inventory method?

Accepted Answer

The answer of St. Paul Corporation had a beginning inventory...

Question 5

An overstatement of ending inventory in one period results in:

Accepted Answer

An overstatement of ending inventory in one period results in an understatement of the cost of goods sold (COGS) for that period, which in turn overstates net income for that period. However, because the ending inventory of one period becomes the beginning inventory of the next, this overstatement leads to a higher COGS in the next period (assuming no further errors), which results in an understatement of net income for the next period.

Question 6

The retail inventory method can be used to estimate the amount of inventory destroyed by fire.

Accepted Answer

The retail inventory method involves estimating inventory values based on cost-to-retail ratios, and can be used to determine the value of lost inventory due to events such as fire or theft.

Question 7

Bright Garden Center had the following data for May:  The cost of the estimated inventory on May 31 under the retail method is:

Accepted Answer

The answer of Bright Garden Center had the following data...

Question 8

A business uses the retail inventory method to estimate the value of the ending inventory. For the month of May, the cost of goods available for sale is $15,625 at cost and $21,550 at retail. The cost ratio is:

Accepted Answer

The cost ratio in the retail inventory method is calculated by dividing the cost of goods available for sale by the retail value of goods available for sale.

Cost ratio = Cost of goods available for sale / Retail value of goods available for sale

Using the numbers provided:

Cost ratio = $15,625 / $21,550 = 0.725

Therefore, the cost ratio is 72.5%. The best choice is A.

Question 9

Possible reasons for a business estimating the value of the ending inventory should NOT include:

Accepted Answer

In a perpetual inventory system, businesses continuously update inventory records, which means they still need to conduct physical inventories periodically to account for discrepancies such as theft or spoilage. Thus, saying a physical inventory is never needed is incorrect.

Question 10

A business has sales of $100,250 and a normal gross profit of 30%. The estimated cost of goods sold is:

Accepted Answer

The formula to calculate cost of goods sold is:
Cost of Goods Sold = Sales - Gross Profit

Gross Profit = Sales * Gross Profit Margin
Gross Profit Margin = Gross Profit / Sales

Given:
Sales = $100,250
Gross Profit Margin = 30% or 0.3

Gross Profit = $100,250 * 0.3 = $30,075

Cost of Goods Sold = $100,250 - $30,075 = $70,175

Therefore, the estimated cost of goods sold is $70,175.

Question 11

As a result of understating ending inventory by $10,000 at the end of Year 1:

Accepted Answer

Understating ending inventory in Year 1 will cause the cost of goods sold (COGS) for Year 1 to be overstated, which in turn reduces net income for Year 1. The understated ending inventory for Year 1 becomes the understated beginning inventory for Year 2. This results in a lower COGS for Year 2 (assuming all else equal), which leads to an overstatement of net income for Year 2.

Question 12

An understated cost of goods sold of $100 will cause:

Accepted Answer

The answer of An understated cost of goods sold of...

Question 13

If a mistake is made in calculating ending inventory, it will take three accounting periods to be self-correcting.

Accepted Answer

The answer of If a mistake is made in calculating...

Question 14

Last year's ending inventory was overstated. This error would cause:

Accepted Answer

Overstating last year's ending inventory would cause the cost of goods sold to be understated, which would result in an overstatement of net income for last year. However, since the overstatement in ending inventory was not corrected, it would cause this period's beginning inventory to be overstated. This would result in a higher cost of goods sold and therefore, an understatement of net income for this period.

Question 15

If the ending inventory is overstated in period 1:

Accepted Answer

The answer of If the ending inventory is overstated in...

Question 16

Chocolate Heaven had the following data for November:  The cost of the estimated inventory on November 30 under the retail method is:

Accepted Answer

The answer of Chocolate Heaven had the following data for...

Question 17

To use the gross profit method to estimate the value of the ending inventory, the company needs the following information:

Accepted Answer

The answer of To use the gross profit method to...

Question 18

Compute the cost of ending inventory using the retail method when goods available for sale at cost are $15,000, retail is $25,000, and sales at retail equal $20,000. What will the cost ratio be? What will the ending inventory be?

Accepted Answer

The answer of Compute the cost of ending inventory using...

Question 19

The retail method is used by many merchandising businesses to estimate the amount of inventory.

Accepted Answer

The retail method is commonly used in the retail industry to estimate the value of inventory. It involves calculating the cost of merchandise by using the selling price and the markup percentage, and then subtracting any markdowns or discounts to arrive at an estimated cost. This method is used to track inventory levels and value, as well as to inform purchasing and pricing decisions.

Question 20

An incorrect inventory figure will affect only the income statement.

Accepted Answer

An incorrect inventory figure can affect both the income statement and the balance sheet. If the inventory figure is overestimated, it can result in lower cost of goods sold and higher gross profit on the income statement, but it can also lead to an overstatement of assets and equity on the balance sheet. Conversely, an underestimated inventory figure can result in higher cost of goods sold and lower gross profit on the income statement, and an understatement of assets and equity on the balance sheet.

Quiz 15: Accounting for Merchandise Inventory