Question 1

When applying the lower of cost or market rule to the valuation of inventory, the allowance method is considered preferable to the direct method because

Accepted Answer

A) the allowance method reports smaller losses than the direct method 
B) the allowance method reports a higher inventory net valuation for balance sheet purposes than the direct method 
C) the allowance method reports the inventory loss or loss recovery in a separate income statement account 
D) the allowance method discloses the inventory loss in a separate account in the stockholders' equity section of the balance sheet 
A) the allowance method reports smaller losses than the direct method 
B) the allowance method reports a higher inventory net valuation for balance sheet purposes than the direct method 
C) the allowance method reports the inventory loss or loss recovery in a separate income statement account 
D) the allowance method discloses the inventory loss in a separate account in the stockholders' equity section of the balance sheet

Question 2

Barbara Co.presents the following information: $\begin{array}{lcc}&\text { Cost }&\text { Retail }\
\text { Net markups } & & \$ 200 \
\text { Sales } & & 2,100 \
\text { Purchases } & \$ 1,870 & 2,050 \
\text { Net markdowns } & & 50 \
\text { Beginning inventory } & 240 & 300
\end{array}$ The company uses the average cost retail inventory method.What is the cost of ending inventory?

Accepted Answer

A) $340.00 
B) $330.98 
C) $379.80 
D) $337.60 
A) $340.00 
B) $330.98 
C) $379.80 
D) $337.60

Question 3

Which one of the following statements is not true concerning the retail inventory method?

Accepted Answer

A) In arriving at a cost-to-retail ratio, sales discounts are deducted from goods available for sale to determine ending inventory at retail. 
B) Employee discounts are subtracted from goods available for sale to compute ending inventory at retail. 
C) Abnormal inventory spoilage would be subtracted at both cost and retail in the determination of goods available for sale. 
D) Purchase returns and allowances must be subtracted from both the cost and retail value of the purchases. 
A) In arriving at a cost-to-retail ratio, sales discounts are deducted from goods available for sale to determine ending inventory at retail. 
B) Employee discounts are subtracted from goods available for sale to compute ending inventory at retail. 
C) Abnormal inventory spoilage would be subtracted at both cost and retail in the determination of goods available for sale. 
D) Purchase returns and allowances must be subtracted from both the cost and retail value of the purchases.

Question 4

Exhibit 9-3 The Donna Company uses the gross profit method to estimate its inventory in interim financial statements.The markup on cost is 50%.The following information is available:
$\begin{array}{ll}
\text { January } 1,2010, \text { inventory balance } & \$ 12,500 \
\text { Purchases } & 25,000 \
\text { Sales churing J anuary } & 24,000
\end{array}$
- Refer to Exhibit 9-3.The estimated cost of goods sold at January 31, 2010, is

Accepted Answer

A) $25, 500 
B) $21, 500 
C) $16, 000 
D) $12, 000 
A) $25, 500 
B) $21, 500 
C) $16, 000 
D) $12, 000

Question 5

The Mary Company provided the following data for its December 31, 2010, inventory maintained on the retail basis. $\begin{array}{lll}&\text { At Cost }&\text { At Retail }\
\text { Beginning inventory } & \$ 120,000 & \$ 224,000 \
\text { Purchases } & 280,000 & 396,000 \
\text { Markups (net) } & & 20,000 \
\text { Markdowns (net) } & & (40,000) \
\text { Sales } & & 520,000
\end{array}$ What is the estimated inventory at December 31, 2010, valued at lower of average cost or market?

Accepted Answer

A) $53, 333 
B) $75, 000 
C) $56, 000 
D) $50, 000 
A) $53, 333 
B) $75, 000 
C) $56, 000 
D) $50, 000

Question 6

Generally, valuing inventory above cost

Accepted Answer

A) violates conservatism and is never allowed 
B) violates the lower of cost or market rule and is never allowed 
C) is acceptable when revenue recognition is not applicable 
D) is acceptable only in selected industries and in certain circumstances 
A) violates conservatism and is never allowed 
B) violates the lower of cost or market rule and is never allowed 
C) is acceptable when revenue recognition is not applicable 
D) is acceptable only in selected industries and in certain circumstances

Question 7

The lower of cost or market rule for inventory valuation can be used in conjunction with the retail inventory method if which of the following adjustments is made?

Accepted Answer

A) Include the cost and retail value of the beginning inventory when using the FIFO method. 
B) Include the cost and retail value of the beginning inventory and the net markups and markdowns when using the average cost method. 
C) Exclude the separate ratios for each layer in the beginning inventory when using the LIFO method. 
D) Exclude the cost and retail value of the beginning inventory and net markups when applying the lower of average cost or market method. 
A) Include the cost and retail value of the beginning inventory when using the FIFO method. 
B) Include the cost and retail value of the beginning inventory and the net markups and markdowns when using the average cost method. 
C) Exclude the separate ratios for each layer in the beginning inventory when using the LIFO method. 
D) Exclude the cost and retail value of the beginning inventory and net markups when applying the lower of average cost or market method.

Question 8

A fire destroyed the Winston Company's warehouse on March 15, 2010.Only goods with a normal selling price of $12, 500 and a net realizable value of $5, 000 were saved.The following information is available from the company's records:
 $\begin{array}{ll}
\text { Inventory in warehouse, } 1 / 1 / 10 & \$ 250,000 \
\text { Purchases, } 1 / 1 / 10-3 / 15 / 10 & 620,000 \
\text { Purchase returns } & 9,500 \
\text { Freight-in } & 14,000 \
\text { Sales, } 1 / 1 / 10-3 / 15 / 10 & 850,000 \
\text { Sales returns } & 20,000
\end{array}$ For the period from 2006 through 2009, Winston had a gross profit of $2, 100, 000 on net sales of $6, 000, 000.
Required:
 a. Estimate Winstons inventory loss from the fire using the gross profit method.
b. What assumptions allow the use of the gross profit metho din these circumstances?

Accepted Answer

The answer of A fire destroyed the Winston Company's warehouse...

Question 9

The gross profit method may be used to estimate the cost of inventory.
Required:
 a. List four situations when it might be appropriate to use the gross profit method to estimate the cost of inventory.
b. Discuss the potentiat disadvantages of the gross profit method.

Accepted Answer

The answer of The gross profit method may be used...

Question 10

Given the following information for the Rachel Company: $\begin{array}{lll}
\text { Date } & \text { Cost } & \text { Market } \
\hline \text { December 31, 2010 } & \$ 500 & \$ 500 \
\text { December 31, 2011 } & 700 & 650 \
\text { December 31, 2012 } & 800 & 730
\end{array}$ If the direct method of recording lower of cost or market is in use, which December 31, 2012 entry is correct?

Accepted Answer

A) 
Loss Due to Market Valuation$\quad$$\quad$20
Allowance to Reduce Inventory to Market$\quad$20 
B) 
Inventory$\quad$$\quad$730
 Income Summary$\quad$$\quad$730 
C) 
Loss Due to Market Valuation $ \quad 70 $
 Allowance to Reduce Inventory to Market $ \quad 70 $ 
D) 
$\begin{array}{ll}
\text { Inventory } & 800 \
\text { Income Summary } &800
\end{array} $ 
A) 
Loss Due to Market Valuation$\quad$$\quad$20
Allowance to Reduce Inventory to Market$\quad$20 
B) 
Inventory$\quad$$\quad$730
 Income Summary$\quad$$\quad$730 
C) 
Loss Due to Market Valuation $ \quad 70 $
 Allowance to Reduce Inventory to Market $ \quad 70 $ 
D) 
$\begin{array}{ll}
\text { Inventory } & 800 \
\text { Income Summary } &800
\end{array} $

Question 11

If the gross profit to cost of goods sold ratio is 0.30, the gross profit to sales ratio is

Accepted Answer

A) 0.231 
B) 0.300 
C) 0.429 
D) 0.700 
A) 0.231 
B) 0.300 
C) 0.429 
D) 0.700

Question 12

Kim Company's accountant made the following errors related to merchandise inventory in 2010: 1. The begining inventory for 2010 was overstated by $ \$ 1,900 $ due to an error in the physical count.
2. A $ \$ 1,150 $ purchase of merchandise on credit was not recorded, but the items were included in the ending inventory.
 Assuming a periodic inventory system, Kim Company's 2010 cost of goods sold will be

Accepted Answer

A) understated by $750 
B) understated by $1, 900 
C) overstated by $750 
D) overstated by $1, 900 
A) understated by $750 
B) understated by $1, 900 
C) overstated by $750 
D) overstated by $1, 900

Question 13

Companies may express their gross profit as a percentage of net sales or as a percentage of cost of goods sold.The following data are available on two different companies:
 $\begin{array}{llr}
  \text {Company A gross profit as a percentage of net sales  } &20\%\
 \text { Company B gross profit as a percentage of cost of goods sold. } &75\%\
\end{array}$
 Required:
 a. Compute the gross profit as a percentage of cost of goods sold for Company A.
b. Compute the gross profit as a percentage of net sales for Company B.

Accepted Answer

The answer of Companies may express their gross profit as...

Question 14

The Patti Company's inventory was destroyed on July 4, 2010, when its warehouse caught on fire early in the morning.Inventory was totally destroyed.The accounting records, which were located in a fireproof vault, contained the following information: $\begin{array}{ll}
\text { Sales }(1 / 1 / 10 \text { through } 7 / 3 / 10) & \$ 220,000 \
\text { Purchases }(1 / 1 / 10 \text { through } 7 / 3 / 10) & 180,000 \
\text { Inventory }(1 / 1 / 10) & 45,000\\text { Grossprofit ratio }&25 \% \text { of cost}
\end{array}$ Using the gross profit method, what is the estimated cost of the inventory that was destroyed by the fire?

Accepted Answer

A) $17, 500 
B) $25, 000 
C) $30, 000 
D) $37, 500 
A) $17, 500 
B) $25, 000 
C) $30, 000 
D) $37, 500

Question 15

The gross profit method is most commonly used to

Accepted Answer

A) replace the year-end physical inventory 
B) check the cost generated by a perpetual inventory system 
C) determine the cost of inventory destroyed by fire 
D) develop a sales budget 
A) replace the year-end physical inventory 
B) check the cost generated by a perpetual inventory system 
C) determine the cost of inventory destroyed by fire 
D) develop a sales budget

Question 16

Laura, Ltd.used the LIFO retail inventory method to determine its ending inventory.The accounting records for the company contained the following relevant information: $\begin{array}{lcc}&\text { Cost }&\text { Retail }\
\text { Net purchases } & \$ 48,000 & \$ 79,000 \
\text { Sales } & & 91,000 \
\text { Beginning inventory } & 12,000 & 25,000 \
\text { Net markups } & & 5,000 \
\text { Net markdowns } & & 4,000
\end{array}$ What is the cost of the ending inventory?

Accepted Answer

A) $6, 720 
B) $7, 700 
C) $7, 980 
D) $8, 400 
A) $6, 720 
B) $7, 700 
C) $7, 980 
D) $8, 400

Question 17

A purchase on credit is recorded twice and not corrected during the physical inventory.Which of the following statements correctly describes the impact of this error?

Accepted Answer

A) The current year income on the income statement is correct because purchases are overstated and ending inventory is overstated. 
B) The current year balance sheet ending inventory and accounts payable are understated. 
C) The succeeding year income on the income statement is incorrect because beginning inventory is understated. 
D) The succeeding year purchases are understated when the prior year purchases are corrected. 
A) The current year income on the income statement is correct because purchases are overstated and ending inventory is overstated. 
B) The current year balance sheet ending inventory and accounts payable are understated. 
C) The succeeding year income on the income statement is incorrect because beginning inventory is understated. 
D) The succeeding year purchases are understated when the prior year purchases are corrected.

Question 18

Guerra, Inc.adopted the dollar-value LIFO retail inventory method on January 1, 2010, when the price index was 100.The following information was taken from company records on December 31, 2010, when the price index was 110.
 $\begin{array}{lll}
&\text { Cost}&\text { Retail}\
\text { Sales } & & \$ 190,000 \
\text { Additional markps } & & 18,000 \
\text { Markup cancellations } & & 6,000 \
\text { Markdowns } & & 8,000 \
\text { Markdown cancellations } & & 2,000 \
\text { Inventory, January 1 } & \$ 14,400 & 20,000 \
\text { Purchases } & 158,000 & 199,000 \
\text { Purchase returns } & 4,000 & 5,000
\end{array}$ Required:
Compute the cost of the December 31, 2010, inventory.(Round off calculations to the nearest dollar.)

Accepted Answer

Cost of inventory = $20, 560, determined

Question 19

Walker Tile Shop uses the lower of cost or market method and has a periodic inventory system.Additional information follows:
 $\begin{array}{lll}
&\text { Inventory}\
\text { Date}&\text { cost}&\text { Market}\
\text { January } 1,2010 & \$ 4,600 & \$ 4,000 \
\text { December } 31,2010 & 6,000 & 5,000 \
\text { December } 31.2011 & 9,000 & 8,200
\end{array}$ Required:
 a. If the direct method of recording the reduction of inventory to market is in use, what would be the amount of the debit to Inventory on December 31, 2011?
b. If the allowance method is in use, what would be the debit to Income Summary on December 31,2010 ?

Accepted Answer

The answer of Walker Tile Shop uses the lower of...

Question 20

The following information was taken from the inventory records of the Walker Company:
 $\begin{array}{llllll}
\text { Product}&\text { A}&\text { B}&\text { C}&\text { D}&\text { E}\
\text { Units } & 75 & 100 & 150 & 100 & 200 \
\text { Unit cost } & \$ 5.50 & \$ 10.00 & \$ 5.10 & \$ 5.10 & \$ 5.00 \
\text { Replacement cost } & \$ 6.00 & \$ 9.00 & \$ 4.60 & \$ 4.50 & \$ 4.50 \
\text { Net realizable value (NRV) } & \$ 5.20 & \$ 12.50 & \$ 7.00 & \$ 7.00 & \$ 7.00 \
\text { NRV-Normal profit } & \$ 4.80 & \$ 10.30 & \$ 5.25 & \$ 4.00 & \$ 4.80
\end{array}$ Required:
Determine the valuation of the inventory at the lower of cost or market applied to:
 a. inclvichual items
b. the inventory as a whole

Accepted Answer

a.@#IMG-DLM&
b.
\[\begin{array} { l } 
\text { Cos

When applying the lower of cost or market rule to the valuation of inventory, the allowance method is considered preferable to the direct method because

Barbara Co.presents the following information: Cost Retail Net markups \ 200 Sales 2,100 Purchases \ 1,870 2,050 Net markdowns 50 Beginning inventory 240 300 The company uses the average cost retail inventory method.What is the cost of ending inventory?

Which one of the following statements is not true concerning the retail inventory method?

Generally, valuing inventory above cost

The lower of cost or market rule for inventory valuation can be used in conjunction with the retail inventory method if which of the following adjustments is made?

The gross profit method may be used to estimate the cost of inventory. Required: a. List four situations when it might be appropriate to use the gross profit method to estimate the cost of inventory. b. Discuss the potentiat disadvantages of the gross profit method.

Given the following information for the Rachel Company: Date Cost Market December 31, 2010 \ 500 \ 500 December 31, 2011 700 650 December 31, 2012 800 730 If the direct method of recording lower of cost or market is in use, which December 31, 2012 entry is correct?

If the gross profit to cost of goods sold ratio is 0.30, the gross profit to sales ratio is

The gross profit method is most commonly used to

A purchase on credit is recorded twice and not corrected during the physical inventory.Which of the following statements correctly describes the impact of this error?

The Environment of Financial Reporting

Financial Reporting: Its Conceptual Framework

Review of a Companys Accounting System

The Balance Sheet and the Statement of Changes in Stockholders Equity

The Income Statement and the Statement of Cash Flows

Additional Aspects of Financial Reporting and Financial Analysis

Cash and Receivables

Inventories: Cost Measurement and Flow Assumptions

Property, Plant, and Equipment: Acquisition and Disposal

Depreciation and Depletion

Intangibles

Current Liabilities and Contingencies

Long-Term Liabilities and Receivables

Investments

Contributed Capital

Earnings Per Share and Retained Earnings

Income Recognition and Measurement of Net Assets

Accounting for Income Taxes

Accounting for Postemployment Benefits

Accounting for Leases

The Statement of Cash Flows

Accounting for Changes and Errors

Time Value of Money Module

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Exam 9: Inventories: Special Valuation Issues

When applying the lower of cost or market rule to the valuation of inventory, the allowance method is considered preferable to the direct method because

Barbara Co.presents the following information: Cost Retail Net markups \ 200 Sales 2,100 Purchases \ 1,870 2,050 Net markdowns 50 Beginning inventory 240 300 The company uses the average cost retail inventory method.What is the cost of ending inventory?

Which one of the following statements is not true concerning the retail inventory method?

Generally, valuing inventory above cost

The lower of cost or market rule for inventory valuation can be used in conjunction with the retail inventory method if which of the following adjustments is made?

The gross profit method may be used to estimate the cost of inventory. Required: a. List four situations when it might be appropriate to use the gross profit method to estimate the cost of inventory. b. Discuss the potentiat disadvantages of the gross profit method.

Given the following information for the Rachel Company: Date Cost Market December 31, 2010 \ 500 \ 500 December 31, 2011 700 650 December 31, 2012 800 730 If the direct method of recording lower of cost or market is in use, which December 31, 2012 entry is correct?

If the gross profit to cost of goods sold ratio is 0.30, the gross profit to sales ratio is

The gross profit method is most commonly used to

A purchase on credit is recorded twice and not corrected during the physical inventory.Which of the following statements correctly describes the impact of this error?

The Environment of Financial Reporting

Financial Reporting: Its Conceptual Framework

Review of a Companys Accounting System

The Balance Sheet and the Statement of Changes in Stockholders Equity

The Income Statement and the Statement of Cash Flows

Additional Aspects of Financial Reporting and Financial Analysis

Cash and Receivables

Inventories: Cost Measurement and Flow Assumptions

Property, Plant, and Equipment: Acquisition and Disposal

Depreciation and Depletion

Intangibles

Current Liabilities and Contingencies

Long-Term Liabilities and Receivables

Investments

Contributed Capital

Earnings Per Share and Retained Earnings

Income Recognition and Measurement of Net Assets

Accounting for Income Taxes

Accounting for Postemployment Benefits

Accounting for Leases

The Statement of Cash Flows

Accounting for Changes and Errors

Time Value of Money Module

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