Question 1

Which one of the following statements is not true with regard to the gross profit method of estimating inventories?

Accepted Answer

A) The gross profit method may be used to determine inventory for interim financial reporting purposes without taking a physical count. 
B) The percentage used for the gross profit method is determined by using previous years' historical data. 
C) The gross profit method is not as accurate as the retail inventory method. 
D) The gross profit method may only be used with a perpetual inventory accounting system.

Question 2

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 allowance 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$730 
C) 
Loss Due to Market Valuation$\quad$$\quad$70
Allowance to Reduce Inventory to Market$\quad$70 
D) 
Allowance to Reduce Inventory to Market $\quad$800 
Income Summary$\quad$$\quad$800

Question 3

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 inventory at January 31, 2010, is

Accepted Answer

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

Question 4

Zelda Company has provided the following values for its 400 units of inventory at the end of 2010: $\begin{array}{ll}
\text { Item } & \text { Per Unit } \
\text { Historical cost } & \$ 5.00 \
\text { Replacement cost } & \$ 4.20 \
\text { Net realizable value } & \$ 4.50 \
\text { Normal profit margin } & \$ .80
\end{array}$ Under IFRS requirements, the per-unit reported value for Zelda's inventory will be

Accepted Answer

A) $5.00 
B) $4.50 
C) $4.20 
D) $3.70

Question 5

When calculating the cost-to-retail ratio, net markups and markdowns are

Accepted Answer

A) always included in the computation of the ending inventory at retail 
B) always included in the computation of the ending inventory at cost 
C) never computed at retail 
D) computed differently in each industry

Question 6

Careful valuation of the ending inventory is necessary because errors can result in inaccurate values on both the income statement and balance sheet.Assume that a company overstates its ending inventory for 2010.
Required:
Explain the effects of the error on the income statements and balance sheets for 2010 and 2011.

Accepted Answer

The answer of Careful valuation of the ending inventory is...

Question 7

Information:
 $\begin{array}{rrr}& \text { Net Income } & \text { Error in } \
\text { Year } & \text { per Books } & \text { Ending Inventory } \
2010 & \$ 75,000 & \$ 2,000 \text { Overstatement } \
2011 & 54,000 & 2,800 \text { Understatement } \
2012 & 96,000 & 1,900 \text { Overstatement }
\end{array}$ Required:
Assuming that no corrections were made in any year, compute the correct income for each of the three years.

Accepted Answer

The answer of Information:
 \(\begin{array}{rrr}& \text { Net Income }...

Question 8

The Smitty Company uses the retail inventory method to estimate inventory for interim financial statements.The following inventory information is available:
  Required:
 a. Determine the inventory value using the retail inventory method and the FIFO cost flow assumption.
b. Detemine the inventory value using the retail inventory method and the LIFO cost flow assumption.

Accepted Answer

The answer of The Smitty Company uses the retail inventory...

Question 9

In comparison to the allowance method of applying the lower of cost or market rule to the valuation of inventory, the direct method has which of the following deficiencies?

Accepted Answer

A) The direct method reports a more conservative amount for net income. 
B) For the direct method, the loss or loss recovery due to market valuation changes is included in the cost of goods sold amount. 
C) With the direct method, the inventory amount reported on the balance sheet is the historical cost. 
D) The direct method can only be used with a perpetual inventory system.

Question 10

The accountant for Sue Company made the following errors related to inventory in 2010: 1. The beginning inventory for $ 2010 \mathrm{was} $ overstated by $ \$ 375 $ due to an error in the physical count. 
2. A $ \$ 650 $ purchase of merchandise on credit in 2010 was not recorded or included in the ending inventony.
 Assuming a periodic inventory system, how would Sue's cost of goods sold, gross profit, and net income be affected in 2010 by these errors?
$\begin{array}{lll}&\text { Cost of Goods Sold }&\text { Gross Profit }&\text { Net Income }\\hline
I.&\text { Overstated } & \text { Understated } & \text { Understated } \
II.&\text { Overstated } & \text { Understated } & \text { No effect } \
III.&\text { Understated } & \text { Overstated } & \text { Overstated } \
IV.&\text { No effect } & \text { No effect } & \text { No effect }
\end{array}$

Accepted Answer

A) I 
B) II 
C) III 
D) IV

Question 11

Brenda Corp.reported 2012 net income of $30, 000.However, the ending inventory in 2011 had been understated by $3, 000, and 2012's ending inventory had been overstated by $6, 000.Brenda's correct net income for 2012 was

Accepted Answer

A) $21, 000 
B) $27, 000 
C) $33, 000 
D) $36, 000

Question 12

Sherrie's Shoes uses the FIFO retail inventory method to determine its ending inventory.The accounting records for Sherrie's Shoes contained the following information: $\begin{array}{lll}&\text { Cost }&\text { Retail }\
\text { Purchases } & \$ 242,000 & \$ 348,830 \
\text { Sales } & & 394,000 \
\text { Sales returns } & & 5,076 \
\text { Beginning inventory } & 60,500 & 107,294 \
\text { Net markups } & & 32,800 \
\text { Net markdowns } & & 12,000
\end{array}$ The freight-in charges for the merchandise were $7, 500.What is the cost of ending inventory for Sherrie's Shoes?

Accepted Answer

A) $49, 280 
B) $55, 792 
C) $57, 200 
D) $59, 400

Question 13

Relevance of the gross profit margin depends upon

Accepted Answer

A) the accuracy of the gross profit percentage 
B) the net sales 
C) applying the overall profit margin to each individual department 
D) averaging prior periods' net sales and total sales to verify which is best to use

Question 14

Which journal entry is required to record the existence of a contingent loss on a cancelable fixed purchase contract?

Accepted Answer

A) 
$\begin{array}{cc}
\text { Accrued Loss on Purchase Commitments } & \mathrm{XXX} \
\text { Loss on Purchase Commitments } & \mathrm{XXX}
\end{array}$ 
B) 
Loss on Purchase Commitments $\quad$$\quad$XXX
Accrued Loss on Purchase Commitments $\quad$XXX 
C) 
$\begin{array}{lr}
\text { Loss on Purchase Commitments } & \text { XXX } \
\text { Accounts Payable } & \text { XXX }
\end{array}$ 
D) No required entry

Question 15

With the retail inventory method, how is the total beginning inventory value used in the calculation of the cost-to-retail ratio for the current period under the following cost flow assumptions? $\begin{array}{lll}&\text { FIFO }&\text { Average Cost }&\text { LIFO }\
I.&\text { Include } & \text { Include } & \text { Exclude } \
II.&\text { Include } & \text { Exclude } & \text { Exclude } \
III.&\text { Exclude } & \text { Exclude } & \text { Exclude } \
IV.&\text { Exclude } & \text { Include } & \text { Excluide }
\end{array}$

Accepted Answer

A) I 
B) II 
C) III 
D) IV

Question 16

Davies adopted the dollar-value LIFO retail inventory method on January 1, 2010.The following information for 2010 was taken from the company's records:
 $\begin{array}{lll}&\text { Cost }&\text { Retail }\
\text { Sales } & & \$ 189,000 \
\text { Net markups } && 6,000 \
\text { Inventory, January 1, } 2010 & \$ 21,000 & 30,000 \
\text { Purchases } & 147,000 & 200,000 \
\text { Net markdowns } & & 10.700
\end{array}$ The price index on January 1, 2010, was 100.On December 31, 2010, it was 110.Round cost/retail percentages to the nearest whole percent if necessary.
Required:
Compute the inventory value for December 31, 2010.

Accepted Answer

The answer of Davies adopted the dollar-value LIFO retail inventory...

Question 17

Concerning application of the lower of cost or market method, which one of the following statements is true regarding the constraints on market value?

Accepted Answer

A) The upper constraint is estimated selling price less costs of completion and disposal. 
B) The lower constraint is net realizable value less costs of completion and disposal. 
C) The upper constraint is estimated selling price less a normal profit margin. 
D) The upper constraint is estimated selling price less costs of completion and disposal and a normal profit margin.

Question 18

Exhibit 9-1 Waring Inc.uses the lower of cost or market rule in valuing its inventory.One unit has a ceiling constraint of $42.50.The following is other information concerning this unit:
$\begin{array}{ll}
\text { Estimated transportation costs for delivery } & \$ 3.20 \
\text { Normal profit margin } & 5.50 \
\text { Packaging costs prior to delivery } & 2.20
\end{array}$
- Refer to Exhibit 9-1.The selling price of this unit must be

Accepted Answer

A) $44.70 
B) $45.70 
C) $47.90 
D) $53.40

Question 19

Amber Company uses the LIFO retail inventory method and reports the following information: $\begin{array}{lcc}&\text { Cost }&\text { Retail }\
\text { Beginning inventory } & \$ 540 & \$ 900 \
\text { Net markups } & & 1,000 \
\text { Sales } & & 4,500 \
\text { Net markdowns } & & 500 \
\text { Purchasess } & 3,150 & 4,000
\end{array}$ What is the cost of ending inventory for Amber Company?

Accepted Answer

A) $540 
B) $580 
C) $630 
D) $900

Question 20

Which one of the following inventories may be valued for balance sheet purposes at the inventory's selling price less distribution costs even if it is above the cost of the inventory?

Accepted Answer

A) automobiles for an automobile manufacturer 
B) gold for a mining corporation 
C) steel for a steel manufacturer 
D) athletic shoes for a retail store

Exam 9: Inventories: Special Valuation Issues