Question 1

Major Company uses the lower of cost or market rule in valuing its inventory and applies it using the LIFO method. The floor constraint for one item in the inventory is $58.20. The following is other information concerning this unit:

Accepted Answer

D

Question 2

Given the following information for the Lawrence Company who uses the LIFO method:  Required:
1.) Determine the lower of cost or market for each inventory item.
2.) Now assume instead that the company uses FIFO and the inventory is valued using the LCNRV rule, determine t each inventory item.

Accepted Answer

a.
Answers for part 1
$ 3.40 
b. $28.80 
c. $ 1.56
d. $ 6.00
e. $21.00
 f. $12.30

Answers for part 2:
Item:
a. 4.14
b. 27.60
c. 1.56
d. 6.15
e. 21.00
f. 12.30

Question 3

Why would a company elect to use dollar-value LIFO retail method for valuing inventory?

Accepted Answer

Companies typically choose LIFO versus FIFO or average cost methods) because, in a period of rising prices, LIFO results in lower taxable income and therefore lower income tax liabilities. Companies that have few inventory items may elect to use traditional LIFO. However, record keeping requirements are costly if the company has a large number of inventory items. Furthermore, if the types of inventory items are constantly changing, adding new items and eliminating old items, the tax benefits of LIFO reverse themselves after old items are removed from inventory which erodes older layers of LIFO-based inventories.
The companies that maintain a large number of products and expect significant changes in their product mix in future, frequently use dollar-value LIFO technique. Older LIFO layers of inventory, representing past tax savings, are based on price-level indices. These layers are maintained as long as the overall quantity levels of inventory are maintained regardless of the quantities of individual inventory items

Question 4

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.

Question 5

Dahlia adopted the dollar-value LIFO retail inventory method on January 1, 2016. The following information for 2016 was taken from the company's records:  The price index on January 1, 2016, was 100. On December 31, 2016, it was 105.
Required:
Compute the inventory value for December 31, 2016.

Accepted Answer

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

Question 6

Under special circumstances GAAP allows a company to report its inventory above cost. How must this exception be justified?

Accepted Answer

The answer of Under special circumstances GAAP allows a company...

Question 7

The accountant for Frieda Company did not record a purchase of merchandise on credit or include the items in the ending inventory. Assuming a periodic inventory system, the balance sheet effects of these omissions on assets, liabilities, and retained earnings would be

Accepted Answer

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

Question 8

An advantage of the retail inventory method over the gross profit is the retail method uses current-period estimates whereas the gross profit used past periods.

Accepted Answer

A) True 
 B)False

Question 9

A purchase on credit is omitted from the purchases account, but ending inventory is correct. What is the effect of this error on the balance sheet for the current year? What is the effect on the income statement for the current year?

Accepted Answer

The answer of A purchase on credit is omitted from...

Question 10

The Sahara Company's inventory was partially destroyed on June 4, 2016, when its warehouse caught on fire early in the morning. Inventory that had a cost of $8,000 was saved. The accounting records, which were located in a fireproof vault, contained the following information:  Using the gross profit method, what is the estimated cost of the inventory destroyed by the fire?

Accepted Answer

A)   $130,,000
B)   $48,000
C)   $39,000
D)   $30,000

Question 11

Which one of the following statements regarding the gross profit method is true?

Accepted Answer

A)   The gross profit method is a complicated method to use in practice.
B)   The gross profit method results in a more accurate inventory valuation than the retail inventory method.
C)   The gross profit method is an acceptable method to estimate the cost of inventory destroyed by a casualty.
D)   The gross profit method is often used to calculate the year-end inventory for financial accounting purposes.

Question 12

A purchase on credit is recorded twice and not corrected during the year-end 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.

Question 13

When using the cost-to-retail ratio for the retail inventory method,

Accepted Answer

A)   neither net markups nor markdowns are included in the computation of ending inventory for FIFO inventory.
B)   net markups but not net markdowns are included in the computation of ending inventory for LIFO inventory.
C)   net markups but not net markdowns are included in the computation of ending inventory for lower-of-cost-or- market inventory.
D)   net markdowns but not net markups are included in the computation of ending inventory for Average Cost inventory.

Question 14

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)   The direct method makes changes to the historical cost of inventory reported on the balance sheet.
D)   The direct method can only be used with a perpetual inventory system.

Question 15

The gross profit method is not 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.

Question 16

Barry Corp. reported 2016 net income of $40,000. However, the ending inventory in 2015 had been understated by $3,000, and 2016's ending inventory had been overstated by $6,000. Barry's correct net income for 2016 was

Accepted Answer

A)   $31,000
B)   $34,000
C)   $43,000
D)   $46,000

Question 17

Exhibit 8-1
Rival Inc. uses the lower of cost or market rule in valuing its inventory. Assume the company uses the LIFO method and that one unit has a ceiling constraint of $45.50. The following is other information concerning this unit: 
-Refer to Exhibit 8-1. The selling price of this unit must be

Accepted Answer

A)   $49.30
B)   $53.00
C)   $52.80
D)   $49.10

Question 18

The dollar-value LIFO cost-to-cost retail ratio does not include

Accepted Answer

A)   beginning inventory.
B)   net markups and markdowns.
C)   ending inventory.
D)   purchases.

Question 19

Darla's Card Shop uses the average cost retail inventory method to determine the ending inventory. Darla's accounting records for the current year contained the following information:  
In addition, sales returns for the year were $28,000, and employee discounts taken were $6,000. What is the cost of the ending inventory

Accepted Answer

A)   $35,000
B)   $50,400
C)   $54,600
D)   $58,800

Question 20

Laura's Department Store uses the average cost retail inventory method to determine its ending inventory. The accounting records for the current year for Laura's contained the following information:  
In addition, the accounting records for Laura's disclosed that purchases returns at cost and retail were $1,950 and $4,250, respectively. What is the cost-to-retail percentage to be used for ending inventory calculations?

Accepted Answer

A)   75.1%
B)   79.8%
C)   76.8%
D)   78.1%

Exam 8: Inventories: Special Valuation Issues