Exam Questions Ch9 Inventories Additional Issues - Answer Key + Test Bank | Intermediate Accounting 10e by J. David Spiceland, Mark W. Nelson, Wayne Thomas. DOCX document preview.
Intermediate Accounting, 10e (Spiceland)
Chapter 9 Inventories: Additional Issues
1) For companies that use FIFO or average cost, inventory is valued at the lower of cost or net realizable value at the end of the reporting period.
Difficulty: 1 Easy
Topic: LCNRV—Overview
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation
2) Net realizable value is selling price less costs of completion, disposal, and transportation.
Difficulty: 1 Easy
Topic: LCNRV—Overview
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
3) The primary motivation behind the lower of cost or net realizable value rule is consistency.
Difficulty: 1 Easy
Topic: Accounting for inventory at end of period
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
4) Lower of cost or net realizable value can be applied to individual inventory items, to logical categories of inventory, or to the entire inventory.
Difficulty: 1 Easy
Topic: Accounting for inventory at end of period
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
5) Losses on reduction to NRV may be charged to either cost of goods sold or to a line item among operating expenses.
Difficulty: 1 Easy
Topic: Accounting for inventory at end of period
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
6) An inventory written down due to the lower of cost or net realizable value may be written back up if net realizable value increases.
Difficulty: 1 Easy
Topic: Accounting for inventory at end of period
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
7) For companies that use LIFO, inventory is valued at the lower of cost or net realizable value at the end of the reporting period.
Difficulty: 1 Easy
Topic: LCM—Overview
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking / Keyboard Navigation
8) The market value for purposes of using the lower of cost or market (LCM) method is defined as replacement cost, subject to a ceiling and a floor.
Difficulty: 1 Easy
Topic: LCM—Overview
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
9) The primary motivation behind the lower of cost or market (LCM) rule is conservatism.
Difficulty: 1 Easy
Topic: Accounting for inventory at end of period
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
10) A reduction in reported inventory due to market value falling below cost would reduce net income in the current period.
Difficulty: 1 Easy
Topic: Accounting for inventory at end of period
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
11) The gross profit method for estimating ending inventory relies on the historical relationship between sales revenue and cost of goods sold.
Difficulty: 1 Easy
Topic: Gross profit method
Learning Objective: 09-02 Estimate ending inventory and cost of goods sold using the gross profit method.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
12) Under the LIFO retail method, the current period cost-to-retail percentage includes both net markdowns and net markups.
Difficulty: 1 Easy
Topic: Retail inventory method—LIFO retail
Learning Objective: 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
13) Purchase returns and purchase discounts are ignored when computing cost-to-retail ratios for the retail method.
Difficulty: 1 Easy
Topic: Retail inventory method—Other issues
Learning Objective: 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
14) The cost-to-retail percentage used in the retail method to approximate average cost incorporates both markdowns and markups.
Difficulty: 1 Easy
Topic: Retail inventory method—Average cost
Learning Objective: 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
15) The cost-to-retail percentage used in the LIFO retail method incorporates both markdowns and markups.
Difficulty: 1 Easy
Topic: Retail inventory method—LIFO retail
Learning Objective: 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
16) Net sales, for purposes of applying the retail inventory method, include sales returns but exclude sales discounts and employee discounts.
Difficulty: 2 Medium
Topic: Retail inventory method—Other issues
Learning Objective: 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
17) Normal shortages (such as spoilage and theft) reduce the retail amount used to calculate the cost-to-retail percentage.
Difficulty: 2 Medium
Topic: Retail inventory method—Other issues
Learning Objective: 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
18) Abnormal shortages (such as spoilage and theft) reduce both the cost and retail amounts used to calculate the cost-to-retail percentage.
Difficulty: 2 Medium
Topic: Retail inventory method—Other issues
Learning Objective: 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
19) The conventional retail method approximates the lower of average cost or market for reporting inventory.
Difficulty: 1 Easy
Topic: Retail inventory method—Conventional retail
Learning Objective: 09-04 Explain how the retail inventory method can be made to approximate the lower of cost or market rule.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
20) The cost-to-retail percentage used in the conventional retail method incorporates both markdowns and markups.
Difficulty: 1 Easy
Topic: Retail inventory method—Conventional retail
Learning Objective: 09-04 Explain how the retail inventory method can be made to approximate the lower of cost or market rule.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
21) For companies that have net markdowns, the cost-to-retail percentage used in the average cost retail method will be lower than the percentage used in the conventional retail method.
Difficulty: 2 Medium
Topic: Retail inventory method—Average cost; Retail inventory method—Conventional retail
Learning Objective: 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.; 09-04 Explain how the retail inventory method can be made to approximate the lower of cost or market rule.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
22) If the quantity of goods held in inventory decreased during the period, the dollar amount of ending inventory can't exceed the dollar amount of beginning inventory.
Difficulty: 1 Easy
Topic: Retail inventory method—Dollar-value LIFO
Learning Objective: 09-05 Determine ending inventory using the dollar-value LIFO retail inventory method.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
23) The dollar-value LIFO retail method reports ending inventory at base year costs.
Difficulty: 1 Easy
Topic: Retail inventory method—Dollar-value LIFO
Learning Objective: 09-05 Determine ending inventory using the dollar-value LIFO retail inventory method.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
24) For the dollar-value LIFO retail method, each layer year carries its unique retail price index and its unique cost-to-retail percentage.
Difficulty: 1 Easy
Topic: Retail inventory method—Dollar-value LIFO
Learning Objective: 09-05 Determine ending inventory using the dollar-value LIFO retail inventory method.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
25) When changing from the average cost method to FIFO, the current year's income includes the cumulative after-tax difference that would have resulted if the company had used FIFO in all prior years.
Difficulty: 2 Medium
Topic: Change in inventory method
Learning Objective: 09-06 Explain the appropriate accounting treatment required when a change in inventory method is made.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
26) A change from LIFO to any other inventory method is accounted for retrospectively.
Difficulty: 1 Easy
Topic: Change in inventory method
Learning Objective: 09-06 Explain the appropriate accounting treatment required when a change in inventory method is made.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
27) A change from FIFO to LIFO does not need to be accounted for retrospectively.
Difficulty: 1 Easy
Topic: Change in inventory method—To LIFO
Learning Objective: 09-06 Explain the appropriate accounting treatment required when a change in inventory method is made.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
28) A change in inventory method that causes an increase to the balance of inventory would be recorded with a debit to inventory and a credit to cost of goods sold.
Difficulty: 2 Medium
Topic: Change in inventory method
Learning Objective: 09-06 Explain the appropriate accounting treatment required when a change in inventory method is made.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
29) Overstating ending inventory in the current year causes net income in the current year to be overstated.
Difficulty: 1 Easy
Topic: Inventory errors
Learning Objective: 09-07 Explain the appropriate accounting treatment required when an inventory error is discovered.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
30) Understating ending inventory in the current year causes cost of goods sold in the current year to be understated.
Difficulty: 1 Easy
Topic: Inventory errors
Learning Objective: 09-07 Explain the appropriate accounting treatment required when an inventory error is discovered.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
31) An error in calculating ending inventory in the current year has no effect on retained earnings in the current year or next year.
Difficulty: 1 Easy
Topic: Inventory errors
Learning Objective: 09-07 Explain the appropriate accounting treatment required when an inventory error is discovered.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
32) Understating ending inventory in the current year causes cost of goods sold in the next year to be understated.
Difficulty: 1 Easy
Topic: Inventory errors
Learning Objective: 09-07 Explain the appropriate accounting treatment required when an inventory error is discovered.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
33) Overstating ending inventory in the current year causes retained earnings in the next year to be overstated.
Difficulty: 1 Easy
Topic: Inventory errors
Learning Objective: 09-07 Explain the appropriate accounting treatment required when an inventory error is discovered.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
34) Overstating ending inventory in the current year causes retained earnings in the next year to be understated.
Difficulty: 1 Easy
Topic: Inventory errors
Learning Objective: 09-07 Explain the appropriate accounting treatment required when an inventory error is discovered.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
35) For a purchase commitment contained within a single fiscal year, if the market price is less than the contract price, the purchase is recorded at the contract price.
Difficulty: 1 Easy
Topic: Purchase commitments—Appendix
Learning Objective: Appendix 9 Purchase Commitments.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
36) For a purchase commitment extending beyond the current fiscal year, if the market price on the purchase date declines from the previous year-end price, the purchase is recorded at the market price.
Difficulty: 1 Easy
Topic: Purchase commitments—Appendix
Learning Objective: Appendix 9 Purchase Commitments.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
37) Under International Financial Reporting Standards, net realizable value is defined as inventory's replacement cost.
Difficulty: 1 Easy
Topic: IFRS—Lower of cost or NRV
Learning Objective: 09-08 Discuss the primary differences between U.S. GAAP and IFRS with respect to the lower of cost or net realizable value rule for valuing inventory.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
38) International Financial Reporting Standards allow the reversal of an inventory write-down.
Difficulty: 1 Easy
Topic: IFRS—Lower of cost or NRV
Learning Objective: 09-08 Discuss the primary differences between U.S. GAAP and IFRS with respect to the lower of cost or net realizable value rule for valuing inventory.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
39) For companies using FIFO or average cost, inventory is valued at:
A) Net realizable value.
B) Cost.
C) Replacement cost.
D) Lower of cost or net realizable value.
Difficulty: 1 Easy
Topic: LCNRV—Overview
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
40) An argument against use of the lower of cost or net realizable value rule is its lack of:
A) Relevance.
B) Reliability.
C) Consistency.
D) Objectivity.
Difficulty: 2 Medium
Topic: Accounting for inventory at end of period
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Decision Making; FN Measurement / Keyboard Navigation
41) Management has adopted a policy of reporting its unsold inventory at the end of each year at the lower of FIFO cost or the most recent selling price of that inventory in the current year. Which of the following statements is correct?
A) Management should instead choose the higher of the two amounts to report inventory.
B) Management should instead compare the inventory's cost to an estimate of its selling price in the next year.
C) Management's policy is acceptable.
D) Management should instead report inventory at the lower of cost or market value based on replacement cost.
Difficulty: 2 Medium
Topic: LCNRV—Overview
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
42) Management has adopted a policy of reporting its unsold inventory at the end of each year at the lower of LIFO cost or the estimated selling price of that inventory in the next year. Which of the following statements is correct?
A) Management's policy is acceptable.
B) Management should instead choose the higher of the two amounts to report inventory.
C) Management also needs to consider the inventory's replacement cost.
D) Management should instead report inventory at the lower of cost or the most recent selling price in the current year.
Difficulty: 2 Medium
Topic: LCM—Overview
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
43) Montana Co. has determined its year-end inventory on a FIFO basis to be $600,000. Information pertaining to that inventory is as follows:
| ||||
Selling price | $ | 620,000 |
| |
Costs to sell |
| 30,000 |
| |
Replacement cost |
| 520,000 |
| |
What should be the reported value of Montana's inventory?
A) $600,000.
B) $520,000.
C) $590,000.
D) $620,000.
Difficulty: 1 Easy
Topic: LCNRV—Determine NRV and apply LCNRV
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
44) Data related to the inventories of Costco Medical Supply are presented below:
| Surgical |
| Surgical |
| Rehab |
| Rehab | |||||||||
| Equipment |
| Supplies |
| Equipment |
| Supplies | |||||||||
Selling price | $ | 260 |
|
| $ | 100 |
|
| $ | 340 |
|
| $ | 165 |
| |
Cost |
| 170 |
|
|
| 90 |
|
|
| 250 |
|
|
| 162 |
| |
Costs to sell |
| 30 |
|
|
| 15 |
|
|
| 25 |
|
|
| 10 |
| |
In applying the lower of cost or net realizable value rule, the inventory of surgical equipment would be valued at:
A) $230.
B) $240.
C) $170.
D) $152.
Difficulty: 1 Easy
Topic: LCNRV—Determine NRV and apply LCNRV
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
45) Data related to the inventories of Costco Medical Supply are presented below:
| Surgical |
| Surgical |
| Rehab |
| Rehab | |||||||||
| Equipment |
| Supplies |
| Equipment |
| Supplies | |||||||||
Selling price | $ | 260 |
|
| $ | 100 |
|
| $ | 340 |
|
| $ | 165 |
| |
Cost |
| 170 |
|
|
| 90 |
|
|
| 250 |
|
|
| 162 |
| |
Costs to sell |
| 30 |
|
|
| 15 |
|
|
| 25 |
|
|
| 10 |
| |
In applying the lower of cost or net realizable value rule, the inventory of surgical supplies would be valued at:
A) $100.
B) $90.
C) $85.
D) $75.
Difficulty: 1 Easy
Topic: LCNRV—Determine NRV and apply LCNRV
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
46) Data related to the inventories of Costco Medical Supply are presented below:
| Surgical |
| Surgical |
| Rehab |
| Rehab | |||||||||
| Equipment |
| Supplies |
| Equipment |
| Supplies | |||||||||
Selling price | $ | 260 |
|
| $ | 100 |
|
| $ | 340 |
|
| $ | 165 |
| |
Cost |
| 170 |
|
|
| 90 |
|
|
| 250 |
|
|
| 162 |
| |
Costs to sell |
| 30 |
|
|
| 15 |
|
|
| 25 |
|
|
| 10 |
| |
In applying the lower of cost or net realizable value rule, the inventory of rehab equipment would be valued at:
A) $315.
B) $340.
C) $225.
D) $250.
Difficulty: 1 Easy
Topic: LCNRV—Determine NRV and apply LCNRV
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
47) Data related to the inventories of Costco Medical Supply are presented below:
| Surgical |
| Surgical |
| Rehab |
| Rehab | |||||||||
| Equipment |
| Supplies |
| Equipment |
| Supplies | |||||||||
Selling price | $ | 260 |
|
| $ | 100 |
|
| $ | 340 |
|
| $ | 165 |
| |
Cost |
| 170 |
|
|
| 90 |
|
|
| 250 |
|
|
| 162 |
| |
Costs to sell |
| 30 |
|
|
| 15 |
|
|
| 25 |
|
|
| 10 |
| |
In applying the lower of cost or net realizable value rule, the inventory of rehab supplies would be valued at:
A) $165.
B) $152.
C) $162.
D) $155.
Difficulty: 1 Easy
Topic: LCNRV—Determine NRV and apply LCNRV
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
48) Data related to the inventories of Alpine Ski Equipment and Supplies is presented below:
| Skis |
| Boots |
| Apparel |
| Supplies | |||||||||||||||
Selling price | $ | 180,000 |
|
| $ | 140,000 |
|
| $ | 120,000 |
|
| $ | 60,000 |
| |||||||
Cost |
| 128,000 |
|
|
| 133,000 |
|
|
| 90,000 |
|
|
| 45,000 |
| |||||||
Replacement cost |
| 120,000 |
|
|
| 130,000 |
|
|
| 110,000 |
|
|
| 41,000 |
| |||||||
Sales commission |
| 10 | % |
|
| 10 | % |
|
| 10 | % |
|
| 10 | % | |||||||
In applying the lower of cost or net realizable value rule, the inventory of skis would be valued at:
A) $162,000.
B) $128,000.
C) $120,000.
D) $180,000.
Difficulty: 1 Easy
Topic: LCNRV—Determine NRV and apply LCNRV
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
49) Data related to the inventories of Alpine Ski Equipment and Supplies is presented below:
| Skis |
| Boots |
| Apparel |
| Supplies | |||||||||||||||
Selling price | $ | 180,000 |
|
| $ | 140,000 |
|
| $ | 120,000 |
|
| $ | 60,000 |
| |||||||
Cost |
| 128,000 |
|
|
| 133,000 |
|
|
| 90,000 |
|
|
| 45,000 |
| |||||||
Replacement cost |
| 120,000 |
|
|
| 130,000 |
|
|
| 110,000 |
|
|
| 41,000 |
| |||||||
Sales commission |
| 10 | % |
|
| 10 | % |
|
| 10 | % |
|
| 10 | % | |||||||
In applying the lower of cost or net realizable value rule, the inventory of boots would be valued at:
A) $140,000.
B) $133,000.
C) $126,000.
D) $130,000.
Difficulty: 1 Easy
Topic: LCNRV—Determine NRV and apply LCNRV
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
50) Data related to the inventories of Alpine Ski Equipment and Supplies is presented below:
| Skis |
| Boots |
| Apparel |
| Supplies | |||||||||||||||
Selling price | $ | 180,000 |
|
| $ | 140,000 |
|
| $ | 120,000 |
|
| $ | 60,000 |
| |||||||
Cost |
| 128,000 |
|
|
| 133,000 |
|
|
| 90,000 |
|
|
| 45,000 |
| |||||||
Replacement cost |
| 120,000 |
|
|
| 130,000 |
|
|
| 110,000 |
|
|
| 41,000 |
| |||||||
Sales commission |
| 10 | % |
|
| 10 | % |
|
| 10 | % |
|
| 10 | % | |||||||
In applying the lower of cost or net realizable value rule, the inventory of apparel would be valued at:
A) $108,000.
B) $90,000.
C) $110,000.
D) $99,000.
Difficulty: 1 Easy
Topic: LCNRV—Determine NRV and apply LCNRV
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
51) Data related to the inventories of Alpine Ski Equipment and Supplies is presented below:
| Skis |
| Boots |
| Apparel |
| Supplies | |||||||||||||||
Selling price | $ | 180,000 |
|
| $ | 140,000 |
|
| $ | 120,000 |
|
| $ | 60,000 |
| |||||||
Cost |
| 128,000 |
|
|
| 133,000 |
|
|
| 90,000 |
|
|
| 45,000 |
| |||||||
Replacement cost |
| 120,000 |
|
|
| 130,000 |
|
|
| 110,000 |
|
|
| 41,000 |
| |||||||
Sales commission |
| 10 | % |
|
| 10 | % |
|
| 10 | % |
|
| 10 | % | |||||||
In applying the lower of cost or net realizable value rule, the inventory of supplies would be valued at:
A) $45,000.
B) $54,000.
C) $41,000.
D) $60,000.
Difficulty: 1 Easy
Topic: LCNRV—Determine NRV and apply LCNRV
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
52) For companies using LIFO, inventory is valued at:
A) Net realizable value.
B) Cost.
C) Replacement cost.
D) Lower of cost or market.
Difficulty: 1 Easy
Topic: LCM—Overview
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
53) In applying LCM, market cannot be:
A) Less than net realizable value.
B) Greater than the normal profit.
C) Less than the normal profit margin.
D) Greater than net realizable value.
Difficulty: 1 Easy
Topic: LCM—Overview
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
54) In applying LCM, market cannot be:
A) Less than net realizable value minus a normal profit margin.
B) Net realizable value less reasonable completion and disposal costs.
C) Greater than net realizable value reduced by an allowance for normal profit margin.
D) Less than cost.
Difficulty: 2 Medium
Topic: LCM—Overview
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
55) Masterlink Co., in applying the lower of cost or market method, reports its inventory at net realizable value. Which of the following statements is correct?
A) NRV is greater than replacement cost.
B) Cost is less than net realizable value.
C) Cost is greater than net realizable value.
D) Cost is less than NRV minus a normal profit margin.
Difficulty: 2 Medium
Topic: LCM—Overview
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
56) Madison Co. has determined its year-end inventory on a LIFO basis to be $600,000. Information pertaining to that inventory is as follows:
| ||||
Selling price | $ | 720,000 |
| |
Costs to sell |
| 30,000 |
| |
Normal profit margin |
| 80,000 |
| |
Replacement cost |
| 620,000 |
| |
What should be the reported value of Madison's inventory?
A) $600,000.
B) $620,000.
C) $690,000.
D) $610,000.
Difficulty: 2 Medium
Topic: LCM—Determine market and apply LCM
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
57) Data related to the inventories of Kimzey Medical Supply are presented below:
| Surgical |
| Surgical |
| Rehab |
| Rehab | |||||||||||||
| Equipment |
| Supplies |
| Equipment |
| Supplies | |||||||||||||
Selling price | $ | 260 |
|
| $ | 120 |
|
| $ | 340 |
|
| $ | 165 |
| |||||
Cost |
| 170 |
|
|
| 90 |
|
|
| 250 |
|
|
| 162 |
| |||||
Replacement cost |
| 240 |
|
|
| 80 |
|
|
| 235 |
|
|
| 158 |
| |||||
Costs to sell |
| 30 |
|
|
| 5 |
|
|
| 25 |
|
|
| 10 |
| |||||
Normal gross profit ratio |
| 30 | % |
|
| 30 | % |
|
| 30 | % |
|
| 20 | % | |||||
In applying the lower of cost or market rule, the inventory of surgical equipment would be valued at:
A) $230.
B) $240.
C) $170.
D) $152.
Difficulty: 3 Hard
Topic: LCM—Determine market and apply LCM
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
58) Data related to the inventories of Kimzey Medical Supply are presented below:
| Surgical |
| Surgical |
| Rehab |
| Rehab | |||||||||||||
| Equipment |
| Supplies |
| Equipment |
| Supplies | |||||||||||||
Selling price | $ | 260 |
|
| $ | 120 |
|
| $ | 340 |
|
| $ | 165 |
| |||||
Cost |
| 170 |
|
|
| 90 |
|
|
| 250 |
|
|
| 162 |
| |||||
Replacement cost |
| 240 |
|
|
| 80 |
|
|
| 235 |
|
|
| 158 |
| |||||
Costs to sell |
| 30 |
|
|
| 5 |
|
|
| 25 |
|
|
| 10 |
| |||||
Normal gross profit ratio |
| 30 | % |
|
| 30 | % |
|
| 30 | % |
|
| 20 | % | |||||
In applying the lower of cost or market rule, the inventory of surgical supplies would be valued at:
A) $100.
B) $90.
C) $80.
D) $75.
Difficulty: 3 Hard
Topic: LCM—Determine market and apply LCM
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
59) Data related to the inventories of Kimzey Medical Supply are presented below:
| Surgical |
| Surgical |
| Rehab |
| Rehab | |||||||||||||
| Equipment |
| Supplies |
| Equipment |
| Supplies | |||||||||||||
Selling price | $ | 260 |
|
| $ | 120 |
|
| $ | 340 |
|
| $ | 165 |
| |||||
Cost |
| 170 |
|
|
| 90 |
|
|
| 250 |
|
|
| 162 |
| |||||
Replacement cost |
| 240 |
|
|
| 80 |
|
|
| 235 |
|
|
| 158 |
| |||||
Costs to sell |
| 30 |
|
|
| 5 |
|
|
| 25 |
|
|
| 10 |
| |||||
Normal gross profit ratio |
| 30 | % |
|
| 30 | % |
|
| 30 | % |
|
| 20 | % | |||||
In applying the lower of cost or market rule, the inventory of rehab equipment would be valued at:
A) $315.
B) $247.
C) $150.
D) $235.
Difficulty: 3 Hard
Topic: LCM—Determine market and apply LCM
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
60) Data related to the inventories of Kimzey Medical Supply are presented below:
| Surgical |
| Surgical |
| Rehab |
| Rehab | |||||||||||||
| Equipment |
| Supplies |
| Equipment |
| Supplies | |||||||||||||
Selling price | $ | 260 |
|
| $ | 120 |
|
| $ | 340 |
|
| $ | 165 |
| |||||
Cost |
| 170 |
|
|
| 90 |
|
|
| 250 |
|
|
| 162 |
| |||||
Replacement cost |
| 240 |
|
|
| 80 |
|
|
| 235 |
|
|
| 158 |
| |||||
Costs to sell |
| 30 |
|
|
| 5 |
|
|
| 25 |
|
|
| 10 |
| |||||
Normal gross profit ratio |
| 30 | % |
|
| 30 | % |
|
| 30 | % |
|
| 20 | % | |||||
In applying the lower of cost or market rule, the inventory of rehab supplies would be valued at:
A) $122.
B) $158.
C) $162.
D) $155.
Difficulty: 3 Hard
Topic: LCM—Determine market and apply LCM
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
61) Data related to the inventories of Mountain Ski Equipment and Supplies is presented below:
| Skis |
| Boots |
| Apparel |
| Supplies | |||||||||||||||
Selling price | $ | 180,000 |
|
| $ | 150,000 |
|
| $ | 120,000 |
|
| $ | 60,000 |
| |||||||
Cost |
| 128,000 |
|
|
| 133,000 |
|
|
| 90,000 |
|
|
| 48,000 |
| |||||||
Replacement cost |
| 120,000 |
|
|
| 130,000 |
|
|
| 110,000 |
|
|
| 50,000 |
| |||||||
Sales commission |
| 10 | % |
|
| 10 | % |
|
| 10 | % |
|
| 10 | % | |||||||
Normal gross profit ratio |
| 20 | % |
|
| 20 | % |
|
| 15 | % |
|
| 15 | % | |||||||
In applying the lower of cost or market rule, the inventory of skis would be valued at:
A) $162,000.
B) $128,000.
C) $120,000.
D) $126,000.
Difficulty: 3 Hard
Topic: LCM—Determine market and apply LCM
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
62) Data related to the inventories of Mountain Ski Equipment and Supplies is presented below:
| Skis |
| Boots |
| Apparel |
| Supplies | |||||||||||||||
Selling price | $ | 180,000 |
|
| $ | 150,000 |
|
| $ | 120,000 |
|
| $ | 60,000 |
| |||||||
Cost |
| 128,000 |
|
|
| 133,000 |
|
|
| 90,000 |
|
|
| 48,000 |
| |||||||
Replacement cost |
| 120,000 |
|
|
| 130,000 |
|
|
| 110,000 |
|
|
| 50,000 |
| |||||||
Sales commission |
| 10 | % |
|
| 10 | % |
|
| 10 | % |
|
| 10 | % | |||||||
Normal gross profit ratio |
| 20 | % |
|
| 20 | % |
|
| 15 | % |
|
| 15 | % | |||||||
In applying the lower of cost or market rule, the inventory of boots would be valued at:
A) $135,000.
B) $133,000.
C) $130,000.
D) $105,000.
Difficulty: 3 Hard
Topic: LCM—Determine market and apply LCM
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
63) Data related to the inventories of Mountain Ski Equipment and Supplies is presented below:
| Skis |
| Boots |
| Apparel |
| Supplies | |||||||||||||||
Selling price | $ | 180,000 |
|
| $ | 150,000 |
|
| $ | 120,000 |
|
| $ | 60,000 |
| |||||||
Cost |
| 128,000 |
|
|
| 133,000 |
|
|
| 90,000 |
|
|
| 48,000 |
| |||||||
Replacement cost |
| 120,000 |
|
|
| 130,000 |
|
|
| 110,000 |
|
|
| 50,000 |
| |||||||
Sales commission |
| 10 | % |
|
| 10 | % |
|
| 10 | % |
|
| 10 | % | |||||||
Normal gross profit ratio |
| 20 | % |
|
| 20 | % |
|
| 15 | % |
|
| 15 | % | |||||||
In applying the lower of cost or market rule, the inventory of apparel would be valued at:
A) $108,000.
B) $90,000.
C) $110,000.
D) $115,000.
Difficulty: 3 Hard
Topic: LCM—Determine market and apply LCM
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
64) Data related to the inventories of Mountain Ski Equipment and Supplies is presented below:
| Skis |
| Boots |
| Apparel |
| Supplies | |||||||||||||||
Selling price | $ | 180,000 |
|
| $ | 150,000 |
|
| $ | 120,000 |
|
| $ | 60,000 |
| |||||||
Cost |
| 128,000 |
|
|
| 133,000 |
|
|
| 90,000 |
|
|
| 48,000 |
| |||||||
Replacement cost |
| 120,000 |
|
|
| 130,000 |
|
|
| 110,000 |
|
|
| 50,000 |
| |||||||
Sales commission |
| 10 | % |
|
| 10 | % |
|
| 10 | % |
|
| 10 | % | |||||||
Normal gross profit ratio |
| 20 | % |
|
| 20 | % |
|
| 15 | % |
|
| 15 | % | |||||||
In applying the lower of cost or market rule, the inventory of supplies would be valued at:
A) $45,000.
B) $54,000.
C) $50,000.
D) $48,000.
Difficulty: 1 Easy
Topic: LCM—Determine market and apply LCM
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
65) When using the gross profit method to estimate ending inventory, it is not necessary to know:
A) Beginning inventory.
B) Net purchases.
C) Cost of goods sold.
D) Net sales.
Difficulty: 2 Medium
Topic: Gross profit method
Learning Objective: 09-02 Estimate ending inventory and cost of goods sold using the gross profit method.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
66) On July 8, a fire destroyed the entire merchandise inventory on hand of Larrenaga Wholesale Corporation. The following information is available:
Sales, January 1 through July 8 | $ | 700,000 |
|
Inventory, January 1 |
| 130,000 |
|
Purchases, January 1 through July 8 |
| 640,000 |
|
Gross profit ratio |
| 30 | % |
What is the estimated inventory on July 8 immediately prior to the fire?
A) $192,000.
B) $490,000.
C) $510,000.
D) $280,000.
|
| |||||
Beginning inventory plus purchases | $ | 770,000 |
|
| ||
Less: Estimated cost of goods sold ($700,000 × [1 − 0.30]) |
| 490,000 |
|
| ||
Estimated ending inventory | $ | 280,000 |
|
| ||
Difficulty: 3 Hard
Topic: Gross profit method
Learning Objective: 09-02 Estimate ending inventory and cost of goods sold using the gross profit method.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
67) California Inc., through no fault of its own, lost an entire plant due to an earthquake on May 1, 2021. In preparing its insurance claim on the inventory loss, the company developed the following data: Inventory January 1, 2021, $300,000; sales and purchases from January 1, 2021, to May 1, 2021, $1,300,000 and $875,000, respectively. California consistently reports a 40% gross profit. The estimated inventory on May 1, 2021, is:
A) $302,500.
B) $360,000.
C) $395,000.
D) $455,000.
| ||||||||||
Beginning inventory |
|
|
|
| $ | 300,000 |
|
| ||
Plus: Net purchases |
|
|
|
|
| 875,000 |
|
| ||
Goods available for sale |
|
|
|
|
| 1,175,000 |
|
| ||
Less: | Cost of goods sold: |
|
|
|
|
|
|
|
| |
| Net sales | $ | 1,300,000 |
|
|
|
|
|
| |
Less: | Estimated gross profit |
| (520,000 | ) |
|
|
|
|
| |
Estimated cost of goods sold |
|
|
|
|
| (780,000 | ) |
| ||
Estimated ending inventory |
|
|
|
| $ | 395,000 |
|
| ||
Difficulty: 3 Hard
Topic: Gross profit method
Learning Objective: 09-02 Estimate ending inventory and cost of goods sold using the gross profit method.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
68) Howard's Supply Co. suffered a fire loss on April 20, 2021. The company's last physical inventory was taken January 30, 2021, at which time the inventory totaled $220,000. Sales from January 30 to April 20 were $600,000 and purchases during that time were $450,000. Howard's consistently reports a 30% gross profit. The estimated inventory loss is:
A) $490,000.
B) $238,000.
C) $250,000.
D) None of these answer choices are correct.
|
| |||||||||
Beginning inventory |
|
|
|
| $ | 220,000 |
|
| ||
Plus: Net purchases |
|
|
|
|
| 450,000 |
|
| ||
Goods available for sale |
|
|
|
|
| 670,000 |
|
| ||
Less: | Cost of goods sold: |
|
|
|
|
|
|
|
| |
| Net sales | $ | 600,000 |
|
|
|
|
|
| |
Less: | Estimated gross profit |
| (180,000 | ) |
|
|
|
|
| |
Estimated cost of goods sold |
|
|
|
|
| (420,000 | ) |
| ||
Estimated ending inventory |
|
|
|
| $ | 250,000 |
|
| ||
Difficulty: 3 Hard
Topic: Gross profit method
Learning Objective: 09-02 Estimate ending inventory and cost of goods sold using the gross profit method.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
69) Coastal Shores Inc. (CSI) was destroyed by Hurricane Fred on August 5, 2021. At January 1, CSI reported an inventory of $170,000. Sales from January 1, 2021, to August 5, 2021, totaled $480,000 and purchases totaled $195,000 during that time. CSI consistently marks up its products 60% over cost to arrive at a selling price. The estimated inventory loss due to Hurricane Fred would be:
A) $131,175.
B) $65,000.
C) $69,000.
D) None of these answer choices are correct.
| |||||
Beginning inventory | $ | 170,000 |
|
| |
Plus: Net purchases |
| 195,000 |
|
| |
Goods available for sale |
| 365,000 |
|
| |
Less: Cost of goods sold: ($480,000 ÷ 160%) |
| (300,000 | ) |
| |
Estimated ending inventory | $ | 65,000 |
|
| |
Difficulty: 3 Hard
Topic: Gross profit method
Learning Objective: 09-02 Estimate ending inventory and cost of goods sold using the gross profit method.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
70) Under the LIFO retail method, the denominator in the cost-to-retail percentage includes:
A) Net markups and net markdowns.
B) Neither net markups nor net markdowns.
C) Net markups, but not net markdowns.
D) Net markdowns, but not net markups.
Difficulty: 1 Easy
Topic: Retail inventory method—LIFO retail
Learning Objective: 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement; FN Risk Analysis / Keyboard Navigation
71) Under the retail method, the denominator in the cost-to-retail percentage does not include:
A) Purchases.
B) Purchase returns.
C) Abnormal shortages.
D) Freight-in.
Difficulty: 1 Easy
Topic: Retail inventory method—Other issues
Learning Objective: 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement; FN Risk Analysis / Keyboard Navigation
72) Under the retail method, the numerator in the cost-to-retail percentage includes:
A) Beginning inventory.
B) Purchases.
C) Freight-in.
D) All of the other choices are included in the numerator.
Difficulty: 1 Easy
Topic: Retail inventory method—Other issues
Learning Objective: 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
73) Under the retail inventory method:
A) A company measures inventory on its balance sheet by converting retail prices to cost.
B) A company measures inventory on its balance sheet at current selling prices.
C) A company measures inventory on its balance sheet on a LIFO basis.
D) None of the other answer choices are correct.
Difficulty: 1 Easy
Topic: Retail inventory method
Learning Objective: 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
74) Under the LIFO retail method, which of the following is used to calculate the denominator of the current-period cost-to-retail percentage?
A) Beginning inventory.
B) Employee discounts.
C) Normal spoilage.
D) None of the other answer choices are correct.
Difficulty: 2 Medium
Topic: Retail inventory method—LIFO retail; Retail inventory method—Other issues
Learning Objective: 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
75) Under the retail method, in determining the cost-to-retail percentage for the current year:
A) Net markups are included.
B) Net markdowns are excluded.
C) Beginning inventory is excluded.
D) All of these answer choices are correct.
Difficulty: 1 Easy
Topic: Retail inventory method
Learning Objective: 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
76) A company using the LIFO retail method has the following information for the current year's operations:
| Cost |
| Retail | |||||||
Beginning inventory | $ | 50,000 |
|
| $ | 80,000 |
| |||
Net purchases during the year |
| 425,000 |
|
|
| 740,000 |
| |||
Net sales |
|
|
|
|
| 710,000 |
| |||
To convert ending inventory to cost, management calculates the cost-to-retail percentage as cost of $475,000 ($50,000 + $425,000) divided by retail of $820,000 ($80,000 + $740,000). Which of the following statements is correct?
A) The retail amount used to calculate the cost-to-retail percentage should be $110,000 ($80,000 + $740,000 − $710,000).
B) Only net purchases during the year are used to calculate the cost-to-retail percentage to convert ending inventory to cost.
C) Separate cost-to-retail percentages for beginning inventory and net purchases are needed to convert ending inventory to cost.
D) The calculation of the cost-to-retail percentage is correct.
Difficulty: 2 Medium
Topic: Retail inventory method—LIFO retail
Learning Objective: 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: Keyboard Navigation
77) A company has the following information for the current year's operations:
| Cost |
| Retail | |||||||
Beginning inventory | $ | 40,000 |
|
| $ | 60,000 |
| |||
Purchases |
| 400,000 |
|
|
| 660,000 |
| |||
Net markups |
|
|
|
|
| 50,000 |
| |||
Net markdowns |
|
|
|
|
| 10,000 |
| |||
Net sales |
|
|
|
|
| 580,000 |
| |||
Management calculates the cost-to-retail percentage as 57.9%, equal to cost of $440,000 ($40,000 + $400,000) divided by retail of $760,000 ($60,000 + $660,000 + $50,000 − $10,000). Which application of the retail inventory method is the company using?
A) Average cost.
B) LIFO.
C) Conventional.
D) Dollar-value LIFO.
Difficulty: 2 Medium
Topic: Retail inventory method—Average cost
Learning Objective: 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: Keyboard Navigation
78) Fad City sells novel clothes that are subject to a great deal of price volatility. A recent item that cost $20 was marked up $12, marked down for a sale by $6 and then had a markdown cancellation of $3. The latest selling price is:
A) $23.
B) $26.
C) $29.
D) $35.
| |||||
Cost | $ | 20 |
|
| |
Initial markup |
| 12 |
|
| |
Markdown |
| (6 | ) |
| |
Markdown cancellation |
| 3 |
|
| |
Selling price | $ | 29 |
|
| |
Difficulty: 2 Medium
Topic: Retail inventory method
Learning Objective: 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
79) Harvey's Junk Jewelry started business January 1, 2021, and uses the LIFO retail method to estimate ending inventory. Listed below is data accumulated for the year ended December 31, 2021:
| Cost |
| Retail | |||||||
Beginning inventory | $ | 15,000 |
|
| $ | 23,000 |
| |||
Purchases |
| 49,000 |
|
|
| 78,000 |
| |||
Freight-in |
| 2,500 |
|
|
|
|
| |||
Purchase returns |
| 1,700 |
|
|
| 2,600 |
| |||
Net markups |
|
|
|
|
| 2,000 |
| |||
Net markdowns |
|
|
|
|
| 4,100 |
| |||
Net sales |
|
|
|
|
| 70,600 |
| |||
Employee discounts |
|
|
|
|
| 700 |
| |||
The numerator for the current period's cost-to-retail percentage is:
A) $64,800.
B) $48,100.
C) $47,700.
D) $49,800.
|
| |||||||||
Beginning inventory | $ | 15,000 |
|
| $ | 23,000 |
|
| ||
Plus: | Purchases |
| 49,000 |
|
|
| 78,000 |
|
| |
| Freight-in |
| 2,500 |
|
|
|
|
|
| |
Less: | Purchases returns |
| (1,700 | ) |
|
| (2,600 | ) |
| |
Plus: | Net markups |
|
|
|
|
| 2,000 |
|
| |
Less: | Net markdowns |
|
|
|
|
| (4,100 | ) |
| |
Goods available for sale (excluding beginning inventory) |
| 49,800 |
|
|
| 73,300 |
|
| ||
Goods available for sale (including beginning inventory) |
| 64,800 |
|
|
| 96,300 |
|
| ||
Difficulty: 3 Hard
Topic: Retail inventory method—LIFO retail; Retail inventory method—Other issues
Learning Objective: 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
80) Harvey's Junk Jewelry started business January 1, 2021, and uses the LIFO retail method to estimate ending inventory. Listed below is data accumulated for the year ended December 31, 2021:
| Cost |
| Retail | |||||||
Beginning inventory | $ | 15,000 |
|
| $ | 23,000 |
| |||
Purchases |
| 49,000 |
|
|
| 78,000 |
| |||
Freight-in |
| 2,500 |
|
|
|
|
| |||
Purchase returns |
| 1,700 |
|
|
| 2,600 |
| |||
Net markups |
|
|
|
|
| 2,000 |
| |||
Net markdowns |
|
|
|
|
| 4,100 |
| |||
Net sales |
|
|
|
|
| 70,600 |
| |||
Employee discounts |
|
|
|
|
| 700 |
| |||
The denominator for the current period's cost-to-retail percentage is:
A) $96,300.
B) $73,300.
C) $101,000.
D) $81,500.
|
| |||||||||
Beginning inventory | $ | 15,000 |
|
| $ | 23,000 |
|
| ||
Plus: | Purchases |
| 49,000 |
|
|
| 78,000 |
|
| |
| Freight-in |
| 2,500 |
|
|
|
|
|
| |
Less: | Purchases returns |
| (1,700 | ) |
|
| (2,600 | ) |
| |
Plus: | Net markups |
|
|
|
|
| 2,000 |
|
| |
Less: | Net markdowns |
|
|
|
|
| (4,100 | ) |
| |
Goods available for sale (excluding beginning inventory) |
| 49,800 |
|
|
| 73,300 |
|
| ||
Goods available for sale (including beginning inventory) |
| 64,800 |
|
|
| 96,300 |
|
| ||
Difficulty: 3 Hard
Topic: Retail inventory method—LIFO retail; Retail inventory method—Other issues
Learning Objective: 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
81) Harvey's Junk Jewelry started business January 1, 2021, and uses the LIFO retail method to estimate ending inventory. Listed below is data accumulated for the year ended December 31, 2021:
| Cost |
| Retail | |||||||
Beginning inventory | $ | 15,000 |
|
| $ | 23,000 |
| |||
Purchases |
| 49,000 |
|
|
| 78,000 |
| |||
Freight-in |
| 2,500 |
|
|
|
|
| |||
Purchase returns |
| 1,700 |
|
|
| 2,600 |
| |||
Net markups |
|
|
|
|
| 2,000 |
| |||
Net markdowns |
|
|
|
|
| 4,100 |
| |||
Net sales |
|
|
|
|
| 70,600 |
| |||
Employee discounts |
|
|
|
|
| 700 |
| |||
The estimated ending inventory at retail is:
A) $27,300.
B) $25,000.
C) $26,600.
D) $26,400.
|
| |||||||||
Beginning inventory | $ | 15,000 |
|
| $ | 23,000 |
|
| ||
Plus: | Purchases |
| 49,000 |
|
|
| 78,000 |
|
| |
| Freight-in |
| 2,500 |
|
|
|
|
|
| |
Less: | Purchases returns |
| (1,700 | ) |
|
| (2,600 | ) |
| |
Plus: | Net markups |
|
|
|
|
| 2,000 |
|
| |
Less: | Net markdowns |
|
|
|
|
| (4,100 | ) |
| |
Goods available for sale (excluding beginning inventory) |
| 49,800 |
|
|
| 73,300 |
|
| ||
Goods available for sale (including beginning inventory) |
| 64,800 |
|
|
| 96,300 |
|
| ||
Less: | Sales |
|
|
|
|
|
|
|
| |
| Net sales | $ | 70,600 |
|
|
|
|
|
| |
| Add back employee discount |
| 700 |
|
|
| (71,300 | ) |
| |
Estimated ending inventory at retail |
|
|
|
| $ | 25,000 |
|
| ||
Difficulty: 3 Hard
Topic: Retail inventory method—LIFO retail; Retail inventory method—Other issues
Learning Objective: 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
82) Harvey's Junk Jewelry started business January 1, 2021, and uses the LIFO retail method to estimate ending inventory. Listed below is data accumulated for the year ended December 31, 2021:
| Cost |
| Retail | |||||||
Beginning inventory | $ | 15,000 |
|
| $ | 23,000 |
| |||
Purchases |
| 49,000 |
|
|
| 78,000 |
| |||
Freight-in |
| 2,500 |
|
|
|
|
| |||
Purchase returns |
| 1,700 |
|
|
| 2,600 |
| |||
Net markups |
|
|
|
|
| 2,000 |
| |||
Net markdowns |
|
|
|
|
| 4,100 |
| |||
Net sales |
|
|
|
|
| 70,600 |
| |||
Employee discounts |
|
|
|
|
| 700 |
| |||
To the nearest thousand, the estimated ending inventory at cost is (round cost-to-retail ratio to whole percentage):
A) $16,000.
B) $15,000.
C) $13,000.
D) $19,000.
Beginning inventory | $ | 15,000 |
|
| $ | 23,000 |
|
| ||
Plus: | Purchases |
| 49,000 |
|
|
| 78,000 |
|
| |
| Freight-in |
| 2,500 |
|
|
|
|
|
| |
Less: | Purchases returns |
| (1,700 | ) |
|
| (2,600 | ) |
| |
Plus: | Net markups |
|
|
|
|
| 2,000 |
|
| |
Less: | Net markdowns |
|
|
|
|
| (4,100 | ) |
| |
Goods available for sale (excluding beginning inventory) |
| 49,800 |
|
|
| 73,300 |
|
| ||
Goods available for sale (including beginning inventory) |
| 64,800 |
|
|
| 96,300 |
|
| ||
Cost-to-retail percentage = $49,800 ÷ $73,300 = 68% (rounded) |
| |||||||||
|
|
|
|
|
|
|
|
|
| |
Less: | Sales |
|
|
|
|
|
|
|
| |
| Net sales | $ | 70,600 |
|
|
|
|
|
| |
| Add back employee discount |
| 700 |
|
|
| (71,300 | ) |
| |
Estimated ending inventory at retail |
|
|
|
| $ | 25,000 |
|
| ||
| Retail |
| Cost | |||||||
Beginning inventory | $ | 23,000 |
|
| $ | 15,000 |
| |||
Current period's layer |
| 2,000 | × 68% |
|
| 1,360 |
| |||
Total | $ | 25,000 |
|
| $ | 16,360 |
| |||
Difficulty: 3 Hard
Topic: Retail inventory method—LIFO retail
Learning Objective: 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
83) Lacy's Linen Mart uses the average cost retail method to estimate inventories. Data for the first six months of 2021 include: beginning inventory at cost and retail were $60,000 and $120,000, net purchases at cost and retail were $312,000 and $480,000, and sales during the first six months totaled $490,000. The estimated inventory at June 30, 2021, would be:
A) $68,200.
B) $55,000.
C) $71,500.
D) $63,250.
Difficulty: 2 Medium
Topic: Retail inventory method—LIFO retail
Learning Objective: 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
84) Hawkeye Auto Parts uses the average cost retail method to estimate inventories. Data for the first six months of 2021 include: beginning inventory at cost and retail were $55,000 and $100,000, net purchases at cost and retail were $785,000 and $1,300,000, and sales during the first six months totaled $800,000. The estimated inventory at June 30, 2021, would be:
A) $330,000.
B) $360,000.
C) $362,300.
D) None of these answer choices are correct.
Difficulty: 2 Medium
Topic: Retail inventory method—LIFO retail
Learning Objective: 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
85) Marilee's Electronics uses a periodic inventory system and the average cost retail method to estimate ending inventory and cost of goods sold. The following data is available from the company records for the month of June 2021:
| Cost |
| Retail | |||||||
Beginning inventory | $ | 80,000 |
|
| $ | 130,000 |
| |||
Net purchases |
| 261,000 |
|
|
| 500,000 |
| |||
Net markups |
|
|
|
|
| 25,000 |
| |||
Net markdowns |
|
|
|
|
| 35,000 |
| |||
Net sales |
|
|
|
|
| 520,000 |
| |||
The average cost-to-retail percentage is:
A) 52.2%.
B) 61.5%.
C) 56.8%.
D) 55%.
| Cost |
| Retail |
| |||||||||
Beginning inventory | $ | 80,000 |
|
| $ | 130,000 |
|
| |||||
Plus: | Net purchases |
| 261,000 |
|
|
| 500,000 |
|
| ||||
| Net markups |
|
|
|
|
| 25,000 |
|
| ||||
Less: | Net markdowns |
|
|
|
|
| (35,000 | ) |
| ||||
Goods available for sale | $ | 341,000 |
|
|
| 620,000 |
|
| |||||
Difficulty: 2 Medium
Topic: Retail inventory method—Average cost
Learning Objective: 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
86) Marilee's Electronics uses a periodic inventory system and the average cost retail method to estimate ending inventory and cost of goods sold. The following data is available from the company records for the month of June 2021:
| Cost |
| Retail | |||||||
Beginning inventory | $ | 80,000 |
|
| $ | 130,000 |
| |||
Net purchases |
| 261,000 |
|
|
| 500,000 |
| |||
Net markups |
|
|
|
|
| 25,000 |
| |||
Net markdowns |
|
|
|
|
| 35,000 |
| |||
Net sales |
|
|
|
|
| 520,000 |
| |||
To the nearest thousand, estimated ending inventory is:
A) $55,000.
B) $52,000.
C) $57,000.
D) None of these answer choices are correct.
|
| Cost |
| Retail |
| ||||||||
Beginning inventory | $ | 80,000 |
|
| $ | 130,000 |
|
| |||||
Plus: | Net purchases |
| 261,000 |
|
|
| 500,000 |
|
| ||||
| Net markups |
|
|
|
|
| 25,000 |
|
| ||||
Less: | Net markdowns |
|
|
|
|
| (35,000 | ) |
| ||||
Goods available for sale | $ | 341,000 |
|
|
| 620,000 |
|
| |||||
|
|
|
|
|
|
|
|
|
| ||||
Cost-to-retail percentage = $341,000 ÷ $620,000 = 55% |
| ||||||||||||
|
|
|
|
|
|
|
|
|
| ||||
Less: Net sales |
|
|
|
|
| (520,000 | ) |
| |||||
Estimated ending inventory at retail |
|
|
|
| $ | 100,000 |
|
| |||||
Estimated ending inventory at cost (55% × $100,000) | $ | 55,000 |
|
|
|
|
|
| |||||
Difficulty: 2 Medium
Topic: Retail inventory method—Average cost
Learning Objective: 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
87) Benny's Bed Co. uses a periodic inventory system and the average cost retail method to estimate ending inventory and cost of goods sold. The following data is available from the company records for the month of September 2021.
| Cost |
| Retail | |||||||
Beginning inventory | $ | 30,000 |
|
| $ | 50,000 |
| |||
Net purchases |
| 125,000 |
|
|
| 220,000 |
| |||
Net markups |
|
|
|
|
| 15,000 |
| |||
Net markdowns |
|
|
|
|
| 6,000 |
| |||
Net sales |
|
|
|
|
| 208,000 |
| |||
The average cost-to-retail percentage (rounded) is:
A) 74.5%.
B) 55.6%.
C) 57.4%.
D) 58.7%.
|
| Cost |
| Retail |
| ||||||||
Beginning inventory | $ | 30,000 |
|
| $ | 50,000 |
|
| |||||
Plus: | Net purchases |
| 125,000 |
|
|
| 220,000 |
|
| ||||
| Net markups |
|
|
|
|
| 15,000 |
|
| ||||
Less: | Net markdowns |
|
|
|
|
| (6,000 | ) |
| ||||
Goods available for sale | $ | 155,000 |
|
|
| 279,000 |
|
| |||||
Difficulty: 2 Medium
Topic: Retail inventory method—Average cost
Learning Objective: 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
88) Benny's Bed Co. uses a periodic inventory system and the average cost retail method to estimate ending inventory and cost of goods sold. The following data is available from the company records for the month of September 2021.
| Cost |
| Retail | |||||||
Beginning inventory | $ | 30,000 |
|
| $ | 50,000 |
| |||
Net purchases |
| 125,000 |
|
|
| 220,000 |
| |||
Net markups |
|
|
|
|
| 15,000 |
| |||
Net markdowns |
|
|
|
|
| 6,000 |
| |||
Net sales |
|
|
|
|
| 208,000 |
| |||
To the nearest thousand, estimated ending inventory is:
A) $41,000.
B) $37,000.
C) $51,000.
D) None of these answer choices are correct.
|
| Cost |
| Retail |
| ||||||||
Beginning inventory | $ | 30,000 |
|
| $ | 50,000 |
|
| |||||
Plus: | Net purchases |
| 125,000 |
|
|
| 220,000 |
|
| ||||
| Net markups |
|
|
|
|
| 15,000 |
|
| ||||
Less: | Net markdowns |
|
|
|
|
| (6,000 | ) |
| ||||
Goods available for sale | $ | 155,000 |
|
|
| 279,000 |
|
| |||||
|
|
|
|
|
|
|
|
|
| ||||
Cost-to-retail percentage = $155,000 ÷ $279,000 = 55.6% |
| ||||||||||||
|
|
|
|
|
|
|
|
|
| ||||
Less: Net sales |
|
|
|
|
| (208,000 | ) |
| |||||
Estimated ending inventory at retail |
|
|
|
| $ | 71,000 |
|
| |||||
Estimated ending inventory at cost (55.6% × $71,000) | $ | 39,476 |
|
|
|
|
|
| |||||
Difficulty: 3 Hard
Topic: Retail inventory method—Average cost
Learning Objective: 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
89) Data below for the year ended December 31, 2021, relates to Houdini Inc. Houdini started business January 1, 2021, and uses the LIFO retail method to estimate ending inventory.
| Cost |
| Retail | |||||||
Beginning inventory | $ | 66,000 |
|
| $ | 104,000 |
| |||
Net purchases |
| 280,000 |
|
|
| 420,000 |
| |||
Net markups |
|
|
|
|
| 20,000 |
| |||
Net markdowns |
|
|
|
|
| 40,000 |
| |||
Net sales |
|
|
|
|
| 375,000 |
| |||
Current period cost-to-retail percentage is:
A) 70.0%.
B) 68.7%.
C) 63.6%.
D) 63.5%.
|
|
| Cost |
|
|
| Retail |
|
|
Beginning inventory | $ | 66,000 |
|
| $ | 104,000 |
|
| |
Plus: | Net Purchases |
| 280,000 |
|
|
| 420,000 |
|
|
| Net markups |
|
|
|
|
| 20,000 |
|
|
Less: | Net markdowns |
|
|
|
|
| (40,000 | ) |
|
Goods available for sale (excluding beginning inventory) | $ | 280,000 |
|
| $ | 400,000 |
|
| |
Goods available for sale (including beginning inventory) | $ | 346,000 |
|
| $ | 504,000 |
|
| |
Difficulty: 3 Hard
Topic: Retail inventory method—LIFO retail
Learning Objective: 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
90) Data below for the year ended December 31, 2021, relates to Houdini Inc. Houdini started business January 1, 2021, and uses the LIFO retail method to estimate ending inventory.
| Cost |
| Retail | |||||||
Beginning inventory | $ | 66,000 |
|
| $ | 104,000 |
| |||
Net purchases |
| 280,000 |
|
|
| 420,000 |
| |||
Net markups |
|
|
|
|
| 20,000 |
| |||
Net markdowns |
|
|
|
|
| 40,000 |
| |||
Net sales |
|
|
|
|
| 375,000 |
| |||
Estimated ending inventory at retail is:
A) $65,000.
B) $169,600.
C) $25,000.
D) $129,000.
|
| Cost |
| Retail |
| ||||||||
Beginning inventory | $ | 66,000 |
|
| $ | 104,000 |
|
| |||||
Plus: | Net Purchases |
| 280,000 |
|
|
| 420,000 |
|
| ||||
| Net markups |
|
|
|
|
| 20,000 |
|
| ||||
Less: | Net markdowns |
|
|
|
|
| (40,000 | ) |
| ||||
Goods available for sale (excluding beginning inventory) | $ | 280,000 |
|
| $ | 400,000 |
|
| |||||
Goods available for sale (including beginning inventory) | $ | 346,000 |
|
| $ | 504,000 |
|
| |||||
Less: Net sales |
|
|
|
|
| (375,000 | ) |
| |||||
Estimated ending inventory at retail |
|
|
|
| $ | 129,000 |
|
| |||||
Difficulty: 2 Medium
Topic: Retail inventory method—LIFO retail
Learning Objective: 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
91) Data below for the year ended December 31, 2021, relates to Houdini Inc. Houdini started business January 1, 2021, and uses the LIFO retail method to estimate ending inventory.
| Cost |
| Retail | |||||||
Beginning inventory | $ | 66,000 |
|
| $ | 104,000 |
| |||
Net purchases |
| 280,000 |
|
|
| 420,000 |
| |||
Net markups |
|
|
|
|
| 20,000 |
| |||
Net markdowns |
|
|
|
|
| 40,000 |
| |||
Net sales |
|
|
|
|
| 375,000 |
| |||
Estimated ending inventory at cost is:
A) $90,720.
B) $83,500.
C) $91,600.
D) None of these answer choices are correct.
|
| Cost |
| Retail |
| |||||||
Beginning inventory | $ | 66,000 |
|
| $ | 104,000 |
|
| ||||
Plus: | Net Purchases |
| 280,000 |
|
|
| 420,000 |
|
| |||
| Net markups |
|
|
|
|
| 20,000 |
|
| |||
Less: | Net markdowns |
|
|
|
|
| (40,000 | ) |
| |||
Goods available for sale (excluding beginning inventory) | $ | 280,000 |
|
| $ | 400,000 |
|
| ||||
Goods available for sale (including beginning inventory) | $ | 346,000 |
|
| $ | 504,000 |
|
| ||||
Less: Net sales |
|
|
|
|
| (375,000 | ) |
| ||||
Estimated ending inventory at retail |
|
|
|
| $ | 129,000 |
|
| ||||
| Retail |
| Cost |
| |||||
Beginning inventory | $ | 104,000 |
|
| $ | 66,000 |
|
| |
Current period's layer |
| 25,000 | × 70% |
|
| 17,500 |
|
| |
Total | $ | 129,000 |
|
| $ | 83,500 |
|
| |
Difficulty: 3 Hard
Topic: Retail inventory method—LIFO retail
Learning Objective: 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
92) When computing the cost-to-retail percentage for the average cost retail method, included in the denominator are:
A) Net markups and net markdowns.
B) Neither net markups nor net markdowns.
C) Net markups, but not net markdowns.
D) Net markdowns, but not net markups.
Difficulty: 1 Easy
Topic: Retail inventory method—Average cost
Learning Objective: 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
93) The conventional retail inventory method is based on:
A) Average cost.
B) LIFO cost.
C) Lower of average cost or market value.
D) Lower of LIFO cost or market value.
Difficulty: 1 Easy
Topic: Retail inventory method—Conventional retail
Learning Objective: 09-04 Explain how the retail inventory method can be made to approximate the lower of cost or market rule.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
94) Under the conventional retail method, the denominator in the cost-to-retail percentage includes:
A) Net markups and net markdowns.
B) Neither net markups nor net markdowns.
C) Net markups, but not net markdowns.
D) Net markdowns, but not net markups.
Difficulty: 1 Easy
Topic: Retail inventory method—Conventional retail
Learning Objective: 09-04 Explain how the retail inventory method can be made to approximate the lower of cost or market rule.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
95) Under the conventional retail method, which of the following are not included in the denominator of the current period cost-to-retail conversion percentage?
A) Purchase returns.
B) Net markups.
C) Purchases.
D) Net markdowns.
Difficulty: 2 Medium
Topic: Retail inventory method—Conventional retail
Learning Objective: 09-04 Explain how the retail inventory method can be made to approximate the lower of cost or market rule.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
96) A company using the conventional retail method has the following information for the current year's operations:
| Cost |
| Retail | |||||||
Beginning inventory | $ | 100,000 |
|
| $ | 150,000 |
| |||
Purchases |
| 500,000 |
|
|
| 800,000 |
| |||
Net markups |
|
|
|
|
| 85,000 |
| |||
Net markdowns |
|
|
|
|
| 35,000 |
| |||
Net sales |
|
|
|
|
| 750,000 |
| |||
Management calculates the cost-to-retail percentage as 60%, equal to cost of $600,000 ($100,000 + $500,000) divided by retail of $1,000,000 ($150,000 + $800,000 + $85,000 − $35,000). Which of the following statements is correct?
A) The cost-to-retail percentage should be calculated as cost of $600,000 divided by retail of $750,000 (Net sales).
B) The retail amount should be $1,035,000, excluding net markdowns.
C) The cost and retail amounts should not include beginning inventory of $100,000 and $150,000, respectively.
D) The retail amount should be $950,000, excluding net markups and net markdowns.
Difficulty: 3 Hard
Topic: Retail inventory method—Conventional retail
Learning Objective: 09-04 Explain how the retail inventory method can be made to approximate the lower of cost or market rule.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: Keyboard Navigation
97) A company using the conventional retail method has the following information for the current year's operations:
| Cost |
| Retail | |||||||
Beginning inventory | $ | 100,000 |
|
| $ | 150,000 |
| |||
Purchases |
| 500,000 |
|
|
| 800,000 |
| |||
Net markups |
|
|
|
|
| 85,000 |
| |||
Net markdowns |
|
|
|
|
| 35,000 |
| |||
Net sales |
|
|
|
|
| 750,000 |
| |||
Management reports ending inventory in the balance sheet as $200,000 ($150,000 + $800,000 − $750,000). Which of the following statements is correct?
A) The calculation of ending inventory should involve adding net markups.
B) The calculation of ending inventory should involve subtracting net markdowns.
C) The calculation of ending inventory should involve converting retail prices to cost.
D) All of the other answer choices are correct.
Difficulty: 3 Hard
Topic: Retail inventory method—Conventional retail
Learning Objective: 09-04 Explain how the retail inventory method can be made to approximate the lower of cost or market rule.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: Keyboard Navigation
98) Cloverdale, Inc., uses the conventional retail inventory method to account for inventory. The following information relates to current year's operations:
| Cost |
| Retail | |||||||
Beginning inventory and purchases | $ | 313,500 |
|
| $ | 540,000 |
| |||
Net markups |
|
|
|
|
| 30,000 |
| |||
Net markdowns |
|
|
|
|
| 20,000 |
| |||
Net sales |
|
|
|
|
| 480,000 |
| |||
What amount should be reported as cost of goods sold for the year?
A) $273,600.
B) $272,861.
C) $275,000.
D) None of these answer choices are correct.
Difficulty: 3 Hard
Topic: Retail inventory method—Conventional retail
Learning Objective: 09-04 Explain how the retail inventory method can be made to approximate the lower of cost or market rule.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
99) Willie Nelson's Boots uses the conventional retail method to estimate ending inventory. Cost data for the most recent quarter is shown below:
| Cost |
| Retail | |||||||
Beginning inventory | $ | 46,000 |
|
| $ | 63,000 |
| |||
Net purchases |
| 154,000 |
|
|
| 215,000 |
| |||
Net markups |
|
|
|
|
| 22,000 |
| |||
Net markdowns |
|
|
|
|
| 35,000 |
| |||
Net sales |
|
|
|
|
| 220,000 |
| |||
The conventional cost-to-retail percentage (rounded) is:
A) 82.6%.
B) 66.7%.
C) 71.9%.
D) 75.5%.
|
| Cost |
| Retail |
| ||||||
Beginning inventory | $ | 46,000 |
| $ | 63,000 |
| |||||
Plus: | Net purchases |
| 154,000 |
|
| 215,000 |
| ||||
| Net markups |
|
|
|
| 22,000 |
| ||||
| $ | 200,000 |
| $ | 300,000 | ||||||
Difficulty: 2 Medium
Topic: Retail inventory method—Conventional retail
Learning Objective: 09-04 Explain how the retail inventory method can be made to approximate the lower of cost or market rule.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
100) Willie Nelson's Boots uses the conventional retail method to estimate ending inventory. Cost data for the most recent quarter is shown below:
| Cost |
| Retail | |||||||
Beginning inventory | $ | 46,000 |
|
| $ | 63,000 |
| |||
Net purchases |
| 154,000 |
|
|
| 215,000 |
| |||
Net markups |
|
|
|
|
| 22,000 |
| |||
Net markdowns |
|
|
|
|
| 35,000 |
| |||
Net sales |
|
|
|
|
| 220,000 |
| |||
To the nearest thousand, estimated ending inventory using the conventional retail method is:
A) $37,000.
B) $32,000.
C) $34,000.
D) $30,000.
Difficulty: 3 Hard
Topic: Retail inventory method—Conventional retail
Learning Objective: 09-04 Explain how the retail inventory method can be made to approximate the lower of cost or market rule.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
101) Clarabell Inc. uses the conventional retail method to estimate ending inventory. Cost data for the most recent quarter is shown below:
| Cost |
| Retail | |||||||
Beginning inventory | $ | 112,000 |
|
| $ | 191,000 |
| |||
Net purchases |
| 402,000 |
|
|
| 703,000 |
| |||
Net markups |
|
|
|
|
| 43,000 |
| |||
Net markdowns |
|
|
|
|
| 21,000 |
| |||
Net sales |
|
|
|
|
| 685,000 |
| |||
The conventional cost-to-retail percentage (rounded) is:
A) 54.9%.
B) 58.9%.
C) 53.6%.
D) 70.6%.
|
| Cost |
| Retail |
| ||||||
Beginning inventory | $ | 112,000 |
| $ | 191,000 |
| |||||
Plus: | Net purchases |
| 402,000 |
|
| 703,000 |
| ||||
| Net markups |
|
|
|
| 43,000 |
| ||||
| $ | 514,000 |
| $ | 937,000 |
| |||||
Difficulty: 3 Hard
Topic: Retail inventory method—Conventional retail
Learning Objective: 09-04 Explain how the retail inventory method can be made to approximate the lower of cost or market rule.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
102) Clarabell Inc. uses the conventional retail method to estimate ending inventory. Cost data for the most recent quarter is shown below:
| Cost |
| Retail | |||||||
Beginning inventory | $ | 112,000 |
|
| $ | 191,000 |
| |||
Net purchases |
| 402,000 |
|
|
| 703,000 |
| |||
Net markups |
|
|
|
|
| 43,000 |
| |||
Net markdowns |
|
|
|
|
| 21,000 |
| |||
Net sales |
|
|
|
|
| 685,000 |
| |||
To the nearest thousand, estimated ending inventory using the conventional retail method is:
A) $163,000.
B) $124,000.
C) $127,000.
D) $136,000.
Difficulty: 3 Hard
Topic: Retail inventory method—Conventional retail
Learning Objective: 09-04 Explain how the retail inventory method can be made to approximate the lower of cost or market rule.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
103) Portman Inc. uses the conventional retail inventory method. Expressed in millions of dollars, information about Portman's 2021 inventory account is expressed in the table below:
| Cost |
| Retail | |||||||
Beginning inventory | $ | 55 |
|
| $ | 90 |
| |||
Purchases |
| 1,160 |
|
|
| 2,170 |
| |||
Freight-in |
| 30 |
|
|
|
|
| |||
Purchase returns |
| 45 |
|
|
| 115 |
| |||
Net markups |
|
|
|
|
| 255 |
| |||
Net markdowns |
|
|
|
|
| 100 |
| |||
Normal spoilage |
|
|
|
|
| 60 |
| |||
Net sales |
|
|
|
|
| 1,940 |
| |||
What is the value of Portman's inventory at 12/31/2021?
A) $150 million.
B) $252 million.
C) $300 million.
D) None of these answer choices are correct.
(in millions of dollars) | Cost |
| Retail |
| ||||||||
Beginning inventory | $ | 55 |
|
| $ | 90 |
|
| ||||
Plus: | Purchases |
| 1,160 |
|
|
| 2,170 |
|
| |||
Freight-in |
| 30 |
|
|
|
|
|
| ||||
Less: | Purchase returns |
| (45 | ) |
|
| (115 | ) |
| |||
Plus: | Net markups |
|
|
|
|
| 255 |
|
| |||
|
|
| 1,200 |
|
|
| 2,400 |
|
| |||
Cost-to-retail percentage: 1,200 ÷ 2,400 = 50% |
|
|
|
|
|
|
|
| ||||
Less: Net markdowns |
|
|
|
|
| (100 | ) |
| ||||
Goods available for sale |
|
|
|
|
| 2,300 |
|
| ||||
Less: Normal spoilage |
|
|
|
|
| (60 | ) |
| ||||
Less: Net sales |
|
|
|
|
| (1,940 | ) |
| ||||
Estimated ending inventory at retail |
|
|
|
|
| 300 |
|
| ||||
Estimated ending inventory at cost (50% × 300) |
| 150 |
|
|
|
|
|
| ||||
Difficulty: 3 Hard
Topic: Retail inventory method—Other issues; Retail inventory method—Conventional retail
Learning Objective: 09-04 Explain how the retail inventory method can be made to approximate the lower of cost or market rule.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: Keyboard Navigation
104) Using the dollar-value LIFO retail method for inventory:
A) Is the same as dollar-value LIFO, except that the inventory is measured at retail, rather than at cost.
B) Combines retail LIFO accounting with dollar-value LIFO accounting.
C) Allows companies to report inventory on the balance sheet at retail prices.
D) All of these answer choices are correct.
Difficulty: 1 Easy
Topic: Retail inventory method—Dollar-value LIFO
Learning Objective: 09-05 Determine ending inventory using the dollar-value LIFO retail inventory method.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
105) The first step, when using dollar-value LIFO retail method for inventory, is to:
A) Determine the estimated ending inventory at current year retail prices.
B) Determine the estimated cost of goods sold for the current year.
C) Determine the cost-to-retail percentage for the current year transactions.
D) Price index adjust the LIFO inventory layers.
Difficulty: 1 Easy
Topic: Retail inventory method—Dollar-value LIFO
Learning Objective: 09-05 Determine ending inventory using the dollar-value LIFO retail inventory method.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
106) The second step, when using dollar-value LIFO retail method for inventory, is to determine the estimated:
A) Ending inventory at current year retail prices.
B) Cost of goods sold for the current year.
C) Ending inventory at cost.
D) Ending inventory at base year retail prices.
Difficulty: 1 Easy
Topic: Retail inventory method—Dollar-value LIFO
Learning Objective: 09-05 Determine ending inventory using the dollar-value LIFO retail inventory method.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
107) Under the dollar-value LIFO retail method, to determine if the increase in the value of inventory was due to an increase in quantities:
A) Compare beginning and ending inventory amounts at current year prices.
B) Compare beginning and ending inventory amounts after adjusting both amounts to the average price level for the year.
C) Inflate beginning inventory amount to end of year prices and compare to ending inventory amount.
D) Deflate the ending inventory amount to beginning of year prices and compare to the beginning inventory amount.
Difficulty: 2 Medium
Topic: Retail inventory method—Dollar-value LIFO
Learning Objective: 09-05 Determine ending inventory using the dollar-value LIFO retail inventory method.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
108) Under the dollar-value LIFO retail method, to determine the value of a LIFO layer:
A) Divide the LIFO layer by the layer-year price index and multiply by the layer-year cost-to-retail percentage.
B) Multiply the LIFO layer by the base year price index and the current year cost-to-retail percentage.
C) Multiply the LIFO layer by the layer-year price index and by the layer-year cost-to-retail percentage.
D) Divide the LIFO layer by the layer-year cost-to-retail percentage and multiply by the layer-year price index.
Difficulty: 2 Medium
Topic: Retail inventory method—Dollar-value LIFO
Learning Objective: 09-05 Determine ending inventory using the dollar-value LIFO retail inventory method.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement / Keyboard Navigation
109) Harlequin Co. has used the dollar-value LIFO retail method since it began operations in early 2020 (its base year). Its beginning inventory for 2021 was $36,000 at cost and $72,000 at retail prices. At the end of 2021, it computed its estimated ending inventory at retail to be $120,000. Assuming its cost-to-retail percentage for 2021 transactions was 60%, what is the inventory balance that Harlequin Co. would report in its 12/31/2021 balance sheet?
A) $64,800.
B) $72,000.
C) $120,000.
D) The balance can't be determined with the given information.
Difficulty: 3 Hard
Topic: Retail inventory method—Dollar-value LIFO
Learning Objective: 09-05 Determine ending inventory using the dollar-value LIFO retail inventory method.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
110) Harlequin Co. adopted the dollar-value LIFO retail method at the beginning of 2021 (its base year). Its beginning inventory for 2021 was $36,000 at cost and $72,000 at retail prices. At the end of 2021, it computed its estimated ending inventory at retail to be $110,000. Assuming its cost-to-retail percentage for 2021 transactions was 60%, and that the retail price index at the end of 2021 was 1.10, what is the inventory balance that Harlequin Co. would report in its 12/31/2021 balance sheet?
A) $66,000.
B) $54,480.
C) $110,000.
D) $60,000.
Difficulty: 3 Hard
Topic: Retail inventory method—Dollar-value LIFO
Learning Objective: 09-05 Determine ending inventory using the dollar-value LIFO retail inventory method.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
111) On January 1, 2021, the Coldstone Corporation adopted the dollar-value LIFO retail inventory method. Beginning inventory at cost and at retail were $180,000 and $282,000, respectively. Net purchases during the year at cost and at retail were $604,500 and $920,000, respectively. Markups during the year were $10,000. There were no markdowns. Net sales for 2021 were $900,000. The retail price index at the end of 2021 was 1.04. What is the inventory balance that Coldstone would report in its 12/31/2021 balance sheet?
A) $195,000.
B) $312,000.
C) $192,168.
D) $202,800.
| COST |
| RETAIL |
| |||||||
Inventory Jan. 1 | $ | 180,000 |
|
| $ | 282,000 |
|
| |||
Net purchases | $ | 604,500 |
|
| $ | 920,000 |
|
| |||
Net markups |
|
|
|
|
| 10,000 |
|
| |||
Subtotal | $ | 604,500 |
|
| $ | 930,000 |
|
| |||
Cost-to-retail: ($604,500 ÷ $930,000 = 65%) |
|
|
|
|
|
|
|
| |||
Goods available for sale | $ | 784,500 |
|
| $ | 1,212,000 |
|
| |||
Less Net sales |
|
|
|
|
| (900,000 | ) |
| |||
Ending inventory at current year retail |
|
|
|
| $ | 312,000 |
| ||||
| Step 1 | Step 2 | Step 3 |
Ending Inventory | Ending Inventory | Inventory Layers | Inventory Layers |
At Year-end | at Base Year | at Base Year | Converted |
Retail Prices | Retail Prices | Retail Prices | to Cost |
Beginning inventory ($282,000 retail) | $ | 180,000 |
|
2021 layer $18,000 × 1.04 × 0.65 |
| 12,168 |
|
Total ending inventory at dollar-value LIFO retail cost | $ | 192,168 |
|
Difficulty: 3 Hard
Topic: Retail inventory method—Dollar-value LIFO
Learning Objective: 09-05 Determine ending inventory using the dollar-value LIFO retail inventory method.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
112) Retrospective treatment of prior years' financial statements is required when there is a change from:
A) Average cost to FIFO.
B) FIFO to average cost.
C) LIFO to average cost.
D) All of these answer choices are correct.
Difficulty: 1 Easy
Topic: Change in inventory method
Learning Objective: 09-06 Explain the appropriate accounting treatment required when a change in inventory method is made.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
113) When changing from the average cost method to FIFO, the company:
A) Includes in current year's income the cumulative after-tax difference that would have resulted if the company had used FIFO in all prior years.
B) Revises comparative financial statements.
C) Records a journal entry to adjust the book balances from their current amounts to what those balances would have been using FIFO.
D) All of these answer choices are correct.
Difficulty: 2 Medium
Topic: Change in inventory method
Learning Objective: 09-06 Explain the appropriate accounting treatment required when a change in inventory method is made.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
114) Which of the following would not require the company to account for the change retrospectively?
A) From average cot to FIFO.
B) From FIFO to LIFO.
C) From LIFO to FIFO.
D) From LIFO to average cost.
Difficulty: 2 Medium
Topic: Change in inventory method
Learning Objective: 09-06 Explain the appropriate accounting treatment required when a change in inventory method is made.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
115) Sampress, Inc., reported inventory in the 2020 year-end balance sheet, using the average cost method, as $342,000. In 2021, the company decided to change its inventory method to FIFO. If the company had used the FIFO method in 2020, ending inventory would have been $367,000. What adjustment would Sampress make for this change in inventory method?
A) Debit Inventory for $25,000; Credit Retained earnings for $25,000.
B) Debit Inventory for $367,000; Credit Cost of goods sold for $367,000.
C) Debit Cost of goods sold for $25,000; Credit Inventory for $25,000.
D) No adjustment is necessary.
Difficulty: 2 Medium
Topic: Change in inventory method
Learning Objective: 09-06 Explain the appropriate accounting treatment required when a change in inventory method is made.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
116) Nidal Company reported inventory in the 2020 year-end balance sheet, using the FIFO method, as $185,000. In 2021, the company decided to change its inventory method to average cost. If the company had used the average cost method in 2020, ending inventory would have been $171,000. What adjustment would Nidal make for this change in inventory method?
A) Debit Inventory for $14,000; Credit Cost of goods sold for $14,000.
B) Debit Retained earnings for $14,000; Credit Inventory for $14,000.
C) Debit Retained earnings for $14,000; Credit Cost of goods sold for $14,000.
D) No adjustment is necessary.
Difficulty: 2 Medium
Topic: Change in inventory method
Learning Objective: 09-06 Explain the appropriate accounting treatment required when a change in inventory method is made.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
117) Connors Academy reported inventory in the 2020 year-end balance sheet, using the FIFO method, as $154,000. In 2021, the company decided to change its inventory method to LIFO. If the company had used the LIFO method in 2020, the company estimates that ending inventory would have been in the range $130,000-$135,000. What adjustment would Connors make for this change in inventory method?
A) Debit Inventory for $21,500; Credit Cost of goods sold for $21,500.
B) Debit Retained earnings for $24,000; Credit Inventory for $24,000.
C) Debit Retained earnings for $19,000; Credit Cost of goods sold for $19,000.
D) No adjustment is necessary.
Difficulty: 3 Hard
Topic: Change in inventory method—To LIFO
Learning Objective: 09-06 Explain the appropriate accounting treatment required when a change in inventory method is made.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
118) Suppose a company overstates its ending inventory in the current year. What effect will this have on the reported amount of cost of goods sold in the current year?
A) Overstate cost of goods sold.
B) Understate cost of goods sold.
C) No effect on cost of goods sold.
D) Cannot be determined without knowing the amount of the error.
Difficulty: 2 Medium
Topic: Inventory errors
Learning Objective: 09-07 Explain the appropriate accounting treatment required when an inventory error is discovered.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
119) If a company overstates its ending balance of inventory in Year 1 and it reports inventory correctly in Year 2, which one of the following is true?
A) Net income is overstated in Year 2.
B) Cost of goods sold is overstated in Year 1.
C) Net income is understated in Year 1.
D) Retained earnings is overstated in Year 1.
Difficulty: 2 Medium
Topic: Inventory errors
Learning Objective: 09-07 Explain the appropriate accounting treatment required when an inventory error is discovered.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
120) If a company understates its ending balance of inventory in Year 1 and it reports inventory correctly in Year 2, which one of the following is true?
A) Net income is overstated in Year 1.
B) Cost of goods sold is understated in Year 2.
C) Net income is understated in Year 2.
D) Retained earnings is understated in Year 2.
Difficulty: 2 Medium
Topic: Inventory errors
Learning Objective: 09-07 Explain the appropriate accounting treatment required when an inventory error is discovered.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
121) If a company understates its count of ending inventory in Year 1 and it reports inventory correctly in Year 2, which of the following is true?
A) Costs of goods sold is understated at the end of Year 1.
B) Net income is correct in Year 2.
C) The balance of retained earnings is overstated at the end of Year 1.
D) The balance of retained earnings is correct at the end of Year 2.
Difficulty: 2 Medium
Topic: Inventory errors
Learning Objective: 09-07 Explain the appropriate accounting treatment required when an inventory error is discovered.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: Keyboard Navigation
122) A company's correct ending balance for the inventory account at the end of Year 1 should be $57,000, but the company incorrectly reported it as $43,000. In Year 2, the company correctly recorded its ending balance of the inventory account. Which one of the following is true?
A) Gross profit is overstated by $14,000 in Year 1.
B) Retained earnings is understated by $14,000 in Year 2.
C) Gross profit is overstated by $14,000 in Year 2.
D) Cost of goods sold is understated by $14,000 in Year 1.
Difficulty: 2 Medium
Topic: Inventory errors
Learning Objective: 09-07 Explain the appropriate accounting treatment required when an inventory error is discovered.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: Keyboard Navigation
123) Prunedale Co. uses a periodic inventory system. Beginning inventory on January 1 was overstated by $32,000, and its ending inventory on December 31 was understated by $62,000. These errors were not discovered until the next year. As a result, Prunedale's cost of goods sold for this year was:
A) Overstated by $94,000.
B) Overstated by $30,000.
C) Understated by $94,000.
D) Understated by $30,000.
Difficulty: 3 Hard
Topic: Inventory errors
Learning Objective: 09-07 Explain the appropriate accounting treatment required when an inventory error is discovered.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
124) A company understated its ending inventory in Year 1 by $25,000 and also understated its ending inventory in Year 2 by $20,000. Neither error was discovered until Year 3. As a result, of these two errors, gross profit for Year 2 was:
A) Overstated by $5,000.
B) Understated by $45,000.
C) Understated by $20,000.
D) Overstated by $25,000.
Difficulty: 3 Hard
Topic: Inventory errors
Learning Objective: 09-07 Explain the appropriate accounting treatment required when an inventory error is discovered.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: Keyboard Navigation
125) A company overstated its ending inventory in Year 1 by $60,000. The error was not discovered until Year 3. No errors were made in Year 2. After finding the error in Year 3, management provides restated balance sheets for Year 1 and Year 2 by reducing the reported ending inventory in both Year 1 and Year 2 by $60,000. Which of the following statements is correct for Year 2?
A) Only the amount reported for retained earnings in Year 2 needs to be decreased by $60,000.
B) The amounts reported for both inventory and retained earnings in Year 2 should instead be increased by $60,000.
C) The amount reported for inventory in Year 2 needs to be increased by $60,000, and the amount reported for retained earnings in Year 2 needs to be decreased by $60,000.
D) No adjustments to the amounts reported for inventory or retained earnings are needed in
Year 2.
Difficulty: 3 Hard
Topic: Inventory errors
Learning Objective: 09-07 Explain the appropriate accounting treatment required when an inventory error is discovered.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: Keyboard Navigation
126) Poppy Co. uses a periodic inventory system. Beginning inventory on January 1 was understated by $30,000, and its ending inventory on December 31 was understated by $17,000. In addition, a purchase of merchandise costing $20,000 was incorrectly recorded as a $2,000 purchase. None of these errors were discovered until the next year. As a result, Poppy's cost of goods sold for this year was:
A) Overstated by $31,000.
B) Overstated by $5,000.
C) Understated by $31,000.
D) Understated by $48,000.
Difficulty: 3 Hard
Topic: Inventory errors
Learning Objective: 09-07 Explain the appropriate accounting treatment required when an inventory error is discovered.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
127) On July 10, 2021, Johnson Corporation signed a purchase commitment to purchase inventory for $200,000 on or before February 15, 2022. The company's fiscal year-end is December 31. The contract was exercised on February 1, 2022, and the inventory was purchased for cash at the contract price. On the purchase date of February 1, the market price of the inventory was $210,000. The market price of the inventory on December 31, 2021, was $180,000. The company uses a perpetual inventory system.
How much loss on purchase commitment will Johnson recognize in 2021?
A) $10,000.
B) $20,000.
C) $30,000.
D) None.
Difficulty: 2 Medium
Topic: Purchase commitments—Appendix
Learning Objective: Appendix 9 Purchase Commitments.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
128) On July 10, 2021, Johnson Corporation signed a purchase commitment to purchase inventory for $200,000 on or before February 15, 2022. The company's fiscal year-end is December 31. The contract was exercised on February 1, 2022, and the inventory was purchased for cash at the contract price. On the purchase date of February 1, the market price of the inventory was $210,000. The market price of the inventory on December 31, 2021, was $180,000. The company uses a perpetual inventory system.
At what amount will Johnson record the inventory purchased on February 1, 2022?
A) $210,000.
B) $200,000.
C) $180,000.
D) $190,000.
Inventory | 180,000 |
|
Estimated liability on purchase commitment | 20,000 |
|
Cash |
| 200,000 |
Difficulty: 3 Hard
Topic: Purchase commitments—Appendix
Learning Objective: Appendix 9 Purchase Commitments.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
129) Sullivan Corporation has determined its year-end inventory on a FIFO basis to be $500,000. Information pertaining to that inventory is as follows:
Selling price | $ | 520,000 |
|
Costs to sell |
| 30,000 |
|
Replacement cost |
| 440,000 |
|
What should be the reported value of Sullivan's inventory?
A) $500,000.
B) $440,000.
C) $470,000.
D) $490,000.
Difficulty: 2 Medium
Topic: LCNRV—Determine NRV and apply LCNRV
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
130) Sullivan Corporation has determined its year-end inventory on a FIFO basis to be $500,000. Information pertaining to that inventory is as follows:
Selling price | $ | 520,000 |
|
Costs to sell |
| 30,000 |
|
Replacement cost |
| 440,000 |
|
What should be the reported value of Sullivan's inventory if the company prepares its financial statements according to International Financial Reporting Standards (IFRS)?
A) $500,000.
B) $440,000.
C) $470,000.
D) $490,000.
Difficulty: 2 Medium
Topic: IFRS—Lower of cost or NRV
Learning Objective: 09-08 Discuss the primary differences between U.S. GAAP and IFRS with respect to the lower of cost or net realizable value rule for valuing inventory.
Bloom's: Apply
AACSB: Knowledge Application; Diversity
AICPA/Accessibility: BB Global; FN Measurement / Keyboard Navigation
131) Under International Financial Reporting Standards (IFRS), inventory is valued at the lower of cost and:
A) Replacement cost.
B) Net realizable value.
C) Net realizable value reduced by a normal profit margin.
D) None of these answer choices are correct.
Difficulty: 1 Easy
Topic: IFRS—Lower of cost or NRV
Learning Objective: 09-08 Discuss the primary differences between U.S. GAAP and IFRS with respect to the lower of cost or net realizable value rule for valuing inventory.
Bloom's: Understand
AACSB: Reflective Thinking; Diversity
AICPA/Accessibility: BB Global; FN Measurement / Keyboard Navigation
132) Haskell Corporation has determined its year-end inventory on a FIFO basis to be $785,000. Information pertaining to that inventory is as follows:
Selling price | $ | 805,000 |
|
Costs to sell |
| 35,000 |
|
Replacement cost |
| 765,000 |
|
What should be the reported value of Haskell's inventory if the company prepares its financial statements according to International Financial Reporting Standards (IFRS)?
A) $765,000.
B) $785,000.
C) $770,000.
D) $750,000.
Difficulty: 2 Medium
Topic: IFRS—Lower of cost or NRV
Learning Objective: 09-08 Discuss the primary differences between U.S. GAAP and IFRS with respect to the lower of cost or net realizable value rule for valuing inventory.
Bloom's: Apply
AACSB: Knowledge Application; Diversity
AICPA/Accessibility: BB Global; FN Measurement / Keyboard Navigation
133) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.
TERM | PHRASE | NUMBER |
1. Retrospective treatment | Estimates value of inventory based on historical relationships. | ____ |
2. LIFO retail | Requires retrospective treatment. | ____ |
3. Gross profit method | Added in arriving at ending inventory at retail. | ____ |
4. Net markup | Beginning inventory is not included in the calculation of the current period's cost-to-retail percentage. | ____ |
5. Change from LIFO to FIFO | Required for a change from FIFO to average cost. | ____ |
TERM | PHRASE | NUMBER |
1. Retrospective treatment | Estimates value of inventory based on historical relationships. | 3 |
2. LIFO retail | Requires retrospective treatment. | 5 |
3. Gross profit method | Added in arriving at ending inventory at retail. | 4 |
4. Net markup | Beginning inventory is not included in the calculation of the current period's cost-to-retail percentage. | 2 |
5. Change from LIFO to FIFO | Required for a change from FIFO to average cost. | 1 |
Difficulty: 1 Easy
Topic: Gross profit method; Retail inventory method; Retail inventory method—LIFO retail; Change in inventory method
Learning Objective: 09-02 Estimate ending inventory and cost of goods sold using the gross profit method.; 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.; 09-06 Explain the appropriate accounting treatment required when a change in inventory method is made.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement
134) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.
TERM | PHRASE | NUMBER |
1. Requires retrospective treatment | Change from LIFO to FIFO. | ____ |
2. Normal spoilage | Cost-to-retail percentage is determined for all goods available for sale. | ____ |
3. Average cost retail method | Always deducted after arriving at the calculation of the cost-to-retail percentage. | ____ |
4. Net markdown | Deducted in arriving at ending inventory at retail. | ____ |
5. Cost-to-retail percentage | Divide cost of goods available for sale by goods available at retail. | ____ |
TERM | PHRASE | NUMBER |
1. Requires retrospective treatment | Change from LIFO to FIFO. | 1 |
2. Normal spoilage | Cost-to-retail percentage is determined for all goods available for sale. | 3 |
3. Average cost retail method | Always deducted after arriving at the calculation of the cost-to-retail percentage. | 2 |
4. Net markdown | Deducted in arriving at ending inventory at retail. | 4 |
5. Cost-to-retail percentage | Divide cost of goods available for sale by goods available at retail. | 5 |
Difficulty: 1 Easy
Topic: Retail inventory method—Average cost; Retail inventory method—Other issues; Change in inventory method—To LIFO
Learning Objective: 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.; 09-06 Explain the appropriate accounting treatment required when a change in inventory method is made.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement
135) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.
TERM | PHRASE | NUMBER |
1. Retail inventory method | Elimination of a price reduction. | ____ |
2. Markdown cancellation | Gross profit divided by sales. | ____ |
3. Normal profit margin | Gross profit divided by cost. | ____ |
4. Markup on cost | Gross profit percentage times selling price. | ____ |
5. Gross profit ratio | Ideal for high volume, low cost inventory. | ____ |
TERM | PHRASE | NUMBER |
1. Retail inventory method | Elimination of a price reduction. | 2 |
2. Markdown cancellation | Gross profit divided by sales. | 5 |
3. Normal profit margin | Gross profit divided by cost. | 4 |
4. Markup on cost | Gross profit percentage times selling price. | 3 |
5. Gross profit ratio | Ideal for high volume, low cost inventory. | 1 |
Difficulty: 1 Easy
Topic: Gross profit method; Retail inventory method; Retail inventory method—Other issues
Learning Objective: 09-02 Estimate ending inventory and cost of goods sold using the gross profit method.; 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement
136) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.
TERM | PHRASE | NUMBER |
1. Conventional retail method | Increase in selling price. | ____ |
2. Additional markup | Losses would be recognized when values decline. | ____ |
3. Requires retrospective restatement | Markdowns are not in the calculation of the cost-to-retail percentage. | ____ |
4. Lower of cost or NRV | Not GAAP for annual financial statements. | ____ |
5. Gross profit method | Material inventory error discovered in a subsequent year. | ____ |
TERM | PHRASE | NUMBER |
1. Conventional retail method | Increase in selling price. | 2 |
2. Additional markup | Losses would be recognized when values decline. | 4 |
3. Requires retrospective restatement | Markdowns are not in the calculation of the cost-to-retail percentage. | 1 |
4. Lower of cost or NRV | Not GAAP for annual financial statements. | 5 |
5. Gross profit method | Material inventory error discovered in a subsequent year. | 3 |
Difficulty: 1 Easy
Topic: LCNRV—Overview; Gross profit method; Retail inventory method—Other issues; Inventory errors
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.; 09-02 Estimate ending inventory and cost of goods sold using the gross profit method.; 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.; 09-04 Explain how the retail inventory method can be made to approximate the lower of cost or market rule.; 09-07 Explain the appropriate accounting treatment required when an inventory error is discovered.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement
137) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.
TERM | PHRASE | NUMBER |
1. Employee discounts | Must be added to sales if sales are recorded net of discounts. | ____ |
2. Net realizable value | Selling price less costs to sell. | ____ |
3. Conventional retail method | Original increase in selling price above cost. | ____ |
4. Inventory error, example | Approximates lower of average cost or market. | ____ |
5. Initial markup | Purchases are unrecorded. | ____ |
TERM | PHRASE | NUMBER |
1. Employee discounts | Must be added to sales if sales are recorded net of discounts. | 1 |
2. Net realizable value | Selling price less costs to sell. | 2 |
3. Conventional retail method | Original increase in selling price above cost. | 5 |
4. Inventory error, example | Approximates lower of average cost or market. | 3 |
5. Initial markup | Purchases are unrecorded. | 4 |
Difficulty: 1 Easy
Topic: LCNRV—Overview; Retail inventory method; Retail inventory method—Other issues; Inventory errors
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.; 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.; 09-04 Explain how the retail inventory method can be made to approximate the lower of cost or market rule.; 09-07 Explain the appropriate accounting treatment required when an inventory error is discovered.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement
138) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.
TERM | PHRASE | NUMBER |
1. Change to LIFO from FIFO | Reduction in selling price. | ____ |
2. Dollar-value LIFO retail method | Requires base year retail to be converted to layer year retail and then to cost. | ____ |
3. Markdown | Deducted from selling price when calculating NRV. | ____ |
4. Costs to sell | Selling price less costs to sell. | ____ |
5. NRV | Usually impossible to calculate the effect on prior years' financial statements. | ____ |
TERM | PHRASE | NUMBER |
1. Change to LIFO from FIFO | Reduction in selling price. | 3 |
2. Dollar-value LIFO retail method | Requires base year retail to be converted to layer year retail and then to cost. | 2 |
3. Markdown | Deducted from selling price when calculating NRV. | 4 |
4. Costs to sell | Selling price less costs to sell. | 5 |
5. NRV | Usually impossible to calculate the effect on prior years' financial statements. | 1 |
Difficulty: 1 Easy
Topic: LCNRV—Overview; Retail inventory method; Retail inventory method—Dollar-value LIFO; Change in inventory method—To LIFO
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.; 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.; 09-05 Determine ending inventory using the dollar-value LIFO retail inventory method.; 09-06 Explain the appropriate accounting treatment required when a change in inventory method is made.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement
139) Listed below are 10 terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the number for the correct term.
TERM | PHRASE | NUMBER |
1. Dollar-value LIFO retail | Reduction in selling price below the original selling price. | ____ |
2. Cost-to-retail percentage | Requires base year retail to be converted to layer year retail and then to cost. | ____ |
3. Conventional retail method | Accounting change requiring retrospective treatment. | ____ |
4. Change from LIFO | Selling price less costs to sell. | ____ |
5. Gross profit method | Usually impossible to calculate the effect on prior years' financial statements. | ____ |
6. Net realizable value | Lower of average cost or market. | ____ |
7. Markdown | Not acceptable for the preparation of annual financial statements. | ____ |
8. Change to LIFO from FIFO | Must be added to sales if sales are recorded net of discounts. | ____ |
9. Employee discounts | Deducted in the retail column after the calculation of the cost-to-retail percentage. | ____ |
10. Normal spoilage | Divide cost of goods available for sale by goods available at retail. | ____ |
TERM | PHRASE | NUMBER |
1. Dollar-value LIFO retail | Reduction in selling price below the original selling price. | 7 |
2. Cost-to-retail percentage | Requires base year retail to be converted to layer year retail and then to cost. | 1 |
3. Conventional retail method | Accounting change requiring retrospective treatment. | 4 |
4. Change from LIFO | Selling price less costs to sell. | 6 |
5. Gross profit method | Usually impossible to calculate the effect on prior years' financial statements. | 8 |
6. Net realizable value | Lower of average cost or market | 3 |
7. Markdown | Not acceptable for the preparation of annual financial statements. | 5 |
8. Change to LIFO from FIFO | Must be added to sales if sales are recorded net of discounts. | 9 |
9.Employee discounts | Deducted in the retail column after the calculation of the cost-to-retail percentage. | 10 |
10. Normal spoilage | Divide cost of goods available for sale by goods available at retail. | 2 |
Difficulty: 2 Medium
Topic: LCNRV—Overview; Gross profit method; Retail inventory method—Dollar-value LIFO; Change in inventory method; Change in inventory method—To LIFO
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.; 09-02 Estimate ending inventory and cost of goods sold using the gross profit method.; 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.; 09-04 Explain how the retail inventory method can be made to approximate the lower of cost or market rule.; 09-05 Determine ending inventory using the dollar-value LIFO retail inventory method.; 09-06 Explain the appropriate accounting treatment required when a change in inventory method is made.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement
Use the following to answer the question(s) below:
Novelli's Nursery has developed the following data in order to calculate the lower of cost or net realizable value for its products. The individual products are listed within the categories of trees.
| Selling Price | Cost |
Broad leaf trees: | ||
Ash | $1,800 | $1,700 |
Beech | 2,200 | 1,600 |
Needle leaf trees: | ||
Cedar | $2,500 | $1,750 |
Fir | 3,600 | 3,350 |
Fruit trees: | ||
Apple | $1,800 | $1,400 |
Cherry | 2,300 | 1,800 |
The costs to sell are 10% of selling price.
140) Required: Determine the reported inventory value assuming the lower of cost or net realizable value rule is applied to individual trees.
Product | Cost | NRV | Lower of Cost or NRV |
Ash | $ 1,700 | $ 1,620 | $ 1,620 |
Beech | 1,600 | 1,980 | 1,600 |
Cedar | 1,750 | 2,250 | 1,750 |
Fir | 3,350 | 3,240 | 3,240 |
Apple | 1,400 | 1,620 | 1,400 |
Cherry | 1,800 | 2,070 | 1,800 |
Inventory value | $ 11,410 |
Difficulty: 2 Medium
Topic: LCNRV—Determine NRV and apply LCNRV
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
141) Required: Determine the reported inventory value assuming the lower of cost or net realizable value rule is applied to categories of trees.
Product | Cost | NRV | Lower of Cost or NRV |
Ash | $1,700 | $ 1,620 | |
Beech | 1,600 | 1,980 | |
Broad leaf trees | $3,300 | $3,600 | $ 3,300 |
Cedar | $1,750 | $ 2,250 | |
Fir | 3,350 | 3,240 | |
Needle leaf trees | $5,100 | $5,490 | $ 5,100 |
Apple | 1,400 | $ 1,620 | |
Cherry | 1,800 | 2,070 | |
Fruit trees | $3,200 | $3,690 | $ 3,200 |
Inventory value | $11,600 |
Difficulty: 2 Medium
Topic: LCNRV—Determine NRV and apply LCNRV
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
142) Required: Determine the reported inventory value assuming the lower of cost or net realizable value rule is applied to the total inventory.
Product | Cost | NRV | Lower of Cost or NRV |
Ash | $1,700 | $1,620 |
|
Beech | 1,600 | 1,980 | |
Cedar | 1,750 | 2,250 | |
Fir | 3,350 | 3,240 | |
Apple | 1,400 | 1,620 | |
Cherry | 1,800 | 2,070 | |
Total Inventory | $11,600 | $12,780 | |
Inventory value | $ 11,600 |
Difficulty: 2 Medium
Topic: LCNRV—Determine NRV and apply LCNRV
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
Use the following to answer the question(s) below:
Weldon Animal Feeds has developed the following data in order to calculate the lower of cost or net realizable value for its products (in thousands). The products are listed within their category of feed product.
Selling Price | Cost | |
Large animal feed: | ||
Cattle | $320 | $160 |
Horse | 400 | 400 |
Small animal feed: | ||
Cat | $360 | $320 |
Dog | 120 | 90 |
Exotic pet feed: | ||
Ferret | $140 | $112 |
Iguana | 70 | 48 |
The costs to sell are 20% of selling price.
143) Required: Determine the reported inventory value assuming the lower of cost or net realizable value rule is applied to individual types of feeds.
Product | Cost | NRV | Lower of Cost or NRV |
Cattle | $160 | $256 | $160 |
Horse | 400 | 320 | 320 |
Cat | 320 | 288 | 288 |
Dog | 90 | 96 | 90 |
Ferret | 112 | 112 | 112 |
Iguana | 48 | 56 | 48 |
Inventory value | $1,018 |
Difficulty: 2 Medium
Topic: LCNRV—Determine NRV and apply LCNRV
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
144) Required: Determine the reported inventory value assuming the lower of cost or net realizable value rule is applied to categories of feeds.
Product | Cost | NRV | Lower of Cost or NRV |
Cattle | $160 | $256 | |
Horse | 400 | 320 | |
Large animal feed | $560 | $576 | $560 |
Cat | $320 | $288 | |
Dog | 90 | 96 | |
Small animal feed | $410 | $384 | $384 |
Ferret | $112 | $112 | |
Iguana | 48 | 56 | |
Exotic pet feed | $160 | $168 | $160 |
Inventory value | $1,104 |
Difficulty: 2 Medium
Topic: LCNRV—Determine NRV and apply LCNRV
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
145) Required: Determine the reported inventory value assuming the lower of cost or net realizable value rule is applied to the total inventory.
Product | Cost | NRV | Lower of Cost or NRV |
Cattle | $160 | $256 | |
Horse | 400 | 320 | |
Cat | 320 | 288 | |
Dog | 90 | 96 | |
Ferret | 112 | 112 | |
Iguana | 48 | 56 | |
$1,130 | $1,128 | ||
Inventory value | $1,128 |
Difficulty: 2 Medium
Topic: LCNRV—Determine NRV and apply LCNRV
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
Use the following to answer the question(s) below:
Novelli's Nursery has developed the following data for lower of cost or market for its products. The individual types of trees are separated as to their categories:
| Selling Price | Cost | Cost to Replace |
Broad leaf trees: | |||
Ash | $1,800 | $1,000 | $800 |
Beech | 2,200 | 1,600 | 1,400 |
Needle leaf trees: | |||
Cedar | $2,500 | $1,750 | $1,800 |
Fir | 3,600 | 3,350 | 3,200 |
Fruit trees: | |||
Apple | $1,800 | $1,400 | $1,300 |
Cherry | 2,300 | 1,800 | 1,700 |
The costs to sell are 10% of the selling price, and the normal profit margin on all trees is 20% of the selling price.
146) Required: Determine the reported inventory value assuming the lower of cost or market rule is applied to individual tree products.
Product | Cost | RC | NRV | NRV-NPM | Designated Market | Lower of Cost or Market |
Ash | $ 1,000 | $ 800 | $ 1,620 | $ 1,260 | $ 1,260 | $ 1,000 |
Beech | 1,600 | 1,400 | 1,980 | 1,540 | 1,540 | 1,540 |
Cedar | 1,750 | 1,800 | 2,250 | 1,750 | 1,800 | 1,750 |
Fir | 3,350 | 3,200 | 3,240 | 2,520 | 3,200 | 3,200 |
Apple | 1,400 | 1,300 | 1,620 | 1,260 | 1,300 | 1,300 |
Cherry | 1,800 | 1,700 | 2,070 | 1,610 | 1,700 | 1,700 |
Inventory value | $ 10,490 |
Difficulty: 2 Medium
Topic: LCM—Determine market and apply LCM
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
147) Required: Determine the reported inventory value assuming the lower of cost or market rule is applied to categories of trees.
Product | Cost | RC | NRV | NRV-NPM | Designated Market | Lower of Cost or Market |
Ash | $ 1,000 | $ 800 | $ 1,620 | $ 1,260 | ||
Beech | 1,600 | 1,400 | 1,980 | 1,540 | ||
Broad leaf trees | $2,600 | 2,200 | 3,600 | 2,800 | $2,800 | $2,600 |
Cedar | 1,750 | 1,800 | 2,250 | 1,750 | ||
Fir | 3,350 | 3,200 | 3,240 | 2,520 | ||
Needle Leaf Trees | $5,100 | 5,000 | 5,490 | 4,270 | $5,000 | $5,000 |
Apple | 1,400 | 1,300 | 1,620 | 1,260 | ||
Cherry | 1,800 | 1,700 | 2,070 | 1,610 | ||
Fruit trees | $3,200 | 3,000 | 3,690 | 2,870 | $3,000 | $3,000 |
Inventory value | $10,600 |
Difficulty: 2 Medium
Topic: LCM—Determine market and apply LCM
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
148) Required: Determine the reported inventory value assuming the lower of cost or market rule is applied to the total inventory.
Product | Cost | RC | NRV | NRV−NPM | Designated Market | Lower of Cost or Market |
Ash | $ 1,000 | $ 800 | $ 1,620 | $ 1,260 | ||
Beech | 1,600 | 1,400 | 1,980 | 1,540 | ||
Cedar | 1,750 | 1,800 | 2,250 | 1,750 | ||
Fir | 3,350 | 3,200 | 3,240 | 2,520 | ||
Apple | 1,400 | 1,300 | 1,620 | 1,260 | ||
Cherry | 1,800 | 1,700 | 2,070 | 1,610 | ||
$10,900 | 10,200 | 12,780 | 9,940 | $10,200 | $10,200 |
Difficulty: 2 Medium
Topic: LCM—Determine market and apply LCM
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
Use the following to answer the question(s) below:
Weldon Animal Feeds has developed the following data to calculate lower of cost or market for its products. The individual products are listed individually among their categories of feed (in thousands):
Selling Price | Cost | Cost to Replace | |
Large animals: | |||
Cattle | $320 | $160 | $170 |
Horse | 400 | 400 | 325 |
Small animals: | |||
Cat | $360 | $320 | $280 |
Dog | 120 | 90 | 40 |
Exotic pets: | |||
Ferret | $140 | $112 | $98 |
Iguana | 70 | 48 | 21 |
The disposal costs are 20% of the selling price and the normal profit margin on all feed is 25% of the selling price.
149) Required: Determine the reported inventory value assuming the lower of cost or market rule is applied to individual animal feed products.
Product | Cost | RC | NRV | NRV−NPM | Designated Market | Lower of Cost or Market |
Cattle | $160 | $170 | $ 256 | $176 | $176 | $160 |
Horse | 400 | 325 | 320 | 220 | 320 | 320 |
Cat | 320 | 280 | 288 | 198 | 280 | 280 |
Dog | 90 | 40 | 96 | 66 | 66 | 66 |
Ferret | 112 | 98 | 112 | 77 | 98 | 98 |
Iguana | 48 | 21 | 56 | 38.5 | 38.5 | 38.5 |
Inventory value | $962.5 |
Difficulty: 2 Medium
Topic: LCM—Determine market and apply LCM
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
150) Required: Determine the reported inventory value assuming the lower of cost or market rule is applied to categories of feed products.
Product | Cost | RC | NRV | NRV−NPM | Demand Market | Lower of Cost or Market |
Cattle | $160 | $170 | $ 256 | $176 | ||
Horse | 400 | 325 | 320 | 220 | ||
Large animals | $560 | 495 | 576 | 396 | $495 | $495 |
Cat | 320 | 280 | 288 | 198 | ||
Dog | 90 | 40 | 96 | 66 | ||
Small animals | $410 | 320 | 376 | 264 | $320 | $320 |
Ferret | 112 | 98 | 112 | 77 | ||
Iguana | 48 | 21 | 56 | 38.5 | ||
Exotic animals | $160 | 119 | 168 | 115.5 | $119 | $119 |
Inventory value | $944 |
Difficulty: 2 Medium
Topic: LCM—Determine market and apply LCM
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
151) Required: Determine the reported inventory value assuming the lower of cost or market rule is applied to the total inventory.
Product | Cost | RC | NRV | NRV−NPM | Demand Market | Lower of Cost or Market |
Cattle | $160 | $170 | $ 256 | $176 | ||
Horse | 400 | 325 | 320 | 220 | ||
Cat | 320 | 280 | 288 | 198 | ||
Dog | 90 | 40 | 96 | 66 | ||
Ferret | 112 | 98 | 112 | 77 | ||
Iguana | 48 | 21 | 56 | 38.5 | ||
$1,130 | 934 | 1,128 | 775.5 | $934 | ||
Inventory value | $934 |
Difficulty: 2 Medium
Topic: LCM—Determine market and apply LCM
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
152) Henderson Company uses the gross profit method to estimate ending inventory and cost of goods sold when preparing monthly financial statements required by its bank. Inventory on hand at the end of July was $122,500. The following information for the month of August was available from company records:
Purchases $219,000
Freight-in 5,200
Sales 350,000
Sales returns 9,000
Purchases returns 4,300
In addition, the controller is aware of $10,000 of inventory that was stolen during August from one of the company's warehouses.
Required:
1. Calculate the estimated inventory at the end of August, assuming a gross profit ratio of 30%.
2. Calculate the estimated inventory at the end of August, assuming a markup on cost of 25%.
Difficulty: 3 Hard
Topic: Gross profit method
Learning Objective: 09-02 Estimate ending inventory and cost of goods sold using the gross profit method.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
153) On March 17, 2021, a flood destroyed the entire inventory of Beatty Co. The following information is available from its accounting records:
Inventory, January 1, 2021 | $208,000 |
Purchases, Jan. 1 – Mar. 17 | 420,000 |
Sales, Jan. 1 – Mar. 17 | 600,000 |
Normal gross margin | 40% |
Required: |
Compute the estimated cost of inventory lost in the flood.
Inventory, January 1, 2021 | $208,000 |
Purchases (Jan. 1–Mar. 17) | 420,000 |
Goods available for sale | 628,000 |
Cost of goods sold | 360,000* |
Estimated inventory | $268,000 |
Difficulty: 2 Medium
Topic: Gross profit method
Learning Objective: 09-02 Estimate ending inventory and cost of goods sold using the gross profit method.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
154) On July 5, 2021, a fire destroyed the entire inventory of Kinard Music Mart. The following information is available from its accounting records:
Inventory, January 1, 2021 | $211,000 |
Purchases, Jan. 1–July 5 | 500,000 |
Sales, Jan. 1–July 5 | 900,000 |
Normal gross margin | 30% |
Required:
Compute the estimated cost of inventory lost in the fire.
Inventory, January 1, 2021 | $211,000 |
Purchases (Jan. 1–May 5) | 500,000 |
Goods available for sale | 711,000 |
Cost of goods sold | 630,000* |
Estimated inventory | $81,000 |
Difficulty: 2 Medium
Topic: Gross profit method
Learning Objective: 09-02 Estimate ending inventory and cost of goods sold using the gross profit method.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
155) On August 31, 2021, Hurricane Chuck destroyed Bedford Craft Mart's entire inventory. The following information is available from its accounting records:
Inventory, January 1, 2021 | $360,000 |
Purchases, Jan. 1–Aug. 31 | 960,000 |
Sales, Jan. 1–Aug. 31 | 1,350,000 |
Required:
Assuming that Bedford estimates the cost of destroyed inventory at $510,000, compute gross profit margin % that Bedford uses in estimating inventory.
Inventory, January 1, 2021 | $ 360,000 | |
Purchases (Jan. 1–Aug. 31) | 960,000 | |
Goods available for sale | $1,320,000 | |
Estimated inventory lost | 510,000 | |
Cost of goods sold | $ 810,000 | * |
Difficulty: 3 Hard
Topic: Gross profit method
Learning Objective: 09-02 Estimate ending inventory and cost of goods sold using the gross profit method.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
156) Andover Stores uses the average cost retail method to estimate its ending inventory. Information as of June 30, 2021, is as follows:
Cost Retail
Beginning inventory | $ 45,000 | $ 82,000 |
Net purchases | 245,000 | 418,000 |
Net sales | 400,000 |
Required:
Use the retail method to estimate the June 30, 2021, inventory.
Cost | Retail | |
Beginning inventory | $ 45,000 | $ 82,000 |
Net purchases | 245,000 | 418,000 |
Goods available for sale | 290,000 | 500,000 |
Cost-to-retail percentage: $290,000 ÷ $500,000 = 58% | ||
Net sales | (400,000) | |
Ending inventory: at retail | ||
Ending inventory: at cost (58% × $100,000) | $ 100,000 | |
$58,000 |
Difficulty: 2 Medium
Topic: Retail inventory method—Average cost
Learning Objective: 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
157) DK Super Stores Inc. uses the average cost retail method to estimate its ending inventory. Information at June 30, 2021, is as follows:
Cost | Retail | |
Beginning inventory | $ 105,000 | |
Net purchases | 375,000 | |
Net sales | 380,000 | |
Ending inventory | $64,000 |
Required:
Compute the cost-to-retail percentage used by DK.
Cost | Retail | ||
Beginning inventory | $ 105,000 | ||
Net purchases | 375,000 | ||
Goods available for sale | 480,000 | ||
Net sales | (380,000) | ||
Ending inventory: at retail | $100,000 | ||
Ending inventory: at cost | $64,000 |
Difficulty: 3 Hard
Topic: Retail inventory method—Average cost
Learning Objective: 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
158) Trask Inc. uses the average cost retail method to estimate its ending inventory. Partial information at June 30, 2021, is as follows:
Cost | Retail | |
Beginning inventory | $ 62,000 | ??? |
Net purchases | 238,000 | 319,000 |
Net sales | 430,000 | |
Ending inventory | 42,000 |
Required:
Assuming Trask's cost-to-retail = 60%, compute Trask's beginning inventory at retail.
Cost | Retail | ||
Beginning inventory | $ 62,000 | $181,000 | |
Net purchases | 238,000 | 319,000 | |
Goods available for sale | $300,000 | $500,000 | |
Cost-to-retail percentage: $300,000 ÷ $500,000 = 60% | |||
Net sales | (430,000) | ||
Ending inventory: at retail ($42,000 ÷ 0.60) | $ 70,000 | ||
Ending inventory: at cost | $42,000 |
Difficulty: 3 Hard
Topic: Retail inventory method—Average cost
Learning Objective: 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
159) Manila Bread Company uses the average cost retail method to estimate its ending inventories. The following data has been summarized for the year 2021:
Cost | Retail | |
Inventory, January 1 | $ 54,205 | $ 78,000 |
Purchases | 326,000 | 466,000 |
Net markups | 8,200 | |
Net markdowns | 16,700 | |
Net sales | 412,000 |
Required:
Estimate the ending inventory as of December 31, 2021.
Cost | Retail | ||
Inventory, January 1 | $ 54,205 | $78,000 | |
Net purchases | 326,000 | 466,000 | |
Net markups | 8,200 | ||
Net markdowns | _______ | (16,700) | |
Goods available for sale | 380,205 | 535,500 | |
Cost-to-retail percentage: $380,205 ÷ $535,500 = 71% | |||
Net sales | (412,000) | ||
Ending inventory: at retail | $123,500 | ||
Ending inventory: at cost (71% × $123,500) | $ 87,685 |
Difficulty: 2 Medium
Topic: Retail inventory method—Average cost
Learning Objective: 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
160) Penfold's Paints uses the average cost retail method to estimate its ending inventories. The following data has been summarized for the year 2021:
Cost | Retail | |
Inventory, January 1 | $ 65,000 | |
Purchases | 270,000 | |
Net markups | 3,600 | |
Net markdowns | 2,100 | |
Net sales | 260,000 | |
Inventory, December 31 | $55,080 |
Required:
Compute the cost-to-retail percentage used by Penfold's Paints.
Cost | Retail | ||
Inventory, January 1 | $65,000 | ||
Net purchases | 270,000 | ||
Net markups | 3,600 | ||
Net markdowns | (2,100) | ||
Goods available for sale | 336,500 | ||
Net sales | (260,000) | ||
Ending inventory: at retail | $76,500 | ||
Ending inventory: at cost | $55,080 |
Difficulty: 3 Hard
Topic: Retail inventory method—Average cost
Learning Objective: 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
161) Murdock Industries uses a periodic inventory system and the LIFO retail method to estimate its ending inventories. The following data has been summarized for December 31, 2021:
Cost | Retail | |
Inventory, January 1 | $116,000 | $165,000 |
Purchases | 355,000 | 540,000 |
Net markups | 15,600 | |
Net markdowns | 9,800 | |
Net sales | 522,000 |
Required:
Estimate the LIFO cost of ending inventory. Assume stable retail prices during the period.
Cost | Retail | ||
Inventory, January 1 | $116,000 | $165,000 | |
Net purchases | 355,000 | 540,000 | |
Net markups | 15,600 | ||
Net markdowns | ______ | (9,800) | |
Goods available for sale (excluding BI) | 355,000 | 545,800 | |
Goods available for sale | 471,000 | 710,800 | |
Cost-to-retail percentage: $355,000 ÷ $545,800 = 65.0% | |||
Net sales | (522,000) | ||
Ending inventory: at retail | $188,800 |
Retail | Cost | |
Beginning inventory | $165,000 | $116,000 |
Current period's layer | 23,800 × 65% = | $ 15,470 |
Total | $188,800 | $131,470 |
Difficulty: 3 Hard
Topic: Retail inventory method—LIFO retail
Learning Objective: 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
162) Littleton Company uses a periodic inventory system and the LIFO retail method to estimate its ending inventories. The following partial data has been summarized for December 31, 2021:
Cost | Retail | |
Inventory, January 1 | $216,000 | $285,000 |
Purchases | 650,000 | |
Net markups | 18,300 | |
Net markdowns | 21,200 | |
Net sales | 625,000 | |
Inventory, Dec. 31 | $232,730 |
Required:
Determine the cost-to-retail percentage used by Littleton. Assume stable retail prices during the period.
Cost | Retail | ||
Inventory, January 1 | $216,000 | $285,000 | |
Net purchases | 650,000 | ||
Net markups | 18,300 | ||
Net markdowns | (21,200) | ||
Goods available for sale (Excluding BI) | 647,100 | ||
Goods available for sale | 932,100 | ||
Net sales | (625,000) | ||
Ending inventory: at retail | 307,100 | ||
Cost | |||
Total | $232,730 | ||
Beginning inventory | $216,000 | ||
Current period's layer (at cost) | $ 16,730 |
|
Difficulty: 3 Hard
Topic: Retail inventory method—LIFO retail
Learning Objective: 09-03 Estimate ending inventory and cost of goods sold using the retail inventory method, applying the various cost flow methods.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
163) Billingsly Products uses the conventional retail method to estimate its ending inventories. The following data has been summarized for the year 2021:
Cost | Retail | |
Inventory, January 1 | $ 53,000 | $ 78,000 |
Purchases | 322,360 | 466,000 |
Net markups | 8,000 | |
Net markdowns | 16,700 | |
Net sales | 392,000 |
Required:
Estimate the ending inventory as of December 31, 2021.
Cost | Retail | ||
Inventory, January 1 | $53,000 | $78,000 | |
Net purchases | 322,360 | 466,000 | |
Net markups | _______ | 8,000 | |
| 375,360 | 552,000 | |
Cost-to-retail percentage: $375,360 ÷ $552,000 = 68% | |||
Net markdowns | (16,700) | ||
Sales | (392,000) | ||
Ending inventory: at retail | $143,300 | ||
Ending inventory: at cost (68% × $143,300) | $97,444 |
Difficulty: 2 Medium
Topic: Retail inventory method—Conventional retail
Learning Objective: 09-04 Explain how the retail inventory method can be made to approximate the lower of cost or market rule.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
164) New York Sales Inc. uses the conventional retail method to estimate its ending inventories. The following data has been summarized for December 31, 2021:
Cost | Retail | |
Inventory, January 1 | $160,000 | |
Purchases | 538,000 | |
Net markups | 12,000 | |
Net markdowns | 9,100 | |
Net sales | 582,000 | |
Inventory, Dec. 31 | $77,285 |
Required:
Compute the cost-to-retail percentage used by New York Sales Inc.
Cost | Retail | ||
Inventory, January 1 | $160,000 | ||
Net purchases | 538,000 | ||
Net markups | 12,000 | ||
|
| 710,000 | |
Net markdowns | (9,100) | ||
Net sales | (582,000) | ||
Ending inventory: at retail | $118,900 | ||
Ending inventory: at cost | $77,285 |
Difficulty: 3 Hard
Topic: Retail inventory method—Conventional retail
Learning Objective: 09-04 Explain how the retail inventory method can be made to approximate the lower of cost or market rule.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
165) Harley Inc. uses the conventional retail method to estimate its ending inventories. The following data has been summarized for December 31, 2021:
Cost | Retail | |
Inventory, January 1 | $208,000 | $ 280,000 |
Purchases | 470,000 | 610,000 |
Net markups | 15,300 | |
Net markdowns | 11,200 | |
Normal spoilage | 4,600 | |
Net sales | 489,500 |
Required:
Estimate the cost of ending inventory applying the conventional retail method.
Cost | Retail | ||
Inventory, January 1 | $ 208,000 | $280,000 | |
Net purchases | 470,000 | 610,000 | |
Net markups | _______ | 15,300 | |
678,000 | 905,300 | ||
Cost-to-retail percentage: $678,000 ÷ $905,300 = 74.9% | |||
Net markdowns | (11,200) | ||
Goods available | 894,100 | ||
Normal Spoilage | (4,600) | ||
Net sales | (489,500) | ||
Ending inventory: at retail | $400,000 | ||
Ending inventory: at cost (74.9% × $400,000) | $299,600 |
Difficulty: 3 Hard
Topic: Retail inventory method—Conventional retail; Retail inventory method—Other issues
Learning Objective: 09-04 Explain how the retail inventory method can be made to approximate the lower of cost or market rule.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
166) Zanesville Pots Co. uses the conventional retail method to estimate ending inventories. The following data has been summarized for the year ended December 31, 2021:
Cost | Retail | |
Inventory, January 1 | $ 88,000 | $ 132,000 |
Purchases | 163,000 | 240,000 |
Net markups | 10,100 | |
Net markdowns | 9,200 | |
Normal spoilage | 43,200 | |
Net sales | 213,000 |
Required:
Estimate the cost of ending inventory applying the conventional retail method.
Cost | Retail | ||||
Inventory, January 1 | $ 88,000 | $132,000 | |||
Net purchases | 163,000 | 240,000 | |||
Net markups | _______ | 10,100 | |||
| 251,000 | 382,100 | |||
Cost-to-retail percentage: $251,000 ÷ $382,100 = 65.7% | |||||
Net markdowns | (9,200) | ||||
Goods available | 372,900 | ||||
Normal Spoilage | (43,200) | ||||
Net sales | (213,000) | ||||
Ending inventory: at retail | $116,700 | ||||
Ending inventory: at cost (65.7% × $116,700) | $76,672 | ||||
Difficulty: 3 Hard
Topic: Retail inventory method—Conventional retail; Retail inventory method—Other issues
Learning Objective: 09-04 Explain how the retail inventory method can be made to approximate the lower of cost or market rule.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
167) Cornhusker Can Co. uses the conventional retail method to estimate ending inventories. The following data has been summarized for year ended December 31, 2021:
Cost | Retail | |
Inventory, January 1 | $ 80,000 | $ 126,000 |
Purchases | 166,000 | 244,000 |
Net markups | 9,100 | |
Net markdowns | 8,200 | |
Normal spoilage | 13,200 | |
Employee discounts | 15,600 | |
Net sales | 238,000 |
Required:
Estimate the cost of ending inventory applying the conventional retail method. Assume that sales are recorded net of employee discounts.
Cost | Retail | ||
Inventory, January 1 | $ 80,000 | $126,000 | |
Net purchases | 166,000 | 244,000 | |
Net markups | _______ | 9,100 | |
246,000 | 379,100 | ||
Cost-to-retail percentage: $246,000 ÷ $379,100 = 64.9% | |||
Net markdowns | (8,200) | ||
Goods available | 370,900 | ||
Normal Spoilage | (13,200) | ||
Net sales plus employee discounts | (253,600) | ||
Ending inventory: at retail | 104,100 | ||
Ending inventory: at cost (64.9% × $104,100) | $67,561 |
Difficulty: 3 Hard
Topic: Retail inventory method—Conventional retail; Retail inventory method—Other issues
Learning Objective: 09-04 Explain how the retail inventory method can be made to approximate the lower of cost or market rule.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
168) Cindy Lou Linens uses the conventional retail method to estimate its ending inventories. The company records sales net of employee discounts. The following partial data has been summarized for the year ended December 31, 2021:
Cost | Retail | |
Inventory, January 1 | $ 465,460 | $ 736,000 |
Purchases | 1,412,000 | 2,344,000 |
Net markups | ??? | |
Net markdowns | 48,200 | |
Normal spoilage | 43,200 | |
Employee discounts | 75,600 | |
Net sales | 2,138,000 | |
Inventory, Dec. 31 | 494,460 | 824,100 |
Required:
Compute the net markups for Cindy Lou Linens during 2021.
Cost | Retail | ||
Inventory, January 1 | $ 465,460 | $736,000 | |
Net purchases | 1,412,000 | 2,344,000 | |
Net markups | _________ | 49,100 | |
$1,877,460 | $3,129,100 | ||
Net markdowns |
| (48,200) | |
Goods available | 3,080,900 | ||
Normal spoilage | (43,200) | ||
Net sales plus employee discounts | (2,213,600) | ||
Ending inventory: at retail | $824,100 | ||
Ending inventory: at cost | $494,460 |
Difficulty: 2 Medium
Topic: Retail inventory method—Other issues
Learning Objective: 09-04 Explain how the retail inventory method can be made to approximate the lower of cost or market rule.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
169) Charleston Company has elected to use the dollar-value LIFO retail method to value its inventory. The following data has been accumulated from the accounting records:
Cost | Retail | |
Merchandise inventory, January 1, 2021 | $320,000 | $ 500,000 |
Net purchases | 670,000 | 1,020,000 |
Net markups | 14,000 | |
Net markdowns | 4,000 | |
Net sales | 650,000 | |
Pertinent retail price indexes: | ||
January 1, 2021 | 1.00 | |
December 31, 2021 | 1.10 |
Required:
Estimate the ending inventory for December 31, 2021.
Cost | Retail | ||
Inventory Jan. 1 | $ 320,000 | $ 500,000 | |
Net purchases | $ 670,000 | $1,020,000 | |
Net markups | 14,000 | ||
Net markdowns | _______ | (4,000) | |
Subtotal | $670,000 | $1,030,000 | |
Cost-to-retail: ($670,000 ÷ $1,030,000 = 65.0%) | _______ | ________ | |
Goods available for sale | $990,000 | $1,530,000 | |
Net sales | (650,000) | ||
Ending inventory at current year retail | $ 880,000 |
Step 1 | Step 2 | Step 3 | |
Ending Inventory | Ending Inventory | Inventory Layers | Inventory Layers |
At Year-end | at Base Year | at Base Year | Converted |
Retail Prices | Retail Prices | Retail Prices | to Cost |
$500,000 × 1.00 × 0.64 | $320,000 |
300,000 × 1.10 × 0.65 | 214,500 |
Total ending inventory at dollar-value LIFO retail cost | $534,500 |
Difficulty: 3 Hard
Topic: Retail inventory method—Dollar-value LIFO
Learning Objective: 09-05 Determine ending inventory using the dollar-value LIFO retail inventory method.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
170) Green Acres Co. has elected to use the dollar-value LIFO retail method to value its inventory. The following data has been accumulated from the accounting records:
Pertinent retail price indexes:
Cost | Retail | |
Merchandise inventory, January 1, 2021 | $240,000 | $375,000 |
Net purchases | 505,000 | 765,000 |
Net markups | 10,500 | |
Net markdowns | 3,000 | |
Net sales | 570,000 | |
January 1, 2021 | 1.00 | |
December 31, 2021 | 1.10 | |
Required: |
Estimate the cost of ending inventory for December 31, 2021.
Cost | Retail | ||
Inventory Jan. 1 | $ 240,000 | $ 375,000 | |
Net purchases | $ 505,000 | $765,000 | |
Net markups | 10,500 | ||
Net markdowns | _______ | (3,000) | |
Subtotal | $ 505,000 | $ 772,500 | |
Cost-to-retail: ($505,000 ÷ $772,500 = 65.4%) | _______ | ________ | |
Goods available for sale | $745,000 | $1,147,500 | |
Net sales | (570,000) | ||
Ending inventory at current year | $ 577,500 |
Step 1 | Step 2 | Step 3 | |
Ending Inventory | Ending Inventory | Inventory Layers | Inventory Layers |
At Year-end | at Base Year | at Base Year | Converted |
Retail Prices | Retail Prices | Retail Prices | to Cost |
$375,000 × 1.00 × 0.64 | $240,000 |
150,000 × 1.10 × 0.654 | $107,910 |
Total ending inventory at dollar-value LIFO retail cost | $347,910 |
Difficulty: 3 Hard
Topic: Retail inventory method—Dollar-value LIFO
Learning Objective: 09-05 Determine ending inventory using the dollar-value LIFO retail inventory method.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
171) Orlando Company has used the average cost method for inventory valuation since it began business in 2017, but has elected to change to the FIFO method starting in 2020. Year-end inventory valuations under each method are shown below:
Year | Average Cost | FIFO |
2017 | $42,000 | $47,000 |
2018 | 53,000 | 61,000 |
2019 | 59,000 | 68,000 |
2020 | 62,000 | 72,000 |
Required:
How would Orlando reflect the change in accounting principle in its financial statements (ignore income taxes)?
Difficulty: 3 Hard
Topic: Change in inventory method
Learning Objective: 09-06 Explain the appropriate accounting treatment required when a change in inventory method is made.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement
172) Ramsgate Company has used the FIFO method for inventory valuation since it began business in 2017, but has elected to change to the average cost method starting in 2020. Year-end inventory valuations under each method are shown below:
Year | FICO | Average Cost |
2017 | $49,000 | $46,000 |
2018 | 55,000 | 48,000 |
2019 | 57,000 | 51,000 |
2020 | 61,000 | 53,000 |
Required:
How, and when, would Ramsgate reflect the change in accounting principle in its financial statements (ignore income taxes)?
Difficulty: 3 Hard
Topic: Change in inventory method
Learning Objective: 09-06 Explain the appropriate accounting treatment required when a change in inventory method is made.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement
Use the following to answer the question(s) below:
In the following questions, inventory errors are noted for 2021. Assume that the errors are not discovered until 2022, and that the company uses a periodic inventory system. Indicate the effect of the error, if any, on the accounts noted in the columns, using the following code:
U = Understated; O = Overstated; NE = No effect
173)
Error | Cost of goods sold | Retained earnings |
Double counted items in ending inventory |
Error | Cost of goods sold | Retained earnings |
Double counted items in ending inventory | U | O |
Difficulty: 3 Hard
Topic: Inventory errors
Learning Objective: 09-07 Explain the appropriate accounting treatment required when an inventory error is discovered.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement
174)
Error | Cost of goods sold | Retained earnings |
Unrecorded purchases |
Error | Cost of goods sold | Retained earnings |
Unrecorded purchases | U | O |
Difficulty: 3 Hard
Topic: Inventory errors
Learning Objective: 09-07 Explain the appropriate accounting treatment required when an inventory error is discovered.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement
175)
Error | Cost of goods sold | Retained earnings |
Understated beginning inventory |
Error | Cost of goods sold | Retained earnings |
Understated beginning inventory | U | O |
Difficulty: 3 Hard
Topic: Inventory errors
Learning Objective: 09-07 Explain the appropriate accounting treatment required when an inventory error is discovered.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement
176)
Error | Cost of goods sold | Retained earnings |
The company ignored its purchase of inventory that was bought FOB shipping point and was in transit at year end |
Error | Cost of goods sold | Retained earnings |
Ignored items purchased and owned that were still in transit at year-end | NE | NE |
Difficulty: 3 Hard
Topic: Inventory errors
Learning Objective: 09-07 Explain the appropriate accounting treatment required when an inventory error is discovered.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement
177)
Error | Cost of goods sold | Retained earnings |
Recorded purchases for $523,000 that should have been $532,000. |
Error | Cost of goods sold | Retained earnings |
Recorded purchases for $523,000 that should have been $532,000. | U | O |
Difficulty: 3 Hard
Topic: Inventory errors
Learning Objective: 09-07 Explain the appropriate accounting treatment required when an inventory error is discovered.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement
178) In 2021, the internal auditors of Blooper Inc. discovered that goods costing $12 million that were shipped f.o.b. shipping point in December of 2020 were in transit on December 31. The goods were recorded as a purchase in December of 2020 but were not included in the 2020 year-end inventory.
Required:
Prepare the journal entry needed in 2021 to correct the error. Also, briefly describe any other measures Blooper would take in connection with correcting the error. (Ignore income taxes.)
U = Understated |
O = Overstated |
Analysis: | |||
2020 | 2021 | ||
Beginning inventory | Beginning inventory | U | |
Purchases | Purchases | ||
Less: Ending inventory | U | ||
Cost of goods sold | O | ||
Revenues | |||
Less: Cost of goods sold | O | ||
Less: Other expenses | |||
Net income | U | ||
⇓ | |||
Retained earnings | U |
Difficulty: 3 Hard
Topic: Inventory errors
Learning Objective: 09-07 Explain the appropriate accounting treatment required when an inventory error is discovered.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Critical Thinking; FN Measurement
179) In the year 2021, the internal auditors of Goofy Co. discovered that goods costing $25 million that were purchased in December of 2020 were recorded for $20 million. The goods were properly measured in the December 31, 2020, ending physical inventory.
Required:
Prepare the journal entry needed in 2021 to correct the error. Also, briefly describe any other measures Goofy would take in connection with correcting the error. (Ignore income taxes.)
Analysis: | |
2020 | |
Beginning inventory | |
Purchases | U |
Less: Ending inventory | |
Cost of goods sold | U |
Revenues | |
Less: Cost of goods sold | U |
Less: Other expenses | |
Net income | O |
⇓ | |
Retained earnings | O |
Difficulty: 3 Hard
Topic: Inventory errors
Learning Objective: 09-07 Explain the appropriate accounting treatment required when an inventory error is discovered.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Critical Thinking; FN Measurement
180) On September 5, 2021, Howard Corporation signed a purchase commitment to purchase inventory for $130,000 on or before March 31, 2022. The company's fiscal year-end is December 31. The contract was exercised on March 4, 2022, and the inventory was purchased for cash at the contract price. On the purchase date of March 4, the market price of the inventory was $116,000. The market price of the inventory on December 31, 2021, was $120,000. The company uses a perpetual inventory system.
Required:
1. Prepare the necessary adjusting journal entry (if any is required) on December 31, 2021.
2. Prepare the journal to record the purchase on March 4, 2022.
Difficulty: 3 Hard
Topic: Purchase commitments—Appendix
Learning Objective: Appendix 9 Purchase Commitments.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: BB Critical Thinking; FN Measurement
Use the following to answer the question(s) below:
Memphis Wholesale Market applies the lower of cost or net realizable valuation to individual products and has collected the following data:
Product A | Product B | Product C | |
Selling price | $100 | $125 | $80 |
Cost | 70 | 75 | 80 |
Costs to sell | 15 | 20 | 8 |
181) Determine the inventory book value for Products A, B, and C.
Difficulty: 2 Medium
Topic: LCNRV—Determine NRV and apply LCNRV
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
182) Determine the inventory carrying value for Products A, B, and C assuming that Memphis Wholesale Market prepares its financial statements according to International Financial Reporting Standards (IFRS).
Difficulty: 2 Medium
Topic: IFRS—Lower of cost or NRV
Learning Objective: 09-08 Discuss the primary differences between U.S. GAAP and IFRS with respect to the lower of cost or net realizable value rule for valuing inventory.
Bloom's: Apply
AACSB: Knowledge Application; Diversity
AICPA/Accessibility: BB Global; FN Measurement
183) Briefly explain how a material adjustment to inventory due to application of the lower of cost or net realizable value rule should be reported in the financial statements.
Difficulty: 2 Medium
Topic: LCNRV—Overview
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Remember
AACSB: Reflective Thinking; Communication
AICPA/Accessibility: BB Critical Thinking; FN Measurement
184) The following disclosure note appeared in the 2021 annual report to shareholders of Upton Systems Inc.
Inventories are stated at the lower of cost or net realizable value. Cost is computed using standard cost, which approximates actual cost, on a first-in, first-out basis. The Company provides inventory allowances based on excess and obsolete inventories.
Another disclosure note in the annual report stated:
The Company recorded a provision for inventory, including purchase commitments, totaling $1.40 billion during fiscal 2021, which included an additional excess inventory charge as previously discussed. This additional excess inventory charge was due to a sudden and significant decrease in demand for the Company's products and was calculated in accordance with the Company's accounting policy.
A skeptic may conclude that Upton's policy and practices threaten earnings quality. Discuss how it may do so.
Difficulty: 3 Hard
Topic: LCNRV—Overview
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking; FN Measurement
185) Briefly explain the differences between U.S. GAAP and International Financial Reporting Standards (IFRS) in the application of the lower of cost or net realizable value rule for valuing inventory.
Difficulty: 2 Medium
Topic: LCNRV—Overview; IFRS—Lower of cost or NRV
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.; 09-08 Discuss the primary differences between U.S. GAAP and IFRS with respect to the lower of cost or net realizable value rule for valuing inventory.
Bloom's: Remember
AACSB: Reflective Thinking; Communication; Diversity
AICPA/Accessibility: BB Critical Thinking; BB Global; FN Measurement
186) Briefly explain what is meant by "market" in the lower of cost or market (LCM) approach to valuing inventory at the end of a reporting period.
Difficulty: 2 Medium
Topic: LCM—Overview; LCNRV and LCM—Overview
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Remember
AACSB: Reflective Thinking; Communication
AICPA/Accessibility: BB Critical Thinking; FN Measurement
187) Briefly explain how a material adjustment to inventory due to application of the lower of cost or market (LCM) rule should be reported in the financial statements.
Difficulty: 2 Medium
Topic: LCM—Overview
Learning Objective: 09-01 Understand and apply rules for measurement of inventory at the end of the reporting period.
Bloom's: Remember
AACSB: Reflective Thinking; Communication
AICPA/Accessibility: BB Critical Thinking; FN Measurement
188) Briefly outline the steps in the gross profit method of estimating ending inventory and indicate when the method might be used.
Difficulty: 2 Medium
Topic: Gross profit method
Learning Objective: 09-02 Estimate ending inventory and cost of goods sold using the gross profit method.
Bloom's: Remember
AACSB: Reflective Thinking; Communication
AICPA/Accessibility: BB Critical Thinking; FN Measurement
189) The gross profit method and retail method are both ways of estimating ending inventory. Briefly explain how the two methods differ.
Difficulty: 2 Medium
Topic: Gross profit method
Learning Objective: 09-02 Estimate ending inventory and cost of goods sold using the gross profit method.
Bloom's: Understand
AACSB: Reflective Thinking; Communication
AICPA/Accessibility: BB Critical Thinking; FN Measurement
190) Briefly explain the difference between the LIFO retail method and the dollar-value LIFO retail method.
Difficulty: 3 Hard
Topic: Retail inventory method—Dollar-value LIFO
Learning Objective: 09-05 Determine ending inventory using the dollar-value LIFO retail inventory method.
Bloom's: Understand
AACSB: Reflective Thinking; Communication
AICPA/Accessibility: BB Critical Thinking; FN Measurement
191) Briefly explain the financial reporting required when a company changes to or from the LIFO inventory method.
Difficulty: 2 Medium
Topic: Change in inventory method; Change in inventory method—To LIFO
Learning Objective: 09-06 Explain the appropriate accounting treatment required when a change in inventory method is made.
Bloom's: Remember
AACSB: Reflective Thinking; Communication
AICPA/Accessibility: BB Critical Thinking; FN Measurement
192) Briefly explain the financial reporting required when material misstatements are found in previous years' financial statements that are included for comparative purposes in the current year's financial statements.
Difficulty: 2 Medium
Topic: Inventory errors
Learning Objective: 09-07 Explain the appropriate accounting treatment required when an inventory error is discovered.
Bloom's: Remember
AACSB: Reflective Thinking; Communication
AICPA/Accessibility: BB Critical Thinking; FN Measurement
193) Symington and Cribbs (S&C) is a sporting goods distributor. S&C uses the FIFO inventory method to determine the cost of its ending inventory. Ending inventory quantities are determined by a physical count. For the fiscal year-end December 31, 2021, ending inventory was originally determined to be $67 million. However, in early January of 2022, the company's controller, Amy Grant, discovered that an error was made in the inventory count. The correct amount of ending inventory should be $87 million. The auditors did not discover the error and the financial statements are scheduled to be issued on February 26, 2022. S&C is a public company.
Amy's first reaction was to communicate her finding to the auditors and to revise the financial statements before they are issued. However, she knows that this was a very good year for the company with profits far exceeding analysts' expectations. If the error is not corrected this year, it will self-correct next year as long as 2022 ending inventory is correctly stated. This will help future 2022 profits. On the other hand, her fellow workers' profit sharing plans are based on annual pretax earnings and if she revises the statements, everyone's profit sharing bonus will be higher this year.
Required:
1. Is Amy correct by stating that the error will self-correct next year as long as 2022 ending inventory is correctly stated? If the error is not corrected in the current year, what will be the effect on 2021 and 2022 income before tax?
2. Discuss the ethical dilemma Amy faces.
Difficulty: 3 Hard
Topic: Inventory errors
Learning Objective: 09-07 Explain the appropriate accounting treatment required when an inventory error is discovered.
Bloom's: Analyze
AACSB: Analytical Thinking; Communication; Ethics
AICPA/Accessibility: FN Decision Making; FN Measurement
Document Information
Connected Book
Answer Key + Test Bank | Intermediate Accounting 10e
By J. David Spiceland, Mark W. Nelson, Wayne Thomas