ACCT 3210: Chapter 9 Preview: Inventories-Additional Issues

Smith Company's inventory cost is $100. The expected sales price is $110, estimated selling costs are $6. The normal gross profit ratio is 20% of selling price. The replacement cost of the inventory is $102. Smith Company uses the LIFO inventory method so must use the lower of cost or market approach and this inventory item should be valued at

$100

Smith Company's inventory cost is $100. The expected sales price is $110, estimated selling costs are $6. The normal gross profit ratio is 20% of selling price. The replacement cost of the inventory is $106. Smith Company uses the LIFO inventory method so must use the lower of cost or market approach and this inventory item should be valued at

$100

Smith Company's inventory cost is $100. The expected sales price is $110, estimated selling costs are $6. Consistent with the lower of cost and net realizable value approach, this inventory item should be valued at

$100.

Goose Company utilizes the LIFO retail inventory method. Its cost-to-retail percentage is 60% based on beginning inventory and 64% based on current-period purchases. The company determined that during the current period a new layer was added with retail value of $50,000. The new layer at cost should be

$32,000.

Thompson Company utilizes the LIFO retail inventory method. Its cost-to-retail percentage is 50% based on beginning inventory and 55% based on current-period purchases. The company determined that during the current period a new layer was added with retail value of $100,000. The new layer at cost should be

$55,000.

Tore Company's records reveal the following information regarding its inventory. Beginning inventory was $100,000 at cost and 160,000 at retail. Purchases during the year were $300,000 at cost and $500,000 at retail. Markups were $10,000 and markdowns, $20,000. Assuming the conventional retail method and net sales of $500,000, ending inventory at cost would be

$89,550.

Smith Company's inventory cost is $100. The expected sales price is $110, estimated selling costs are $6. The normal gross profit ratio is 20% of selling price. The replacement cost of the inventory is $95. Smith Company uses the LIFO inventory method so must use the lower of cost or market approach and this inventory item should be valued at

$95

Tore Company's records reveal the following information regarding its inventory: Beginning inventory was $100,000 at cost and 160,000 at retail. Purchases during the year were $300,000 at cost and $500,000 at retail. Net markups were $10,000 and net markdowns, $20,000. Assuming the conventional retail method, the cost-to-retail ratio will be

59.7%.

Using the LIFO retail method, a new layer at retail is determined by subtracting what from ending inventory at retail?

Beginning inventory at retail

The retail inventory method is also referred to as the _____ retail method. (Enter only one word.)

Blank 1: conventional

An inventory _____ can occur due to a mistake in physical count or a mistake in pricing inventory quantities. (Enter only one word.)

Blank 1: error or mistake

The _____ _____ method uses the cost-to-retail percentage based on a current relationship between cost and selling price. (Enter one word per blank.)

Blank 1: retail Blank 2: inventory

When inventory is adjusted down to reflect net realizable value, which of the following can occur? (Select all that apply.)

Credit inventory Debit cost of goods sold

The dollar-value LIFO retail method is a combination of which of the following? (Select all that apply.)

Dollar-value LIFO method LIFO retail method

Using the LIFO retail method, we determine if a new layer at retail has been added by comparing beginning inventory at retail to what?

Ending inventory at retail

True or false: Most changes in inventory method are accounted for prospectively.

False

True or false: The conventional retail method gives an exact amount of what ending inventory value should be.

False

Match the terms relating to the retail inventory method to the correct explanation.

Initial markup--Original amount of markup from cost to selling price Additional markup --Increase in selling price subsequent to initial markup Markup cancellation-- Elimination of an additional markup Markdown -- Reduction in selling price below the original selling price Markdown cancellation --Elimination of a markdown

The _____ method assumes that units sold are those most recently acquired.

LIFO

When there is a net increase in the physical quantity of inventory during a period, the use of _____ results in an additional layer of inventory.

LIFO

Which of the following inventory-related events typically cause financial statement misstatements? (Select all that apply.)

Mistakes in the cutoff relating to purchases of inventory. Mistakes in the physical count. Mistakes in pricing inventory quantities.

When using the LIFO retail method, how many inventory layers can be added per year if inventory increases?

No more than one inventory layer per year.

When using the retail method to approximate average cost, the cost-to-retail percentage is applied to which goods?

Only the ending inventory

Which of the following can create inventory errors? (Select all that apply.)

Overstatement of ending inventory due to physical count mistake. Mistakes in the cutoff relating to purchases of inventory. Understatement of ending inventory due to pricing mistake.

Berta Company recently lost its entire inventory in a fire. The following information is available from its accounting records: Beginning inventory: $1,000; purchases: $13,000; net sales: $20,000. The company's average gross profit percentage is 40%. Using the gross profit method, a reasonable estimate of the lost inventory would be

Reason: $1,000 + 13,000 = $14,000 goods available for sale Net sales $20,000 less gross profit 40% = $12,000 $14,000 - 12,000 = 2,000

Feather Company's inventory is recorded at its historical cost of $100,000. The replacement cost currently is $95,000; estimated selling price is $102,000; estimated selling cost is $5,000; normal profit is $10,000. The estimated net realizable value of the inventory is

Reason: $102,000 - $5,000=97,000

Berta Company recently lost its entire inventory in a fire. The following information is available from its accounting records: Beginning inventory: $1,000; purchases: $13,000; net sales: $20,000. The company's average gross profit percentage is 40%. Using the gross profit method, a reasonable estimate of cost of goods sold for this past period would be

Reason: $20,000 x (1 - 40%) = $12,000

Western Company recently lost its entire inventory in an earthquake. The following information is available from its accounting records: Beginning inventory: $5,000; purchases: $18,000; net sales: $40,000. The company's average gross profit percentage is 40%. Using the gross profit method, a reasonable estimate of cost of goods sold for this past period would be

Reason: $40,000 x (1 - 40%) = $24,000

Jones Company's inventory cost is $100. The expected sales price is $110. The company estimates sales cost as 10% of the sales price. Consistent with the lower of cost and net realizable value approach, this inventory item should be valued at

Reason: Lower of cost and net realizable value is required. The NRV is $110-11 = 99 and is lower than cost.

Jones Company's inventory cost is $100. The expected sales price is $110, estimated selling costs are $12. Consistent with the lower of cost and net realizable value approach, this inventory item should be valued at

Reason: Lower of cost and net realizable value is required. The NRV is $110-12 = 98 and is lower than cost.

Which of the following can be used to write-down inventory according to the lower of cost and net realizable value rule? (Select all that apply.)

Recognize the write-down as a separate line item on the income statement. Recognize the write-down as an addition to cost of goods sold.

Smart Company rarely had to write down inventory. In the past, when inventory write-downs were necessary, the company debited cost of goods sold. Recently, write-downs have become more common and Smart is concerned about the distortion of its gross profit percentage. What alternative is available under GAAP?

Smart Company could debit a separate loss account and include it as an operating expense.

Smith Company has several current product lines. In the past, the company applied the lower of cost and net realizable value method to individual inventory items. The company wants to make the process less time consuming and is exploring alternatives. What alternatives does the company have? (Select all that apply.)

Smith could apply the lower of cost and net realizable rule to its entire inventory. Smith could apply the lower of cost and net realizable value rule to each product line.

True or false: For financial reporting purposes, the lower of cost and net realizable value method can be applied to individual inventory items, categories of inventory, or the entire inventory.

True

A LIFO liquidation occurs when there is _____ in inventory quantity.

a net decrease

The dollar-value LIFO retail method (Select all that apply.)

allows the company to determine if there is an increase in the quantity of inventory. eliminates the effect of any price changes when comparing beginning and ending inventory.

By overstating an inventory write-down, profits _____ in future periods as the inventory is sold.

are increased

GAAP requires companies to report inventory (Select all that apply.)

at the lower of cost or market value for companies using LIFO. at the lower of cost and net realizable value for companies using FIFO.

The _____ method assumes that cost of goods sold and ending inventory each consist of a mixture of all the goods available for sale.

average cost

Retail inventory markdowns occur because of (Select all that apply.)

competition. obsolescence. price declines. spoilage.

Applying the retail inventory method to approximate the lower of average cost or market value is often referred to as the

conventional retail method.

Mauser Company properly applies the lower of cost or net realizable value rule and determines that its inventory value has declined by $10,500 below cost. Which of the following could be debited for this write-down? (Select all that apply.)

cost of goods sold other loss or expense

The cost to retail percentage is found by dividing goods available for sale at _____ by goods available for sale at _____.

cost; current selling price

On January 2, Neumann Corp. changes from the LIFO to the FIFO method. Its financial statement notes indicate that beginning inventory would have been $10,000 higher if it had utilized FIFO during prior years. Neumann's journal entry should include a

credit to retained earnings.

Under the LIFO retail inventory method, the cost of a new layer added during the period is determined by multiplying the retail value of the layer by the

current-period cost-to-retail percentage.

Western Company determines the cost of its inventory is $410,000 and net realizable value is $400,000. Western Company should (Select all that apply.)

debit cost of goods sold $10,000 credit inventory $10,000

Panther Company's bookkeeper debited supplies expense for the cost of goods sold during that month. The bookkeeper discovered the error prior to closing the books. The correcting entry would include (Select all that apply.)

debit to cost of goods sold. credit to supplies expense.

On January 2, Allison Corp. changes from the LIFO to the FIFO method. Its prior-year financial statement notes show a LIFO reserve of $20,000 if it had utilized FIFO in prior years. Allison should make a journal entry that includes a

debit to inventory.

On March 31, Oscar Corp. changes from the LIFO to the FIFO method. Its financial statement notes indicate that beginning inventory would have been $50,000 higher if it had utilized FIFO during prior years. Oscar's journal entry should include a

debit to inventory. credit to retained earnings.

The variety of inventory cost flow assumptions that can be utilized by companies typically does not impair earnings quality because

detail about the methods must be disclosed in the financial statement notes.

Using the _____ method allows a company to determine if there has been a "real" increase in quantity of inventory.

dollar-value LIFO retail

When using the LIFO retail method,

each inventory layer will carry its own cost-to-retail percentage.

Inventory related note disclosures _____ earnings quality.

enhance

An inventory can occur due to a mistake in physical count or a mistake in pricing inventory quantities. (Enter only one word.)

error

Net realizable value of inventory is determined by subtracting selling cost from the

expected sales price

The conventional retail method gives a(n) _____ measurement for ending inventory than the lower of cost and net realizable value method.

less precise

When using the conventional retail method with markdowns present, the cost approximation of ending inventory will always be _____ the retail inventory method.

less than

Reduction in selling price below the original selling price is known as ______. (Enter only one word.)

markdown

Accounting errors

must be corrected when they are discovered.

The selling price of inventory less any costs of completion, disposal, and transportation is

net realizable value.

Accounting errors that are discovered during the same accounting period that they occurred must be corrected by (Select all that apply.)

recording the correct entry. reversing the incorrect entry

The lower of cost or market approach is _____ for companies that use _____.

required under GAAP; LIFO or the retail inventory

The lower of cost or net realizable value approach is _____ for companies that use _____.

required under GAAP; a method other than LIFO or retail inventory

To use the _____ method, a company must maintain records of inventory and purchases at cost and at current selling price.

retail inventory

Generally, voluntary changes in accounting principles are accounted for

retrospectively.

When the retail inventory method is used to approximate average cost, the cost-to-retail percentage is calculated by dividing _____ by _____. (Select all that apply.)

total cost of goods available for sale; total goods available for sale at retail