Homework 9 pt 1

Pernell Company reported LIFO reserves of $150,000 and $100,000 in 2016 and 2015, respectively. The company utilized the FIFO assumption for internal purposes. Based on this information, we can conclude that at the end of 2016, Pernell's ending inventory would have been

$150,000 higher if it had used FIFO.

Gerhard Company has 300 units costing $10 per unit in beginning inventory. During the year, the company purchases an additional 1,000 units costing $20 per unit and sells 1,200 units. The company has used the LIFO inventory method for the past 5 years. If the company had purchased at least 1,200 units, COGS would have been

$2,000 higher.

Linden Company has three inventory items. Utilizing the lower of cost and net realizable value rule, Linden determines the following: Item A: cost exceeds net realizable value by $20 Item B: cost is $10 lower than net realizable value Item C, cost is $5 lower than net realizable value. If Linden applies the rule to individual items, it should recognize a loss of

$20 Reason: When applying the rule to individual items, only item A has a market value below cost so a $20 loss is recorded

Pernell Company reported LIFO reserves of $150,000 and $100,000 in 2016 and 2015, respectively. The company utilized the FIFO assumption for internal purposes. Based on this information, we can conclude that Pernell's pretax income for the 2016 fiscal year would have been

$50,000 higher if it had used FIFO.

Smith Company adopted dollar-value LIFO (DVL) as of January 1, 2016, when it had an inventory of $690,000. Its inventory as of December 31, 2016, was $758,100 at year-end costs and the cost index was 1.05. What was DVL inventory on December 31, 2016?

$723,600 Reason: $758,100/1.05 = $722,000 giving 2 layers of $690,000 and $32,000. $690,000 x 1.0 = $690,000 $32,000 x 1.05 = $33,600 $690,000 + $33,600 = $723,600

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 Reason: Ceiling is NRV = $110 - 6 = $104. Floor is NRV less normal profit of 20% so $104 - 22 = $82. Replacement cost is $102. Market is the middle of these three values so = $102 compared to cost of $100. Cost is lower so record at cost.

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 Reason: Ceiling is NRV = $110 - 6 = $104. Floor is NRV less normal profit of 20% so $104 - 22 = $82. Replacement cost is $106. Market is the middle of these three values so = $104 compared to cost of $100. Cost is lower so record at cost.

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 Reason: Lower of cost and net realizable value is required. The NRV is $104, but the cost of $100 is lower.

Doris recently started her position at Monro Company. The company uses the dollar-value LIFO inventory method. On her first day at work, Doris was asked to calculate the cost index for a new inventory layer. The company's records reveal that the cost in terms of the base year was $50,000 and the cost in terms of the layer year was $100,000. What is the cost index for the new layer?

2

Chase Company reports gross sales revenue of $7.5 million, net sales revenue of $7 million, and cost of goods sold of $3.5 million. Rounding to the nearest percent, the company's gross profit ratio would be

50% Reason: Gross profit ratio is computed as gross profit/NET SALES. Be sure to use the net sales number, not gross sales. ($7 million -$3.5 million)/$7 million

Western Company adopted dollar-value LIFO (DVL) as of January 1, 2016, when it had an inventory of $715,000. Its inventory as of December 31, 2016, was $815,400 at year-end costs and the cost index was 1.08. What was DVL inventory on December 31, 2016?

758,200 Reason: $815,400/1.08 = $755,000 giving 2 layers of $715,000 and $40,000. $715,000 x 1.0 = $715,000 $40,000 x 1.08 = $43,200 $715,000 + $43,200 = $758,200

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 Reason: Ceiling is NRV = $110 - 6 = $104. Floor is NRV less normal profit of 20% so $104 - 22 = $82. Replacement cost is $95. Market is the middle of these three values so = $95 compared to cost of $100. Market is lower so record at market.

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

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

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

98 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 require inventory to be valued at the lower of cost and net realizable value?

Both U.S. GAAP and IFRS

Which of the following statements regarding inventory valuation is correct?

Both U.S. GAAP and IFRS require that inventory is valued at the lower of cost or net realizable value.

Which of the following can affect earnings quality for a company? (Select all that apply.)

Choice of inventory method Change in inventory method Inventory write-downs

The practice of recognizing decreases in inventory but not increases is consistent with what?

Conservatism

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

Which of the following would be included in the journal entry needed to adjust a LIFO reserve for an increase in the difference between LIFO and FIFO inventory balances?

Debit Cost of goods sold

Match the inventory cost flow assumption with the scenario. fifo lifo: Provides better matching of current revenues with current inventory cost Most closely approximates the actual physical flow of inventory

FIFO: Most closely approximates the actual physical flow of inventory LIFO: Provides better matching of current revenues with current inventory cost

Many companies maintain their internal records using _____ or the average cost method, but use ______ for external reporting and income tax purposes.

FIFO; LIFO

True or false: Reversals of inventory write-downs are not permitted under either U.S. GAAP or IFRS.

False

Identify the accounting standard(s) that permit reversal of inventory value write-downs.

IFRS

Which of the following is a correct interpretation of the information provided by the gross profit margin?

It indicates the percentage of each sales dollar available to cover other expenses.

In which type of inventory costing system are inventory costs on the balance sheet generally out of date?

LIFO

When prices increase, the ______ inventory method provides the best matching of revenue and expenses.

LIFO

Another name for the LIFO reserve account is

LIFO allowance.

Which of the following represents a criticism of the lower of cost and net realizable value rule?

Losses that have not actually occurred are recognized.

Which method can be applied to individual inventory items, categories of inventory, or the entire inventory?

Lower of cost or market and lower of cost and net realizable value

A slowing turnover ratio combined with higher than normal inventory levels may indicate which of the following? (Select all that apply.)

Potential for inventory becoming obsolete Potential for decreased production

Rudy Company reports gross sales revenue of $5.2 million, net sales revenue of $5 million, and cost of goods sold of $3 million. Its inventory balance was $250,000 at the beginning of the accounting period and $300,000 at the end of the accounting period. The company's inventory turnover ratio is closest to

Reason: $3 million/($250,000+$300,000/2)=10.9 rounded to 11

Joachim Company has 300 units costing $10 per unit in beginning inventory. During the year, the company purchases an additional 1,000 units costing $20 per unit and sells 1,200 units. The company has used the LIFO inventory method for the past 5 years. If the company had purchased 1,200 units, pretax income would have been

Reason: Currently cost of goods sold ($22,000) is computed using the 1,000 units at $20 plus 200 units at $10 ((1,000 x $20) + (200 x $10))so the units from beginning inventory are liquidated. If they had purchased at least 1,200 units, cost of goods sold would have been $24,000 (1,200 x $20); $2,000 higher; resulting in lower pretax income of $2,000.

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.

Which of the following situations would result in a LIFO liquidation for a company that has 200 units in beginning inventory and sales of 1,000 units?

The company purchases 950 units during the year.

What of the following could motivate a company that uses LIFO for external reporting to use another method for internal recordkeeping? (Select all that apply.)

The high recordkeeping cost of LIFO. Contractual agreements such as bonus contracts.

Which of the following represent a reason why managers closely monitor inventory levels? (Select all that apply.)

To ensure that sufficient units are available. To minimize costs of ordering and carrying inventory.

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

True Reason: GAAP allows LCNRV to be applied to individual, categories of, or the entire inventory.

Which of the following inventory-related techniques can be used to manipulate earnings? (Select all that apply.)

Write-downs Changes in inventory method

Under the DVL approach, cost indexes are used to determine whether

a real increase in inventory quantity has occurred.

The dollar-value LIFO (DVL) inventory method

allows a broader range of goods to be included in pools.

A just-in-time (JIT) inventory system (Select all that apply.)

allows companies to maintain relatively low inventory balances. assists managers with inventory management.

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 or net realizable value for companies using FIFO.

The lower of cost and net realizable value method was developed to

avoid reporting inventory at an amount that exceeds the cash it can provide.

The dollar-value LIFO method extends the concept of inventory pools by allowing companies to

combine a large variety of goods in one pool.

If prices have changed and a company uses dollar-value LIFO, we need to determine whether an observed increase in inventory is an actual increase in the quantity of inventory or one caused by an increase in prices. This is accomplished by using

cost indexes

The inventory turnover ratio is computed as _____ divided by average inventory.

cost of goods sold

In a LIFO inventory system, inventory amounts shown in the balance sheet may be distorted because they may represent

costs incurred several years earlier.

Smith Corporation began Year 1 with a difference of $50,000 between inventory valued internally using FIFO and inventory valued using LIFO. At the end of Year 1, this difference increased to $75,000. The journal entry to record this increase would include a

credit to LIFO reserve for $25,000.

When the DVL method is used, a LIFO layer is added when

current period ending inventory at base-year cost has increased.

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

A LIFO liquidation occurs when inventory quantities ______.

decrease

Merger Company applies the lower of cost and net realizable value rule to individual inventory items. If the company were to apply the rule to the entire inventory balance, the chance of recording an inventory loss would

decrease.

Fill in the blank question. Companies must disclose the impact of a LIFO liquidation on earnings to provide users information about __________ _________

earnings quality

The _____ ratio indicates the percentage of each sales dollar available to cover expenses other than cost of goods sold and then to provide a profit.

gross profit

Steiner Company's average days in inventory has decreased during 2016 as compared to the prior year. From this information, we can conclude that Steiner (Select all that apply.)

has a higher inventory turnover ratio. is selling its inventory faster.

The inventory turnover ratio shows

how many times the average inventory balance is sold during the current reporting period.

Under the DVL method, a layer may only be added during the current year if inventory at base-year cost has ______.

increased

Under IFRS, the lower of cost and net realizable value rule typically is applied to

individual inventory items.

For financial reporting of companies using LIFO, the lower of cost or market approach can be applied to (Select all that apply.)

individual inventory items. groups of inventory items. the entire inventory.

Consistent with U.S. GAAP, the lower of cost and net realizable value rule can be applied to (Select all that apply.)

individual inventory items. the entire inventory. logical inventory categories.

Steiner Company's average days in inventory has decreased during 2016 as compared to the prior year. From this information, we can conclude that Steiner (Select all that apply.)

is selling its inventory faster. has a higher inventory turnover ratio.

The layer year cost index is calculated by dividing the cost in ______ year by the cost in ______ year.

layer; base

GAAP requires disclosure of significant LIFO liquidations with respect to the effect on

net income

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

net realizable value.

The gross profit ratio is computed as gross profit divided by _____.

net sales

If inventory values recover after a lower of cost and net realizable value write-down, the write-down must

not be reversed. Reason: GAAP does not allow inventory to be written up once the cost basis is reduced

Doris Company wrote down its inventory under the lower of cost and net realizable value rule by $10,000. Subsequent to the write-down, inventory values recover by $8,000. Doris Company must

not recognize the increase. Reason: GAAP does not allow inventory to be written up once the cost basis is reduced

Companies closely monitor inventories to maintain a sufficient ________ of inventory to meet customer demand, while also controlling the ______ of carrying inventory.

quantity; cost

Under the LCM approach, market generally is defined as ______ cost.

replacement

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

required under GAAP; LIFO or the retail inventory

In applying the lower of cost or market rule, market value (Select all that apply)

should not be greater than net realizable value should not be less than net realizable value less normal profit margin

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

simplifies recordkeeping. reduces the risk of liquidation of layers.

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

simplifies recordkeeping. reduces the risk of liquidation of layers.

A JIT inventory system allows companies to maintain ______ inventory levels.

smaller

A DVL pool is made up of items

that are likely to have similar cost change pressures.

The lower of cost and net realizable value rule causes income to be reduced in the period when

the inventory value declines below cost.

Fill in the blank question. Analyzing changes in the inventory _____________ ratio can provide information about the quality of current period earnings.

turnover