AC310 Final (Chapter 9)

A product purchased for $20 is marker up to a $25 sales price. Later, the selling price is decreased to $22. Eventually, the sales price is increased to $24. What is the net markdown amount?

$1

Smith Company's inventory cost $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

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

$2,000

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

Smith Company's inventory cost $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

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

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

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

$99

When a material inventory error is discovered in a period subsequent to when the error was made, what must occur?

- a correction of retained earnings is reported as a prior year adjustment - incorrect balances are corrected - previous year's financial statements are retrospectively restated

Advantages of he retail inventory method include that is can

- be adjusted to approximate the different cost flow assumptions - be used to estimate inventory lost, stolen, or destroyed

In applying the lower of cost or market rule, market value should not

- be greater than net realizable value - be less than the net realizable value less normal profit margin

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 alternative does the company have?

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

What is needed to utilize the gross profit method?

- estimated gross profit ratio - net sales - beginning inventory - purchases

Consistent with US GAAP, the lower of cost and net realizable value rule can be applied to

- individual inventory items - the entire inventory - logical inventory categories

Werner Company's accountant discovered that the prior-year financial statements were misstated due to a material inventory-related error. Werner must

- restate its prior years financial statements - adjust account balances that are incorrect as a result of the error

Multi Company changed in inventory method from LIFO to FIFO. Multi must disclose the following information in its notes

- the cumulative effect of the change on retained earnings - the effect on earnings per share amounts

Omar Company uses a periodic inventory system and erroneously overstates ending inventory by $10,000 for the year ended December 31, 2017. Ignoring the tax effect, the effect on the 2017 financial statement includes

- understatement of cost of goods sold by $10,000 - overstatement of net income by $10,000

For financial reporting, the lower of cost or net realizable value approach can be applied to what?

-individual inventory items - groups of inventory items - the entire inventory

How do you estimate ending inventory using the gross profit method?

-multiply sales by 1-gross profit % to get COGS -subtract cost of goods sold from cost of goods available for sale

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 were $20,000. Assuming the conventional retail method, the cost to retail ratio will be

59.7%

What inventory methods are LCNRV used for?

FIFO and average cost

When a company changes to the __________ inventory method from any other method, it usually is impossible to calculate the income effect on prior years.

LIFO

What inventory methods are LCM used for?

LIFO and retail

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

a net decrease

__________ shortages can be deducted in both the cost and retail columns before the calculation of cost-to-retail percentage.

abnormal

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 lower of average cost and net realizable value retail inventory method is also referred to as the __________ retail method.

conventional

Beginning inventory plus net purchases equals

cost of goods available for sale

How do you calculate the cost to retail percentage?

cost of goods available for sale at cost/cost of goods available for sale at retail

Mauser Company properly applies he lower of cost and net realizable value rule and determines that its inventory value has declined by $10,500 below cost. What should be debited for this write-down?

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, retail

Western Company determines the cost of its inventory is $410,000 and net realizable value is $400,000. Western Company should

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

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

An inventory __________ can occur due to a mistake in physical count or a mistake in pricing inventory quantities.

error

How do you estimate ending inventory using the retail inventory method?

find ending inventory at retail and multiply by the cost to retail percentage

What is an important limitation of the gross profit method?

it does not explicitly consider possible theft or spoilage of inventory

What is a loss recognized if inventory write downs are common?

loss is included as part of cost of goods sold

Where is a loss recognized if inventory write downs are rare?

loss is recognized as a separate item in operating expenses

What is a criticism of the lower of cost and net realizable value rule?

losses that have not actually occurred are recognized

When gross profit is stated as a percentage of cost, it is referred to as the ________ on cost.

markup

If the retail inventory method is used, what is included in the calculation of goods available for sale at retail to approximate average costs?

markups and markdowns

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

not be reversed

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

required under GAAP for companies that use a method other than LIFO or retail inventory

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

retail inventory

Which estimation method is acceptable for purposes of annual financial reporting?

retail inventory method

When a company applies a retrospective change in inventory method, they must revise beginning __________ __________ to reflect the cumulative income effect of the difference in inventory methods for all prior years.

retained earnings

Changes in inventory methods, other than a change to LIFO, are treated

retrospectively

Under the LIFO retail method, we determine that a new layer of inventory has been added during the period if

the ending inventory at retail is greater than the beginning inventory at retail

When the retail inventory method is used to approximate average cost, the cost-to-retail percentage is calculated by dividing ____________ by ___________.

total cost of goods available for sale by total good available for sale at retail