ACC 301 Chapter 9

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

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.

Linden Company has three inventory items. Utilizing the lower of cost and net realizable value rule, Linden determines the following: Item A: cost is $40; net realizable value is $20 Item B, cost is $10; net realizable value is $20 Item C, cost is $5; net realizable value is $10 If Linden applies the rule to its entire inventory, it should recognize a loss of

$5 Reason: Item A has a cost higher than net realizable value and B and C have a cost lower than NRV. -$20 + $10 + $5 = $5 loss. Total cost is $55, total NRV is $50

For financial reporting of companies using LIFO, the lower of cost or market approach can be applied to

- Groups of inventory items - Individual inventory items - The entire inventory

Which of the following information is needed to utilize the gross profit method? (Select all that apply.)

- Net sales - Beginning inventory - estimated gross profit ratio -purchases

The retail inventory method can be modified to estimate which of the following using FIFO, LIFO, or average cost?

- cost of goods sold - Ending inventory

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

-At the lower cost or market value for companies using LIFO -At the lower cost or net realizable value for comapnies using FIFO

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

-Debit Cost of Goods sold - Credit inventory

Ziegler Company properly applies the lower of cost and net realizable value rule and determines that its inventory value has declined below cost. Which of the following methods may Ziegler use to adjust its inventory to market value? (Select all that apply.)

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

Which of the following must be included in the disclosure note related to a change in inventory method?

-The cumulative effect of the change on retained earnings. -Justification that the change is preferable. -The effect of the change on items not reported on the face of the primary statements.

Advantages of the retail inventory method include that it can

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

The retail inventory method (Select all that apply.)

-is used to test the overall reasonableness of physical counts. -is used to generate information for interim financial statements. -is used in budgeting and forecasting.

Which of the following are required in the note disclosure of a company changing to the LIFO inventory method?

-reason why retrospective application was impracticable -the nature of the change -justification for the change -effect on current year earnings per share and income amounts

In applying the lower of cost or market rule, market value.

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

Which of the following are required in the note disclosure of a company changing to the LIFO inventory method? (Select all that apply.)

-the nature of the change -reason why retrospective application was impracticable -effect on current year earnings per share and income amounts -justification for the change

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

If gross profit is 30%, then what is the markup on cost?

42.86%

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.

Beginning inventory plus net purchases equals

Cost of Goods availble for sale

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

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

IFRS

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

Individual inventory items

The original amount a company adds to cost to determine the selling price is known as ________ _________

Initial Markup

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

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

Markup

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

The entire inventory Logical inventory categories Individual inventory items

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.

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

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

not be reversed.

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.

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

replacement

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