ACC Final Exam

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

$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

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 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.

Warren 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 retail inventory method is used to approximate average costs, what is the amount of goods available for sale at cost?

$100,000 + $300,000

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 is used and net sales were $500,000, ending inventory at retail would be

$150,000 $160,000 + $500,000 + $10,000 - $20,000 - $500,000 = $150,000

Geese 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 beginning inventory at retail was $200,000 and that during the current period a new layer was added with retail value of $50,000. The cost of ending inventory should be

$152,000 $200,000 x 60% = $120,000 $50,000 x 64% = $32,000

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

$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

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

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 $100,000 x 55%

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 Markdowns are excluded from the calculation of the cost-to-retail percentage Cost $400,000 ($100,000+$300,000) divided by Retail of $670,000 ($160,000+$500,000+$10,000) =59.7% x estimated ending inventory at retail = ($160,000 + $500,000 + $10,000 - $20,000 - $500,000) = 59.7% x $150,000 = $89,550

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

- A correction of retained earnings is reported as a prior period adjustment. - Previous year's financial statements are retrospectively restated. - Incorrect balances are corrected.

When inventory is adjusted down to reflect net realizable value, which of the following can occur?

- Debit cost of goods sold - Credit inventory

Which of the following must be known to apply the retail inventory method?

- Inventory and purchases based on cost. - Inventory and purchases based on retail value.

The dollar-value LIFO retail method is a combination of which of the following?

- LIFO retail method - Dollar-value LIFO method

Which of the following inventory-related events typically cause financial statement misstatements?

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

Which of the following can be used to write-down inventory according to the lower of cost and net realizable value rule?

- 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.

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?

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

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?

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

Which of the following are included in the disclosure note related to an inventory error?

- The nature of the error. - The impact of the correction on net income. - The impact of the correction on earnings per share.

Identify the situations for which ending inventory and cost of goods sold may be estimated utilizing the gross profit method.

- To determine reasonableness of inventory amounts during an audit. - When inventory was lost, destroyed, or stolen. - For interim reporting periods.

Which of the following can create inventory errors?

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

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

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

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

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

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

The dollar-value LIFO retail method

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

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

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

Retail inventory fs occur because of

- price declines. - competition. - obsolescence. - spoilage.

Which of the following must be considered to calculate net purchases?

- purchase returns - purchase discounts - freight-in

Accounting errors that are discovered during the same accounting period that they occurred must be corrected by

- recording the correct entry. - reversing the incorrect entry.

Note disclosures relating to the correction of prior-year errors include information about

- the nature of the error. - each line item affected. - the effect on earnings per share.

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 an

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

Warren 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 retail inventory method is used to approximate average costs, what is the cost to retail percentage?

61.54 % ($100,000 + $300,000)/($160,000 + $500,000 + $10,000 - $20,000)

Freight-in

Added to gross purchases

Amber is in charge of preparing an annual budget for her company. As part of the budgeting process, she must estimate cost of goods sold and ending inventory. Which of the following statements is correct regarding the use of the gross profit method?

Amber may utilize the gross profit method to estimate ending inventory and cost of goods sold.

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

Beginning inventory at retail

Beginning inventory

Beginning-inventory cost-to-retail percentage

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 is correct regarding changes in accounting methods?

Changes are permitted if they are made in response to changes in the company's business environment.

Current period layer

Current-period purchases cost-to-retail percentage

Markdown cancellation

Elimination of a markdown

Markup cancellation

Elimination of an additional markup

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

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

False

Additional markup

Increase in selling price subsequent to initial markup

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

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

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

LIFO

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

write downs are common

Loss is included as part of cost of goods sold.

write downs are rare

Loss is recognized as a separate item in operating expense.

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

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

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

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.

Initial markup

Original amount of markup from cost to selling price

Markdown

Reduction in selling price below the original selling price

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.

Purchase discounts

Subtracted from gross purchases

Both U.S. GAAP and IFRS require inventory to be valued at the lower of cost and net realizable value.

True

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

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

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

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

a net decrease

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

are increased

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

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 base year inventory for all future LIFO determinations is the

beginning inventory in the year the LIFO method is adopted.

The retail inventory method is also referred to as the ____ retail method

conventional

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

conventional retail method.

The cost-to-retail percentage is found by dividing goods available for sale at ____ by goods available for sale at current selling price.

cost

Beginning inventory plus net purchases equals

cost of goods available for sale

Ending inventory plus cost of goods sold equals

cost of goods available for sale.

In the retail inventory method, a __-___-___ percentage is used to estimate ending inventory and cost of goods sold.

cost to retail

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.

The retail inventory method tends to be more accurate than the gross profit method because it relies on the

current relationship between cost and selling prices

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

Omar Company uses a periodic inventory system and erroneously overstates ending inventory by $10,000 for the year ended December 2016. If Omar discovers this error in 2017, it should

debit retained earnings and credit inventory.

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.

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

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

The gross profit method is useful in situations where _____ of inventory are desirable.

estimates

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

expected sales price

Accounting principles should be applied consistently because this practice enhances

financial statement comparability.

The original amount a company adds to cost to determine the selling price is known as ____ ____ .

initial markup

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

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

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

The ____ ____ method uses the cost-to-retail percentage based on a current relationship between cost and selling price.

retail inventory

Which of the following estimation methods is acceptable for purposes of annual financial reporting?

retail inventory method

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.

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

the inventory value declines below cost.

When a company changes to the LIFO inventory method,

they do not restate prior year financial statements.

The LIFO method assumes that units sold are

those most recently purchased.

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; total goods available for sale at retail

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.

true

Net realizable value is selling price less costs of completion, disposal, and transportation.

true