Chapter 9

Bronte Corporation acquired two inventory items at a lump-sum cost of $160,000. The acquisition included 6,000 units of product A, and 14,000 units of product B. Product A normally sells for $24 per unit, and product B for $8 per unit. If Bronte sells 2,000 units of A, what amount of gross profit should it recognize? $9,500. $18,000. $4,500. $1,500.

$18,000. The sales value of A is (6,000 units X $24 each) $144,000 and the B is (14,000 units X $8 each) $112,000 totaling $256,000. Thus, the cost allocated to A based on relative sales values is ($144,000 / $256,000) 56.25% of the $160,000 or $90,000. The cost per unit of A is ($90,000/6,000) $15.00 making 2,000 units worth $30,000. Revenues of $48,000 less $30,000 results in a gross profit of $18,000.

Rosetta Company's July 31 inventory was destroyed by fire. The company's beginning inventory was $250,000, and purchases for January through July were $600,000. Sales for the same period were $900,000. The company's normal gross profit percentage is 30% of sales. Using the gross profit method, the July 31 inventory is estimated to be $20,000. $220,000. $270,000. $150,000.

$220,000. ($250,000 + $600,000) - [$900,000 - ($900,000 X .30)] = $220,000.

Crown Corporation acquired two inventory items at a lump-sum cost of $60,000. The acquisition included 3,000 units of product X001, and 3,000 units of product X002. X001 normally sells for $20 per unit, and X002 for $10 per unit. If Crown sells 1,000 units of X002, what amount of gross profit should it recognize? $6,670. $10,000. $1,000. $3,330.

$3,330. The sales value of X001 is (3,000 X $20 each) $60,000 and the X002 units are (3,000 X $10 each) $30,000 totaling $90,000. Thus, the cost allocated to X002 based on relative sales values is ($30,000/$90,000) 33.33% of the $60,000 or $20,000. The cost per unit of X002 is ($20,000/3,000) $6.67 making 1,000 units worth $6,670. Revenues of $10,000 less cost of $6,670 results in a gross profit of $3,330.

The replacement cost of an inventory item is $50. Net realizable value is $55. Net realizable value less a normal profit margin is $46. The cost of the item is $51. The inventory item would be valued at: $51. $55. $50. $46.

$50.

The replacement cost of an inventory item is $60. Net realizable value is $65. Net realizable value less a normal profit margin is $59. The cost of the item is $62. The designated market value used in applying Lower-of-Cost-or-Market is $60. $62. $65. $59.

$60.

Gautreaux Corporation's computation of cost of goods sold is: Beginning inventory $160,000 Add: Cost of goods purchased 605,000 Cost of goods available for sale 765,000 Ending inventory 180,000 Cost of goods sold $585,000 The average days to sell inventory for Gautreaux are 106.1 days. 112.3 days. 53.0 days. 100.0 days.

106.1 days. 365 days / {$585,000 / [($160,000 + $180,000) / 2]} = 106.1 days.

Which one of the following is deducted in computing the cost-to-retail ratio? Normal shortages. Employee discounts. Abnormal shortages. Sales returns.

Abnormal shortages.

Which of the following is not a required inventory disclosure under GAAP? The inventory costing methods employed. The composition of the inventory.. All of the above are required disclosures. Significant or unusual inventory financing arrangements.

All of the above are required disclosures.

When market is lower than cost, and the indirect method of recording the write-down is used, what account is credited? Cost of Goods Sold. Allowance to Reduce Inventory to Market. A loss account. Merchandise Inventory.

Allowance to Reduce Inventory to Market. Using the indirect method, the write-down is recorded with a debit to a loss account and a credit to the valuation account, Allowance to Reduce Inventory to Market.

The following data concerning the retail inventory method are taken from the financial records of Stone Company. Cost Retail Beginning inventory $ 49,000 $ 70,000 Purchases 224,000 320,000 Freight-in 6,000 — Net markups — 20,000 Net markdowns — 14,000 Sales — 336,000 If the foregoing figures are verified and a count of the ending inventory reveals that merchandise actually on hand amounts to $54,000 at retail, the business has: sustained a loss. realized a windfall gain. no gain or loss as there is close coincidence of the inventories. none of these.

Answer is A

In applying the lower of cost or market rule, market may be represented by: net realizable value. current replacement cost. Any of the above may be correct. net realizable value less a normal profit margin.

Any of the above may be correct. Market is the value that falls in the middle of the first three options.

When the direct method is used to adjust cost to "market", what account is debited? Inventories. Cost of Goods Sold. Loss Due to Market Decline of Inventories. Allowance to Reduce Inventory to Market Value.

Cost of Goods Sold.

Which of the following statements about IFRS for inventory accounting is not true? IFRS provide more limited guidance than GAAP for inventory accounting. IFRS prohibits the use of LIFO. IFRS allows reversals of write-downs up to the amount of the previous write-down. IFRS defines market value as replacement cost subject to the constraints of a ceiling and floor.

IFRS defines market value as replacement cost subject to the constraints of a ceiling and floor. IFRS defines market value as net realizable value without regard to the ceiling and floor constraints required by GAAP.

Which statement is not true about the gross profit method of inventory valuation? None of these. It may be used to estimate inventories for annual statements. It may be used by auditors. It may be used to estimate inventories for interim statements.

It may be used to estimate inventories for annual statements. The gross profit method may NOT be used for annual statements.

Which of the following is a major assumption of the LIFO retail method? Changes in the selling price of the inventory should be ignored Neither markups nor markdowns should be included in the computation of the cost-to-retail percentage. Markups but not markdowns apply to both beginning inventory and goods purchased during the period. Markups and markdowns apply to goods purchased during the period and not to beginning inventory.

Markups and markdowns apply to goods purchased during the period and not to beginning inventory.

Which of the following is included in the calculation of the cost-to-retail ratio under the conventional retail inventory method? Markdowns only. Markdowns and markdown cancellations. Markups only. Markups and markup cancellations.

Markups and markup cancellations. The conventional retail inventory method does not include markdowns or markdown cancellations in the calculation of the cost-to-retail ratio.

Which statement is true about the retail inventory method? It may not be used to estimate inventories for interim statements. It may not be used to estimate inventories for annual statements. It may not be used by auditors. None of these.

None of these.

Which of the following is not an assumption made when using the gross profit method? Entry field with correct answer Ending inventory is equal to beginning inventory plus purchases less sales, reduced to cost. Goods not sold are on hand. The cost ratio is computed after markups (and markup cancellations) but before markdowns. The beginning inventory plus purchases equal total goods available during the period.

The cost ratio is computed after markups (and markup cancellations) but before markdowns. The conventional retail inventory method assumes that the cost ratio is computed after markups (and markup cancellations) but before markdowns.

Which of the following is not permitted under IFRS? Reversals of lower-of-cost-or-market write-downs. Lower-of-cost-or-market valuation. The use of the LIFO cost flow assumption. Reporting of any type of inventory at net realizable value.

The use of the LIFO cost flow assumption.

When is the relative sales value method used? When purchasing a group of like items. When purchasing damaged inventory. When purchasing a group of varying units. When purchasing a commodity.

When purchasing a group of varying units. The relative sales value method is used to allocate a lump-sum purchase price to the various types of inventory purchased based on their relative sales values.

Which of the following statements is true regarding IFRS and inventories? With respect to inventories, IFRS defines market as net realizable value. IFRS allows inventory to be written up above its original cost. IFRS permits the option of valuing inventories at fair value. GAAP and IFRS permit the use of the same inventory cost flow assumptions.

With respect to inventories, IFRS defines market as net realizable value.

Inventory may be recorded at net realizable value if all of these. there is a controlled market with a quoted price. there are no significant costs of disposal. the inventory consists of precious metals or agricultural products.

all of these.

The gross profit method of estimating ending inventory is not acceptable for: annual financial statements. None of the above. insurance claims for destroyed inventory. interim financial statements.

annual financial statements.

The inventory turnover ratio is computed by dividing the cost of goods sold by average inventory. number of days in the year. beginning inventory. ending inventory.

average inventory. The inventory turnover ratio is computed by dividing the cost of goods sold by average inventory.

In the lower of cost or market rule, net realizable value is referred to as the: floor. wall. ceiling. current market.

ceiling. In the lower of cost or market rule, net realizable value is referred to as the:

The inventory turnover ratio is computed by dividing sales by ending inventory. cost of goods sold by ending inventory. sales by average inventory. cost of goods sold by average inventory.

cost of goods sold by average inventory. Cost of goods sold divided by average inventory yields the inventory turnover ratio.

The method of recording inventory at market that substitutes the market value for cost and reports the loss as a part of cost of goods sold is the: indirect method. replacement method. allowance method. direct method.

direct method. The direct method substitutes the market value for cost when valuing inventory.

The lower limit (floor) for inventory valuation is defined as the selling price less: the net realizable value. estimated costs of completion and disposal. estimated costs of completion and disposal and a normal profit margin. a normal profit margin.

estimated costs of completion and disposal and a normal profit margin. The floor for inventory valuation is the selling price less estimated costs of completion and disposal and a normal profit margin.

In no case can "market" in the lower-of-cost-or-market rule be more than estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal and an allowance for an approximately normal profit margin. estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal, an allowance for an approximately normal profit margin, and an adequate reserve for possible future losses. estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal. estimated selling price in the ordinary course of business.

estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal. Market cannot be greater than the estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal.

The primary basis of accounting for inventories is cost. A departure from the cost basis of pricing the inventory is required where there is evidence that when the goods are sold in the ordinary course of business their selling price will be less than their replacement cost. future utility will be less than their cost. replacement cost will be more than their net realizable value. cost will be less than their replacement cost.

future utility will be less than their cost. To preclude overstating assets, the lower of cost or market (future utility) is used for inventory valuation.

Losses on noncancelable purchase contracts should be recognized: at the time of payment. when the purchase is recorded. in the period a decline in market price occurs. at the date of inception.

in the period a decline in market price occurs.

A decrease in the original sales price of an item is called a: markdown cancellation.. markup. markdown. markup cancellation.

markdown. When the original price is reduced it is called a markdown.

The percentage markup on cost can be computed by dividing gross profit by 100%: minus gross profit. plus markup on cost. minus markup on cost. plus gross profit.

minus gross profit. Dividing gross profit by 100% minus gross profit yields the percentage markup on cost.

Under the conventional retail inventory method, the cost-to-retail ratio includes the retail price of goods available and markups and markdowns. markups only. net markups only. net markdowns only.

net markups only. The cost-to-retail ratio includes net markups under the conventional retail method.

In applying the lower of cost or market rule, the floor is defined as: net realizable value less a normal profit margin. current replacement cost. historical cost. net realizable value.

net realizable value less a normal profit margin. The floor, net realizable value less normal profit margin, prevents understatement of inventories and overstatement of the loss.

Inventories of certain minerals and agricultural products are valued at: lower of cost or market. net realizable value. replacement cost. cost.

net realizable value. Valuing inventory at net realizable value is permitted for certain minerals and agricultural products.

La Jolla Corporation, a manufacturer of ethnic foods, contracted in 2011 to purchase 1,000 pounds of a spice mixture at $5.25 per pound, delivery to be made in spring of 2012. By 12/31/11, the price per pound of the spice mixture had risen to $5.95 per pound. In 2011, La Jolla should recognize a loss of $2,500. a loss of $300. no gain or loss. a gain of $300.

no gain or loss.

The relative sales value method is used throughout the: agricultural products industry. petroleum industry. meat-packing industry. mining industry.

petroleum industry. The petroleum industry uses the relative sales value method extensively.

The term market in the phrase "lower of cost or market" generally means the: ceiling. floor. net realizable value. replacement cost.

replacement cost. The term market generally means the cost to replace the inventory item.

In applying Lower-of-Cost-or-Market, the designated market value is the middle value of replacement cost, net realizable value and net realizable value less a normal profit margin. net realizable value less a normal profit margin. the lower of net realizable value or replacement cost. the higher of replacement cost or net realizable value less a normal profit margin.

the middle value of replacement cost, net realizable value and net realizable value less a normal profit margin. In applying Lower-of-Cost-or-Market, the designated market value is the middle value of replacement cost, net realizable value and net realizable value less a normal profit margin.

If a material amount of inventory has been ordered through a formal purchase contract at the balance sheet date for future delivery at firm prices, disclosure is required only if prices have declined since the date of the order. disclosure is required only if prices have since risen substantially. an appropriation of retained earnings is necessary. this fact must be disclosed.

this fact must be disclosed.

The retail inventory method requires that a record be kept of all of the following except the total cost and retail value of goods available for sale. sales for the period. total cost and retail value of freight costs. total cost and retail value of goods purchased.

total cost and retail value of freight costs. All of the options are required except the total retail value of freight costs.

An estimated loss on purchase commitments is reported: as an extraordinary item. as a valuation account. under Other Expenses and Losses. as a deduction from purchases.

under Other Expenses and Losses. An estimated loss on purchase commitments is reported under Other Expenses and Losses.