Chapter 9 Intermediate Financial 1

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

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

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 cost of goods sold for this past period would be

$12,000.

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 (round the cost-to-retail percentage to two digits after the decimal point)

$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.

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.

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

$24,000.

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.

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?

$400,000

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.

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 retail?

$650,000

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 and net sales of $500,000, ending inventory at cost would be

$89,550.

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

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 a

$98.

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 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

The dollar-value LIFO retail method is a combination of which of the following? (Select all that apply.)

- LIFO retail method - Dollar-value LIFO method

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.

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

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

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

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 and net realizable value for companies using FIFO.

In the retail inventory method, a -- percentage is used to estimate ending inventory and cost of goods sold. (Enter one word per blank.)

- cost - to - retail

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

For financial reporting, the lower of cost or net realizable value approach can be applied to (Select all that apply.)

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

Which of the following must be considered to calculate net purchases? (Select all that apply.)

- purchase discounts - freight-in - purchase returns

Retail inventory markdowns occur because of (Select all that apply.)

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

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

59.7%.

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.

The retail inventory method is also referred to as the retail method. (Enter only one word.)

Blank 1: conventional

The cost-to-retail percentage is found by dividing goods available for sale at by goods available for sale at current selling price. (Enter one word per blank.)

Blank 1: cost

The original amount a company adds to cost to determine the selling price is known as . (Enter one word per blank.)

Blank 1: initial Blank 2: markup

Reduction in selling price below the original selling price is known as . (Enter only one word.)

Blank 1: markdown

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.

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

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

False

When there is a net increase in the physical quantity of inventory during a period, the use of _____ results in an additional layer of inventory.

LIFO

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.

When using the retail method to approximate average cost, the cost-to-retail percentage is applied to which goods?

Only the ending inventory

The method uses the cost-to-retail percentage based on a current relationship between cost and selling price. (Enter one word per blank.)

Retail inventory

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.

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

True

True or false: 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

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

a net decrease

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.

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

conventional retail method.

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.

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.

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

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

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

markups and markdowns

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

net realizable value.

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

required under GAAP; LIFO or the retail inventory

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

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.

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 _____. (Select all that apply.)

total cost of goods available for sale; total goods available for sale at retail