Chapter 9 LS Questions

A product purchased for $10 is listed with a $15 sales price. Later, the selling price is increased to $17. When the product does not sell, the sales price is decreased to $16. What is the net markup amount?

$1 The sales price is $15 and the initial markup is $2. When the price is decreased from $17 to $16, the markup is reduced to $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 $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 Ceiling is NRV = $110 - 6 = $104. Floor is NRV less normal profit of 20% so $104 - 22 = $82. Replacement cost is $106. Market is the middle of these three values so = $104 compared to cost of $100. Cost is lower so record at cost

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 Reason: $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

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 o

$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

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 Reason: Ceiling is NRV = $110 - 6 = $104. Floor is NRV less normal profit of 20% so $104 - 22 = $82. Replacement cost is $95. Market is the middle of these three values so = $95 compared to cost of $100. Market is lower so record at market

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. (102,000-5,000)

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 Lower of cost and net realizable value is required. The NRV is $110-11 = 99 and is lower than cost.

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. Reason: $20,000 x (1 - 40%) = $12,000

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

42.86% 30%(100%-30%)

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 practice of recognizing decreases in inventory but not increases is consistent with what?

Conservatism

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

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

IFRS

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.

Which of the following is an important limitation of the gross profit method?

It does not explicitly consider possible theft or spoilage of inventory

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.

Which of the following represents a criticism of the lower of cost and net realizable value rule?

Losses that have not actually occurred are recognized

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

Only the ending inventory

Which of the following can be used to write-down inventory according to the lower of cost and net realizable value rule? (Select all that apply.)

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

Which of the following must be considered when applying the gross profit method?

The inventory cost flow assumption used by the company. Conditions that may have changed the current year gross profit margin

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

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

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

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

Which of the following information is needed to utilize the gross profit method?

beginning inventory estimated gross profit ratio net sales purchases

The cost to retail percentage is found by dividing goods available for sale at _____ by goods available for sale at _____.

cost; current selling price

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

NRV Formula

expected selling price-total selling cost

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

individual inventory items

The retail inventory method

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

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

logical inventory categories. individual inventory items. the entire inventory

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

markup

When determining ending inventory at retail, a company should include both net ___ and net ____

markups markdowns

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 (GAAP does not allow inventory to be written up once the cost basis is reduced)

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?

other loss or expense cost of goods sold

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

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

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

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

the inventory value declines below cost.

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 (GAAP allows LCNRV to be applied to individual, categories of, or the entire inventory.)