Chapter 9 SmartBook

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 a. $110 b. $102 c. $104 d. $106 e. $100

$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.

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 a. $104 b. $110 c. $100 d. $95

$100 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.

Which of the following must be known to apply the retail inventory method? (Select all that apply.) a. Number of units on hand at time of sale. b. Inventory and purchases based on cost. c. Inventory and purchases based on retail value.

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

When using the retail method to approximate average cost, the cost-to-retail percentage is applied to which goods? a. All goods available for sale b. All goods sold during the period c. Only the ending inventory d. Only the beginning inventory

Only the ending inventory

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. a. True b. False

True

To use the _____ method, a company must maintain records of inventory and purchases at cost and at current selling price. a. gross profit b. retail inventory c. LIFO d. FIFO

retail inventory

For financial reporting, the lower of cost or net realizable value approach can be applied to (Select all that apply.) a. the entire inventory. b. groups of inventory items. c. individual inventory items. d. only to inventory purchased during the current year.

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

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 a. $96. b. $104. c. $100. d. $110.

$100. Lower of cost and net realizable value is required. The NRV is $104, but the cost of $100 is lower.

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 a. $8,000. b. $12,000. c. $6,400.

$12,000. $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 a. $18,000. b. $24,000. c. $16,000 d. $23,000.

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

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 a. $97,000. b. $102,000. c. $100,000. d. $87,000.

$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 a. $100. b. $90. c. $99. d. $110. e. $121.

$99. 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. 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 a. $110. b. $121. c. $90. d. $100. e. $99.

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

Initial markup <<<--->>> Original amount of markup from cost to selling price

Additional markup <<<--->>> Additional markup answer drop zone Increase in selling price subsequent to initial markup

When inventory is adjusted down to reflect net realizable value, which of the following can occur? (Select all that apply.) a. Credit inventory income b. Debit sales expense c. Credit inventory d. Debit cost of goods sold e. Debit inventory

Credit inventory Debit cost of goods sold

Markup cancellation <<<--->>> Elimination of an additional markup

Markdown <<<--->>> Reduction in selling price below the original selling price

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.) a. Recognize the write-down as a separate line item on the income statement. b. Recognize the write-down as an addition to cost of goods sold. c. Defer the write-down until the inventory is sold.

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? (Select all that apply.) a. Defer the write-down until the inventory is sold. b. Recognize the write-down as an addition to cost of goods sold. c. Recognize the write-down as a separate line item.

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

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? a. Smart Company could record the loss as extraordinary because it rarely occurred. b. Smart Company could debit a separate loss account and include it as an operating expense. c. Smart Company could record a non-operating loss.

Smart Company could debit a separate loss account and include it as an operating expense.

Write-downs are rare. <<<--->>> Loss is recognized as a separate item in operating expense.

Write-down are common. <<<--->>> Loss is included as part of cost of goods sold.

GAAP requires companies to report inventory (Select all that apply.) a. using either the LIFO or FIFO method. b. at the lower of cost or market value for companies using FIFO. c. at the lower of cost or market value for companies using LIFO. d. at the lower of cost and net realizable value for companies using FIFO. e. by applying the same valuation method to all inventory.

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.

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.) a. debit cost of goods sold $10,000 b. debit inventory $10,000 c. not record a journal entry d.credit cost of goods sold $10,000 e. credit inventory $10,000

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

Net realizable value of inventory is determined by subtracting selling cost from the a. replacement cost. b. normal profit. c. expected sales price

expected sales price

The selling price of inventory less any costs of completion, disposal, and transportation is a. inventory cost. b. market cost. c. net realizable value.

net realizable value.

The lower of cost or market approach is _____ for companies that use _____. a. optional under GAAP; LIFO or the retail inventory b. optional under GAAP; any method of inventory valuation c. required under GAAP; LIFO or the retail inventory d. required under GAAP; any method of inventory valuation

required under GAAP; LIFO or the retail inventory

The lower of cost or net realizable value approach is _____ for companies that use _____. a. required under GAAP; any method of inventory valuation b. required under GAAP; a method other than LIFO or retail inventory c. optional under GAAP; any method of inventory valuation d. optional under GAAP; a method other than LIFO or retail inventory

required under GAAP; a method other than LIFO or retail inventory