Intermediate Financial Accounting - Ch9 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 $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...

$100 Reason: Ceiling is NRV = 110 - 6 = 104. Floor is NRV less gross profit (20%), 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

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 Reason: ceiling is NRV = 110 - 6 = 104. Floor is NRV less gross profit (20%), 104 - 22 = 82. Replacement cost is 102. Market is the middle so = 102 compared to cost of $100. Cost is lower so record 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 $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 Reason: ceiling is NRV = 110 - 6 = 104. Floor is NRV less gross profit (20%), 104 - 22 = 82. Replacement cost is 106. Market is the middle so = 104 compared to cost of $100. Cost is lower so record 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...

$100 Reason: 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...

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

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 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 of...

$20 Reason: only item A has a market value below cost so a $20 loss is recorded

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 Reason: $50,000 x 64%

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 Reason: 100,000 + 300,000

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: Total cost is $55, total NRV is $50

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 Reason: 160,000 + 500,000 + 10,000 - 20,000

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?

$660,000 Reason: $160,000 + 500,000 + 10,000 + 20,000 = $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 Reason: cost to retail percentage $400,000 (100,000 + 300,000) / $670,000 (160,000 + 500,000 + 10,000) = 59.7% x $150,000 (670,000 - 20,000 - 500,000) = $89,550

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 Reason: $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, cost to retail percentage would be...

59.7% Reason: cost $400,000 (100,000+300,000) divided by Retail of $670,000 (160,000+500,000+10,000)

Jones Company's inventory cost is $100. The expected sales price is $110. The company estimates sales costs 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 Reason: the NRV is $110-11=99 and is lower than cost

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

True or false: reversals of inventory write-downs are not permitted under either U.S. GAAP or IFRS

False Reason: Under IFRS, if an inventory write down is no longer appropriate, it must be reversed

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

Initial markup

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

Which of the following is correct regarding changes in accounting methods? a) changes are permitted if they are made in response to changes in the company's business environment b) changes in accounting principles are permitted only once every 5 years c) changes in accounting principles violate the consistency concept and are prohibited

a) changes are permitted if they are made in response to changes in the company's business environment

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

a) debit cost of goods sold c) credit inventory

Which of the following must be considered to calculate net purchases? (select all that apply) a) freight in b) purchase returns c) purchase discounts d) freight out e) storage costs after purchase

a) freight in b) purchase returns c) purchase discounts

If inventory values recover after a lower of cost and net realizable value write-down, the write-down must a) not be reversed b) be revered for any amount c) be reversed if it is a material amount

a) not be reversed Reason: GAAP does not allow inventory to be written up once the cost basis is reduced

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) recognize the write-down as a separate line item b) recognize the write-down as an addition to cost of goods sold c) defer the write-down until the inventory is sold

a) recognize the write-down as a separate line item b) 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.) a) smith could apply the lower of cost and net realizable rule to its entire inventory b) smith could choose not to apply the lower of cost and net realizable value rule and report inventory at historical cost c) smith could apply the lower of cost and net realizable value rule to each product line

a) smith could apply the lower of cost and net realizable rule to its entire inventory c) smith could apply the lower of cost and net realizable value rule to each product line

Omar Company uses a periodic inventory system and erroneously overstates ending inventory by $10,000 for the year ended December 31. Ignoring the tax effect, the effect on the current year financial statement includes an (select all that apply) a) understatement of cost of goods sold by $10,000 b) understatement of net income by $10,000 c) overstatement of net income by $10,000 d) overstatement of cost of good sold by $10,000

a) understatement of cost of goods sold by $10,000 c) overstatement of net income by $10,000

Which of the following can create inventory errors? a) understatement of ending inventory due to pricing mistake b) overstatement of ending inventory due to physical count mistake c) mistakes in the cutoff relating to purchases of inventory d) reporting inventory at the lower of cost and net realizable value

a) understatement of ending inventory due to pricing mistake b) overstatement of ending inventory due to physical count mistake c) mistakes in the cutoff relating to purchases of inventory

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

are increased

The dollar-value LIFO retail method (select all that apply) a) eliminates the effect of any quantity changes when comparing beginning and ending inventory b) allows the company to determine if there is an increase in the quantity of inventory c) eliminates the effect of any price changes when comparing beginning and ending inventory d) allows the company to determine if there is an increase in the price of inventory

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

The base year inventory for all future LIFO determinations is the... a) ending inventory in the year the LIFO method is adopted b) beginning inventory in the year the LIFO method is adopted c) first year the company acquired inventory

b) beginning inventory in the year the LIFO method is adopted

Which of the following statements regarding inventory valuation is correct? a) only IFRS requires that inventory is valued at the lower of cost or net realizable value b) both U.S. GAAP and IFRS require that inventory is valued at the lower of cost or net realizable value c) only U.S. GAAP requires that inventory is valued at the lower of cost or net realizable value

b) both U.S. GAAP and IFRS require that inventory is valued at the lower of cost or net realizable value

Which of the following must be considered when applying the gross profit method? (select all that apply) a) the shipping terms utilized for the purchase and sale of inventory items b) conditions that may have changed the current year gross profit margin c) the inventory cost flow assumption used by the company

b) conditions that may have changed the current year gross profit margin c) the inventory cost flow assumption used by the company

Omar Company uses a periodic inventory system and erroneously overstates ending inventory by $10,000 for the year ended December 31. If Omar discovers this error in the following year, it should... a) debit cost of goods sold and credit inventory b) debit retained earnings and credit inventory c) credit retained earnings and debit inventory d) credit cost of goods sold and debit inventory

b) debit retained earnings and credit inventory

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

b) individual inventory items c) groups of inventory items d) the entire inventory

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

b) inventory and purchases based on cost c) inventory and purchases based on retail value

Accounting errors... a) must be corrected by the end of the year they are discovered in b) must be corrected when they are discovered c) do not need to be corrected

b) must be corrected when they are discovered

Which of the following statements is correct regarding the accuracy of the estimates derived under the gross profit method? a) the company's cost flow assumption is irrelevant b) the gross profit ratio must be reliable c) a physical count is necessary to enhance reliability

b) the gross profit ratio must be reliable

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

beginning inventory at retail

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? (Select all that apply.) a) depreciation expense b) inventory c) cost of goods sold d) other loss or expense

c) cost of goods sold d) other loss or expense

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

c) credit inventory $10,000 e) debit cost of goods sold $10,000

The variety of inventory cost flow assumptions that can be utilized by companies typically does not impair earning quality because... a) all companies are required to report financial statements using the same inventory method b) the different choices produce financial statement results that are not materially different c) detail about the methods must be disclosed in the financial statement notes

c) detail about the methods must be disclosed in the financial statement notes

Accounting principles should be applied consistently because this practice enhances... a) full disclosure of information b) matching of revenue and expenses c) financial statement comparability

c) financial statement comparability

Under IFRS, the lower of cost and net realizable value rule typically is applied to a) logical inventory categories b) individual or the entire inventory only c) individual inventory items d) the entire inventory

c) individual inventory items

Which of the following represents a criticism of the lower of cost and net realizable value rule? a) the rule violates the matching principle b) application of the rule results in lower than expected income c) losses that have not actually occurred are recognized

c) losses that have not actually occurred are recognized

Otto Company uses a periodic inventory system and erroneously understates ending inventory by $10,000 for the year ended December 2016. This error is not discovered until 2018. The company should... a) adjust the inventory account for the current year b) adjust the retained earnings beginning balance of the current year c) retrospectively restate financial statements for the previous two years

c) retrospectively restate financial statements for the previous two years

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

conservatism

The exclusion of net markdowns from the calculation of the cost-to-retail percentage occurs in 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 ____________.

cost; current selling price

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

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

d) at the lower of cost or net realizable value for companies using FIFO e) at the lower of cost or market value for companies using LIFO

Using the ___________ method allows a company to determine if there has been a "real" increase in quantity of inventory.

dollar-value LIFO retail

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

Inventory related note disclosures ______________ earnings quality.

enhance

An inventory _____________ can occur due to a mistake in physical count or a mistake in pricing inventory quantities.

error or mistake

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

expected sales price

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

net realizable value

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 Reason: GAAP does not allow inventory to be written up once the cost basis is reduced

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

only ending inventory

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

required under GAAP; LIFO or the retail inventory

Changes in inventory methods; other than a change to LIFO, are treated...

retrospectively

Generally, voluntary changes in accounting principles are accounted for...

retrospectively