Accounting 326 Chapter 9 Learnsmarts

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 b

$32,000.Reason: $50,000 x 64%

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 Multiple choice question. $98.

$98

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

When a material inventory error is discovered in a period subsequent to when the error was made, which of the following must occur? (Select all that apply.)

A correction of retained earnings is reported as a prior period adjustment. Previous year's financial statements are retrospectively restated. Incorrect balances are corrected.

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.

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

Beginning inventory at retail

When a company applies a retrospective change in inventory method, they must revise beginning Blank 1Blank 1 retained , Correct Unavailable Blank 2Blank 2 earnings , Correct Unavailable to reflect the cumulative income effect of the difference in inventory methods for all prior years. (Enter one word per blank.)

Blank 1: retained Blank 2: earnings

Which of the following is correct regarding changes in accounting methods?

Changes are permitted if they are made in response to changes in the company's business environment.

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

Which of the following must be known to apply the retail inventory method? (Select all that apply.)

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

When a company changes to the _____ inventory method from any other method, it usually is impossible to calculate the income effect on prior years.

LIFO

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 can create inventory errors? (Select all that apply.)

Mistakes in the cutoff relating to purchases of inventory. Understatement of ending inventory due to pricing mistake. Overstatement of ending inventory due to physical count mistake.

When using the LIFO retail method, how many inventory layers can be added per year if inventory increases?

One 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

A contract that obligates a company to purchase a specific amount of merchandise, at a specific price, on or before a specific date is referred to as what?

Purchase commitment

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

Reason: $20,000 x (1 - 40%) = $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 and net sales of $500,000, ending inventory at cost would be

Reason: Markdowns are excluded from the calculation of the cost-to-retail percentage Cost $400,000 ($100,000+$300,000) divided by Retail of $670,000 ($160,000+$500,000+$10,000) =59.7% x estimated ending inventory at retail = ($160,000 + $500,000 + $10,000 - $20,000 - $500,000) = 59.7% x $150,000 = $89,550

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

Reason: $200,000 x 60% = $120,000 $50,000 x 64% = $32,000

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

Reason: 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.

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

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

When a company applies a retrospective change in inventory method, they must revise beginning Blank 1Blank 1 inventory , Incorrect Unavailable Blank 2Blank 2 account , Incorrect Unavailable to reflect the cumulative income effect of the difference in inventory methods for all prior years. (Enter one word per blank.)

Retained Earnings

Which of the following are included in a purchase commitment? (Select all that apply.)

Set purchase deadline Specific amount of material Specific price of material

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.

Which of the following are included in the disclosure note related to an inventory error? (Select all that apply.)

The nature of the error. The impact of the correction on earnings per share. The impact of the correction on net income.

When a company records a loss on purchase commitment and the inventory market price later recovers, what occurs?

The recovery of value is ignored.

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

Identify the situations for which ending inventory and cost of goods sold may be estimated utilizing the gross profit method. (Select all that apply.)

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

Which of the following are estimated when using the gross profit method? (Select all that apply.)

Which of the following are estimated when using the gross profit method? (Select all that apply.)

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

are increased

A loss relating to a purchase commitment must be recognized when the market price is lower than the contract price (Select all that apply.)

at the end of the reporting period if the commitment is outstanding. when the product is purchased.

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.

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 (Select all that apply.)

be adjusted to approximate the different cost flow assumptions. be used to estimate inventory lost, stolen, or destroyed.

The base year inventory for all future LIFO determinations is the

beginning inventory in the year the LIFO method is adopted.

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

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.

Beginning inventory plus net purchases equals

cost of goods available for sale.

Ending inventory plus cost of goods sold equals

cost of goods available for sale.

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.)

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

Panther Company's bookkeeper debited supplies expense for the cost of goods sold during that month. The bookkeeper discovered the error prior to closing the books. The correcting entry would include (Select all that apply.)

credit to supplies expense. debit to cost of goods sold.

The retail inventory method tends to be more accurate than the gross profit method because it relies on the

current relationship between cost and selling prices

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.

On January 2, Lucky Corp. entered into a purchase commitment to buy 1,000 units of raw materials for $25 per unit. On January 31, the company purchased 1,000 units with cash when the market price was $26 per unit. Lucky should (Select all that apply.)

debit inventory $25,000 credit cash $25,000

Omar Company uses a periodic inventory system and erroneously overstates ending inventory by $10,000 for the year ended December 2016. If Omar discovers this error in 2017, it should

debit retained earnings and credit inventory.

On January 2, Allison Corp. changes from the LIFO to the FIFO method. Its prior-year financial statement notes show a LIFO reserve of $20,000 if it had utilized FIFO in prior years. Allison should make a journal entry that includes a

debit to inventory.

On March 31, Oscar Corp. changes from the LIFO to the FIFO method. Its financial statement notes indicate that beginning inventory would have been $50,000 higher if it had utilized FIFO during prior years. Oscar's journal entry should include a

debit to inventory.

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

The variety of inventory cost flow assumptions that can be utilized by companies typically does not impair earnings quality because

detail about the methods must be disclosed in the financial statement notes.

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.

Inventory related note disclosures _____ earnings quality.

enhance

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

Accounting principles should be applied consistently because this practice enhances

financial statement comparability.

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

freight-in purchase returns purchase discounts

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

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

The retail inventory method (Select all that apply.)

is used to test the overall reasonableness of physical counts. is used in budgeting and forecasting. is used to generate information for interim financial statements.

When an inventory error is discovered in the period it occurred,

it is corrected in the current period.

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

If inventory values recover after a lower of cost and net realizable value write-down, the write-down must

not be reversed.

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

obsolescence. price declines. spoilage. competition.

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.)

other loss or expense cost of goods sold

Omar Company uses a periodic inventory system and erroneously overstates ending inventory by $10,000 for the year ended December 31, 2017. Ignoring the tax effect, the effect on the 2017 financial statement includes an (Select all that apply.)

overstatement of net income by $10,000. understatement of cost of goods sold by $10,000.

A retrospective change in inventory method would normally cause changes to

prior income statements and balance sheets.

Companies utilize purchase agreements primarily to

protect against price increases.

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

purchase returns purchase discounts freight-in

Which of the following information is needed to utilize the gross profit method? (Select all that apply.)

purchases estimated gross profit ratio net sales beginning inventory

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

required under GAAP; any method of inventory valuation

Werner Company's accountant discovered that the prior-year financial statements were misstated due to a material inventory-related error. Werner must (Select all that apply.)

restate its prior-year financial statements. adjust account balances that are incorrect as a result of the error.

Which of the following estimation methods is acceptable for purposes of annual financial reporting?

retail inventory method

The retail inventory method, unlike the gross profit method, is acceptable for financial reporting purposes because it

tends to be more accurate.

If the purchase price decreases before a purchase commitment is exercised (Select all that apply.)

the company must purchase the inventory at a higher than market price. a loss on the purchase commitment is recorded.

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.

Note disclosures relating to the correction of prior-year errors include information about (Select all that apply.)

the nature of the error. the effect on earnings per share. each line item affected.

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