ACCT 3321

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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 Reason: 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.

A product purchased for $20 is marked up to a $25 sales price. Later, the selling price is decreased to $22. Eventually, the sales price is increased to $24. What is the net markdown amount?

$1 Reason: The sales price is $25 and the initial markdown is $3. When the price is increased from $22 to $24, the markdown 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 $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 normal profit of 20% so $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.

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

Geese Company utilizes the dollar-value 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 ending inventory at current-year retail prices was $250,000. The current-year price index is 1.10. Round interim calculations to the nearest whole dollar amount. Estimated ending inventory at cost would be

$139,200. Reason: Ending inventory $250,000/1.10 = $227,273 $200,000 x 1.0 x 60% = $120,000 $27,273 x 1.1 x 64% = $19,200

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. Reason: $160,000 + $500,000 + $10,000 - $20,000 - $500,000 = $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. Reason: $200,000 x 60% = $120,000 $50,000 x 64% = $32,000

A product purchased for $20 is listed with a $25 sales price. Later, the selling price is marked up to $30. When the product does not sell, the sales price is decreased to $27. What is the net markup amount?

$2 Reason: Net markup is the difference between the original sales price and any mark up or down, but not below the original selling price. $5 markup - $3 markup cancellation = $2 net markup

$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

Geese Company utilizes the dollar-value 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 ending inventory at current-year retail prices was $250,000. The current-year price index is 1.10. Rounding to the nearest dollar, ending inventory at base-year retail prices would be

$227,273 Reason: Ending inventory $250,000/1.10

On December 22, Lucy Corp. entered into a purchase commitment to buy 1,000 units of raw materials for $25 per unit. On December 31, the market value of the inventory dropped to $24 per unit and Lucy recognizes a $1,000 loss. On January 15, the date of actual purchase, the market value increased to $26. At the date of purchase, the company should record the inventory at

$24 per unit.

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

A product purchased for $40 is marked up to a $50 sales price. Later, the selling price is decreased to $45. Eventually, the sales price is increased to $47. What is the net markdown amount?

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%

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. Reason: $102,000 - $5,000

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 at

$98. Reason: Lower of cost and net realizable value is required. The NRV is $110-12 = 98 and is lower than cost.

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.

Which of the following must be considered when applying the gross profit method? (Select all that apply.)

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

When inventory is adjusted down to reflect net realizable value, which of the following occur? (Select all that apply.)

- Debit cost of goods sold - Credit inventory

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

- Dollar-value LIFO method - LIFO retail method

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

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

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.

Which of the following must be included in the disclosure note related to a change in inventory method? (Select all that apply.)

- Justification that the change is preferable. - The cumulative effect of the change on retained earnings. - The effect of the change on items not reported on the face of the primary statements.

Which of the following inventory-related events typically cause financial statement misstatements? (Select all that apply.)

- Mistakes in the cutoff relating to purchases of inventory. - Mistakes in the physical count. - Mistakes in pricing inventory quantities.

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

- Specific price of material - Specific amount of material - Set purchase deadline

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

Why do companies enter into purchase commitment agreements? (Select all that apply.)

- To make sure they will be able to obtain important inventory. - To protect against increases in purchase price.

Which of the following can create inventory errors? (Select all that apply.)

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

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

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

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 and net realizable value for companies using FIFO. - at the lower of cost or market value for companies using LIFO.

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

On January 2, Otto 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 when the market price was $24 per unit. Otto should (Select all that apply.)

- debit inventory $24,000 - credit cash $25,000 - debit loss on purchase commitment $1,000

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.)

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

Which of the following are required in the note disclosure of a company changing to the LIFO inventory method? (Select all that apply.)

- effect on current year earnings per share and income amounts - the nature of the change - justification for the change - reason why retrospective application was impracticable

Consistent with U.S. GAAP, the lower of cost and net realizable value rule can be applied to (Select all that apply.)

- individual inventory items. - the entire inventory. - logical inventory categories.

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. Ignoring the tax effect, the effect on the current year financial statement includes an (Select all that apply.)

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

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

- purchase discounts - purchase returns - freight-in

Vogel Company changed its inventory method from FIFO to LIFO during the current year. Vogel must disclose the following information in its notes (Select all that apply.)

- reason why retrospective treatment was impracticable - nature of and the justification for the change - effect on current year earnings per share and income amounts

Accounting errors that are discovered during the same accounting period that they occurred must be corrected by (Select all that apply.)

- recording the correct entry. - reversing the incorrect entry.

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.

In applying the lower of cost or market rule, market value (Select all that apply)

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

Multi Company changed its inventory method from LIFO to FIFO. Multi must disclose the following information in its notes (Select all that apply.)

- the cumulative effect of the change on retained earnings. - the effect on earnings per share amounts.

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

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

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

42.86% Reason: =30%/(100%-30%)

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

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?

61.54% Reason: ($100,000 + $300,000)/($160,000 + $500,000 + $10,000 - $20,000)

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.

Beginning inventory matches Choice Beginning-inventory cost-to-retail percentage Current period layer matches Choice Current-period purchases cost-to-retail percentage

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

Beginning inventory at retail

____ shortages should be deducted in both the cost and retail columns before the calculation of the cost-to-retail percentage. (Enter only one word.)

Blank 1: Abnormal

Under US GAAP, losses on purchase commitments ____ be recovered if the market price of the inventory increases.

Blank 1: cannot or can't

The exclusion of net markdowns from the calculation of the cost-to-retail percentage occurs in the ____ retail method. (Enter only one word.)

Blank 1: conventional

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

When the commitment price exceeds the market price, inventory should be recorded at ____ price. (Enter only one word.)

Blank 1: market

When gross profit is stated as a percentage of cost, it is referred to as the ____ on cost. (Enter only one word.)

Blank 1: markup

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

Blank 1: markups Blank 2: markdowns

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

Blank 1: retail Blank 2: inventory

When a company applies a retrospective change in inventory method, they must revise beginning ____ ____ 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 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.

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

Otto Corp. entered into a purchase commitment to buy 1,000 units of raw materials for $25 per unit. As of December 31, the purchase commitment is outstanding and the year-end market price is $24 per unit. Otto should recognize

Estimated liability of $1,000

Smith Corp. entered into a purchase commitment to buy 1,000 units of raw materials for $30 per unit. As of December 31, the purchase commitment is outstanding and the year-end market price is $28 per unit. Smith should recognize

Estimated loss of $2,000

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

False Reason: The conventional retail method approximates ending inventory.

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.

Freight-in matches Choice Added in the cost column Purchase returns matches Choice Deducted in both the cost and retail columns Purchase discounts taken (gross method) matches Choice Deducted in the cost column

Freight-in matches Choice Added to gross purchases Purchase discounts matches Choice Subtracted from gross purchases

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

IFRS

Initial markup matches Choice Original amount of markup from cost to selling price Additional markup matches Choice Increase in selling price subsequent to initial markup Markup cancellation matches Choice Elimination of an additional markup Markdown matches Choice Reduction in selling price below the original selling price Markdown cancellation matches Choice Elimination of a markdown

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

It does not explicitly consider possible theft or spoilage of inventory.

A special form must be filed with the IRS when a company intends to adopt the ______ inventory method.

LIFO

The ______ method assumes that units sold are those most recently acquired.

LIFO

The conventional retail method is not generally used in combination with ______.

LIFO

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

In a purchase commitment, if market price at acquisition is less than the contract price, the purchase is recorded at what price?

Market price

Which of the following must be included in the determination of ending inventory at retail when applying the retail inventory method?

Net markups and net markdowns

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.

Normal shortages matches Choice Deducted in the retail column Employee discounts (sales recorded net of discounts) matches Choice Added to net sales

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

Which of the following statements is correct regarding the accuracy of the estimates derived under the gross profit method?

The gross profit ratio must be reliable.

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 Reason: GAAP allows LCNRV to be applied to individual, categories of, or the entire inventory.

True or false: Approximating lower of cost or market using the conventional retail method is not used in combination with LIFO because LIFO ending inventory includes lower-priced items whose costs are likely to be lower than current market.

True Reason: In periods of rising costs, lower costs remain in ending inventory and, thus, are more likely to be lower than market.

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

True Reason: Lower of cost and net realizable value are required under both sets of standards.

a loss of $1,000.

Under the retail inventory method, if sales are recorded net of employee discounts, the discounts are ______ before sales are deducted in the retail column.

added to net sales

Normal shortages are deducted in the retail column ______ the calculation of the cost-to-retail percentage when applying the retail inventory method.

after

The inventory value determined using the gross profit method represents

an estimate of ending inventory.

The ending inventory balance determined using the gross profit method is ______ and ______ acceptable according to GAAP.

an estimate; is not

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

are increased

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

The base year inventory for all future LIFO determinations is the

beginning inventory in the year the LIFO method is adopted.

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.

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

cost; current selling price

On January 2, Neumann Corp. changes from the LIFO to the FIFO method. Its financial statement notes indicate that beginning inventory would have been $10,000 higher if it had utilized FIFO during prior years. Neumann's journal entry should include a

credit to retained earnings.

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

credit to retained earnings.

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.

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

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.

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.

Prior period adjustments

directly adjust retained earnings.

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

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.

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

individual inventory items.

When a company changes from LIFO for tax purposes,

it cannot change back to LIFO until five tax returns have been filed.

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

Losses related to inventory purchase commitments are recognized when the

market price falls below the commitment price.

Losses related to purchase commitments must be recognized when the

market price of the related inventory items falls below the commitment price.

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

Accounting errors

must be corrected when they are discovered.

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

not be reversed.

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

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

obsolescence. price declines. competition. spoilage.

Under the retail inventory method, sales discounts are not deducted from sales because it would cause inventory to be ______.

overstated

Purchase commitments carry the potential disadvantage or risk that

prices decrease after the commitment was made.

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.

On December 22, Lucy Corp. entered into a purchase commitment to buy 1,000 units of raw materials for $25 per unit. On December 31, the market price of the inventory is $24 per unit. The actual purchase occurs on January 15 of the following year. On December 31, the company should

recognize a loss of $1,000.

In Year 2, Stetson Inc. discovers a material inventory error that was made in Year 1. In this case, Stetson should

record a prior period adjustment that flows directly through retained earnings.

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

To use the ______ method, a company must maintain records of inventory and purchases at cost and at current selling price.

retail inventory

Under the dollar-value LIFO retail method, each inventory layer carries its unique

retail price index and cost-to retail percentage.

Otto Company uses a periodic inventory system and erroneously understates ending inventory by $10,000 for the year ended December 31. This error is not discovered until two years later. The company should

retroactively restate financial statements for the previous two years.

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

retrospectively.

Generally, voluntary changes in accounting principles are accounted for

retrospectively.

When accounting changes are applied retrospectively, the first step is to

revise prior years' financial statements.

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.

If a company discovers an inventory error two years after the error occurred,

the financial statements for the two previous years are restated.

When a company changes to the LIFO inventory method,

they do not restate prior year financial statements.

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

ACCT 3321

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