ACCT Smartbook Ch. 7

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

$100.

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.

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.

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.

The lower of average cost and net realizable value retail inventory method is also referred to as the _______ retail method. (Enter only one word.)

conventional

The lower of average cost and net realizable value retail inventory method is also referred to as the _________ 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

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

cost of goods sold; ending inventory

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

cost; current selling price

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.

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.

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

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

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

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

required under GAAP; LIFO or the retail inventory

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

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

retail inventory

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

retail inventory

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

retail inventory method

Generally, voluntary changes in accounting principles are accounted for

retrospectively

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

reversing the incorrect entry. recording the correct entry.

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

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

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

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.

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.

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.

Beginning inventory plus net purchases equals

Cost of Goods available for sale

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

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

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

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

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.)

Smith could apply the lower of cost and net realizable value rule to each product line; Smith could apply the lower of cost and net realizable rule to its entire 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.

True

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

The gross profit method is useful in situations where _____ of inventory are desirable.

estimates

Accounting errors

must be corrected when they are discovered.

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

net realizable value.

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

purchases, beginning inventory, net sales, estimated gross profit ratio

Under the LCM approach, market generally is defined as ______ cost.

replacement

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

the inventory value declines below cost.