IA2 Ch. 9

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

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

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

- freight in - purchase discounts - purchase returns

The retail inventory method can be modified to estimate which of the following using FIFO, LIFO, or average cost? (Select all that apply.)

-Ending inventory -Cost of goods sold

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 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.

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

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

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

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.

Recognize the write-down as a separate line item.

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

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

Beginning inventory at retail

Which of the following represents a criticism of the lower of cost and net realizable value rule?

Losses that have not actually occurred are recognized.

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 retail method to approximate average cost, the cost-to-retail percentage is applied to which goods?

Only the ending inventory

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

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. debit to inventory.

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.

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.

When a company changes from LIFO for tax purposes,

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

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

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

overstated

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

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.

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

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

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

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: When applying the rule to individual items, only item A has a market value below cost so a $20 loss is recorded.

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: 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

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

- beg inv -net sales -estimated gross profit ratio - purchases

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. -Incorrect balances are corrected. -Previous year's financial statements are retrospectively restated.

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

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

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.)

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

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

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

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

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

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

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

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. -For interim reporting periods. -To determine reasonableness of inventory amounts during an audit.

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.)

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

Advantages of the retail inventory method include that it can (Select all that apply.)

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

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.)

-cost of goods sold -other loss or expense

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

-debit COGS -credit inv

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 estimated when using the gross profit method? (Select all that apply.)

-end inv. -COGS

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

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.

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 -effect on current year earnings per share and income amounts -nature of and the justification for the change

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.

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

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

-spoilage -price declines - competition - obsolescence

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.

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.

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

2000 Reason: $1,000 + 13,000 = $14,000 goods available for sale Net sales $20,000 less gross profit (8000) 40% = $12,000 $14,000 - 12,000 = 2,000

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

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

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%

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: 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

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)

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

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

conservatism

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

expected sales price

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

revise prior years' financial statements.