McGraw Hill Intermediate Accounting SB Chapter 9

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

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

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

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

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.

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.

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.

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.

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

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.

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

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

42.86%

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%.

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.

Which of the following must be considered when applying the gross profit method?

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 can occur?

Debit cost of goods sold Credit inventory

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

False

When a material inventory error is discovered in a period subsequent to when the error was made, which of the following must occur?

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

Which of the following must be known to apply the retail inventory method?

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?

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

Jones Company's inventory cost is $100. The expected sales price is $110. The company estimates sales cost as 10% of the sales price. Consistent with the lower of cost and net realizable value approach, this inventory item should be valued at

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

Which method can be applied to individual inventory items, categories of inventory, or the entire inventory?

Lower of cost or market and lower of cost and net realizable value

When a material inventory error is discovered in a period subsequent to when the error was made, which of the following must occur?

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

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?

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

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.

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?

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.

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.

Which of the following are included in the disclosure note related to an inventory error?

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

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

Which of the following can create inventory errors?

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

_____ shortages should be deducted in both the cost and retail columns before the calculation of the cost-to-retail percentage

abnormal

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

GAAP requires companies to report inventory

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.

The retail inventory method is also referred to as 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.

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 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.

Western Company determines the cost of its inventory is $410,000 and net realizable value is $400,000. Western Company should

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

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.

Prior period adjustments

directly adjust retained earnings.

Which of the following are estimated when using the gross profit method?

ending inventory cost of goods sold

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

For financial reporting of companies using LIFO, the lower of cost or market approach can be applied to

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

For financial reporting, the lower of cost or net realizable value approach can be applied to

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

The conventional retail method gives a(n) _____ measurement for ending inventory than the lower of cost and net realizable value method.

less precise

When gross profit is stated as a percentage of cost, it is referred to as the _____ on cost

markup

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

mistake

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.

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

net realizable value.

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.

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?

other loss or expense cost of goods sold

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

overstated

If beginning inventory is overstated then cost of goods sold would be ____ and net income would be _____.

overstated; understated

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

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.

Which of the following must be considered to calculate net purchases?

purchase discounts freight-in purchase returns

Which of the following information is needed to utilize the gross profit method?

purchases beginning inventory net sales estimated gross profit ratio

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 market approach is _____ for companies that use _____.

required under GAAP; LIFO or the retail inventory

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

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

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

retail 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

retained earnings

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

retroactively restate its 2016 and 2017 financial statements.

Changes in inventory method generally are accounted for

retrospectively.

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

revise prior years' financial statements.

In applying the lower of cost or market rule, market value

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

Multi Company changed its inventory method from LIFO to FIFO. Multi must disclose the following information in its notes

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

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

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

the financial statements for the two previous years are restated.

Note disclosures relating to the correction of prior-year errors include information about

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