Intermediate Accounting 7th Edition Test Bank Spiceland

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Intermediate Accounting 7th Edition Test Bank Spiceland

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True/False Questions

1. Inventory is valued at the lower of cost, net realizable value, and replacement cost.

Answer: False
Level of Learning: 1 Easy
Learning Objective: 09-01
Topic: Applying lower of cost or NRV
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking

2. Net realizable value is selling price less costs of completion, disposal, and transportation.

Answer: True
Level of Learning: 1 Easy
Learning Objective: 09-01
Topic Area: Determining NRV
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement

3. The primary motivation behind the lower of cost and net realizable value rule is consistency.

Answer: False
Level of Learning: 1 Easy
Learning Objective: 09-01
Topic Area: Applying lower of cost or NRV
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement

4. Lower of cost and net realizable value can be applied to individual inventory items, to logical categories of inventory, or to the entire inventory.

Answer: True
Level of Learning: 1 Easy
Learning Objective: 09-01
Topic Area: Applying lower of cost or NRV
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement

5. Losses on reduction to NRV may be charged to either cost of goods sold or to a line item among operating expenses.

Answer: True
Level of Learning: 1 Easy
Learning Objective: 09-01
Topic Area: Applying lower of cost or NRV
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement

6. An inventory written down due to the lower of cost and net realizable value may be written back up if market value increases.

Answer: False
Level of Learning: 1 Easy
Learning Objective: 09-01
Topic Area: Applying lower of cost or NRV
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement

7. Under the LIFO retail method, the current period cost-to-retail percentage includes both net markdowns and net markups.

Answer: True
Level of Learning: 1 Easy
Learning Objective: 09-03
Topic Area: Retail inventory method LIFO retail
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement

8. Purchase returns and purchase discounts are ignored when computing cost-to-retail ratios for the retail method.

Answer: False
Level of Learning: 1 Easy
Learning Objective: 09-03
Topic Area: Retail inventory method Other issues
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement

9. The cost-to-retail percentage used in the retail method to approximate average cost incorporates both markdowns and markups.

Answer: True
Level of Learning: 1 Easy
Learning Objective: 09-03
Topic Area: Retail inventory method Average cost
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement

10. If the quantity of goods held in inventory decreased during the period, the dollar amount of ending inventory cant exceed the dollar amount of beginning inventory.

Answer: False
Level of Learning: 1 Easy
Learning Objective: 09-05
Topic Area: Retail inventory method Dollar-value LIFO
Blooms: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement

11. When changing from the average cost method to FIFO, the current years income includes the cumulative after-tax difference that would have resulted if the company had used FIFO in all prior years.

Answer: False
Level of Learning: 2 Medium
Learning Objective: 09-06
Topic Area: Change in inventory method
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement

12. A change from LIFO to any other inventory method is accounted for retrospectively.

Answer: True
Level of Learning: 1 Easy
Learning Objective: 09-06
Topic Area: Change in inventory method
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement

13. For a purchase commitment contained within a single fiscal year, if the market price is less than the contract price, the purchase is recorded at the contract price.

Answer: False
Level of Learning: 1 Easy
Learning Objective: Appendix 9
Topic Area: Purchase commitments
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement

14. For a purchase commitment extending beyond the current fiscal year, if the market price on the purchase date declines from the previous year-end price, the purchase is recorded at the market price.

Answer: True
Level of Learning: 1 Easy
Learning Objective: Appendix 9
Topic Area: Purchase commitments
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement

15. International Financial Reporting Standards allow the reversal of an inventory write-down.

Answer: True
Level of Learning: 1 Easy
Learning Objective: 09-08
Topic Area: IFRS Lower of cost or NRV
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement

Multiple Choice Questions

16. Inventory is valued at:
a. Net realizable value.
b. Cost.
c. Replacement cost.
d. Lower of cost and net realizable value.

Answer: d
Level of Learning: 1 Easy
Learning Objective: 09-01
Topic Area: Applying lower of cost or NRV
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement

17. An argument against use of the lower of cost and net realizable value rule is its lack of:
a. Relevance.
b. Reliability.
c. Consistency.
d. Objectivity.

Answer: c
Level of Learning: 2 Medium
Learning Objective: 09-01
Topic Area: Applying lower of cost or NRV
Blooms: Remember
AACSB: Reflective Thinking
AICPA: FN Decision Making
AICPA: FN Measurement

18. Montana Co. has determined its year-end inventory on a FIFO basis to be $600,000. Information pertaining to that inventory is as follows:

Selling price $620,000
Costs to sell 30,000
Replacement cost 520,000

What should be the reported value of Montanas inventory?
a. $600,000.
b. $520,000.
c. $590,000.
d. $620,000.

Answer: c
Level of Learning: 1 Easy
Learning Objective: 09-01
Topic Area: Determining and applying lower of cost or NRV
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
NRV = $590,000 which is less than cost.

Use the following to answer questions 1922:

Data related to the inventories of Costco Medical Supply are presented below:

Surgical Surgical Rehab Rehab
Equipment Supplies Equipment Supplies
Selling price $260 $100 $340 $165
Cost 170 90 250 162
Costs to sell 30 15 25 10

19. In applying the lower of cost and net realizable value rule, the inventory of surgical equipment would be valued at:
a. $230.
b. $240.
c. $170.
d. $152.

Answer: c
Level of Learning: 1 Easy
Learning Objective: 09-01
Topic Area: Determining and applying lower of cost or NRV
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
NRV = $260 30 = $230

$170 cost is less than the $230 net realizable value.

20. In applying the lower of cost and net realizable value rule, the inventory of surgical supplies would be valued at:
a. $100.
b. $90.
c. $85.
d. $75.

Answer: c
Level of Learning: 1 Easy
Learning Objective: 09-01
Topic Area: Applying lower of cost or NRV
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
NRV = $100 15 = $85

$85 net realizable value is less than $90 cost.

21. In applying the lower of cost and net realizable value rule, the inventory of rehab equipment would be valued at:
a. $315.
b. $340.
c. $225.
d. $250.

Answer: d
Level of Learning: 1 Easy
Learning Objective: 09-01
Topic Area: Determining and applying lower of cost or NRV
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
NRV = $340 25 = $315

$250 cost is less than $315 net realizable value.

22. In applying the lower of cost and net realizable value rule, the inventory of rehab supplies would be valued at:
a. $165.
b. $152.
c. $162.
d. $155.

Answer: d
Level of Learning: 1 Easy
Learning Objective: 09-01
Topic Area: Determining and applying lower of cost or NRV
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
NRV = $165 10 = $155

$155 net realizable value is less than $162 cost.

Use the following to answer questions 2326:

Data related to the inventories of Alpine Ski Equipment and Supplies is presented below:

Skis Boots Apparel Supplies
Selling price $180,000 $140,000 $120,000 $60,000
Cost 128,000 133,000 90,000 45,000
Replacement cost 120,000 130,000 110,000 41,000
Sales commission 10% 10% 10% 10%

23. In applying the lower of cost and net realizable value rule, the inventory of skis would be valued at:
a. $162,000.
b. $128,000.
c. $120,000.
d. $180,000.

Answer: b
Level of Learning: 1 Easy
Learning Objective: 09-01
Topic Area: Determining and applying lower of cost or NRV
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
NRV = $180,000 ($180,000 x 10%) = $162,000

$128,000 cost is less than $162,000 net realizable value.

24. In applying the lower of cost and net realizable value rule, the inventory of boots would be valued at:
a. $140,000.
b. $133,000.
c. $126,000.
d. $130,000.

Answer: c
Level of Learning: 1 1 Easy
Learning Objective: 09-01
Topic Area: Determining and applying lower of cost or NRV
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
NRV = $140,000 ($140,000 x 10%) = $126,000

$126,000 net realizable value is less than $133,000 cost.

25. In applying the lower of cost and net realizable value rule, the inventory of apparel would be valued at:
a. $108,000.
b. $ 90,000.
c. $110,000.
d. $99,000.

Answer: b
Level of Learning: 1 Easy
Learning Objective: 09-01
Topic Area: Determining and applying lower of cost or NRV
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
NRV = $120,000 ($120,000 x 10%) = $108,000

$90,000 cost is less than net realizable value of $108,000 cost.

26. In applying the lower of cost and net realizable value rule, the inventory of supplies would be valued at:
a. $45,000.
b. $54,000.
c. $41,000.
d. $60,000.

Answer: a
Level of Learning: 1 Easy
Learning Objective: 09-01
Topic Area: Determining and applying lower of cost or NRV
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
NRV = $60,000 ($60,000 x 10%) = $54,000

$45,000 cost is less than net realizable value of $54,000.

27. When using the gross profit method to estimate ending inventory, it is not necessary to know:
a. Beginning inventory.
b. Net purchases.
c. Cost of goods sold.
d. Net sales.

Answer: c
Level of Learning: 2 Medium
Learning Objective: 09-02
Topic Area: Gross profit method
Blooms: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement

28. On July 8, a fire destroyed the entire merchandise inventory on hand of Larrenaga Wholesale Corporation. The following information is available:

Sales, January 1 through July 8 $700,000
Inventory, January 1 130,000
Purchases, January 1 through July 8 640,000
Gross profit ratio 30%

What is the estimated inventory on July 8 immediately prior to the fire?
a. $192,000.
b. $490,000.
c. $510,000.
d. $280,000.

Answer: d
Level of Learning: 3 Hard
Learning Objective: 09-02
Topic Area: Gross profit method
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
Beginning inventory plus purchases $770,000
Less: Estimated cost of goods sold ($700,000 x [1 .30]) 490,000
Estimated ending inventory $280,000

29. California Inc., through no fault of its own, lost an entire plant due to an earthquake on May 1, 2016. In preparing its insurance claim on the inventory loss, the company developed the following data: Inventory January 1, 2016, $300,000; sales and purchases from January 1, 2016, to May 1, 2016, $1,300,000 and $875,000, respectively. California consistently reports a 40% gross profit. The estimated inventory on May 1, 2016, is:
a. $302,500.
b. $360,000.
c. $395,000.
d. $455,000.

Answer: c
Level of Learning: 3 Hard
Learning Objective: 09-02
Topic Area: Gross profit method
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
Beginning inventory $300,000
Plus: Net purchases 875,000
Goods available for sale 1,175,000
Less: Cost of goods sold:
Net sales $1,300,000
Less: Estimated gross profit (520,000 )
Estimated cost of goods sold (780,000 )
Estimated ending inventory $395,000

30. Howards Supply Co. suffered a fire loss on April 20, 2016. The companys last physical inventory was taken January 30, 2016, at which time the inventory totaled $220,000. Sales from January 30 to April 20 were $600,000 and purchases during that time were $450,000. Howards consistently reports a 30% gross profit. The estimated inventory loss is:
a. $490,000.
b. $238,000.
c. $250,000.
d. None of these answer choices are correct.

Answer: c
Level of Learning: 3 Hard
Learning Objective: 09-02
Topic Area: Gross profit method
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
Beginning inventory $220,000
Plus: Net purchases 450,000
Goods available for sale 670,000
Less: Cost of goods sold:
Net sales $600,000
Less: Estimated gross profit (180,000 )
Estimated cost of goods sold (420,000 )
Estimated ending inventory $250,000

31. Coastal Shores Inc. (CSI) was destroyed by Hurricane Fred on August 5, 2016. At January 1, CSI reported an inventory of $170,000. Sales from January 1, 2016, to August 5, 2016, totaled $480,000 and purchases totaled $195,000 during that time. CSI consistently marks up its products 60% over cost to arrive at a selling price. The estimated inventory loss due to Hurricane Fred would be:
a. $131,175.
b. $ 65,000.
c. $ 69,000.
d. None of these answer choices are correct.

Answer: b
Level of Learning: 3 Hard
Learning Objective: 09-02
Topic Area: Gross profit method
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
Beginning inventory $170,000
Plus: Net purchases 195,000
Goods available for sale 365,000
Less: Cost of goods sold: ($480,000 160%) (300,000 )
Estimated ending inventory $ 65,000

32. Under the conventional retail method, the denominator in the cost-to-retail percentage includes:
a. Net markups and net markdowns.
b. Neither net markups nor net markdowns.
c. Net markups, but not net markdowns.
d. Net markdowns, but not net markups.

Answer: c
Level of Learning: 1 Easy
Learning Objective: 09-04
Topic Area: Retail inventory method Conventional retail
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement

33. Under the LIFO retail method, the denominator in the cost-to-retail percentage includes:
a. Net markups and net markdowns.
b. Neither net markups nor net markdowns.
c. Net markups, but not net markdowns.
d. Net markdowns, but not net markups.

Answer: a
Level of Learning: 1 Easy
Learning Objective: 09-03
Topic Area: Retail inventory method LIFO retail
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement

34. Under the retail method, the denominator in the cost-to-retail percentage does not include:
a. Purchases.
b. Purchase returns.
c. Abnormal shortages.
d. Freight-in.

Answer: d
Level of Learning: 1 Easy
Learning Objective: 09-03
Topic Area: Retail inventory method Other issues
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement

35. Under the retail inventory method:
a. A company measures inventory on its balance sheet by converting retail prices to cost.
b. A company measures inventory on its balance sheet at current selling prices.
c. A company measures inventory on its balance sheet on a LIFO basis.
d. None of these answer choices are correct.

Answer: a
Level of Learning: 1 Easy
Learning Objective: 09-03
Topic Area: Retail inventory method
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement

36. Under the conventional retail method, which of the following are not included in the denominator of the current period cost-to-retail conversion percentage?
a. Purchase returns.
b. Net markups.
c. Purchases.
d. Net markdowns.

Answer: d
Level of Learning: 2 Medium
Learning Objective: 09-04
Topic Area: Retail inventory method Conventional retail
Topic Area: Retail inventory method Other issues
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement

37. Under the LIFO retail method, which of the following are not included in the denominator of the cost-to-retail conversion percentage?
a. Freight-in.
b. Purchase returns.
c. Purchases.
d. Net markdowns.

Answer: a
Level of Learning: 2 Medium
Learning Objective: 09-03
Topic Area: Retail inventory method LIFO retail
Topic Area: Retail inventory method Other issues
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement

38. Under the retail method, in determining the cost-to-retail percentage for the current year:
a. Net markups are included.
b. Net markdowns are excluded.
c. Net sales are included.
d. All of these answer choices are correct.

Answer: a
Level of Learning: 1 Easy
Learning Objective: 09-03
Topic Area: Retail inventory method
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement

39. Fad City sells novel clothes that are subject to a great deal of price volatility. A recent item that cost $20 was marked up $12, marked down for a sale by $6 and then had a markdown cancellation of $3. The latest selling price is:
a. $23.
b. $26.
c. $29.
d. $35.

Answer: c
Level of Learning: 2 Medium
Learning Objective: 09-03
Topic Area: Retail inventory method
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
Cost $20
Initial markup 12
Markdown (6 )
Markdown cancellation 3
Selling price $29

Use the following to answer questions 4043:

Harveys Junk Jewelry started business January 1, 2016, and uses the LIFO retail method to estimate ending inventory. Listed below is data accumulated for the year ended December 31, 2016:

Cost Retail
Beginning inventory $15,000 $23,000
Purchases 49,000 78,000
Freight-in 2,500
Purchase returns 1,700 2,600
Net markups 2,000
Net markdowns 4,100
Net sales 70,600
Employee discounts 700

40. The numerator for the current periods cost-to-retail percentage is:
a. $64,800.
b. $48,100.
c. $47,700.
d. $49,800.

Answer: d
Level of Learning: 3 Hard
Learning Objective: 09-03
Topic Area: Retail inventory method LIFO retail
Topic Area: Retail inventory method Other issues
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
$49,800

Beginning inventory $15,000 $23,000
Plus: Purchases 49,000 78,000
Freight-in 2,500
Less: Purchases returns (1,700 ) (2,600 )
Plus: Net markups 2,000
Less: Net markdowns (4,100 )
Goods available for sale (excluding beginning inventory) 49,800 73,300
Goods available for sale (including beginning inventory) 64,800 96,300

41. The denominator for the current periods cost-to-retail percentage is:
a. $ 96,300.
b. $ 73,300.
c. $101,000.
d. $ 81,500.

Answer: b
Level of Learning: 3 Hard
Learning Objective: 09-03
Topic Area: Retail inventory method LIFO retail
Topic Area: Retail inventory method Other issues
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
$73,300

Beginning inventory $15,000 $23,000
Plus: Purchases 49,000 78,000
Freight-in 2,500
Less: Purchases returns (1,700 ) (2,600 )
Plus: Net markups 2,000
Less: Net markdowns (4,100 )
Goods available for sale (excluding beginning inventory) 49,800 73,300
Goods available for sale (including beginning inventory) 64,800 96,300

42. The estimated ending inventory at retail is:
a. $27,300.
b. $25,000.
c. $26,600.
d. $26,400.

Answer: b
Level of Learning: 3 Hard
Learning Objective: 09-03
Topic Area: Retail inventory method LIFO retail
Topic Area: Retail inventory method Other issues
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
$25,000

Beginning inventory $15,000 $23,000
Plus: Purchases 49,000 78,000
Freight-in 2,500
Less: Purchases returns (1,700 ) (2,600 )
Plus: Net markups 2,000
Less: Net markdowns (4,100 )
Goods available for sale (excluding beginning inventory) 49,800 73,300
Goods available for sale (including beginning inventory) 64,800 96,300

Less: Sales
Net sales $70,600
Add back employee discount 700 (71,300 )
Estimated ending inventory at retail 25,000


43. To the nearest thousand, the estimated ending inventory at cost is (round cost-to-retail ratio to whole percentage):
a. $16,000.
b. $15,000.
c. $13,000.
d. $19,000.

Answer: a
Level of Learning: 3 Hard
Learning Objective: 09-03
Topic Area: Retail inventory method LIFO retail
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
$16,000

Beginning inventory $15,000 $23,000
Plus: Purchases 49,000 78,000
Freight-in 2,500
Less: Purchases returns (1,700 ) (2,600 )
Plus: Net markups 2,000
Less: Net markdowns (4,100 )
Goods available for sale (excluding beginning inventory) 49,800 73,300
Goods available for sale (including beginning inventory) 64,800 96,300

Cost-to-retail percentage = $49,800 $73,300 = 68% (rounded)

Less: Sales
Net sales $70,600
Add back employee discount 700 (71,300 )
Estimated ending inventory at retail 25,000

Retail Cost
Beginning inventory $23,000 $15,000
Current periods layer 2,000 x 68% 1,360
Total $25,000 $16,360

44. Lacys Linen Mart uses the average cost retail method to estimate inventories. Data for the first six months of 2016 include: beginning inventory at cost and retail were $60,000 and $120,000, net purchases at cost and retail were $312,000 and $480,000, and sales during the first six months totaled $490,000. The estimated inventory at June 30, 2016, would be:
a. $ 68,200.
b. $ 55,000.
c. $ 71,500.
d. $ 63,250.

Answer: a
Level of Learning: 2 Medium
Learning Objective: 09-03
Topic Area: Retail inventory method LIFO retail
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
Cost Retail
Beginning inventory $ 60,000 $120,000
Plus: net purchases 312,000 480,000
Goods available for sale $372,000 600,000

Cost-to-retail percentage = $372,000 $600,000 = 62%

Less: Net sales (490,000 )
Estimated ending inventory at retail $ 110,000
Estimated ending inventory at cost
(62% x $110,000) $ 68,200

45. Hawkeye Auto Parts uses the average cost retail method to estimate inventories. Data for the first six months of 2016 include: beginning inventory at cost and retail were $55,000 and $100,000, net purchases at cost and retail were $785,000 and $1,300,000, and sales during the first six months totaled $800,000. The estimated inventory at June 30, 2016, would be:
a. $330,000.
b. $360,000.
c. $362,300.
d. None of these answer choices are correct.

Answer: b
Level of Learning: 2 Medium
Learning Objective: 09-03
Topic Area: Retail inventory method LIFO retail
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
Cost Retail
Beginning inventory $ 55,000 $100,000
Plus: net purchases 785,000 1,300,000
Goods available for sale $840,000 1,400,000

Cost-to-retail percentage = $840,000 $1,400,000 = 60%

Less: Net sales (800,000 )
Estimated ending inventory at retail $ 600,000
Estimated ending inventory at cost
(60% x $600,000) $ 360,000

Use the following to answer questions 46 and 47:

Marilees Electronics uses a periodic inventory system and the average cost retail method to estimate ending inventory and cost of goods sold. The following data is available from the company records for the month of June 2016:

Cost Retail
Beginning inventory $ 80,000 $130,000
Net purchases 261,000 500,000
Net markups 25,000
Net markdowns 35,000
Net sales 520,000

46. The average cost-to-retail percentage is:
a. 52.2%.
b. 61.5%.
c. 56.8%
d. 55%.

Answer: d
Level of Learning: 2 Medium
Learning Objective: 09-03
Topic Area: Retail inventory method Average cost
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
Cost Retail
Beginning inventory $80,000 $130,000
Plus: Net purchases 261,000 500,000
Net markups 25,000
Less: Net markdowns _______ (35,000 )
Goods available for sale $341,000 620,000

Cost-to-retail percentage = $341,000 $620,000 = 55%

47. To the nearest thousand, estimated ending inventory is:
a. $55,000.
b. $52,000.
c. $57,000.
d. None of these answer choices are correct.

Answer: a
Level of Learning: 2 Medium
Learning Objective: 09-03
Topic Area: Retail inventory method Average costs
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
Cost Retail
Beginning inventory $80,000 $130,000
Plus: Net purchases 261,000 500,000
Net markups 25,000
Less: Net markdowns _______ (35,000 )
Goods available for sale $341,000 620,000

Cost-to-retail percentage = $341,000 $620,000 = 55%

Less: Net sales (520,000 )
Estimated ending inventory at retail $100,000
Estimated ending inventory at cost
(55% x $100,000) $55,000

Use the following to answer questions 48 and 49:

Bennys Bed Co. uses a periodic inventory system and the average cost retail method to estimate ending inventory and cost of goods sold. The following data is available from the company records for the month of September 2016.

Cost Retail
Beginning inventory $ 30,000 $ 50,000
Net purchases 125,000 220,000
Net markups 15,000
Net markdowns 6,000
Net sales 208,000

48. The average cost-to-retail percentage (rounded) is:
a. 74.5%.
b. 55.6%.
c. 57.4%.
d. 58.7%.

Answer: b
Level of Learning: 2 Medium
Learning Objective: 09-03
Topic Area: Retail inventory method Average cost
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
55.6%

Cost Retail
Beginning inventory $30,000 $50,000
Plus: Net purchases 125,000 220,000
Net markups 15,000
Less: Net markdowns _______ (6,000 )
Goods available for sale $155,000 279,000

Cost-to-retail percentage = $155,000 $279,000 = 55.6%

49. To the nearest thousand, estimated ending inventory is:
a. $41,000.
b. $37,000.
c. $51,000.
d. None of these answer choices are correct.

Answer: d
Level of Learning: 3 Hard
Learning Objective: 09-03
Topic Area: Retail inventory method Average cost
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback: The correct answer is $39,000 (rounded)

Cost Retail
Beginning inventory $30,000 $ 50,000
Plus: Net purchases 125,000 220,000
Net markups 15,000
Less: Net markdowns _______ (6,000 )
Goods available for sale $155,000 279,000

Cost-to-retail percentage = $155,000 $279,000 = 55.6%

Less: Net sales (208,000 )
Estimated ending inventory at retail $ 71,000
Estimated ending inventory at cost
(55.6% x $71,000) $39,476

Use the following to answer questions 5052:

Data below for the year ended December 31, 2016, relates to Houdini Inc. Houdini started business January 1, 2016, and uses the LIFO retail method to estimate ending inventory.

Cost Retail
Beginning inventory $66,000 $104,000
Net purchases 280,000 420,000
Net markups 20,000
Net markdowns 40,000
Net sales 375,000

50. Current period cost-to-retail percentage is:
a. 70.0%.
b. 68.7%.
c. 63.6%.
d. 63.5%.

Answer: a
Level of Learning: 3 Hard
Learning Objective: 09-03
Topic Area: Retail inventory method LIFO retail
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
Cost Retail
Beginning inventory $66,000 $104,000
Plus: Net purchases 280,000 420,000
Net markups 20,000
Less: Net markdowns _______ (40,000 )
Goods available for sale (excluding beginning inventory) $280,000 $400,000
Goods available for sale (including beginning inventory) $346,000 $504,000

Cost-to-retail percentage = $280,000$400,000 = 70%

51. Estimated ending inventory at retail is:
a. $ 65,000.
b. $169,600.
c. $ 25,000.
d. $129,000.

Answer: d
Level of Learning: 2 Medium
Learning Objective: 09-03
Topic Area: Retail inventory method LIFO retail
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:

Cost Retail
Beginning inventory $66,000 $104,000
Plus: Net purchases 280,000 420,000
Net markups 20,000
Less: Net markdowns _______ (40,000 )
Goods available for sale (excluding beginning inventory) $280,000 $400,000
Goods available for sale (including beginning inventory) $346,000 $504,000

Less: Net sales (375,000 )
Estimated ending inventory at retail $129,000

52. Estimated ending inventory at cost is:
a. $90,720.
b. $83,500.
c. $91,600.
d. None of these answer choices are correct.

Answer: b
Level of Learning: 3 Hard
Learning Objective: 09-03
Topic Area: Retail inventory method LIFO retail
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
Cost Retail
Beginning inventory $66,000 $104,000
Plus: Net purchases 280,000 420,000
Net markups 20,000
Less: Net markdowns _______ (40,000 )
Goods available for sale (excluding beginning inventory) $280,000 $400,000
Goods available for sale (including beginning inventory) $346,000 $504,000

Less: Net sales (375,000 )
Estimated ending inventory at retail $129,000
Current period cost-to-retail percentage = $280,000 $400,000 = 70%

Retail Cost
Beginning inventory $104,000 $66,000
Current periods layer 25,000 x 70% 17,500
Total $129,000 $83,500

53. When computing the cost-to-retail percentage for the average cost retail method, included in the denominator are:
a. Net markups and net markdowns.
b. Neither net markups nor net markdowns.
c. Net markups, but not net markdowns.
d. Net markdowns, but not net markups.

Answer: a
Level of Learning: 1 Easy
Learning Objective: 09-03
Topic Area: Retail inventory method Average cost
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement

54. The conventional retail inventory method is based on:
a. Average cost.
b. LIFO cost.
c. Average, lower of cost and net realizable value.
d. LIFO, lower of cost and net realizable value.

Answer: c
Level of Learning: 1 Easy
Learning Objective: 09-04
Topic Area: Retail inventory method Conventional retail
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement

55. Cloverdale, Inc., uses the conventional retail inventory method to account for inventory. The following information relates to current years operations:

Cost Retail
Beginning inventory and purchases $313,500 $540,000
Net markups 30,000
Net markdowns 20,000
Net sales 480,000

What amount should be reported as cost of goods sold for the year?
a. $273,600.
b. $272,861.
c. $275,000.
d. None of these answer choices are correct.

Answer: c
Level of Learning: 3 Hard
Learning Objective: 09-04
Topic Area: Retail inventory method Conventional retail
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:

Cost Retail
Beginning inventory plus purchases $313,500 $ 540,000
Net markups 30,000
570,000

$313,500
Cost-to-retail percentage: = 55%
$570,000
Less: Net markdowns ______ (20,000)
Goods available for sale 313,500 550,000
Less: Net sales (480,000)
Estimated ending inventory at retail $ 70,000
Estimated ending inventory at cost (55% x $70,000) (38,500)
Estimated cost of goods sold $275,000

Use the following to answer questions 56 and 57:

Willie Nelsons Boots uses the conventional retail method to estimate ending inventory. Cost data for the most recent quarter is shown below:

Cost Retail
Beginning inventory $ 46,000 $ 63,000
Net purchases 154,000 215,000
Net markups 22,000
Net markdowns 35,000
Net sales 220,000

56. The conventional cost-to-retail percentage (rounded) is:
a. 82.6%.
b. 66.7%.
c. 71.9%.
d. 75.5%.

Answer: b
Level of Learning: 2 Medium
Learning Objective: 09-04
Topic Area: Retail inventory method Conventional retail
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback: 66.7%

Cost Retail
Beginning inventory $46,000 $63,000
Plus: Net purchases 154,000 215,000
Net markups 22,000
$200,000 300,000

or 2/3

57. To the nearest thousand, estimated ending inventory using the conventional retail method is:
a. $37,000.
b. $32,000.
c. $34,000.
d. $30,000.

Answer: d
Level of Learning: 3 Hard
Learning Objective: 09-04
Topic Area: Retail inventory method Conventional retail
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:

Cost Retail
Beginning inventory $ 46,000 $ 63,000
Plus: Net purchases 154,000 215,000
Net markups 22,000
300,000

Less: Net markdowns ________ (35,000 )
Goods available for sale 200,000 265,000
Less: Net sales (220,000 )
Estimated ending inventory at retail $ 45,000
Estimated ending inventory at cost $ 30,000
(2/3 x $45,000)

Use the following to answer questions 58 and 59:

Clarabell Inc. uses the conventional retail method to estimate ending inventory. Cost data for the most recent quarter is shown below:

Cost Retail
Beginning inventory $112,000 $191,000
Net purchases 402,000 703,000
Net markups 43,000
Net markdowns 21,000
Net sales 685,000

58. The conventional cost-to-retail percentage (rounded) is:
a. 54.9%.
b. 58.9%.
c. 53.6%.
d. 70.6%.

Answer: a
Level of Learning: 3 Hard
Learning Objective: 09-04
Topic Area: Retail inventory method Conventional retail
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback: 54.9%

Cost Retail
Beginning inventory $112,000 $191,000
Plus: Net purchases 402,000 703,000
Net markups 43,000
514,000 937,000

59. To the nearest thousand, estimated ending inventory using the conventional retail method is:
a. $163,000.
b. $124,000.
c. $127,000.
d. $136,000.

Answer: c
Level of Learning: 3 Hard
Learning Objective: 09-04
Topic Area: Retail inventory method Conventional retail
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback: 127,000

Cost Retail
Beginning inventory $112,000 $191,000
Plus: Net purchases 402,000 703,000
Net markups 43,000
514,000 937,000

Less: Net markdowns ________ (21,000 )
Goods available for sale 514,000 916,000
Less: Net sales (685,000 )
Estimated ending inventory at retail $231,000
Estimated ending inventory at cost $ 126,819
(54.9% x $231,000)

60. Using the dollar-value LIFO retail method for inventory:
a. Is the same as dollar-value LIFO, except that the inventory is measured at retail, rather than at cost.
b. Combines retail LIFO accounting with dollar-value LIFO accounting.
c. Allows companies to report inventory on the balance sheet at retail prices.
d. All of these answer choices are correct.

Answer: b
Level of Learning: 1 Easy
Learning Objective: 09-05
Topic Area: Retail inventory method Dollar-value LIFO
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement

61. The first step, when using dollar-value LIFO retail method for inventory, is to:
a. Determine the estimated ending inventory at current year retail prices.
b. Determine the estimated cost of goods sold for the current year.
c. Determine the cost-to-retail percentage for the current year transactions.
d. Price index adjust the LIFO inventory layers.

Answer: c
Level of Learning: 1 Easy
Learning Objective: 09-05
Topic Area: Retail inventory method Dollar-value LIFO
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement

62. The second step, when using dollar-value LIFO retail method for inventory, is to determine the estimated:
a. Ending inventory at current year retail prices.
b. Cost of goods sold for the current year.
c. Ending inventory at cost.
d. Ending inventory at base year retail prices.

Answer: d
Level of Learning: 1 Easy
Learning Objective: 09-05
Topic Area: Retail inventory method Dollar-value LIFO
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement

63. Under the dollar-value LIFO retail method, to determine if the increase in the value of inventory was due to an increase in quantities:
a. Compare beginning and ending inventory amounts at current year prices.
b. Compare beginning and ending inventory amounts after adjusting both amounts to the average price level for the year.
c. Inflate beginning inventory amount to end of year prices and compare to ending inventory amount.
d. Deflate the ending inventory amount to beginning of year prices and compare to the beginning inventory amount.

Answer: d
Level of Learning: 2 Medium
Learning Objective: 09-05
Topic Area: Retail inventory method Dollar-value LIFO
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement

64. Under the dollar-value LIFO retail method, to determine the value of a LIFO layer:
a. Divide the LIFO layer by the layer-year price index and multiply by the layer-year cost-to-retail percentage.
b. Multiply the LIFO layer by the base year price index and the current year cost-to-retail percentage.
c. Multiply the LIFO layer by the layer-year price index and by the layer-year cost-to-retail percentage.
d. Divide the LIFO layer by the layer-year cost-to-retail percentage and multiply by the layer-year price index.

Answer: c
Level of Learning: 2 Medium
Learning Objective: 09-05
Topic Area: Retail inventory method Dollar-value LIFO
Blooms: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement

65. Portman Inc. uses the conventional retail inventory method. Expressed in millions of dollars, information about Portmans 2016 inventory account is expressed in the table below:

Cost Retail
Beginning inventory $ 55 $ 90
Purchases 1,160 2,170
Freight-in 30
Purchase returns 45 115
Net markups 255
Net markdowns 100
Normal spoilage 60
Net sales 1,940

What is the value of Portmans inventory at 12/31/16?
a. $150 million.
b. $252 million.
c. $300 million.
d. None of these answer choices are correct.

Answer: a
Level of Learning: 3 Hard
Learning Objective: 09-04
Topic Area: Retail inventory method Conventional retail
Topic Area: Retail inventory method Other issues
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback: $150 million is correct. The following table shows the correct computations:

(in millions of dollars) Cost Retail
Beginning inventory 55 90
Plus: Purchases 1,160 2,170
Freight-in 30
Less: Purchase returns (45) (115)
Plus: Net markups 255
2,400
Cost-to-retail percentage: 1,200 2,400 = 50%
Less: Net markdowns (100)
Goods available for sale 1,200 2,300
Less: Normal spoilage (60)
Less: Net sales (1,940)
Estimated ending inventory at retail 300
Estimated ending inventory at cost (50% x 300) 150

66. Harlequin Co. has used the dollar-value LIFO retail method since it began operations in early 2015 (its base year). Its beginning inventory for 2016 was $36,000 at cost and $72,000 at retail prices. At the end of 2016, it computed its estimated ending inventory at retail to be $120,000. Assuming its cost-to-retail percentage for 2016 transactions was 60%, what is the inventory balance that Harlequin Co. would report in its 12/31/16 balance sheet?
a. $64,800.
b. $72,000.
c. $120,000.
d. The balance cant be determined with the given information.

Answer: d
Level of Learning: 3 Hard
Learning Objective: 09-05
Topic Area: Retail inventory method Dollar-value LIFO
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback: You would need to know the retail price index for 2016 transactions relative to the base year to make this computation.

67. Retrospective treatment of prior years financial statements is required when there is a change from:
a. Average cost to FIFO.
b. FIFO to average cost.
c. LIFO to average cost.
d. All of these answer choices are correct.

Answer: d
Level of Learning: 1 Easy
Learning Objective: 09-06
Topic Area: Change in inventory method
Blooms: Remember
AACSB: Reflective Thinking
AICPA: FN Measurement

68. Prunedale Co. uses a periodic inventory system. Beginning inventory on January 1 was overstated by $32,000, and its ending inventory on December 31 was understated by $62,000. These errors were not discovered until the next year. As a result, Prunedales cost of goods sold for this year was:
a. Overstated by $94,000.
b. Overstated by $30,000.
c. Understated by $94,000.
d. Understated by $30,000.

Answer: a
Level of Learning: 3 Hard
Learning Objective: 09-07
Topic Area: Inventory errors
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
Overstatement of beginning inventory overstates cost of goods sold and the understatement of ending inventory overstates cost of goods sold:
$32,000 + 62,000 = $94,000 overstatement of cost of goods sold

69. Poppy Co. uses a periodic inventory system. Beginning inventory on January 1 was understated by $30,000, and its ending inventory on December 31 was understated by $17,000. In addition, a purchase of merchandise costing $20,000 was incorrectly recorded as a $2,000 purchase. None of these errors were discovered until the next year. As a result, Poppys cost of goods sold for this year was:
a. Overstated by $31,000.
b. Overstated by $5,000.
c. Understated by $31,000.
d. Understated by $48,000.

Answer: c
Level of Learning: 3 Hard
Learning Objective: 09-07
Topic Area: Inventory errors
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
Understatement of beginning inventory understates () cost of goods sold and the understatement of ending inventory overstates (+) cost of goods sold. Also, the understatement of purchases understates () cost of goods sold:
$30,000 + 17,000 18,000 ($20,000 2,000) = $31,000 understatement of cost of goods sold

Use the following to answer questions 70 and 71:

On July 10, 2016, Johnson Corporation signed a purchase commitment to purchase inventory for $200,000 on or before February 15, 2017. The companys fiscal year-end is December 31. The contract was exercised on February 1, 2017, and the inventory was purchased for cash at the contract price. On the purchase date of February 1, the market price of the inventory was $210,000. The market price of the inventory on December 31, 2016, was $180,000. The company uses a perpetual inventory system.

70. How much loss on purchase commitment will Johnson recognize in 2016?
a. $10,000.
b. $20,000.
c. $30,000.
d. None.

Answer: b
Level of Learning: 2 Medium
Learning Objective: Appendix 9
Topic Area: Purchase commitments
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
$200,000 180,000 = $20,000 loss

71. At what amount will Johnson record the inventory purchased on February 1, 2017?
a. $210,000.
b. $200,000.
c. $180,000.
d. $190,000.

Answer: c
Level of Learning: 3 Hard
Learning Objective: Appendix 9
Topic Area: Purchase commitments
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
In 2016, loss of $20,000 recognized ($200,000 180,000) and liability established for the estimated loss on purchase commitment. When the inventory is purchased for $200,000, the following journal entry records the transaction:

Inventory 180,000
Estimated liability on purchase commitment 20,000
Cash 200,000

Use the following to answer questions 72 and 73:

Sullivan Corporation has determined its year-end inventory on a FIFO basis to be $500,000. Information pertaining to that inventory is as follows:

Selling price $520,000
Costs to sell 30,000
Replacement cost 440,000

72. What should be the reported value of Sullivans inventory?
a. $500,000.
b. $440,000.
c. $470,000.
d. $490,000.

Answer: d
Level of Learning: 2 Medium
Learning Objective: 09-01
Topic Area: Determining and applying lower of cost or NRV
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
NRV = $520,000 $30,000 = $490,000
Net realizable value = $490,000 which is less than $500,000 cost.

73. What should be the reported value of Sullivans inventory if the company prepares its financial statements according to International Financial Reporting Standards (IFRS)?
a. $500,000.
b. $440,000.
c. $470,000.
d. $490,000.

Answer: d
Level of Learning: 2 Medium
Learning Objective: 09-08
Topic Area: IFRS Lower of cost or NRV
Blooms: Apply
AACSB: Knowledge Application
AACSB: Diversity
AICPA: BB Global
AICPA: FN Measurement
Feedback:
Under IFRS, inventory is valued at the lower of cost or net realizable value. NRV = $520,000 $30,000 = $490,000 which is is less than $500,000 cost.

74. Under International Financial Reporting Standards (IFRS), inventory is valued at the lower of cost and:
a. Replacement cost.
b. Net realizable value.
c. Net realizable value reduced by a normal profit margin.
d. None of these answer choices are correct.

Answer: b
Level of Learning: 1 Easy
Learning Objective: 09-08
Topic Area: IFRS Lower of cost or NRV
Blooms: Understand
AACSB: Reflective Thinking
AACSB: Diversity
AICPA: BB Global
AICPA: FN Measurement

75. Haskell Corporation has determined its year-end inventory on a FIFO basis to be
$785,000. Information pertaining to that inventory is as follows:

Selling price $805,000
Costs to sell 35,000
Replacement cost 765,000

What should be the reported value of Haskells inventory if the company prepares its
financial statements according to International Financial Reporting Standards (IFRS)?
a. $765,000.
b. $785,000.
c. $770,000.
d. $750,000.

Answer: c
Level of Learning: 2 Medium
Learning Objective: 09-08
Topic Area: IFRS Lower of cost or NRV
Blooms: Apply
AACSB: Knowledge Application
AACSB: Diversity
AICPA: BB Global
AICPA: FN Measurement
Feedback:
Under IFRS, inventory is valued at the lower of cost or net realizable value. NRV = $805,000 $35,000 = $770,000 which is less than $785,000 cost.


Matching Pair Questions

76. Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.

TERM PHRASE NUMBER
1. Retrospective treatment Estimates value of inventory based on historical relationships. ____
2. LIFO retail Requires retrospective treatment. ____
3. Gross profit method Added in arriving at ending inventory at retail. ____
4. Net markup Beginning inventory is not included in the calculation of the current periods cost-to-retail percentage. ____
5. Change from LIFO to FIFO Required for a change from FIFO to average cost. ____

Answer:
TERM PHRASE NUMBER
1. Retrospective treatment Estimates value of inventory based on historical relationships. 3
2. LIFO retail Requires retrospective treatment. 5
3. Gross profit method Added in arriving at ending inventory at retail. 4
4. Net markup Beginning inventory is not included in the calculation of the current periods cost-to-retail percentage. 2
5. Change from LIFO to FIFO Required for a change from FIFO to average cost. 1

Level of Learning: 1 Easy
Learning Objective: 09-02
Learning Objective: 09-03
Learning Objective: 09-06
Topic Area: Gross profit method
Topic Area: Retail inventory method
Topic Area: Retail inventory method LIFO retail
Topic Area: Change in inventory method
Blooms: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement

77. Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.

TERM PHRASE NUMBER
1. Requires retrospective treatment Change from LIFO to FIFO. ____
2. Normal spoilage Cost-to-retail percentage is determined for all goods available for sale. ____
3. Average cost retail method Always deducted after arriving at the calculation of the cost-to-retail percentage. ____
4. Net markdown Deducted in arriving at ending inventory at retail. ____
5. Cost-to-retail percentage Divide cost of goods available for sale by goods available at retail. ____

Answer:
TERM PHRASE NUMBER
1. Requires retrospective treatment Change from LIFO to FIFO. 1
2. Normal spoilage Cost-to-retail percentage is determined for all goods available for sale. 3
3. Average cost retail method Always deducted after arriving at the calculation of the cost-to-retail percentage. 2
4. Net markdown Deducted in arriving at ending inventory at retail. 4
5. Cost-to-retail percentage Divide cost of goods available for sale by goods available at retail. 5

Level of Learning: 1 Easy
Learning Objective: 09-03
Learning Objective: 09-06
Topic Area: Retail inventory method Average cost
Topic Area: Retail inventory method Other issues
Topic Area: Change in inventory method To LIFO
Blooms: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement

78. Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.

TERM PHRASE NUMBER
1. Retail inventory method Elimination of a price reduction. ____
2. Markdown cancellation Gross profit divided by sales. ____
3. Normal profit margin Gross profit divided by cost. ____
4. Markup on cost Gross profit percentage times selling price. ____
5. Gross profit ratio Ideal for high volume, low cost inventory. ____

Answer:
TERM PHRASE NUMBER
1. Retail inventory method Elimination of a price reduction. 2
2. Markdown cancellation Gross profit divided by sales. 5
3. Normal profit margin Gross profit divided by cost. 4
4. Markup on cost Gross profit percentage times selling price. 3
5. Gross profit ratio Ideal for high volume, low cost inventory. 1

Level of Learning: 1 Easy
Learning Objective: 09-02
Learning Objective: 09-03
Topic Area: Gross profit method
Topic Area: Retail inventory method
Topic Area: Retail inventory method Other issues
Blooms: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement

79. Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.

TERM PHRASE NUMBER
1. Conventional retail method Increase in selling price. ____
2. Additional markup Losses would be recognized when values decline. ____
3. Requires retrospective restatement Markdowns are not in the calculation of the cost-to-retail percentage. ____
4. Lower of cost and NRV Not GAAP for annual financial statements. ____
5. Gross profit method Material inventory error discovered in a subsequent year. ____

Answer:
TERM PHRASE NUMBER
1. Conventional retail method Increase in selling price. 2
2. Additional markup Losses would be recognized when values decline. 4
3. Requires retrospective restatement Markdowns are not in the calculation of the cost-to-retail percentage. 1
4. Lower of cost and NRV Not GAAP for annual financial statements. 5
5. Gross profit method Material inventory error discovered in a subsequent year. 3

Level of Learning: 1 Easy
Learning Objective: 09-01
Learning Objective: 09-02
Learning Objective: 09-03
Learning Objective: 09-04
Learning Objective: 09-07
Topic Area: Applying lower of cost or NRV
Topic Area: Gross profit method
Topic Area: Retail inventory method Other issues
Topic Area: Retail inventory method Conventional retail
Topic Area: Inventory errors
Blooms: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement

80. Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.

TERM PHRASE NUMBER
1. Employee discounts Must be added to sales if sales are recorded net of discounts. ____
2. Net realizable value Selling price less costs to sell. ____
3. Conventional retail method Original increase in selling price above cost. ____
4. Inventory error, example Approximates lower of average cost and NRV. ____
5. Initial markup Purchases are unrecorded. ____

Answer:
TERM PHRASE NUMBER
1. Employee discounts Must be added to sales if sales are recorded net of discounts. 1
2. Net realizable value Selling price less costs to sell. 2
3. Conventional retail method Original increase in selling price above cost. 5
4. Inventory error, example Approximates lower of average cost and NRV. 3
5. Initial markup Purchases are unrecorded. 4

Level of Learning: 1 Easy
Learning Objective: 09-01
Learning Objective: 09-03
Learning Objective: 09-04
Learning Objective: 09-07
Topic Area: Determining NRV
Topic Area: Retail inventory method
Topic Area: Retail inventory method Other issues
Topic Area: Retail inventory method Conventional retail
Topic Area: Inventory errors
Blooms: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement

81. Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.

TERM PHRASE NUMBER
1. Change to LIFO from FIFO Reduction in selling price. ____
2. Dollar-value LIFO retail method Requires base year retail to be converted to layer year retail and then to cost. ____
3. Markdown Deducted from selling price when calculating NRV. ____
4. Costs to sell Selling price less costs to sell. ____
5. NRV Usually impossible to calculate the effect on prior years financial statements. ____

Answer:

1. Change to LIFO from FIFO Reduction in selling price. 3
2. Dollar-value LIFO retail method Requires base year retail to be converted to layer year retail and then to cost. 2
3. Markdown Deducted from selling price when calculating NRV. 4
4. Costs to sell Selling price less costs to sell. 5
5. NRV Usually impossible to calculate the effect on prior years financial statements. 1

Level of Learning: 1 Easy
Learning Objective: 09-01
Learning Objective: 09-03
Learning Objective: 09-05
Learning Objective: 09-06
Topic Area: Determining NRV
Topic Area: Retail inventory method
Topic Area: Retail inventory method Dollar-value LIFO
Topic Area: Change in inventory method To LIFO
Blooms: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement

82. Listed below are 10 terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the number for the correct term.

TERM PHRASE NUMBER
1. Dollar-value LIFO retail Reduction in selling price below the original selling price. ____
2. Cost-to-retail percentage Requires base year retail to be converted to layer year retail and then to cost. ____
3. Conventional retail method Accounting change requiring retrospective treatment. ____
4. Change from LIFO Selling price less costs to sell. ____
5. Gross profit method Usually impossible to calculate the effect on prior years financial statements. ____
6. Net realizable value Average cost, lower of cost and NRV. ____
7. Markdown Not acceptable for the preparation of annual financial statements. ____
8. Change to LIFO from FIFO Must be added to sales if sales are recorded net of discounts. ____
9. Employee discounts Deducted in the retail column after the calculation of the cost-to-retail percentage. ____
10. Normal spoilage Divide cost of goods available for sale by goods available at retail. ____

Answer:
TERM PHRASE NUMBER
1. Dollar-value LIFO retail Reduction in selling price below the original selling price. 7
2. Cost-to-retail percentage Requires base year retail to be converted to layer year retail and then to cost. 1
3. Conventional retail method Accounting change requiring retrospective treatment. 4
4. Change from LIFO Selling price less costs to sell. 6
5. Gross profit method Usually impossible to calculate the effect on prior years financial statements. 8
6. Net realizable value Average cost, lower of cost and NRV. 3
7. Markdown Not acceptable for the preparation of annual financial statements. 5
8. Change to LIFO from FIFO Must be added to sales if sales are recorded net of discounts. 9
9. Employee discounts Deducted in the retail column after the calculation of the cost-to-retail percentage. 10
10. Normal spoilage Divide cost of goods available for sale by goods available at retail. 2

Level of Learning: 2 Medium
Learning Objective: 09-01
Learning Objective: 09-02
Learning Objective: 09-03
Learning Objective: 09-04
Learning Objective: 09-05
Learning Objective: 09-06
Topic Area: Determining NRV
Topic Area: Gross profit method
Topic Area: Retail inventory method Conventional retail
Topic Area: Retail inventory method Dollar-value LIFO
Topic Area: Change in inventory method
Topic Area: Change in inventory method To LIFO
Blooms: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement

Problems

Use the following to answer questions 8385:

Novellis Nursery has developed the following data for lower of cost and net realizable valuation for its products:
Selling
Price Cost
Broad leaf trees:
Ash $1,800 $1,700
Beech 2,200 1,600
Needle leaf trees:
Cedar $2,500 $1,750
Fir 3,600 3,350
Fruit trees:
Apple $1,800 $1,400
Cherry 2,300 1,800

The costs to sell are 10% of selling price.

83. Required: Determine the reported inventory value assuming the lower of cost and net realizable value rule is applied to individual trees.

Answer:
Individual Trees

Lower of
Product Cost NRV Cost and
NRV
Ash $ 1,700 $ 1,620 $ 1,620
Beech 1,600 1,980 1,600
Cedar 1,750 2,250 1,750
Fir 3,350 3,240 3,240
Apple 1,400 1,620 1,400
Cherry 1,800 2,070 1,800
Inventory value $11,410

Level of Learning: 2 Medium
Learning Objective: 09-01
Topic Area: Determining and applying lower of cost or NRV
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement

84. Required: Determine the reported inventory value assuming the lower of cost and net realizable value rule is applied to classes of trees.

Answer:
Classes of Inventory

Lowe

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