Question 1

To produce an inventory valuation which approximates lower-of-cost or market using the retail inventory method,the computation of the ratio of cost to retail should:
A)ignore both mark-ups and markdowns.
B)include mark-ups but not markdowns.
C)include markdowns but not mark-ups.
D)include mark-ups and markdowns.

Accepted Answer

The answer of To produce an inventory valuation which approximates...

Question 2

A company uses a periodic inventory system.At the end of 2013 a purchase on credit of $5,000 was not recorded.Also,it was incorrectly excluded from the 2013 ending inventory.What effect,will these errors have on the 2013 financial statements of the company if they are undetected?
A)Pre-tax income will be overstated $5,000 and assets and liabilities each will be understated.
B)Pre-tax income will be correct, but liabilities and assets each will be understated by $5,000.
C)Pre-tax income and liabilities will be understated $5,000 each.
D)Pre-tax income, assets, and liabilities will be overstated $5,000 each.
E)Pre-tax income, assets and liabilities each will be understated.

Accepted Answer

Since the purchase was not recorded, it means that both the inventory (an asset) and accounts payable (a liability) were not increased by $5,000. However, because the inventory was also excluded from the ending inventory count, the cost of goods sold (COGS) was not increased by this amount, leaving the pre-tax income unaffected.

Question 3

Lumber Number Ltd.began business in 2001.It uses a periodic inventory system and values inventory at lower-of-cost-or-market.The following data represents price information related to the inventory on a unit basis: $$\begin{array} { | l | r| r |r |r| r | } 
\hline &  { \text { 2002 Inventory } } & &{ \text { 2003 Inventory } } \
\hline & \text { Beginning } & \text { Ending } & \text { Beginning } & \text { Ending } \
\hline \text { Cost } & \$ 80 & \$ 86 & \$ 86 & \$ 98 \
\hline \text { Market } & 80 & 84 & 84 & 90 \
\hline
\end{array}$$ What effect will this information have on the 2003 statement of income if the allowance method is used?
A)$2 holding loss
B)$4 holding loss
C)$6 holding loss
D)$8 holding loss

Accepted Answer

The allowance method recognizes a holding loss when the market value of inventory is less than its cost. In this case, the market value of the 2003 ending inventory is $90, which is less than its cost of $98. Therefore, a holding loss of $8 ($98 - $90) will be recognized in the 2003 statement of income.

Question 4

Lower-of-cost-or-market (LCM) is to be applied to the following situation: Cost,$10; Net realizable value,$8; Replacement cost,$7; Net realizable value less normal profit,$7.50.One unit in inventory should be valued at:
A)$7.00
B)$7.50
C)$8.00
D)$10.00

Accepted Answer

The answer of Lower-of-cost-or-market (LCM) is to be applied to...

Question 5

In inventorying goods at December 31,a company incorrectly included some items received on consignment.The error causes an:
A)understatement of inventory, purchases, and accounts payable.
B)overstatement of net income and assets by the same amount.
C)understatement of income and assets by the same amount.
D)overstatement of inventory, purchases, and accounts payable.

Accepted Answer

Including items received on consignment (which should not be included in the company's inventory as they do not own these goods) leads to an overstatement of inventory. This overstatement of inventory results in a lower cost of goods sold, which in turn overstates net income. Since inventory is an asset, this also overstates the company's assets. The amounts by which net income and assets are overstated are the same, as the overstatement of inventory directly impacts both.

Question 6

Which one of the following would cause a decrease in the cost ratio as used in the retail inventory method?
A)Higher retail prices.
B)Lower net mark-ups.
C)More employee discounts given.
D)Higher freight-in charges.

Accepted Answer

Higher retail prices increase the retail value of inventory, which, when used in the denominator of the cost ratio (cost/value), results in a lower ratio.

Question 7

Which of the following would cause an increase in the cost ratio as used in the retail inventory method?
A)Fewer employee discounts given
B)Less spoilage
C)Lower freight-in charges
D)Decreased mark-ups

Accepted Answer

Decreased mark-ups would result in lower retail prices and therefore a lower cost-to-retail ratio, whereas the other options would result in a higher cost-to-retail ratio (more employee discounts given means lower retail prices, less spoilage means higher retail prices, and lower freight-in charges mean lower retail prices).

Question 8

The relative sales value method is:
A)similar to the gross margin method.
B)used to account for spoilage.
C)a retail inventory method.
D)a cost allocation method.

Accepted Answer

The relative sales value method is a cost allocation method used to allocate joint costs to products based on their relative sales values.

Question 9

A company using the periodic inventory method correctly recorded a December 29 purchase of merchandise,but the merchandise was not included in the physical inventory count on December 31 (end of the accounting period).The error caused an:
A)understatement of inventory, purchases, and accounts payable.
B)overstatement of both income and assets by the same amount.
C)understatement of both income and assets by the same amount.
D)overstatement of inventory, purchases, and accounts payable.

Accepted Answer

Since the merchandise was not included in the physical inventory count, the ending inventory value would be understated. This, in turn, would cause cost of goods sold to be overstated, and therefore, income would be understated. The error would also cause an understatement of assets (inventory) and an understatement of accounts payable (since the purchase was recorded but not included in the physical count).

Question 10

Inventory items purchased on credit that are correctly debited to 2013 purchases,but improperly included in the 2013 ending inventory cause:
A)2013 assets to be understated and 2013 pre-tax income to be overstated.
B)both 2013 pre-tax income and 2013 assets to be understated.
C)both 2013 assets and pre-tax income to be overstated.
D)both accounts payable for 2013 and 2013 pre-tax income to be overstated.

Accepted Answer

When inventory items are improperly included in the ending inventory, it means that the cost of goods sold (COGS) is understated because the ending inventory is overstated. This leads to an overstatement of pre-tax income because COGS is deducted from revenue to calculate income. Additionally, because the ending inventory is part of current assets, assets are also overstated.

Question 11

On December 31 (end of the accounting period) a company completed an inventory count and included some merchandise that had been received but was not unpacked.No purchase had been recorded.The error causes an:
A)understatement of inventory, purchases, and accounts payable.
B)understatement of both income and assets by the same amount.
C)overstatement of income and understatement of accounts payable.
D)overstatement of inventory, purchases, and accounts payable.

Accepted Answer

The answer of On December 31 (end of the accounting...

Question 12

On December 15,2013,a corporation accepted delivery of goods for resale which it purchased on credit.As of December 31,the company had not recorded the transaction or included the merchandise in its inventory.The effect of this on the balance sheet for December 31,2013 would be:
A)assets and liabilities were understated but stockholders' equity was not affected.
B)assets and stockholders' equity were understated but liabilities were not affected.
C)assets and stockholders' equity were overstated but liabilities were not affected.
D)stockholders' equity was the only item affected by the omission.

Accepted Answer

Since the corporation has not recorded the transaction or included the merchandise in its inventory, both assets and liabilities are understated. However, stockholders' equity is not affected since the transaction has not been recorded.

Question 13

When the retail inventory method is used,markdowns are commonly ignored in the computation of the cost to retail ratio because:
A)mark-ups are also ignored.
B)this tends to result in the showing of a normal profit margin in a period when no markdown goods have been sold.
C)there may be no markdowns in a given year.
D)this tends to give a better approximation of the lower-of-cost or market.

Accepted Answer

Markdowns are commonly ignored in the computation of the cost to retail ratio when using the retail inventory method because this approach tends to give a better approximation of the lower-of-cost or market. This method aims to value inventory at the lower of its cost or the market value, and by ignoring markdowns, it avoids overstating losses or understating the value of the inventory.

Question 14

The FIFO retail inventory method requires that the inventory valuation be determined first on a(n):
A)Average cost basis.
B)NRV basis.
C)FIFO, lower-of-cost-or-market basis.
D)FIFO basis.
E)None of these answers are correct.

Accepted Answer

The answer of The FIFO retail inventory method requires that...

Question 15

A company using a periodic inventory system neglected to record a purchase of merchandise on credit at year end.This merchandise was omitted from the year end physical count.How will these errors affect assets,liabilities,owners' equity at year end and net earnings for the year? $$\begin{array} { | l | l | l | l | l | } 
\hline & & & \text { Owners' } & \text { Net } \
\hline & \text { Assets } & \text { Liabilities } & \text { Equity } & \text { Earnings } \
\hline 1 & \text { No effect } & \text { overstate } & \text { understate } & \text { understate } \
\hline 2 & \text { No effect } & \text { understate } & \text { overstate } & \text { overstate } \
\hline 3 & \text { Understate } & \text { no effect } & \text { understate } & \text { understate } \
\hline 4 & \text { Understate } & \text { understate } & \text { no effect } & \text { no effect } \
\hline
\end{array}$$
A)Choice 1
B)Choice 2
C)Choice 3
D)Choice 4

Accepted Answer

The answer of A company using a periodic inventory system...

Question 16

Items that were incorrectly omitted from 2013 credit purchases,but correctly included in the 2013 ending inventory would have the following 2013 effects:
A)overstate pre-tax income but have no effect on current liabilities.
B)overstate pre-tax income and understate liabilities.
C)cancel out with no effect on pre-tax income but would understate current liabilities.
D)understate pre-tax income but have no effect on liabilities.

Accepted Answer

The answer of Items that were incorrectly omitted from 2013...

Question 17

When inventory declines in value below original cost,and the decline is considered other than temporary,what is the maximum amount that the inventory can be valued at?
A)Historical cost
B)Net realizable value less a normal profit margin
C)Sales price less a standard mark-up
D)Net realizable value

Accepted Answer

When inventory declines in value below its original cost and the decline is considered other than temporary, the maximum amount that the inventory can be valued at is its net realizable value. This is in accordance with the lower of cost or market rule, which dictates that inventory should be reported at the lower of its historical cost or its net realizable value.

Question 18

To compute inventory on a lower-of-cost or market basis using the retail inventory method:
A)Markups are excluded in the computation of the cost ratio.
B)Markups and markdowns are included in the computation of the cost ratio.
C)Markups and markdowns are excluded in the computation of the cost ratio.
D)Markdowns are excluded in the computation of the cost ratio.

Accepted Answer

The answer of To compute inventory on a lower-of-cost or...

Question 19

In the FIFO retail method,what does the ending inventory for any period represent?
A)The ending inventory at approximately the current cost.
B)The ending inventory at the beginning of the year cost dollars.
C)The ending inventory at the average cost dollars.
D)The sum of inventory layers from previous periods.
E)The sum of inventory layers each costed at current dollars found by applying the current years' selling prices.

Accepted Answer

In the FIFO retail method, the ending inventory for any period represents the ending inventory at approximately the current cost. This is because under FIFO, the most recently purchased inventory items are assumed to be sold first, therefore the ending inventory would consist of the oldest inventory items (which were purchased at lower prices) and the newer inventory items (which were purchased at higher prices). Thus, the ending inventory value would be closer to the current cost of inventory at that period.

Question 20

The retail inventory method may be used for all of the following except:
A)Cost the raw materials inventory in a production facility.
B)Used to provide a means of converting a physical inventory, at retail, to a cost basis.
C)Adapted to approximate both lower-of-cost or market and FIFO cost.
D)Used to provide estimated inventory valuations when a physical inventory count is impracticable.

Accepted Answer

The retail inventory method is not typically used to cost raw materials inventory in a production facility, as raw materials are typically tracked and valued differently than finished goods inventory that is sold through retail channels. The retail inventory method is primarily used for retail and wholesale businesses to value their inventory and estimate the cost of goods sold.

Quiz 8: Cost-Based Inventories and Cost of Sales

To produce an inventory valuation which approximates lower-of-cost or market using the retail inventory method,the computation of the ratio of cost to retail should:

A company uses a periodic inventory system.At the end of 2013 a purchase on credit of $5,000 was not recorded.Also,it was incorrectly excluded from the 2013 ending inventory.What effect,will these errors have on the 2013 financial statements of the company if they are undetected?

Lower-of-cost-or-market (LCM) is to be applied to the following situation: Cost,$10; Net realizable value,$8; Replacement cost,$7; Net realizable value less normal profit,$7.50.One unit in inventory should be valued at:

In inventorying goods at December 31,a company incorrectly included some items received on consignment.The error causes an:

Which one of the following would cause a decrease in the cost ratio as used in the retail inventory method?

Which of the following would cause an increase in the cost ratio as used in the retail inventory method?

The relative sales value method is:

A company using the periodic inventory method correctly recorded a December 29 purchase of merchandise,but the merchandise was not included in the physical inventory count on December 31 (end of the accounting period) .The error caused an:

Inventory items purchased on credit that are correctly debited to 2013 purchases,but improperly included in the 2013 ending inventory cause:

On December 31 (end of the accounting period) a company completed an inventory count and included some merchandise that had been received but was not unpacked.No purchase had been recorded.The error causes an:

On December 15,2013,a corporation accepted delivery of goods for resale which it purchased on credit.As of December 31,the company had not recorded the transaction or included the merchandise in its inventory.The effect of this on the balance sheet for December 31,2013 would be:

When the retail inventory method is used,markdowns are commonly ignored in the computation of the cost to retail ratio because:

The FIFO retail inventory method requires that the inventory valuation be determined first on a(n) :

Items that were incorrectly omitted from 2013 credit purchases,but correctly included in the 2013 ending inventory would have the following 2013 effects:

When inventory declines in value below original cost,and the decline is considered other than temporary,what is the maximum amount that the inventory can be valued at?

To compute inventory on a lower-of-cost or market basis using the retail inventory method:

In the FIFO retail method,what does the ending inventory for any period represent?

The retail inventory method may be used for all of the following except: