Question 1

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:

Accepted Answer

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

Question 2

On December 31, 2013 Trade Cards Ltd. completed a physical inventory count that reflected an inventory valuation of $25,000. Theft is suspected; therefore, a reliable estimate of what the inventory should be is needed. Relevant data are: Sales revenue, $400,000; Average gross margin rate on sales for the past three years was 30 percent; Beginning inventory $20,000, and purchases, $290,000. The estimated amount of the theft loss is:

Accepted Answer

The answer of On December 31, 2013 Trade Cards Ltd....

Question 3

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:

Accepted Answer

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

Question 4

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

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 5

A company's 2013 income statement reported the following for the year ended December 31, 2013: $\begin{array} { | l | l | } 
\hline \text { Sales revenue } & \$ 453 \
\hline \text { Sales returns } & 6 \
\hline \text { Cost of goods sold } & 270 \
\hline \text { Expenses } & 126 \
\hline \text { Net income } & \$ 51 \
\hline
\end{array}$
Based only on the above data, the (a) average markup on cost, and (b) the average markup on selling price were: $\begin{array}{|l|l|l|}
\hline &\text { (a) Mark-up on a cost } & \text { (b) Mark-up on selling price } \
\hline 1&13.60 \% & 7.40 \% \
\hline 2&59.60 \% & 39.70 \% \\hline 3&60.00 \% & 40.00 \% \
\hline 4&65.56 \% & 39.60 \% \
\hline
\end{array}$

Accepted Answer

To calculate the average markup on cost, we use the formula: $\frac{\text{Net Sales} - \text{Cost of Goods Sold}}{\text{Cost of Goods Sold}} \times 100$. Net Sales is Sales Revenue minus Sales Returns, which is $453 - 6 = 447$. So, the markup on cost is $\frac{447 - 270}{270} \times 100 = 65.56\%$.For the average markup on selling price, we use the formula: $\frac{\text{Net Sales} - \text{Cost of Goods Sold}}{\text{Net Sales}} \times 100$. Using the Net Sales calculated above, the markup on selling price is $\frac{447 - 270}{447} \times 100 = 39.60\%$.

Question 6

A company manufactures and sells four products; the related inventories are valued at lower-of-cost-or-market. The company considers a profit margin of 20 percent of sales to be normal for all four products. The following information was compiled as of December 31: $\begin{array} { | l | l | l | l | l | } 
\hline \text { Product } & \text { Original Cost } & \text { Cost to Replace } & \text { Estimated Cost to Complete and sell } & \text { Expected Selling Price } \
\hline \text { A } & \$ 70 & \$ 84 & \$ 30 & \$ 160 \
\hline \text { B } & 94 & 90 & 41 & 190 \
\hline \text { C } & 35 & 30 & 10 & 60 \
\hline \text { D } & 90 & 92 & 118 & 200 \
\hline
\end{array}$
 Using lower-of-cost-or-NRV, the reported unit amount of the ending inventory for Product D is:

Accepted Answer

For Product D, the cost to replace is $92, and the estimated cost to complete and sell is $118. However, to find the NRV (Net Realizable Value), we subtract the estimated cost to complete and sell ($118) from the expected selling price ($200), which gives us $82. Since the lower-of-cost-or-NRV method is used, and $82 (NRV) is lower than both the original cost ($90) and the cost to replace ($92), the reported unit amount of the ending inventory for Product D is $82.

Question 7

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

Accepted Answer

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

Question 8

During a year, Small Wears Ltd. (whose usual gross margin rate on sales is 30 percent) recorded sales of $10,000 and goods available for sale of $12,000. The cost of its ending inventory can be reliably estimated at:

Accepted Answer

To calculate the cost of ending inventory, we need to subtract the cost of goods sold (COGS) from goods available for sale. COGS can be calculated as (1 - gross margin rate) x sales, which is (1 - 0.30) x $10,000 = $7,000. Therefore, goods available for sale - COGS = ending inventory. 
$12,000 - $7,000 = $5,000, which is the estimated cost of ending inventory. Option B is the closest choice to this estimate.

Question 9

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

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 10

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:

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 11

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: $\begin{array} { | l | l | l | l | l | } 
\hline & 2002 \text { Inventory } & &{ 2003 \text { Inventory } } \
\hline & \text { Beginning } & \text { Ending } & \text { Beginning } & \text { Ending } \
\hline \text { Cost } & \$ 80 & \$ 86 & \$ 86 & \$ 98 \
\hline \text { Market } 80 & 84 & 84 & 90 \
\hline
\end{array}$
 What effect will this information have on the 2003 statement of income if the allowance method is used?

Accepted Answer

The allowance method recognizes a holding loss when the market value of inventory is below its cost. In this case, the market value of the 2003 beginning inventory is $84, which is below its cost of $86. Therefore, a holding loss of $2 is recognized. The market value of the 2003 ending inventory is $90, which is below its cost of $98. Therefore, a holding loss of $8 is recognized. The total holding loss for 2003 is $2 + $8 = $10.

Question 12

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?

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 13

Seaton's of Canada Ltd. uses the retail inventory method to approximate average cost at lower-of-cost-or-market. The following information is available for the month of April 2008 (in 000's): $\begin{array} { | l | l | l | } 
\hline & \text { Retail } & \text { Cost } \
\hline \text { Cost of goods available for sale } & \$ 4,500 & \$ 3,600 \
\hline \text { Net mark-ups } & & \$ 500 \
\hline \text { Net markdowns } & & \$ 200 \
\hline \text { Sales } & & \$ 3,400 \
\hline
\end{array}$
The inventory approximation at April 30, 2008, was:

Accepted Answer

To find the ending inventory using the retail inventory method, first calculate the cost-to-retail ratio: $ \frac{3,600}{4,500} = 0.8 $. Adjust the retail value of goods available for sale by adding net mark-ups and subtracting net markdowns: $ 4,500 + 500 - 200 = 4,800 $. Subtract sales from this adjusted retail value: $ 4,800 - 3,400 = 1,400 $. Finally, apply the cost-to-retail ratio to the ending inventory at retail: $ 1,400 \times 0.8 = 1,120 $.

Question 14

Food Depot Ltd. assembled the following information at the end of the current reporting period: $\begin{array} { | l | l | } 
\hline \text { Sales revenue } & \$ 56,400 \
\hline \text { Beginning inventory } & 21,250 \
\hline \text { Purchases } & 9,000 \
\hline \text { Purchase returns } & 600 \
\hline \text { Freight-in } & 950 \
\hline \text { Selling expense } & 15,750 \
\hline \text { Mark-up on cost (estimated) } & 25 \text { percent } \
\hline
\end{array}$
 If the gross margin method is used to estimate ending inventory, what amount should be reported as pre-tax income or loss?

Accepted Answer

The answer of Food Depot Ltd. assembled the following information...

Question 15

A fire completely destroyed the inventory housed in a warehouse in August. Reconstructed data follows: $\begin{array} { | l | l | } 
\hline \text { Sales to date of fire } & \$ 340,000 \
\hline \text { Gross margin as a percent of cost } & 60 \% \
\hline \text { Gross purchases to date of fire } & 200,000 \
\hline \text { Beginning inventory } & 30,000 \
\hline \text { Purchases returns and allowances to date of fire } & 10,000 \
\hline \text { Freight-in } & 4,000 \
\hline \text { Sales returns } & 25,000 \
\hline
\end{array}$
 Compute the loss of inventory due to the fire.

Accepted Answer

The answer of A fire completely destroyed the inventory housed...

Question 16

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? $\begin{array} { | l | l | l | l | l | } 
\hline \text { Assets } & \text { Liabilities } & \text { Owners' Equity } & \text { Net Earnings } \
\hline 1 & \text { No effect } & \text { Overstate } & \text { understate } & \text { Understate } \
\hline 2 & \text { No effect } & \text { Understate } & \text { Overstate } & \text { Overstate } \
\hline 3 & \text { Understate } & \text { No effect } & \text { Understate } & \text { Understate } \
\hline 4 & \text { Understate } & \text { Understate } & \text { No effect } & \text { No effect } \
\hline
\end{array}$

Accepted Answer

Neglecting to record a purchase of merchandise on credit at year-end and omitting it from the year-end physical count would understate assets (inventory not added) and understate liabilities (credit purchase not recorded). Owners' equity and net earnings would not be directly affected by this error in the current period, as the omission impacts both assets and liabilities equally without an immediate effect on net income or owners' equity.

Question 17

Country Guides Inc. uses the gross margin method to estimate its ending inventory for each quarter. The following information for the second quarter was provided from the records: $\begin{array} { | l | l | } 
\hline \text { Sales revenue } & \$ 200,000 \
\hline \text { Purchases } & 47,500 \
\hline \text { Freight-in } & 1,400 \
\hline \text { Beginning inventory } & 41,250 \
\hline \text { Purchase returns } & 900 \
\hline \text { Estimated gross margin rate } & 72 \text { percent } \
\hline
\end{array}$
 The estimated ending inventory for the second quarter is:

Accepted Answer

The estimated ending inventory is calculated as follows:Estimated ending inventory = Beginning inventory + Purchases + Freight-in - Purchase returns - Cost of goods soldCost of goods sold = Sales revenue * (1 - Gross margin rate)Cost of goods sold = $200,000 * (1 - 0.72) = $56,000Estimated ending inventory = $41,250 + $47,500 + $1,400 - $900 - $56,000 = $33,250

Question 18

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:

Accepted Answer

Since the merchandise was not included in the physical inventory count, the inventory balance would be understated by the cost of the merchandise. This understatement of inventory would also result in an understatement of the cost of goods sold and an overstatement of gross profit, which in turn would result in an understatement of net income. Therefore, both income and assets would be understated by the same amount. Purchases and accounts payable would not be affected by this error.

Question 19

An inventory item was purchased for $3.00. Before it was finally sold it was given an initial markup of $1.00, followed by an additional markup of 50 cents, and then a markup cancellation of 50 cents, and finally a markdown of 40 cents. It was then sold for:

Accepted Answer

The item's initial cost was $3.00. With the first markup of $1.00, its cost increased to $4.00. 
The second markup of 50 cents brought the cost to $4.50. 
The markup cancellation of 50 cents lowered the cost to $4.00. 
Finally, the markdown of 40 cents brought the cost down to $3.60. Therefore, the item was sold for $3.60.

Question 20

A retail company uses the retail method of inventory valued at average cost, lower-of-cost-or-market. The following information relates to 2007 (in 000's): $\begin{array} { | l | l | l | } 
\hline & \text { Retail } & \text { Cost } \
\hline \text { Beginning inventory, January 1, 2007 } & \$ 120 & \$ 72 \
\hline \text { Sales revenue } & \$ 352 & \
\hline \text { Purchases } & \$ 312 & \$ 480 \
\hline \text { Net markdowns } & \$ 128 & \
\hline \text { Net mark-ups } & \$ 40 & \
\hline
\end{array}$
 What cost ratio should be used to determine the 2007 ending inventory valuation? Do not round to the nearest intermediate value.

Accepted Answer

The answer of A retail company uses the retail method...

Quiz 8: Cost-Based Inventories and Cost of Sales