303 Exam 3- CH.8

Question 1

The method of recording inventory at NRC that substitutes the NRC for the historical cost and reports the loss as a part of the cost of goods sold is the

Answer 1

Cost of Goods Sold Method

Question 2

The primary basis of accounting for inventories is the cost. A departure from the cost basis of pricing the inventory is required where there is evidence that when the goods are sold in the ordinary course of business their

Answer 2

future utility will be less than their cost

Question 3

T/F: NRV is defined as estimated selling price less purchase price

Answer 3

False; NRV = estimates selling price less predictable cost of completion and disposal

Question 4

T/F: The cost of goods sold method of recording inventory at net realizable value under the lower of cost and net realizable value (LCNRV) rule establishes a separate contra asset account and a loss account to record the write-off

Answer 4

False; the loss method, not the cost of goods sold method

Question 5

When the COGS method is used to adjust cost to NRV in the LCNRV approach, what account is debited?

Answer 5

Cost of Goods Sold

Question 6

When NRV is lower than the cost, and the loss method applying the LCNRV approach of recording the write-down is used, what account is credited?

Answer 6

Inventory; Debit to a loss account

Question 7

In applying LCM, the designated market value is

Answer 7

the middle value of the replacement cost, NRV, and NRV - normal profit margin

Question 8

In applying the LCM rule, the floor is defined as

Answer 8

NRV - Normal PM

Question 9

In applying LCM rule, NRV is referred to as the

Answer 9

ceiling

Question 10

In no case can “market” in the LCM rule be more than

Answer 10

estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal

Question 11

T/F: IFRS uses a floor to determine market for inventory valuation

Answer 11

False; IFRS does not use a ceiling or a floor to determine market

Question 12

The term market in the phrase “LCM” generally means the:

Answer 12

replacement cost

Question 13

The lower limit (floor) for inventory valuation is defined as the selling price less:

Answer 13

estimated costs of completion and disposal (NRV) less a normal profit margin

Question 14

Co. uses the LCM approach. The replacement cost of an inventory item is $75. NRV is $82. NRV-PM is $61. The cost of the item is $76.50. The inventory item would be valued at:

Answer 14

$75 - Market value is lower than Cost value

Question 15

The replacement cost of an inventory item is $93. NRV is $98.96. NRV-PM is $89.55. The cost of the item is $100. The designated market value used in applying LCM is

Answer 15

$93; middle number of NRV, NRV-PM , and replacement cost

Question 16

Inventory may be recorded at NRV if

Answer 16

There is a controlled market with a quoted price
There are no significant costs of disposal
The inventory or products are available for immediate delivery

Question 17

The relative sales value method is used extensively throughout the:

Answer 17

Petroleum industry

Question 18

Co. acquired two inventory items at a lump-sum cost of $64,400. The acquisition included 5,000 units of knife X001, and 5,000 units of knife X002. X001 normally sells for $20 per unit, and knife X002 for $10 per unit. If co. sells 1,950 units of X002, what amount of gross profit should it recognize?

Answer 18

5,000 * 20 = $100,000
5,000 * 10 = $50,000
Totaling $150,000
X002 relative sales values: $50,000/$150,000 = 33.33% of $64,400 = $21,465
X002 Cost per Unit:
$21,465/5,000 = $4.29
1950 * $4.29 = $8,366 COGS
Revenue - COGS = Gross Profit
$19,500 - $8,366 = $11,134

Question 19

If a material amount of inventory has been ordered through a formal purchase contract at the balance sheet date for future delivery at firm prices

Answer 19

The facts of the purchase contract should be disclosed if material in amount.

Question 20

Inventories of certain minerals and agriculture products are valued at:

Answer 20

NRV

Question 21

Co. acquired two inventory items at a lump-sum cost of $87,000. The acquisition included 6,500 units of A, and 14,800 units of B. A normally sells for $14 per unit and B normally sells for $5 per unit. If Co. sells 2,400 units of A, what amount of gross profit should is recognize?

Answer 21

6,500 * 14 = $91,000
14,800 * 5 = $74,000
Totalling $165,000
$91,000/ $165,000 = 55.15% of the $87,000 = $47,981
$47,981/6,500 = $7.38 A cost per unit
$7.38 * 2,400 = $17,712 COGS
Revenue = 2,400 * 14 = $33,600
Less COGS $17,712 =
Gross Profit $15,888

Question 22

An estimated loss on purchase commitments is reported:

Answer 22

under other expenses and losses in the income statement

Question 23

The Percentage markup on cost can be computed by dividing gross profit on selling price by:

Answer 23

100% minus gross profit on selling price

Question 24

T/F: The gross profit method of estimating inventory is acceptable for both interim and annual financial reports

Answer 24

False; gross profit method is not acceptable for annual reports but it ca be used for interim periods.

Question 25

Which statement is NOT true about the gross profit method of inventory valuations?

Answer 25

It may be used to estimate inventories for annual statements TRUE STATEMENTS: It may be used to estimate inventories for interim statements It may be used by auditors

Question 26

Co. October 31 inventory was destroyed by fire. Co. beginning inventory was $533,000, and purchases for Jan. - Oct. were $1,255,000. Sales for the same period were $1,889,000. The Co. normal gross profit percentage is 30% of sales. Using Gross Profit Method, the Oct. 31 inventory is estimated to be

Answer 26

Beg Inv $533,000 + Purch $1,255,000 = COGAS $$1,788,000 - Est COGS (sales, $1,889,000 - (sales, $1,889,000 * Gross profit %, .30) = Est ending inventory, $465,700

Question 27

Which of the following is included in the calculation of the cost-to-retail ratio under the conventional retail inventory method

Answer 27

Markups and markup cancellations

Question 28

Which of the following is deducted from both the cost and retail columns in computing the cost-to-retail ratio?

Answer 28

Abnormal shortages

Question 29

T/F: The conventional retail inventory method includes both net markups and net markdowns to calculate the cost-to-retail ratio.

Answer 29

False; does not include net markdowns

Question 30

Average Days to sale

Answer 30

365/ (COGS/ (beg inventory+ ending inventory /2))

Question 31

The inventory turnover ratio is computed by dividing the cost of goods sold by

Answer 31

average inventory

Question 32

T/F: The LIFO retail method assumes that markups and markdowns apply to both beginning inventory and goods purchased during the period.

Answer 32

False; The LIFO retail method assumes that markups and markdowns apply only to the goods purchased during the period.

Question 33

T/F: The LIFO retail method assumes that markups and markdowns apply only to the goods purchased during the period.

Answer 33

True