Chapter 9 Flashcards by Jennifer Roede

The replacement cost of an inventory item is below the net realizable value and above the net realizable value less the normal profit margin. The original cost of the inventory item is below the net realizable value less the normal profit margin.

Under the lower of cost or market method, the inventory item should be valued at:

A. Original Cost
B. Net realizable value less the normal profit margin
C. Replacement Cost
D. Net realizable value

A. Original Cost

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How does the retail inventory method establish the lower-of-cost-or-market valuation for ending inventory?

A. By excluding net markdowns from the cost-to-retail ratio.
B. The procedure is applied on a cost basis at the unit level
C. By excluding beginning inventory from the cost-to-retail ratio.
D. By excluding net markups form the cost-to-retail ratio.

A. By excluding net markdowns from the cost-to-retail ratio.

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The gross profit method of estimating ending inventory is not acceptable for:

A. Insurance claims for destroyed inventory
B. Interim financial statements
C. Annual financial statements
D. None of these answer choices are correct

C. Annual financial statements

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The inventory turnover ratio is computed by dividing:

A. Cost of goods sold by ending inventory
B. Sales by average inventory
C. Cost of goods sold by average inventory
D. Sales by ending inventory

C. Cost of goods sold by average inventory

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The primary basis of accounting for inventories is 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

A. Cost will be less than their replacement cost
B. Replacement cost will be more than their net realizable value
C. Selling price will be less than their replacement cost
D. Future utility will be less than their cost

D. Future utility will be less than their cost

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In applying Lower-of-Cost -or-Market, the designated market value is

A. Net realizable value less a normal profit margin
B. The lower of net realizable value or replacement cost
C. The middle value of replacement cost, net realizable value and net realizable value less a normal profit margin
D. The higher of replacement cost of net realizable value less a normal profit margin.

C. The middle value of replacement cost, net realizable value and net realizable value less a normal profit margin

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In the lower cost or market rule, net realizable value is referred to as the:

A. Wall
B. Floor
C. Ceiling
D. Current Market

C. Ceiling

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

A. Inventory
B. Allowance to reduce Inventory to NRV
C. Cost of goods sold
D. A loss account

B. Allowance to reduce Inventory to NRV

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

A. The net realizable value
B. Estimated costs of completion and disposal (net realizable value) less a normal profit margin
C. A normal profit margin
D. Estimated costs of completion and disposal

B. Estimated costs of completion and disposal (net realizable value) less a normal profit margin

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Under the conventional retail inventory method, the cost-to-retail ratio includes the retail price of goods available and:

A. Markups Only
B. Net markdowns only
C. Net markups only
D. Markups and markdowns

C. Net markups only

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The following information is available for the silver Company for the 3 months ended March 31

Merchandise inventory Jan. 1 $900,0000
Purchased 3,400,000
Freight-in 200,000
Sales 4,800,000

The gross margin recorded was 25% of sales. What should be the merchandise inventory at March 31?

A. $1,200,000
B. $900,000
C. $700,000
D. $1,125,000

B. $900,000

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A flash flood swept through Hat, Inc.’s warehouse on May 1. After the flood, Hat’s accounting records showed the following:

Inventory, Jan. 1 $35,000
Purchased, Jan1 through May 1 200,000
Sales, Jan. 1 through May 1 250,000
Inventory not damaged by flood 30,000
Gross profit percentages on sales 40%

What amount of inventory was lost in the flood?

A. $85,000
B. $55,000
C. $150,000
D. $120,000

B. $55,000

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Diego Corporation values its inventory at the lower of cost or net realizable value as required by IFRS. Diego has the following information regarding its inventory.

Historical Cost $100,000
Estimated selling price 98,000
Estimated costs to complete and sell 3,000
Replacement cost 90,000

What is the amount for inventory that Diego should report on the balance sheet under the lower of cost or net realizable value method?

A. $100,000
B. $98,000
C. $95,000
D. $97,000

C. $95,000

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Loft Co. reviewed its LIFO Inventory values for proper pricing at year-end. The following summarizes two inventory items examined for the lower of cost or market:

                                              Inventory #1  Inventory #2 Original Cost                                 210,000       400,000 Replacement Cost                        150,000       370,000 Net realizable value                     240,000       410,000 Net realizable value less             208,000       405,000 profit margin

What amount should Loft include in inventory at year-end, if it uses the total of the inventory to apply the lower of cost or market?

A. $610,000
B. $650,000
C. $520,000
D. $613,000

A. $610,000

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The following information was obtained form Smith Co:

Sales $275,000
Beginning inventory 30,000
Ending Inventory 18,000

Smith’s gross margin is 20%. What amount represents Smith purchases?

A. $202,000
B. $208,000
C. $232,000
D. $220,000

B. $208,000

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Lin Co. sell its merchandise at a gross profit of 30%. The following figures are among those pertaining to Lin’s operations for the 6 months ended June 30.

Sales $200,000
Beginning inventory 50,000
Purchases 130,000

One June 30, all of Lin’s inventory was destroyed by fire. The estimated cost of this destroyed inventory was:

A. $70,000
B. $120,000
C. $40,000
D. $20,000

C. $40,000

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The following information is available for October for Carla Vista Company.

Beginning Inventory $350,000
Net purchases 1,100,000
Net Sales 2,200,000
Percentage markup 66.67%
on cost

A fire destroyed Carla Vista’s October 31 inventory, leaving undamaged inventory with a cost of $21,500. Using the gross profit method, the estimated ending inventory destroyed by fire is:

A. $750,000
B. $108,500
C. $586,667
D. $565,167

B. $108,500

COGS = sales1/(1+markup on cost)
22000001/(1.6667)
=1,319,973

Beginning Inventory $350,000
add: purchases 1,100,000
less: cost of goods sold (1,319,973)
less: undamaged inventory (21,500)
inventory destroyed by fire 108,527….

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Presented below is information related to Marigold Inc.’s inventory.

per unit Skis Boots Parkas
Historical cost 228.00 127.20 63.60
Selling price 254.40 174.00 88.50
Cost to sell 22.80 9.60 3.00
Cost to complete 38.40 34.80 25.50

Determine the following: the net realizable value for each item, and the carrying value of each item under LCNRV.

Item Cost NRV LCNRV
Skis 228.00 193.20 193.20
Boots 127.20 129.60 127.20
Parkas 63.60 60.00 60.00

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Presented below is information related to Concord Inc.’s inventory assuming Concord uses lower-of-LIFO cost-or-market.

per unit Skis Boots Parkas
Historical cost 209.00 116.60 58.30
Selling price 233.20 159.50 81.13
Cost to distribute 20.90 8.80 2.75
Current replacement 35.20 31.90 23.38
cost

Determine the following:

(a) The two limits to market value (i.e. the ceiling and the floor) that should be used in the lower-of-cost-or-market computation for skis.
Ceiling: 212.30
Floor: 117.10

(b) The cost amount that should be used in the lower-of-cost-or-market comparison of boots.
116.60

(a) Ceiling: 212.30
Floor: 117.10

(b) 116.60

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Metlock Inc. uses LIFO inventory costing. At Jan. 1, 2020 inventory was $213,871 at both cost and market value. At December 31, 2020, the inventory was $287,997 at cost and $268,610 at market value. Use an allowance account.

Prepare the necessary December 31 entry under (a) cost-of-goods-sold method (b) loss method

(a) cost-of-goods-sold method

                                                     Debit               Credit  Cost of Goods Sold                      19,387              
 Allowance to Reduce                                        19,387
 Inventory to Market

(b) loss method

Loss Due to Market Decline 19,387
Allowance to Reduce 19,387
Inventory to Market

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Waterway Corporation’s April 30 inventory was destroyed by fire. January 1 inventory was $160,900, and purchases for January through April totaled $462,200. Sales revenue for the same period was $752,700. Waterway’s normal gross profit percentage is 25% on sales.

Using the gross profit method, estimate Waterway’s April 30 inventory that was destroyed by fire.

Estimated ending inventory destroyed in fire: _______________

58,575

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Sheffield Inc. had beginning inventory of $12,000 at cost and $21,500 at retail. Net purchases were $142,872 at cost and $184,000 at retail. Net markups were $9,600, net markdowns were $7,500, and sales revenue was $152,300. Compute ending inventory at cost using the conventional retail method.

Ending inventory using the conventional retail method ___________________

39,816

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Coronado Company began operations in 2020 and determined its ending inventory at cost and at LCNRV at December 31, 2021. This information is presented below.

                        Cost                 NRV 12/31/20         $356,040         $331,940 12/31/21           427,030           407,300

(a) Prepare the journal entries required at 12/31/20 and 12/31/21 assuming inventory is recorded at LCNRV and a perpetual inventory system using the cost-of-goods-sol method.
Date Account Titles & Explanation Debit Credit
_____ ______________________________ ______ ______
_____ ______________________________ ______ ______ _____ ______________________________ ______ ______
_____ ______________________________ ______ ______

(b) Prepare journal entries required at 12/31/20 and 12/31/21, assuming the inventory is recorded at LCNRV and a perpetual system using the loss method.
Date Account Titles & Explanation Debit Credit
_____ ______________________________ ______ ______
_____ ______________________________ ______ ______ _____ ______________________________ ______ ______
_____ ______________________________ ______ ______

-cost-of-goods-sold method
-loss method
-Both methods have the same effect

(a)
12/31/20 COGS 24,100
Allowance to Reduce 24,100
Inventory to NRV

12/31/21 Allowance to Reduce 4.370
Inventory to NRV
COGS 4,370

(b)
12/31/20 Loss Due to Decline 24,100
of Inventory to NRV
Allowance to Reduce 24,100
Inventory to NRV

12/31/21 Allowance to Reduce 4,370
Inventory to NRV
Recovery of Loss Inventory 4.370

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Martinez Company lost most of its inventory in a fire in December just before the year-end physical inventory was taken. The corporation’s books disclosed the following.

Beginning Inventory 230,000
Purchases for the year 875,000
Purchase returns 14,000
Sales 1,040,000
Sales Returns 75,000
Rate of gross margin on net sales 20%

Merchandise with a selling price of $46,000 remained undamaged after the fire. Damaged merchandised with an original selling price of $22,000 had a net realizable value of $2,500.

Compute the amount of the loss as a result of the fire, assuming that the company had no insurance coverage.

Amount of loss: __________________

Answer: $279,700

Beginning Inventory 230,000
Purchases 875,000
1,105,000
Purchase returns (14,000)
Goods Available (at cost) 1,091,000
Sales 1,040,000
Sales returns (75,000)
Net sales 965,000
Less: Gross profit (20% x 965,000) (193,000) 772,000
Estimated ending inventory
(unadjusted for damage) 319.000
Less: Goods on Hand - undamaged
at cost. $46,000 x (1-20%) (36,800)
Less: Goods on Hand - damaged
(at NRV) (2,500)
Fire loss on inventory $ 279,700

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The records of Monty's report the following data for the month of April. Purchases (at cost) 88,000 Purchases (at sales price) 187,000 Purchase returns (at cost) 4,400 Purchase returns (at sales price) 6.500 Beginning inventory (at cost) 89,500 Beginning inventory (at sales price) 97,000 Sales Revenue 183,000 Sales Returns 4,400 Additional markups 18,200 Markup cancellations 3,200 Markdowns 19,100 Markdown cancellations 6,200 freight on purchases 2,400 Compute the ending inventory by the conventional retail inventory method. Ending inventory using conventional retail inventory method: _____________________

Answer: 60,600 Cost Retail Beginning Inventory 89,500 97,000 Purchases 88,000 187,000 Purchase Returns (4,400) (6,500) Freight on Purchases 2,400 Total 175,500 277,500 Add: Markups 18,200 Less: Markup Cancellations 3,200 Net Markups 15,000 175,000 292,500 Deduct: Markdowns 19,100 Markdown Cancellations (6,200) 12,900 154,000 279,600 Deduct Sales (Net) (183,000-4,400) 178,600 Ending Inventory 101,000 175,500 / 292,500 = 60% 60% X 101,000 = 60,600

Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. True or False

True

The application of the LCNRV to the inventory as a whole would yield a more conservative inventory value than would application of the rule to each individual item. True or False

False

Instead of crediting the Inventory account for market adjustments, companies generally use an allowance account. True or False

True

As used in the lower-of-cost-or-market rule, market should not exceed net realizable value. True or False

True

Net realizable value is the estimated selling price in the normal course of business less the normal profit margin. True or False

False

It is acceptable practice to write down inventory to market when market is lower than cost, but it is not acceptable to write up inventory to market when market is higher than cost. True or False

True

When inventory is written down to market, this new basis is considered to be the cost basis for future periods. True or False

True

Under the lower-of-cost-or-market rule, the income statement may show a larger net income in future periods than would be justified if the inventory were carried forward at cost. True or False

True

Under the lower-of-cost-or-market rule, an item of inventory should not be valued at an amount in excess of net realizable value. True or False

True

The recognition of inventories at selling price less cost of disposal means that income is usually recognized before the goods are transferred to an outside party. True or False

True

The allocation of a lump sum cost among the individual units on the basis of relative sales value assumes that each individual unit should show the same dollar amount of profit. True or False

False

No asset or liability is recognized at the inception of a purchase commitment because the contract is “executory” in nature. True or False

True

The account Unrealized Holding Gain or Loss (Purchase Commitments) should be included in the stockholders’ equity section of the balance sheet. True or False

False

If the contracted price under a purchase commitment is less than market and it is expected that gains will occur when the purchase is effected, gains should be recognized in the period during which such increases in market prices take place. True or False

False

Gross margin is the excess of selling price over cost. True or False

True

The gross margin expressed as a percentage of cost is normally less than the gross margin expressed as a percentage of sales. True or False

False

The use of the gross profit method for interim reports does not preclude the need for a physical inventory to be taken at least annually. True or False

True

Regardless of which version is used, the retail inventory method is sanctioned by the IRS. True or False

True

The retail inventory method is not useful for interim reports. True or False

False

The conventional retail method includes net markdowns but excludes net markups in the computation of the cost to retail percentage. True or False

False

The inclusion of both net markups and net markdowns in the computation of the cost to retail percentage yields an inventory valuation that approximates cost. True or False

True

The retail method assumes that the mix of the ending inventory is the same as the mix of the total goods available for sale. True or False

True

The conventional retail inventory method is designed to approximate the lower of average cost or market. True or False

True

The basis upon which inventory amounts are stated (lower of cost or market) and the method used in determining cost (LIFO, FIFO, average cost, etc.) should be disclosed in the notes of the financial statements. True or False

True

A major assumption of the LIFO retail method is that the markups and markdowns apply only to the goods purchased during the current period, not to the beginning inventory. True or False

True

Franiuk Co. has unfinished inventory with a cost of $600, a sales value of $800, estimated cost of completion of $40, and estimated selling costs of $170. Franiuks’ net realizable value and loss due to decline in NRV are: NRV Loss due to decline in NRV A. $800 $ 0 B. $600 $ 0 C. $590 $ 10 D. $390 $ 210

C Franiuk’s net realizable value is computed as follows: Inventory value—unfinished $800 Less: Estimated cost of completion $ 40 Estimated cost to sell 170 210 Net realizable value $590 The loss due to a decline in NRV is $600 − $590 = $10

Which of the following represents the best justification for the departure from the historical cost principle that results when lower-of-cost-or-net realizable is used? A. It is easier to keep track of market value than it is to keep track of cost as market value is available from any supplier. B. Cost loses its relevance for the determination of cost of goods sold if the cost of inventory has been incurred in an earlier accounting period. C. The balance sheet valuation of inventory is the most important consideration in the preparation of financial statements. D. The loss in utility (revenue-producing ability) that results from a decline in the market value of in

D The general rule is that the historical cost principle is abandoned when the future utility (revenue producing ability) of the inventory is no longer as great as its original cost. It is no easier to keep track of market value than it is to keep track of cost, and cost does not lose its relevance if market value remains in excess. The balance sheet valuation is not the most significant reason for lower-of-cost-or-net realizable.

Replacement cost is the designated market value used to compare to cost in determining lower of cost or market when its relationship to the items shown below is: Net Realizable Value NRV less Normal Profit A. Lower Higher B. Higher Higher C. Higher Lower D. Lower Lower

A The amount that is compared to cost is always the middle value of the three amounts: replacement cost, net realizable value, and NRV less a normal profit. Because NRV is greater than NRV less a normal profit, replacement cost can only be the middle value when it is lower than NRV and higher than NRV minus a normal profit.

When using the lower-of-cost-or-market method, what is the meaning of “designated market”? A. Discounted present value. B. Net realizable value. C. The middle value of replacement cost, net realizable value, and net realizable value less a normal profit margin. D. Net realizable value less a normal profit margin.

C “Designated market” as used in the lower-of-cost-or-market method is the middle value of replacement cost, net realizable value, and net realizable value less a normal profit margin.

A dudad has an original cost of $15 and a replacement cost of $12. The cost of completion and disposal is $2. If the dudad has a net realizable value of $16 and a normal profit margin of $5, its inventory value should be: A. $15. B. $12. C. $16. D. $14.

B Net Realizable Value $16 NRV Minus Profit $11 Replacement Cost $12 Market is defined in this case as replacement cost because the replacement cost is between the upper limit (NRV) and the lower limit (NRV minus profit). Thus, when the replacement cost ($12) is compared to cost ($15), the inventory is valued at $12.

If a unit of inventory has declined in value below original cost, and the replacement cost is less than the net realizable value less a normal profit margin, the amount to be used for purposes of inventory valuation under LCM is: A. original cost. B. replacement cost. C. net realizable value. D. net realizable value less a normal profit margin

D “Designated market” is middle value of replacement cost, net realizable value, and net realizable value less a normal profit margin. Therefore, in this question where replacement cost is below cost and less than the floor, net realizable value less a normal profit margin is the amount that should be used for purposes of inventory valuation.

Let A equal the reported inventory value if the lower-of-cost-or-market rule is applied to individual items of inventory; B equals the reported inventory value if the lower of cost or market rule is applied to the inventory as a whole. Which of the following best describes the relationship between A and B? A. A will always be equal to B. B. A will always be equal to or less than B. C. A will always be equal to or greater than B. D. A can never be equal to B.

B Increases in the market prices of some inventory items tend to offset decreases in other inventory items when the lower-of-cost-or-market (LCM) rule is applied to the inventory as a whole. Thus, the inventory valuation that results from applying the LCM method to individual items in inventory (alternative A) will always be equal to or less than the inventory valuation that results from applying the LCM rule to the inventory as a whole (alternative B).

Martinez Corporation has two products in its ending inventory. A profit margin of 30% on selling price is considered normal for each product. Specific data with respect to each product follows: Product A Product B Historical cost $22.00 $ 55.00 Replacement cost 20.00 56.00 Estimated cost to dispose 7.00 31.00 Estimated selling price 35.00 110.00 In pricing its ending inventory using the lower-of-cost-or-market method, what unit values should Martinez use for products A and B respectively? A. $17.50 and $55.00 B. $20.00 and $46.00 C. $20.00 and $55.00 D. $28.00 and $56.00

Under the lower-of-cost-or-market-rule, designated market will be replacement cost except when replacement cost is: A. higher than cost. B. less than net realizable value. C. less than net realizable value less a normal profit margin. D. less than cost.

C If replacement cost is less than net realizable value less a normal profit margin, then replacement cost is below the lower limit for market value. When this occurs, market is defined as the lower limit (NRV minus a normal profit margin).

The fact that it is accepted practice to recognize decreases in the value of inventory prior to the point of sale, but not increases, A. illustrates the materiality concept. B. can distort income data. C. emphasizes relevance over representational faithfulness. D. emphasizes representational faithfulness over relevance.

B The fact that it is accepted practice to recognize decreases in the value of inventory prior to the point of sale, but not increases can distort income data. The tradeoff between relevance and representational faithfulness is best illustrated by the differences between the cost-of-goods-sold and the loss method of recognizing inventory write downs.

Recording inventory at net realizable value is permitted, even if it is above cost, when there are no significant costs of disposal involved and: A. the ending inventory is determined by a physical inventory count. B. a normal profit is not anticipated. C. there is a controlled market with a quoted price applicable to all quantities. D. the internal revenue service is assured that the practice is not used only to distort reported net income.

C With no significant disposal costs and a controlled market, net realizable value is an appropriate inventory valuation approach. For example, inventories of certain minerals are ordinarily reported at selling prices because there is often a controlled market without significant costs of disposal. A similar treatment is given to agricultural products that are immediately marketable at fixed prices. Also, this method proves to be valuable when cost figures are too difficult to obtain.

Maricel Company has a noncancelable purchase commitment to buy 10,000 units of a particular product during the next three years. The contract was signed one year prior to the first year in which the purchase commitment must be honored. At the end of the year in which the contract was signed Maricel Companyshould formally recognize in its balance sheet: An Asset A Liability A. Yes Yes B. No No C. Yes No D. No Yes

B Even with formal, noncancelable purchase contracts, no asset or liability is recognized at the date of inception, because the contract is “executory” in nature; neither party has fulfilled its part of the contract. However, if material, such commitment details should be disclosed in the buyer’s balance sheet in a footnote.

Which of the following is not a basic assumption of the gross profit method? A. The beginning inventory plus the purchases equal total goods to be accounted for. B. Goods not sold must be on hand. C. If the sales, reduced to the cost basis, are deducted from the sum of the opening inventory plus purchases, the result is the amount of inventory on hand. D. The total amount of purchases and the total amount of sales remain relatively unchanged from the comparable previous period.

D The gross profit method assumes a constant gross profit percentage, but makes no assumptions about the total amount of sales or purchases. Alternatively (A), (B), and (C) are basic assumptions of the gross profit method.

On January 31, fire destroyed the entire inventory of Mojares Company. The following data are available: Sales for January $60,000 Inventory, January 1 10,000 Purchases for January 55,000 Markup on cost 25% The amount of the loss is estimated to be: A. $17,000. B. $20,000. C. $15,000. D. $16,250.

A A 25% markup on cost is equivalent to a 20% markup on selling price: %markup on cost GP on selling price = / 100% + % markup on cost .25 GP on selling price = / 1.25 GP on selling price = .20 Sales ........................................................................ $60,000 GP ($60,000 × .20) .................................................... 12,000 Cost of goods sold ................................................. $48,000 Goods available for sale........................................... 65,000 Inventory loss.......................................................... $17,000

Devers Company sells its product for $25.00 per unit. This price is set to yield a gross margin on selling price of 25%. What is the cost of the product and what is the markup on cost for the product? Cost of Product Markup on Cost A. $ 6.25 40% B. $ 9.75 75% C. $12.50 20% D. $18.75 33%

D C + .25SP = SP C = (1 - .25)SP C = .75SP C = .75($25) C = $18.75 SP $25.00 C 18.75 GP $ 6.25 Markup on Cost = $6.25 ÷ $18.75 = 33%

Which of the following is not required when using the retail inventory method? A. All inventory items must be categorized according to the retail markup percentage which reflects the item’s selling price. B. A record of the total cost and retail value of goods purchased. C. A record of the total cost and retail value of the goods available for sale. D. Total sales for the period.

A Inventory items need not be categorized in any manner. The major benefit of the retail inventory method is that inventory items are accumulated without the need to separate them into distinct classifications. Alternatives B, C and D reflect the requirements for use of the retail inventory method.

To determine an inventory valuation that approximates lower of average cost or market using the retail method, the computation of the cost to retail percentage should: A. include markups but not markdowns. B. include markups and markdowns. C. include markdowns but not markups. D. exclude markups but not markdowns.

The retail method has been used by a retail department store during its first year of operations. As of the end of the year, compare (A) the markdowns with (B) the markdown cancellations: A. A will be equal to B. B. A will be less than or equal to B. C. A will be greater than or equal to B. D. A cannot be equal to B.

C Markdown cancellations represent the cancellation of previous markdowns applied to a product. Therefore, markdown cancellations are limited to the total amount of markdowns previously recorded. Thus, for any entity, markdowns will be greater than or equal to markdown cancellations.

Phair Co., a specialty clothing store, uses the retail inventory method. The following relates to 2020 operations: Inventory, January 1, 2020, at cost $14,200 Inventory, January 1, 2020 at sales price 20,100 Purchases in 2020 at cost 32,600 Purchases in 2020 at sales price 50,000 Additional markups on normal sales price 1,900 Sales (including $4,200 of items that were marked down from $6,400) 60,000 The cost of the December 31, 2020 inventory determined by the conventional retail method is: A. $9,800 B. $6,370 C. $6,743 D. $6,543

B Cost Retail Inventory ........................................ $14,200 $20,100 Purchase........................................... 32,600 50,000 .......................................................... $46,800 $70,100 Additional Markups......................... 1,900 Totals ............................................... $46,800 $72,000 (Cost-to-retail ratio: $46,800 ÷ 72,000 = 65%) Deduct Markdowns ............................ 2,200 Sales Price of Goods Available........... $69,800 Deduct Sales......................................... 60,000 Ending Inventory at Retail.................... $ 9,800 Ending Inventory at LCM: $9,800 × .65 = $6,370

One of the basic assumptions of the conventional retail method is that: A. net markups apply to the goods sold. B. net markdowns apply to the total goods available for sale. C. markdowns are considered a current loss. D. the cost to retail percentage is unchanged from that of prior years.

C When the attempt is to approximate lower of cost or market, under the retail inventory method, markdowns are considered a current loss and are not involved in the calculation of the cost to retail ratio

Under the retail inventory method, purchase returns and allowances are normally considered a reduction of price at: Cost Retail A. No No B. No Yes C. Yes No D. Yes Yes

D Purchase returns and allowances are ordinarily considered both as a reduction of the price at cost and retail.

Under the retail inventory method, purchase returns and allowances are normally considered a reduction of price at: Cost Retail A. No No B. No Yes C. Yes No D. Yes Yes

D Purchase returns and allowances are ordinarily considered both as a reduction of the price at cost and retail.

Chapter 9 Flashcards

(73 cards)