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Flashcards in Retail Inventory Method & Fund Accounting Deck (14):
1

The retail inventory method allows the firm to count inventory at retail rather than at cost.
True
False

True

2

How does the retail inventory method establish the lower-of-cost-or-market valuation for ending inventory?
A. The procedure is applied on a cost basis at the unit level.
B. By excluding net markups from the cost-to-retail ratio.
C. By excluding beginning inventory from the cost-to-retail ratio.
D. By excluding net markdowns from the cost-to-retail ratio.

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


Although the result is approximate, by excluding net markdowns from the denominator of the cost-to-retail ratio, the ratio is a smaller amount, resulting in a lower ending inventory valuation.

3

Data for a firm using the FIFO-LCM retail inventory method is as follows:
Cost Retail
Beginning inventory $ 300 $ 467
Net purchases 1,200 2,000
Net additional markups 100
Net markdowns (300)
Sales $1,700
Compute cost of goods sold.

A. $1,169
B. $1,160
C. $1,177
D. $1,122

1. Get ending Inventory at Retail
Ending inventory at retail = $567 (= $467 + $2,000 + $100-$300-$1,700)
2. Get the cost/retail ratio
The cost-to-retail ratio for FIFO LCM excludes both the beginning inventory amounts, and net markdowns. C/R = $1,200/($2,000 + $100) = .57.
*added back markup*

3. Ending Inventory at Cost
567*.57=323

4. Get COGS for Cost
Cost of goods sold = $300 + $1,200-$323 = $1,177. Note, that cost of goods sold is based solely on cost.

4

Union Corp. uses the first-in, first-out retail method of inventory valuation. The following information is available:
Cost Retail
Beginning inventory $12,000 $ 30,000
Purchases 60,000 110,000
Net additional markups 10,000
Net markdowns 20,000
Sales revenue 90,000
If the lower of cost or market rule is disregarded, what would be the estimated cost of the ending inventory?

A. $24,000
B. $20,800
C. $20,000
D. $19,200

When it is not LCM you apply the markup/down regularly.

The cost to retail ratio under FIFO is: [$60,000/($110,000 + $10,000 - $20,000)] = .60.

Ending inventory at retail is $30,000 + $110,000 + $10,000 - $20,000 - $90,000 = $40,000.

Ending inventory at cost, therefore, is .60($40,000) = $24,000.

5


The retail inventory method includes which of the following in the calculation of both cost and retail amounts of goods available for sale?
A. Purchase returns.
B. Sales returns.
C. Net markups.
D. Freight in.

A. Purchase returns.

The retail method measures beginning inventory and net purchases at both cost and retail.
It then applies the average relationship between cost and retail (based on beginning inventory and purchases) to ending inventory at retail to determine ending inventory at cost.


Purchase returns reduce net purchases at both cost and retail because returns represent amounts included in gross purchases that are not available for sale.

6

Which of the following is not a characteristic of a fund?

A.
Fiscal entity

B.
Accounting entity

C.
Separate legal entity

D.
All of the above are characteristics of a fund.

C. Separate legal entity

A fund is both a fiscal and an accounting entity. A fund is "fiscal" because it has assets, liabilities, revenue, expenditure or expense, and fund balance or other equity accounts. A fund is "accounting" because it has its own ledgers and contains a self-balancing set of accounts. A fund is not a separate legal entity.

7

King City Council will be establishing a library fund. Library fees are expected to cover 55% of the library's annual resource requirements. King has decided that an annual determination of net income is desirable in order to maintain management control and accountability over the library. What type of fund should King establish in order to meet their measurement objectives?
A. Special revenue fund
B. General fund
C. Internal service fund
D. Enterprise fund

D. Enterprise fund
An enterprise fund is used when services are provided primarily to the public for a charge. Since enterprise funds use accrual accounting, it will provide the determination of net income and other control and accountability that management desires.

An internal service fund is for services provided primarily to other departments within the government for a fee and would not be the appropriate fund for the library.

The general fund uses modified accrual accounting, which is based on the flow of current financial resources rather than net income determination and therefore will not provide the control and accountability desired by management.

A special revenue fund uses modified accrual accounting, which is based on the flow of current financial resources rather than net income determination and therefore will not provide the control and accountability desired by management.

8

One feature of state and local government accounting and financial reporting is that fixed assets used for general government activities
A. Often are not expected to contribute to the generation of revenues.
B. Do not depreciate as a result of such use.
C. Are acquired only when direct contribution to revenues is expected.
D. Should not be maintained at the same level as those of businesses so that current financial resources can be used for other government services.1

A. Often are not expected to contribute to the generation of revenues

General fixed assets are items on which financial resources have been expended and accountability must be maintained; however, their main purpose is NOT the generation of revenues.

General fixed assets do depreciate from use; however, depreciation expense for general fixed assets is not recorded in the Statement of Revenues, Expenditures, and Changes in Fund Balances.

9

Which of the following local government funds uses the accrual basis of accounting?
A. Enterprise.
B. Debt service.
C. Capital projects.
D. Special revenue.

A. Enterprise.

Recall the acronym "DRIP-CEG-PIPPA" where the vowels in "DRIP-CEG" represent fund types that use accrual accounting and the consonants use modified accrual accounting. The "I" stands for Internal Service Fund and "E" for Enterprise Funds. This answer is correct.

10

Kenn City obtained a municipal landfill and passed a local ordinance that required the city to operate the landfill so that the costs of operating the landfill, as well as the capital costs, are to be recovered with charges to customers. Which of the following funds should Kenn City use to report the activities of the landfill?
A. Enterprise.
B. Permanent.
C. Special revenue.
D. Internal service.

A. Enterprise.
An Enterprise Fund is commonly used in situations where user fees are the primarily source of revenue and the fee charged is based on an amount sufficient to cover the costs of operations and to provide for capital maintenance, which is the case here. Note that the fee for a service provided and that most of the users are external to the government.

Incorrect...

A special revenue fund accounts for revenues that are restricted or committed to expenditure for a particular purpose such as a Federal grant restricted to a homeless shelter.

11

Which of the following funds would be reported as a fiduciary fund in Pine City's financial statements?
A. Special revenue.
B. Permanent.
C. Private-purpose trust.
D. Internal service.

C. Private-purpose trust.

Recall the acronym "PIPPA" for fiduciary funds. Fiduciary funds include the following 4 types of funds: P ension trust funds, I nvestment trust funds, P rivate- P urpose trust funds, and A gency funds.

12

Which of the following activities would most likely be accounted for in a proprietary fund?

A.
Street, curb, and sidewalk maintenance and repairs

B.
Wastewater and sewerage services

C.
Police protection

D.
Tax assessor and collection activities

B. Wastewater and sewerage services

Wastewater and sewerage services are usually provided on a service-fee basis; therefore, they are accounted for in an enterprise fund - one of the two types of proprietary funds. Enterprise funds are also referred to as "business type" funds and use full accrual accounting.

13

Which of the following funds is not a fiduciary fund type?

A.
Police and fire pension trust fund

B.
Motor pool fund

C.
Historical society private-purpose trust fund

D.
County and city tax collection fund

B. Motor pool fund

A motor pool fund is a type of internal service fund that charges other parts of the government for services provided on a cost-reimbursement basis. An internal service fund is one of the two types of proprietary service funds. Recall the mnemonic "PIPPA" for fiduciary funds - pension trust funds, investment trust funds, private-purpose trust funds, and agency funds.


Incorrect:
D. County and city tax collection fund

A county and city tax collection fund is an agency fund administered to collect and distribute property taxes collected to the county and the city.

14

Fund accounting is used by governmental units with resources that must be
A. Composed of cash or cash equivalents.
B. Incorporated into combined or combining financial statements.
C. Segregated for the purpose of carrying on specific activities or attaining certain objectives.
D. Segregated physically according to various objectives.

C. Segregated for the purpose of carrying on specific activities or attaining certain objectives.

Governmental accounting systems are organized and operated on a fund basis. A fund is a fiscal and accounting entity with a self-balancing set of accounts that record cash and other financial resources, along with the related liabilities and residual equities or balances, which are segregated for the purpose of carrying on specific activities or attaining certain objectives. GASB Codification 1100.102