Columbia College

ACCT 383

True/False Questions

1)In determining lower-of-cost-or-market, market is the expected selling price under normal operations.

2. Net realizable value is selling price less costs of completion and disposal.

3. The primary motivation behind LCM is consistency.

4. The purpose of ceilings and floors in LCM is to prevent profit distortion.

5. Losses on reduction to LCM may be charged to either cost of goods sold or to a current loss account without distorting financial statement ratios.

6. Inventory written down due to LCM may be written back up if market values go back up.

7. If the quantity of goods held in inventory decreased during the period, the dollar amount of ending inventory cannot exceed the dollar amount of beginning inventory.

8. The cost-to-retail percentage used in the retail method to approximate average costs considers both markdowns and markups.

9. In using the LIFO retail method, the current period cost-to-retail percentage includes both net markdowns and net markups.

10. Purchase returns and purchase discounts are ignored when computing cost-to-retail ratios for the retail method.

11. For a change from the average cost method to FIFO, the current year's income includes the cumulative after-tax difference that would have resulted if the company had used FIFO in all prior years.

12. A change from LIFO to any other inventory method is accounted for retrospectively.

Matching Pair Questions

Use the following to answer questions 13-17:

13-17. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term placing the letter designating the best term in the space provided by the phrase.

Terms:

1. Approximation of average cost
2. Change from LIFO to FIFO
3. Cost-to-retail percentage
4. Cumulative effect
5. Gross profit method
6. LIFO retail
7. Net markdown
8. Net markup
1. Normal spoilage
10. Retrospective treatment

Phrases:

13.                

14.                

15.                

16.                

17.                

Estimates value of destroyed inventory based on historical relationships. Requires retrospective treatment.

Added in arriving at ending inventory at retail.

Beginning inventory is not included in the calculation of the current period's cost-to- retail percentage.

Required for a change from FIFO to average cost.

Use the following to answer questions 18-21:

18-21. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term placing the letter designating the best term in the space provided by the phrase.

Terms:

1. Approximation of average cost
2. Change from LIFO to FIFO
3. Cost-to-retail percentage
4. Cumulative effect
5. Gross profit method
6. LIFO retail
7. Net markdown
8. Net markup
1. Normal spoilage
10. Requires retrospective treatment

Phrases:

18.                

19.                

20.                

21.                

22.                

Change from LIFO to FIFO.

Cost-to-retail percentage is determined for all goods available for sale.

Always deducted after arriving at the calculation of the cost-to-retail percentage. Deducted in arriving at ending inventory at retail.

Divide cost of goods available for sale by goods available at retail.

Use the following to answer questions 23-27:

23-27. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term by placing the letter designating the best term in the space provided by the phrase.

Terms:

1. Additional markup
2. Approximation of LCM
3. Gross profit ratio
4. LCM
5. Markdown cancellation
6. Markup on cost
7. Normal profit margin
8. Replacement cost
1. Requires retrospective restatement
10. Retail inventory method

Phrases:

23.              Elimination of a price reduction.
24.              Gross profit divided by sales.
25.              Gross profit divided by cost.
26.              Gross profit percentage times selling price.
27.              Ideal with high volume, low cost inventory.

Use the following to answer questions 28-32:

28-32. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term by placing the letter designating the best term in the space provided by the phrase.

Terms:

1. Additional markup
2. Approximation of LCM
3. Gross profit ratio
4. LCM
5. Markdown cancellation
6. Markup on cost
7. Normal profit margin
8. Replacement cost
1. Requires retrospective restatement
10. Retail inventory method

Phrases:

28.              Increase in selling price.
29.              Losses recognized when values decline.
30.              Markdowns are not in the calculation of the cost-to-retail percentage.
31.              Market if between ceiling and floor.
32.              Material inventory error discovered in a subsequent year.

Use the following to answer questions 33-37:

33-37. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term placing the letter designating the best term in the space provided by the phrase.

Terms:

1. Change to LIFO from FIFO
2. Conventional retail
3. Disposal cost
4. Dollar-value LIFO retail
5. Employee discounts
6. Floor
7. Initial markup
8. Markdown
1. NRV
10. Inventory error

Phrases:

33.              Must be added to sales if sales are recorded net of discounts.
34.              NRV less "normal" profit.
35.              Original cost add-on.
36.              Produces lower of average cost or market.
37.              Unrecorded purchases.

Use the following to answer questions 38-42:

38-42. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term placing the letter designating the best term in the space provided by the phrase.

Terms:

1. Change to LIFO from FIFO
2. Conventional retail
3. Disposal cost
4. Dollar-value LIFO retail
5. Employee discounts
6. Floor
7. Initial markup
8. Markdown
1. NRV
10. Inventory error

Phrases:

38.              Reduction in selling price
39.              Requires base year retail to be converted to layer year retail and then to cost.
40.              Deducted from selling price when calculating ceiling.
41.              Upper limit or ceiling.
42.              Usually impossible to calculate the effect on prior years' financial statements.

Multiple Choice Questions

43. An argument against the use of LCM is its lack of:
    1. Relevance.
    2. Reliability.
    3. Consistency.
    4. Objectivity.

44. In applying LCM, market cannot be:
    1. Less than net realizable value.
    2. Greater than the normal profit.
    3. Less than the normal profit margin.
    4. Greater than net realizable value.

45. In applying LCM, market cannot be:
    1. Less than net realizable value minus a normal profit margin.
    2. Net realizable value less reasonable completion and disposal costs.
    3. Greater than net realizable value reduced by an allowance for normal profit margin.
    4. Less than cost.

46. When using the gross profit method to estimate ending inventory, it is not necessary to know:
    1. Beginning inventory.
    2. Net purchases.
    3. Cost of goods sold.
    4. Net sales.

47. When computing the cost-to-retail percentage for the conventional retail method, included in the denominator are:
    1. Net markups and net markdowns.
    2. Neither net markups nor net markdowns.
    3. Net markups, but not net markdowns.
    4. Net markdowns, but not net markups.

48. When computing the cost-to-retail percentage for the average cost retail method, included in the denominator are:
    1. Net markups and net markdowns.
    2. Neither net markups nor net markdowns.
    3. Net markups, but not net markdowns.
    4. Net markdowns, but not net markups.

49. When computing the cost-to-retail percentage for the LIFO retail method, included in the denominator are:
    1. Net markups and net markdowns.
    2. Neither net markups nor net markdowns.
    3. Net markups, but not net markdowns.
    4. Net markdowns, but not net markups.

50. In calculating the cost-to-retail percentage for the retail method, the retail column will not include:
    1. Purchases.
    2. Purchase returns.
    3. Abnormal shortages.
    4. Freight-in.

51. To determine if an increase in the dollar value of inventory is due to increased quantities, using dollar-value LIFO retail:
    1. Compare beginning and ending inventory amounts at current year prices.
    2. Compare beginning and ending inventory amounts after adjusting both amounts to the average price level for the year.
    3. Inflate beginning inventory amount to end of year prices and compare to ending inventory amount.
    4. Deflate the ending inventory amount to beginning of year prices and compare to the beginning inventory amount.

52. To determine the value of a LIFO layer, using dollar-value LIFO retail:
    1. Divide the LIFO layer by the layer year price index and multiply by the layer year cost-to- retail percentage.
    2. Multiply the LIFO layer by the base year price index and the current year cost-to-retail percentage.
    3. Multiply the LIFO layer by the layer year price index and by the layer year cost-to-retail percentage.
    4. Divide the LIFO layer by the layer year cost-to-retail percentage and multiply by the layer year price index.

53. A retrospective treatment of prior years' financial statements is required when there is a change from:
    1. Average cost to LIFO.
    2. FIFO to LIFO.
    3. LIFO to average cost.
    4. All of the above.

54. Under the retail inventory method,:
    1. A company measures inventory on its balance sheet by converting retail prices to cost.
    2. A company measures inventory on its balance sheet at current selling prices.
    3. A company measures inventory on its balance sheet on a LIFO basis.
    4. None of the above is correct.

55. The conventional retail inventory method is based on:
    1. Average cost
    2. LIFO cost
    3. Average, lower of cost or market
    4. LIFO, lower of cost or market

56. Under the conventional retail method, which of the following are not included in the denominator of the current period cost-to-retail conversion percentage?
    1. Purchase returns
    2. Net markups
    3. Purchases
    4. Net markdowns

57. Under the LIFO retail method, which of the following are not included in the denominator of the cost-to-retail conversion percentage?
    1. Freight-in
    2. Purchase returns
    3. Purchases
    4. Net markdowns

58. Using the dollar-value LIFO retail method for inventory,:
    1. Is the same as dollar-value LIFO, except that the inventory is measured at retail, rather than at cost.
    2. Combines retail LIFO accounting with dollar-value LIFO accounting
    3. Allows companies to report inventory on the balance sheet at retail prices.
    4. All of the above are correct.

59. To use the dollar-value LIFO retail method for inventory, the first step is:
    1. To determine the estimated ending inventory at current year retail prices.
    2. To determine the estimated cost of goods sold for the current year.
    3. To determine the cost-to-retail percentage for the current year transactions.
    4. To price index adjust the LIFO inventory layers.

60. To use the dollar-value LIFO retail method for inventory, the second step is:
    1. To determine the estimated ending inventory at current year retail prices.
    2. To determine the estimated cost of goods sold for the current year.
    3. To determine the estimated ending inventory at cost.
    4. To determine the estimated ending inventory at base year retail prices.

61. In determining the cost-to-retail percentage for the current year,:
    1. Net markups are included.
    2. Net markdowns are excluded.
    3. Net sales are included.
    4. All of the above are correct.

62. Portman Inc. uses the conventional retail inventory method. Expressed in millions of dollars, information about Portman's 2006 inventory account is expressed in the table below:

At what amount would Portman record its inventory on its 12/31/06 balance sheet?

1. 1. $150 million
   2. $252 million
   3. $300 million
   4. None of the above is correct.

63. Harlequin Co. has used the dollar-value LIFO retail method since it began operations in early 2005 (its base year). Its beginning inventory for 2006 was $36,000 at cost and $72,000 at retail prices. At the end of 2006, it computed its estimated ending inventory at retail to be

$120,000. Assuming its cost-to-retail percentage for 2006 transactions was 60%, what is the inventory balance that Coral Beauty would report in its 12/31/06 balance sheet?

A) $64,800

B)   $72,000

C) $120,000

D) It cannot be determined with the given information.

Rationale: You would need to know the retail price index for 2006 transactions relative to the base year to make this computation.

Use the following to answer questions 64-67:

Data related to the inventories of Costco Medical Supply is presented below:

64. In applying the LCM rule, the inventory of surgical equipment would be valued at: A) $230.

B)   $240.

C)   $170.

D) $152.

65. In applying the LCM rule, the inventory of surgical supplies would be valued at: A) $205.

B)   $190.

C)   $180.

D) $161.

66. In applying the LCM rule, the inventory of rehab equipment would be valued at: A) $315.

B)   $247.

C)   $150.

D) $235.

67. In applying the LCM rule, the inventory of rehab supplies would be valued at: A) $122.

B)   $158.

C)   $162.

D) $155.

Use the following to answer questions 68-71:

Data related to the inventories of Alpine Ski Equipment and Supplies is presented below:

68. In applying the LCM rule, the inventory of skis would be valued at: A) $162,000.

B)   $128,000.

C)   $120,000.

D) $126,000.

.

69. In applying the LCM rule, the inventory of boots would be valued at: A) $135,000.

B)   $133,000.

C)   $130,000.

D) $105,000.

70. In applying the LCM rule, the inventory of apparel would be valued at: A) $108,000.

B) $ 90,000.

C)   $110,000.

D) $115,000.

71. In applying the LCM rule, the inventory of supplies would be valued at: A) $45,000.

B)   $54,000.

C)   $41,000.

D) $42,000.

72. So. California Inc., through no fault of its own, lost an entire plant due to an earthquake on May 1, 2006. In preparing their insurance claim on the inventory loss, they developed the following data: Inventory January 1, 2006, $300,000; sales and purchases from January 1, 2006, to May 1, 2006, $1,300,000 and $875,000, respectively. So. California consistently reports a 40% gross profit. The estimated inventory on May 1, 2006, is:

A) $302,500.

B)   $360,000.

C)   $395,000.

D) $455,000.

73. Howard's Supply Co. suffered a fire loss on April 20, 2006. The company's last physical inventory was taken on January 30, 2006, at which time the inventory totaled $220,000. Sales from January 30 to April 20 were $600,000 and purchases during that time were $450,000. Howard's consistently reports a 30% gross profit. The estimated inventory loss is:

A) $490,000.

B)   $238,000.

C)   $250,000.

D) None of the above is correct.

74. Coastal Shores Inc. (CSI) was completely destroyed by Hurricane Fred on August 5, 2006. At January 1, CSI reported an inventory of $170,000. Sales from January 1, 2006, to August 5, 2006, totaled $480,000 and purchases totaled $195,000 during that time. CSI consistently marks up its products 60% over cost to arrive at a selling price. The estimated inventory loss due to Hurricane Fred would be:

A) $131,175.

B)   $ 65,000.

C)   $ 17,143.

D) None of the above is correct.

75. Lacy's Linen Mart uses the retail method to estimate inventories. Data for the first six months of 2006 include: beginning inventory at cost and retail were $60,000 and $120,000, net purchases at cost and retail were $312,000 and $480,000, and sales during the first six months totaled $490,000. The estimated inventory at June 30, 2006, would be:

A) $ 68,200.

B)   $ 55,000.

C) $ 71,500.

D) $ 63,250.

76. Hawkeye Auto Parts uses the retail method to estimate inventories. Data for the first six months of 2006 include: beginning inventory at cost and retail were $55,000 and $100,000, net purchases at cost and retail were $785,000 and $1,300,000, and sales during the first six months totaled $800,000. The estimated inventory at June 30, 2006, would be:

A) $330,000.

B)   $360,000.

C)   $362,300.

D) None of the above is correct.

77. Fad City sells novel clothes which are subject to a great deal of price volatility. A recent item which cost $20 was marked up $12, marked down for a sale by $6 and then had a markdown cancellation of $3. The latest selling price is:

A) $14.

B)   $26.

C)   $29.

D) $35.

Use the following to answer questions 78-79:

Marilee's Electronics uses a periodic inventory system and the average cost retail method to estimate ending inventory and cost of goods sold. The following data is available from the company records for the month of June 2006:

78. The average cost-to-retail percentage is: A) 52.2%.

B) 61.5%.

C) 56.8%

D) 55%.

79. To the nearest thousand, estimated ending inventory is: A) $55,000.

B)   $45,000.

C)   $38,000.

D) None of the above is correct.

Use the following to answer questions 80-81:

Benny's Bed Co. uses a periodic inventory system and the average cost retail method to estimate ending inventory and cost of goods sold. The following data is available from the company records for the month of September 2006.

80. The average cost-to-retail percentage is: A) 74.5%.

B)   55.6%.

C)   57.4%.

D) 58.7%.

81. To the nearest thousand, estimated ending inventory is: A) $41,000.

B)   $37,000.

C)   $51,000.

D) None of the above is correct.

Use the following to answer questions 82-83:

Willie Nelson's Boots uses the conventional retail method to estimate ending inventory. Cost data for the most recent quarter is shown below:

82. The conventional cost-to-retail percentage is: A) 6%.

B)   66.7%.

C) 71.9%.

D) 75.8%.

83. To the nearest thousand, estimated ending inventory using the conventional retail method is: A) $36,000.

B)   $32,000.

C)   $33,000.

D) $29,000.

 (66.7 x $44,000)

Use the following to answer questions 84-85:

Clarabell Inc. uses the conventional retail method to estimate ending inventory. Cost data for the most recent quarter is shown below:

84. The conventional cost-to-retail percentage is: A) 54.9%.

B)   58.9%.

C)   53.6%.

D) 70.6%.

85. To the nearest thousand, estimated ending inventory using the conventional retail method is: A) $163,000.

B)   $124,000.

C)   $127,000.

D) $136,000.

Use the following to answer questions 86-88:

Data below for the year ended December 31, 2006, relates to Houdini Inc. Houdini started business January 1, 2006, and uses the LIFO retail method to estimate ending inventory.

Use the following to answer questions 89-92:

Harvey's Junk Jewelry started business January 1, 2006, and uses the LIFO retail method to estimate ending inventory. Listed below is data accumulated for the year ended December 31, 2006:

89. The numerator for the current period's cost-to-retail percentage is:

Problems

93. Memphis Wholesale Market applies lower-of-cost-or-market valuation to individual products and has collected the following data:

Required:

Determine the balance sheet inventory carrying value for Products A, B, and C.

94. Chicago Inc. applies lower-of-cost-or-market valuation to individual products and has collected the following data:

Product A        Product B        Product C

Required:

Determine the balance sheet inventory carrying value for Products A, B, and C.

 Use the following to answer questions 95-97:

Novelli's Nursery has developed the following data for lower-of-cost-or-market valuation for its products:

The normal profit margin on all trees is 20% of selling price and disposal costs are 10% of selling price.

95. Required: Determine the balance sheet inventory carrying value assuming the LCM rule is applied to individual trees.

96. Required: Determine the balance sheet inventory carrying value assuming the LCM rule is applied to classes of trees.

97. Required: Determine the balance sheet inventory carrying value assuming the LCM rule is applied to the total inventory.

Designated

 Use the following to answer questions 98-100:

L S E

The normal profit margin on all feed is 25% of selling price and disposal costs are 20% of selling price.

98. Required: Determine the balance sheet inventory carrying value assuming the LCM rule is applied to individual types of feeds.

                                                                                                                                $962

99. Required: Determine the balance sheet inventory carrying value assuming the LCM rule is applied to classes of feeds.

100. Required: Determine the balance sheet inventory carrying value assuming the LCM rule is applied to the total inventory.

101. On March 17, 2006, a flood destroyed the entire inventory of Beatty Co. The following information is available from its accounting records:

Required:

Compute the estimated cost of inventory lost in the flood.

102. On July 5, 2006, a fire destroyed the entire inventory of Kinard Music Mart. The following information is available from its accounting records:

Required:

Compute the estimated cost of inventory lost in the fire.

103. On August 31, 2006, Hurricane Chuck destroyed Bedford Craft Mart's entire inventory. The following information is available from its accounting records:

Required:

Assuming that Bedford estimates the cost of destroyed inventory at $510,000, compute gross profit margin % that Bedford uses in estimating inventory.

104. Andover Stores uses the average cost retail method to estimate its ending inventory. Information as of June 30, 2006, is as follows:

Required:

Use the retail method to estimate the June 30, 2006, inventory.

105. DK Super Stores Inc. uses the average cost retail method to estimate its ending inventory. Information at June 30, 2006, is as follows:

Required:

Compute the cost-to-retail percentage used by DK.

106. Trask Inc. uses the average cost retail method to estimate its ending inventory. Partial information at June 30, 2006, is as follows:

Required:

Assuming Trask's cost-to-retail = 60%, compute Trask's beginning inventory at retail.

107. Manila Bread Company uses the average cost retail method to estimate its ending inventories. The following data has been summarized for the year 2006:

108. Penfold's Paints uses the average cost retail method to estimate its ending inventories. The following data has been summarized for the year 2006:

Required:

Compute the cost-to-retail percentage used by Penfold's Paints.

109. Billingsly Products uses the conventional retail method to estimate its ending inventories. The following data has been summarized for the year 2006:

Required:

Estimate the ending inventory as of December 31, 2006.

110. New York Sales Inc. uses the conventional retail method to estimate its ending inventories. The following data has been summarized for December 31, 2006:

Required:

Compute the cost-to-retail percentage used by New York Sales Inc.

111. Murdock Industries uses a periodic inventory system and the LIFO retail method to estimate its ending inventories. The following data has been summarized for December 31, 2006:

Required:

Estimate the LIFO cost of ending inventory. Assume stable retail prices during the period.

112. Littleton Company uses a periodic inventory system and the LIFO retail method to estimate its ending inventories. The following partial data has been summarized for December 31, 2006:

113. Harley Inc. uses the conventional retail method to estimate its ending inventories. The following data has been summarized for December 31, 2006:

Required:

Estimate the cost of ending inventory applying the conventional retail method.

114. Zanesville Pots Co. uses the conventional retail method to estimate ending inventories. The following data has been summarized for the year ended December 31, 2006:

Required:

Estimate the cost of ending inventory applying the conventional retail method.

115. Cornhusker Can Co. uses the conventional retail method to estimate ending inventories. The following data has been summarized for year ended December 31, 2006:

Required:

Estimate the cost of ending inventory applying the conventional retail method. Assume that sales are recorded net of employee discounts.

116. Cindy Lou Linens. uses the conventional retail method to estimate its ending inventories. The company records sales net of employee discounts. The following partial data has been summarized for the year ended December 31, 2006:

Required:

Compute the net markups for Cindy Lou Linens during 2006.

117. Charleston Company has elected to use the dollar-value LIFO retail method to value its inventory. The following data has been accumulated from the accounting records:

Pertinent retail price indexes:

January 1, 2006                                               1.00

December 31, 2006                                       1.10

Required:

Estimate the ending inventory for December 31, 2006.

118. Green Acres Co. has elected to use the dollar-value LIFO retail method to value its inventory. The following data has been accumulated from the accounting records:

Pertinent retail price indexes:

Cost               Retail

Merchandise inventory, January 1, 2006       $240,000        $375,000 Net purchases                                                                                 505,000           765,000

Required:

Estimate the cost of ending inventory for December 31, 2006.

119. Orlando Company has used the average cost method for inventory valuation since it began business in 2002, but has elected to change to the FIFO method starting in 2005. Year-end inventory valuations under each method are shown below:

Required:

What journal entry, if any, would Orlando record in 2005 for the cumulative effect of the change in accounting principle (ignore income taxes)?

120. Ramsgate Company has used the FIFO method for inventory valuation since it began business in 2002, but has elected to change to the average cost method starting in 2005. Year-end inventory valuations under each method are shown below:

Required:

What journal entry, if any, would Ramsgate record in 2005 for the cumulative effect of the change in accounting principle (ignore income taxes)?

Use the following to answer questions 121-125:

In the following questions, inventory errors are noted for 2006. Assume that the errors are not discovered until 2007, and that the company uses a periodic inventory system. . Indicate the effect of the error, if any, on the accounts noted in the columns, using the following code:

U = understated; O = Overstated; NE = No effect

126. In the year 2006, the internal auditors of Blooper Inc. discovered that goods costing $12 million that were shipped f.o.b. shipping point in December of 2005 were in transit on 12/31/05. The goods were recorded as a purchase in December of 2005 but were not included in the 2005 year-end inventory.

Required:

Prepare the journal entry needed in 2006 to correct the error. Also, briefly describe any other measures Blooper would take in connection with correcting the error. (Ignore income taxes.)

127. In the year 2006, the internal auditors of Goofy Co. discovered that goods costing $25 million that were purchased in December of 2005 were recorded for $20 million. The goods were properly measured in the 12/31/02 ending physical inventory.

Required:

Prepare the journal entry needed in 2006 to correct the error. Also, briefly describe any other measures Goofy would take in connection with correcting the error. (Ignore income taxes.)

Essay

Instructions:

The following answers point out the key phrases that should appear in students' answers. They are not intended to be examples of complete student responses. It might be helpful to provide detailed instructions to students on how brief or in-depth you want their answers to be.

128. Briefly explain how a material adjustment to inventory due to application of the lower-of-cost- or-market rule should be reported in the financial statements.

129. Briefly explain what is meant by "market" in the lower-of-cost-or-market (LCM) approach.

130. Briefly outline the steps in the gross profit method of estimating ending inventory and indicate when the method might be used.

131. The gross profit method and retail method are both ways of estimating ending inventory. Briefly explain how the two methods differ.

132. Briefly explain the difference between the LIFO retail method and the dollar-value LIFO retail method.

133. Briefly explain the financial reporting required when a company changes to or from the LIFO inventory method.

134. Briefly explain the financial reporting required when material misstatements are found in previous years' financial statements that are included for comparative purposes in the current year's financial statements.