When applying the lower-of-cost-or-market rule to inventory valuation according to International Financial Reporting Standards, market always is:

When applying the lower-of-cost-or-market rule to inventory valuation according to International Financial Reporting Standards, market always is:

A. Replacement cost.
B. Net realizable value.
C. Net realizable value reduced by a normal profit margin.
D. None of the above.


Answer: B. Net realizable value.

Sullivan Corporation. has determined its year-end inventory on a FIFO basis to be $500,000. Information pertaining to that inventory is as follows:

Sullivan Corporation. has determined its year-end inventory on a FIFO basis to be $500,000.
Information pertaining to that inventory is as follows:

selling price: $520,000
disposal cost: 30,000
normal profit margin: 60,000
replacement cost: 440,000
What should be the carrying value of Sullivan's inventory if the company prepares its financial
statements according to International Financial Reporting Standards?



A. $500,000.
B. $440,000.
C. $430,000.
D. $490,000.


Answer: D. $490,000.

Sullivan Corporation. has determined its year-end inventory on a FIFO basis to be $500,000. Information pertaining to that inventory is as follows:

Sullivan Corporation. has determined its year-end inventory on a FIFO basis to be $500,000.
Information pertaining to that inventory is as follows:

selling price: $520,000
disposal cost: 30,000
normal profit margin: 60,000
replacement cost: 440,000
What should be the carrying value of Sullivan's inventory?



A. $500,000.
B. $440,000.
C. $430,000.
D. $490,000.


Answer: B. $440,000.

On July 10, 2011, Johnson Corporation signed a purchase commitment to purchase inventory for $200,000 on or before February 15, 2012. The company's fiscal year-end is December 31. The contract was exercised on February 1, 2012 and the inventory was purchased for cash at the contract price. On the purchase date of February 1, the market price of the inventory was $210,000. The market price of the inventory on December 31, 2011, was $180,000. The company uses a perpetual inventory system. At what amount will Johnson record the inventory purchased on February 1, 2012?

On July 10, 2011, Johnson Corporation signed a purchase commitment to purchase inventory for $200,000 on or before February 15, 2012. The company's fiscal year-end is December 31. The contract was exercised on February 1, 2012 and the inventory was purchased for cash at the contract price. On the purchase date of February 1, the market price of the inventory was $210,000. The market price of the inventory on December 31, 2011, was $180,000. The company uses a perpetual inventory system. At what amount will Johnson record the inventory purchased on February 1, 2012?

A. $210,000
B. $200,000
C. $180,000
D. $190,000


Answer: C. $180,000

On July 10, 2011, Johnson Corporation signed a purchase commitment to purchase inventory for $200,000 on or before February 15, 2012. The company's fiscal year-end is December 31. The contract was exercised on February 1, 2012 and the inventory was purchased for cash at the contract price. On the purchase date of February 1, the market price of the inventory was $210,000. The market price of the inventory on December 31, 2011, was $180,000. The company uses a perpetual inventory system. How much loss on purchase commitment will Johnson recognize in 2011?

On July 10, 2011, Johnson Corporation signed a purchase commitment to purchase inventory for $200,000 on or before February 15, 2012. The company's fiscal year-end is December 31. The contract was exercised on February 1, 2012 and the inventory was purchased for cash at the contract price. On the purchase date of February 1, the market price of the inventory was $210,000. The market price of the inventory on December 31, 2011, was $180,000. The company uses a perpetual inventory system. How much loss on purchase commitment will Johnson recognize in 2011?

A. $10,000.
B. $20,000.
C. $30,000.
D. None.


Answer: B. $20,000.

Prunedale Co. uses a periodic inventory system. Beginning inventory on January 1 was understated by $30,000, and its ending inventory on December 31 was understated by $17,000. In addition, a purchase of merchandise costing $20,000 was incorrectly recorded as a $2,000 purchase. None of these errors were discovered until the next year. As a result, Prunedale's cost of goods sold for this year was:

Prunedale Co. uses a periodic inventory system. Beginning inventory on January 1 was understated by $30,000, and its ending inventory on December 31 was understated by $17,000. In addition, a purchase of merchandise costing $20,000 was incorrectly recorded as a $2,000 purchase. None of these errors were discovered until the next year. As a result, Prunedale's cost of goods sold for this year was:

A. Overstated by $31,000.
B. Overstated by $5,000.
C. Understated by $31,000.
D. Understated by $48,000.


Answer: C. Understated by $31,000.

Prunedale Co. uses a periodic inventory system. Beginning inventory on January 1 was overstated by $32,000, and its ending inventory on December 31 was understated by $62,000. These errors were not discovered until the next year. As a result, Prunedale cost of goods sold for this year was:

Prunedale Co. uses a periodic inventory system. Beginning inventory on January 1 was overstated by $32,000, and its ending inventory on December 31 was understated by $62,000. These errors were not discovered until the next year. As a result, Prunedale cost of goods sold for this year was:

A. Overstated by $94,000.
B. Overstated by $30,000.
C. Understated by $94,000.
D. Understated by $30,000.


Answer: A. Overstated by $94,000.

Retrospective treatment of prior years' financial statements is required when there is a change from:

Retrospective treatment of prior years' financial statements is required when there is a change from:

A. Average cost to FIFO.
B. FIFO to average cost.
C. LIFO to average cost.
D. All of the above.


Answer: D. All of the above.

Harlequin Co. has used the dollar-value LIFO retail method since it began operations in early 2010 (its base year). Its beginning inventory for 2011 was $36,000 at cost and $72,000 at retail prices. At the end of 2011, it computed its estimated ending inventory at retail to be $120,000. Assuming its cost-to-retail percentage for 2011 transactions was 60%, what is the inventory balance that Harlequin Co. would report in its 12/31/11 balance sheet?

Harlequin Co. has used the dollar-value LIFO retail method since it began operations in early 2010 (its base year). Its beginning inventory for 2011 was $36,000 at cost and $72,000 at retail prices. At the end of 2011, it computed its estimated ending inventory at retail to be $120,000. Assuming its cost-to-retail percentage for 2011 transactions was 60%, what is the inventory balance that Harlequin Co. would report in its 12/31/11 balance sheet?

A. $64,800
B. $72,000
C. $120,000
D. It can't be determined with the given information.


Answer: D. It can't be determined with the given information.

To determine the value of a LIFO layer, using dollar-value LIFO retail:

To determine the value of a LIFO layer, using dollar-value LIFO retail:

A.Divide the LIFO layer by the layer-year price index and multiply by the layer-year cost-to-retail percentage.
B. Multiply the LIFO layer by the base year price index and the current year cost-to-retail percentage.
C. Multiply the LIFO layer by the layer-year price index and by the layer-year cost-to-retail percentage.
D.Divide the LIFO layer by the layer-year cost-to-retail percentage and multiply by the layer-year price index.


Answer: C. Multiply the LIFO layer by the layer-year price index and by the layer-year cost-to-retail percentage.

To determine if an increase in the dollar value of inventory is due to increased quantities, using dollar value LIFO retail:

To determine if an increase in the dollar value of inventory is due to increased quantities, using dollar value LIFO retail:

A. Compare beginning and ending inventory amounts at current year prices.
B.Compare beginning and ending inventory amounts after adjusting both amounts to the average price level for the year.
C. Inflate beginning inventory amount to end of year prices and compare to ending inventory amount.
D.Deflate the ending inventory amount to beginning of year prices and compare to the beginning inventory amount.


Answer: D.Deflate the ending inventory amount to beginning of year prices and compare to the beginning inventory amount.

To use the dollar-value LIFO retail method for inventory, the second step is to determine the estimated:

To use the dollar-value LIFO retail method for inventory, the second step is to determine the estimated:

A. Ending inventory at current year retail prices.
B. Cost of goods sold for the current year.
C. Ending inventory at cost.
D. Ending inventory at base year retail prices.



Answer: D. Ending inventory at base year retail prices.

To use the dollar-value LIFO retail method for inventory, the first step is to:

To use the dollar-value LIFO retail method for inventory, the first step is to:

A. Determine the estimated ending inventory at current year retail prices.
B. Determine the estimated cost of goods sold for the current year.
C. Determine the cost-to-retail percentage for the current year transactions.
D. Price index adjust the LIFO inventory layers.


Answer: C. Determine the cost-to-retail percentage for the current year transactions

Using the dollar-value LIFO retail method for inventory:

Using the dollar-value LIFO retail method for inventory:

A. Is the same as dollar-value LIFO, except that the inventory is measured at retail, rather than at cost.
B. Combines retail LIFO accounting with dollar-value LIFO accounting
C. Allows companies to report inventory on the balance sheet at retail prices.
D. All of the above are correct.


Answer: B. Combines retail LIFO accounting with dollar-value LIFO accounting

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

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

(cost, retail)
beginning inventory:(112,000; 191,000)
net purchases:(402,000; 703,000)
net markups: (0; 43,000)
net markdowns: (0; 21,000)
net sales: (0; 685,000)
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.


Answer: C. $127,000.

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

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

(cost, retail)
beginning inventory:(112,000; 191,000)
net purchases:(402,000; 703,000)
net markups: (0; 43,000)
net markdowns: (0; 21,000)
net sales: (0; 685,000)

The conventional cost-to-retail percentage (rounded) is:



A. 54.9%.
B. 58.9%.
C. 53.6%.
D. 70.6%.


Answer: A. 54.9%.

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

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

(cost, retail)
beginning inventory:(46,000; 63,000)
net purchases:(154,000; 215,000)
net markups: (0; 22,000)
net markdowns: (0; 35,000)
net sales: (0; 220,000)
To the nearest thousand, estimated ending inventory using the conventional retail method is:



A. $37,000.
B. $32,000.
C. $34,000.
D. $30,000.


Answer: D. $30,000.

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

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

(cost, retail)
beginning inventory:(46,000; 63,000)
net purchases:(154,000; 215,000)
net markups: (0; 22,000)
net markdowns: (0; 35,000)
net sales: (0; 220,000)

The conventional cost-to-retail percentage (rounded) is:



A. 82.6%.
B. 66.7%.
C. 71.9%.
D. 75.5%.


Answer: B. 66.7%.

Cloverdale, Inc. uses the conventional retail inventory method to account for inventory. The following information relates to current year's operations:

Cloverdale, Inc. uses the conventional retail inventory method to account for inventory. The following information relates to current year's operations:

(cost, retail)
beginning inventory: (313,500; 540,000)
net markups: (0; 30,000)
net markdowns: (0; 20,000)
net sales: (0; 480,000)
What amount should be reported as cost of goods sold for the year?



A. $273,600.
B. $272,861.
C. $275,000.
D. None of the above.


Answer: C. $275,000.

The conventional retail inventory method is based on:

The conventional retail inventory method is based on:

A. Average cost
B. LIFO cost
C. Average, lower of cost or market
D. LIFO, lower of cost or market


Answer: C. Average, lower of cost or market

When computing the cost-to-retail percentage for the average cost retail method, included in the denominator are:

When computing the cost-to-retail percentage for the average cost retail method, included in the denominator are:

A. Net markups and net markdowns.
B. Neither net markups nor net markdowns.
C. Net markups, but not net markdowns.
D. Net markdowns, but not net markups.


Answer: A. Net markups and net markdowns

Data below for the year ended December 31, 2011, relates to Houdini Inc. Houdini started business January 1, 2011, and uses the LIFO retail method to estimate ending inventory.

Data below for the year ended December 31, 2011, relates to Houdini Inc. Houdini started business January 1, 2011, and uses the LIFO retail method to estimate ending inventory.

(cost, retail)
beginning inventory: ( 66,000; 104,000)
net purchases: (280,000; 420,000)
net markups: (0; 20,000)
net markdowns: (0; 40,000)
net sales: (0; 375,000)

Estimated ending inventory at cost is:



A. $90,720.
B. $83,500.
C. $91,600.
D. None of the above is correct.


Answer: B. $83,500.

Data below for the year ended December 31, 2011, relates to Houdini Inc. Houdini started business January 1, 2011, and uses the LIFO retail method to estimate ending inventory.

Data below for the year ended December 31, 2011, relates to Houdini Inc. Houdini started business January 1, 2011, and uses the LIFO retail method to estimate ending inventory.

(cost, retail)
beginning inventory: ( 66,000; 104,000)
net purchases: (280,000; 420,000)
net markups: (0; 20,000)
net markdowns: (0; 40,000)
net sales: (0; 375,000)

Estimated ending inventory at retail is:



A. $65,000.
B. $169,600.
C. $25,000.
D. $129,000.


Answer: D. $129,000.

Data below for the year ended December 31, 2011, relates to Houdini Inc. Houdini started business January 1, 2011, and uses the LIFO retail method to estimate ending inventory.

Data below for the year ended December 31, 2011, relates to Houdini Inc. Houdini started business January 1, 2011, and uses the LIFO retail method to estimate ending inventory.

(cost, retail)
beginning inventory: ( 66,000; 104,000)
net purchases: (280,000; 420,000)
net markups: (0; 20,000)
net markdowns: (0; 40,000)
net sales: (0; 375,000)

Current period cost-to-retail percentage is:



A. 70.0%.
B. 68.7%.
C. 63.6%.
D. 63.5%.


Answer: A. 70.0%.

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 2011.

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 2011.

(cost, retail)
beginning inventory: ( 30,000; 50,000)
net purchases: (125,000; 220,000)
net markups: (0; 15,000)
net markdowns: (0; 6,000)
net sales: (0; 208,000)
To the nearest thousand, estimated ending inventory is:



A. $41,000.
B. $37,000.
C. $51,000.
D. None of the above is correct.


Answer: D. None of the above is correct.

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 2011.

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 2011.

(cost, retail)
beginning inventory: ( 30,000; 50,000)
net purchases: (125,000; 220,000)
net markups: (0; 15,000)
net markdowns: (0; 6,000)
net sales: (0; 208,000)

The average cost-to-retail percentage is:


A. 74.5%.
B. 55.6%
C. 57.4%.
D. 58.7%.



Answer: B. 55.6%

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 2011:

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 2011:

(cost, retail)
beginning inventory: ( 80,000; 130,000)
net purchases: (261,000; 500,000)
net markups: (0; 25,000)
net markdowns: (0; 35,000)
net sales: (0; 520,000)
To the nearest thousand, estimated ending inventory is:


A. $55,000.
B. $52,000.
C. $57,000.
D. None of the above is correct.


Answer: A. $55,000.

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 2011:

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 2011:

(cost, retail)
beginning inventory: ( 80,000; 130,000)
net purchases: (261,000; 500,000)
net markups: (0; 25,000)
net markdowns: (0; 35,000)
net sales: (0; 520,000)
The average cost-to-retail percentage is:


A. 52.2%.
B. 61.5%.
C. 56.8%.
D. 55%.


Answer: D. 55%.

Hawkeye Auto Parts uses the retail method to estimate inventories. Data for the first six months of 2011 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, 2011, would be:

Hawkeye Auto Parts uses the retail method to estimate inventories. Data for the first six months of 2011 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, 2011, would be:

A. $330,000.
B. $360,000.
C. $362,300.
D. None of the above is correct.


Answer: B. $360,000.

Lacy's Linen Mart uses the retail method to estimate inventories. Data for the first six months of 2011 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, 2011, would be:

Lacy's Linen Mart uses the retail method to estimate inventories. Data for the first six months of 2011 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, 2011, would be:

A. $68,200.
B. $55,000.
C. $71,500.
D. $63,250.


Answer: A. $68,200.

Harvey's Junk Jewelry started business January 1, 2011, and uses the LIFO retail method to estimate ending inventory. Listed below is data accumulated for the year ended December 31, 2011:

Harvey's Junk Jewelry started business January 1, 2011, and uses the LIFO retail method to estimate ending inventory. Listed below is data accumulated for the year ended December 31, 2011:

(cost, retail)
beginning inventory:(15,000; 23,000)
purchases:(49000; 78000)
freight-in: (2500; 0)
purchase returns:(1700; 2600)
net markups:(0; 2000)
net markdowns:(0, 4100)
net sales:(0; 70600)
employee discounts:(0; 700)

To the nearest thousand, the estimated ending inventory at cost is:



A. $16,000.
B. $15,000.
C. $13,000.
D. $19,000.


Answer: A. $16,000.

Harvey's Junk Jewelry started business January 1, 2011, and uses the LIFO retail method to estimate ending inventory. Listed below is data accumulated for the year ended December 31, 2011:

Harvey's Junk Jewelry started business January 1, 2011, and uses the LIFO retail method to estimate ending inventory. Listed below is data accumulated for the year ended December 31, 2011:

(cost, retail)
beginning inventory:(15,000; 23,000)
purchases:(49000; 78000)
freight-in: (2500; 0)
purchase returns:(1700; 2600)
net markups:(0; 2000)
net markdowns:(0, 4100)
net sales:(0; 70600)
employee discounts:(0; 700)

The denominator for the current period's cost-to-retail percentage is:


A. $96,300.
B. $73,300.
C. $101,000.
D. $81,500.


Answer: B. $73,300.

Harvey's Junk Jewelry started business January 1, 2011, and uses the LIFO retail method to estimate ending inventory. Listed below is data accumulated for the year ended December 31, 2011:

Harvey's Junk Jewelry started business January 1, 2011, and uses the LIFO retail method to estimate ending inventory. Listed below is data accumulated for the year ended December 31, 2011:

(cost, retail)
beginning inventory:(15,000; 23,000)
purchases:(49000; 78000)
freight-in: (2500; 0)
purchase returns:(1700; 2600)
net markups:(0; 2000)
net markdowns:(0, 4100)
net sales:(0; 70600)
employee discounts:(0; 700)

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


A. $64,800.
B. $48,100.
C. $47,700.
D. $49,800.


Answer: D. $49,800.

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:

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.


Answer: C. $29.

In determining the cost-to-retail percentage for the current year:

In determining the cost-to-retail percentage for the current year:

A. Net markups are included.
B. Net markdowns are excluded.
C. Net sales are included.
D. All of the above are correct.


Answer: A. Net markups are included.

Under the LIFO retail method, which of the following are not included in the denominator of the cost-to- retail conversion percentage?

Under the LIFO retail method, which of the following are not included in the denominator of the cost-to- retail conversion percentage?

A. Freight-in
B. Purchase returns
C. Purchases
D. Net markdowns


Answer: A. Freight-in

Under the conventional retail method, which of the following are not included in the denominator of the current period cost-to-retail conversion percentage?

Under the conventional retail method, which of the following are not included in the denominator of the current period cost-to-retail conversion percentage?

A. Purchase returns
B. Net markups
C. Purchases
D. Net markdowns


Answer: D. Net markdowns

Under the retail inventory method:

Under the retail inventory method:

A. A company measures inventory on its balance sheet by converting retail prices to cost.
B. A company measures inventory on its balance sheet at current selling prices.
C. A company measures inventory on its balance sheet on a LIFO basis.
D. None of the above is correct.


Answer: A. A company measures inventory on its balance sheet by converting retail prices to cost.

In calculating the cost-to-retail percentage for the retail method, the retail column will not include:

In calculating the cost-to-retail percentage for the retail method, the retail column will not include:

A. Purchases.
B. Purchase returns.
C. Abnormal shortages.
D. Freight-in.


Answer: D. Freight-in.

Included in the computation of the cost-to-retail percentage for the LIFO retail method are:

Included in the computation of the cost-to-retail percentage for the LIFO retail method are:

A. Net markups and net markdowns.
B. Neither net markups nor net markdowns.
C. Net markups, but not net markdowns.
D. Net markdowns, but not net markups.


Answer: A. Net markups and net markdowns.

When computing the cost-to-retail percentage for the conventional retail method, included in the denominator are:

When computing the cost-to-retail percentage for the conventional retail method, included in the denominator are:

A. Net markups and net markdowns.
B. Neither net markups nor net markdowns.
C. Net markups, but not net markdowns.
D. Net markdowns, but not net markups.


Answer: C. Net markups, but not net markdowns.

Coastal Shores Inc. (CSI) was completely destroyed by Hurricane Fred on August 5, 2011. At January 1, CSI reported an inventory of $170,000. Sales from January 1, 2011, to August 5, 2011, 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:

Coastal Shores Inc. (CSI) was completely destroyed by Hurricane Fred on August 5, 2011. At January 1, CSI reported an inventory of $170,000. Sales from January 1, 2011, to August 5, 2011, 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.


Answer: B. $65,000.

Howard's Supply Co. suffered a fire loss on April 20, 2011. The company's last physical inventory was taken on January 30, 2011, 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:

Howard's Supply Co. suffered a fire loss on April 20, 2011. The company's last physical inventory was taken on January 30, 2011, 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.


Answer: C. $250,000.

So. California Inc., through no fault of its own, lost an entire plant due to an earthquake on May 1, 2011. In preparing their insurance claim on the inventory loss, they developed the following data: Inventory January 1, 2011, $300,000; sales and purchases from January 1, 2011, to May 1, 2011, $1,300,000 and $875,000, respectively. So. California consistently reports a 40% gross profit. The estimated inventory on May 1, 2011, is:

So. California Inc., through no fault of its own, lost an entire plant due to an earthquake on May 1, 2011. In preparing their insurance claim on the inventory loss, they developed the following data: Inventory January 1, 2011, $300,000; sales and purchases from January 1, 2011, to May 1, 2011, $1,300,000 and $875,000, respectively. So. California consistently reports a 40% gross profit. The estimated inventory on May 1, 2011, is:

A. $302,500.
B. $360,000.
C. $395,000.
D. $455,000.


Answer: C. $395,000.

On July 8, a fire destroyed the entire merchandise inventory on hand of Larrenaga Wholesale Corporation. The following information is available:

On July 8, a fire destroyed the entire merchandise inventory on hand of Larrenaga Wholesale Corporation. The following information is available:

sales Jan. 1- July 8: 700,000
inventory Jan. 1: 130,000
purchases Jan.1- July 8: 640,000
gross profit ratio : 30%
What is the estimated inventory on July 8 immediately prior to the fire?



A. $192,000
B. $490,000
C. $510,000
D. $280,000


Answer: D. $280,000

When using the gross profit method to estimate ending inventory, it is not necessary to know:

When using the gross profit method to estimate ending inventory, it is not necessary to know:

A. Beginning inventory.
B. Net purchases.
C. Cost of goods sold.
D. Net sales.


Answer: C. Cost of goods sold.

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

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

(skis, boots, apparel, supplies)
selling price: (180,000; 150,000; 120,000; 60,000)
cost: (128,000; 133,000; 90,000; 45,000)
replacement cost: (120,000; 133,000; 110,000; 41,000)
sales commission: (120,000; 130,000; 110,000; 41,000)
normal gross profit ratio: (20%, 20%, 15%, 15%)
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.


Answer: A. $45,000.

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

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

(skis, boots, apparel, supplies)
selling price: (180,000; 150,000; 120,000; 60,000)
cost: (128,000; 133,000; 90,000; 45,000)
replacement cost: (120,000; 133,000; 110,000; 41,000)
sales commission: (120,000; 130,000; 110,000; 41,000)
normal gross profit ratio: (20%, 20%, 15%, 15%)
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.


Answer: B. $90,000.

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

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

(skis, boots, apparel, supplies)
selling price: (180,000; 150,000; 120,000; 60,000)
cost: (128,000; 133,000; 90,000; 45,000)
replacement cost: (120,000; 133,000; 110,000; 41,000)
sales commission: (120,000; 130,000; 110,000; 41,000)
normal gross profit ratio: (20%, 20%, 15%, 15%)
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.


Answer: C. $130,000

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

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

(skis, boots, apparel, supplies)
selling price: (180,000; 150,000; 120,000; 60,000)
cost: (128,000; 133,000; 90,000; 45,000)
replacement cost: (120,000; 133,000; 110,000; 41,000)
sales commission: (120,000; 130,000; 110,000; 41,000)
normal gross profit ratio: (20%, 20%, 15%, 15%)
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.


Answer: D. $126,000.

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

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

(surgical equipment, surgical supplies, rehab equipment, rehab supplies)
selling price: (260, 120, 340, 165)
cost: (170, 90, 250, 162)
replacement cost: (240, 80, 235,158)
disposal cost: (30, 5, 25, 10)
normal gross profit ratio: (30%, 30%, 30%, 20%)
In applying the LCM rule, the inventory of rehab supplies would be valued at:




A. $122.
B. $158.
C. $162.
D. $155.



Answer: D. $155.

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

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

(surgical equipment, surgical supplies, rehab equipment, rehab supplies)
selling price: (260, 120, 340, 165)
cost: (170, 90, 250, 162)
replacement cost: (240, 80, 235,158)
disposal cost: (30, 5, 25, 10)
normal gross profit ratio: (30%, 30%, 30%, 20%)
In applying the LCM rule, the inventory of rehab equipment would be valued at:


A. $315.
B. $247.
C. $150.
D. $235.


Answer: D. $235.

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

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

(surgical equipment, surgical supplies, rehab equipment, rehab supplies)
selling price: (260, 120, 340, 165)
cost: (170, 90, 250, 162)
replacement cost: (240, 80, 235,158)
disposal cost: (30, 5, 25, 10)
normal gross profit ratio: (30%, 30%, 30%, 20%)
In applying the LCM rule, the inventory of surgical supplies would be valued at:




A. $115.
B. $90.
C. $80.
D. $69.


Answer: C. $80.

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

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

(surgical equipment, surgical supplies, rehab equipment, rehab supplies)
selling price: (260, 120, 340, 165)
cost: (170, 90, 250, 162)
replacement cost: (240, 80, 235,158)
disposal cost: (30, 5, 25, 10)
normal gross profit ratio: (30%, 30%, 30%, 20%)
In applying the LCM rule, the inventory of surgical equipment would be valued at:



A. $230.
B. $240.
C. $170.
D. $152.


Answer: C. $170.

Montana Co. has determined its year-end inventory on a FIFO basis to be $600,000. Information pertaining to that inventory is as follows:

Montana Co. has determined its year-end inventory on a FIFO basis to be $600,000. Information pertaining to that inventory is as follows:

Selling price----------620,000
disposal costs----------30,000
normal profit margin-- 80,000
replacement cost------520,000



What should be the carrying value of Montana's inventory?


A. $600,000.

B. $520,000.

C. $590,000.

D. $510,000.




Answer: B. $520,000.
NRV = $590,000

NRV - NP = $510,000
RC = $520,000
Designated market is RC = $520,000 which is less than cost.

An argument against the use of LCM is its lack of:

An argument against the use of LCM is its lack of: 

A. Relevance.

B. Reliability.

C. Consistency.

D. Objectivity.


Answer: C. Consistency.

Masterlink Co., in applying the lower of cost or market method, reports its inventory at net realizable value. Which of the following statements is correct?

Masterlink Co., in applying the lower of cost or market method, reports its inventory at net realizable value. Which of the following statements is correct?

cost is greater/ NRV greater than
than net real value/ replacement cost
a Y Y
b N N
c Y N
d N Y




A. Option a

B. Option b

C. Option c

D. Option d


Answer: C. Option c

In applying LCM, market cannot be:

In applying LCM, market cannot be: 

A. Less than net realizable value minus a normal profit margin.

B. Net realizable value less reasonable completion and disposal costs.

C. Greater than net realizable value reduced by an allowance for normal profit margin.

D. Less than cost.



Answer: A. Less than net realizable value minus a normal profit margin.

In applying LCM, market cannot be:

In applying LCM, market cannot be: 

A. Less than net realizable value.

B. Greater than the normal profit.

C. Less than the normal profit margin.

D. Greater than net realizable value.



Answer: D. Greater than net realizable value.

Retail Inventory Method Questions with Answers.

What are Net Additional Markups?

Answer: A net increase in the original selling price.

What are the steps in Basic Retail Method?

Answer:

# Ending inventory at retail is determined.
# Cost to retail ratio is calculated.
# #1 x #2 = ending inventory at cost.

What is included in the cost ratio of the FIFO LCM Retail Method?

Answer: The cost ratio excludes the cost of beginning inventory from the numerator and the retail value of beginning inventory from the denominator. Net markdowns are also excluded from the cost ratio.

What are Net Markdowns?

Answer: A net decrease in the original selling price.

What is included in the cost ratio of the FIFO Retail Method?

Answer: The cost ratio excludes the cost of beginning inventory from the numerator and the retail value of beginning inventory from the denominator.

How is Normal Spoilage handled?

Answer: Subtracted along with sales from Goods Available for Sale at Retail to arrive at Ending Inventory at Retail.

What is included in the Average LCM or Conventional Retail Inventory Method cost ratio?

Answer: The cost ratio includes beginning inventory, along with current period purchases, in both the numerator and the denominator, but excludes net markdowns from the cost ratio calculation.

What is included in the cost ratio of the Average Retail Method?

Answer: The cost ratio includes beginning inventory, along with current period purchases in both the numerator and the denominator of the cost to retail ratio.

What is Original Selling Price?

Answer: Cost plus initial markup.

What is the effect of net markup on the cost-retail ratio when using the conservative retail method?

What is the effect of net markup on the cost-retail ratio when using the conservative retail method?

A. Increases the cost-retail ratio
B. No effect on the cost-retail ratio
C. Depends on the amount of the net markdowns
D. Decreases the cost-retail ratio


Answer: D. Decreases the cost-retail ratio

What is the effect of freight in on the cost-retail ratio when using the conservative retail method?

What is the effect of freight in on the cost-retail ratio when using the conservative retail method?

A. Increases the cost retail ratio
B. No effect on the cost-retail ratio
C. Depends on the amount of the net markup
D. Decreases the cost retail ratio


Answer: B. No effect on the cost-retail ratio

An inventory method which is designed to approximate inventory valuation at the lower of cost and net realizable value is

An inventory method which is designed to approximate inventory valuation at the lower of cost and net realizable value is

A. Average retail method
B. FIFO retail
C. Conventional retail method
D. LIFO retail


Answer: C. Conventional retail method

What condition is not necessary when using the retail inventory method?

What condition is not necessary when using the retail inventory method?

A. Total cost of goods sold for the period
B. Total cost and retail price of goods purchased
C. Total cost and retail price of goods available for sale
D. The sale for the period


Answer: A. Total cost of goods sold for the period

Which of the following is not required when using the retail inventory method?

Which of the following is not required when using the retail inventory method?

A. All inventory item must be categorized according to the retail markup percentage
B. Total cost and retail price of goos purchased
C. Total cost and retail price of goods available for sale
D. Total sales for the period



Answer: A. All inventory item must be categorized according to the retail markup percentage

Which of the following is not a reason the retail inventory method is used widely?

Which of the following is not a reason the retail inventory method is used widely?

A. As a control measure in determining inventory shortage
B. Fir insurance information
C. To permit the computaion of the net income witout a physical count of the inventory
D. To defer income tax liability


Answer: D. To defer income tax liability

The retail method is based on the assumption that

The retail method is based on the assumption that

A. Final inventory and the total of goods availble for sale contain the same proportion of high cost and low cost ratio goods
B. Ratio of gross margin to sales is approximately the swme each period
C. Ratio of cost to retail changes at a constabt rate
D. Proportions of markup and markdowns to selling price are the same


Answer: A. Final inventory and the total of goods available for sale contain the same proportion of high cost and low cost ratio goods

Which one of the following would cause a decrease in the cost ratio as used in the retail inventory method?

Which one of the following would cause a decrease in the cost ratio as used in the retail inventory method?

A. Higher retail prices
B. Lower net markups
C. More employee discounts granted
D. Higher freight in charges


Answer: A. Higher retail prices

The conventional retail method produces an ending inventory that approximates

The conventional retail method produces an ending inventory that approximates

A. Lower of average cost and net realizable value
B. Lower of FIFO cost and net realizable value
C. Net realizable value
D. Lower of cost and net realizable value


Answer: A. Lower of average cost and net realizable value

With regard to the retail inventory method, which of the following statements is the most accurate?

With regard to the retail inventory method, which of the following statements is the most accurate?

A. Generally , accountants ignore net markups and net markdowns in computing the cost-price percentage
B. Generally, accountants exclude both net marups and net markdowns in computing cost-price percentage
C. This method results in a lower ending inventory cost if net markups are included but net markdowns are excluded in computing the cost-price percentage
D. It is not adoptable to FIFO existing


Answer: C. This method results in a lower ending inventory cost if net markups are included but net markdowns are excluded in computing the cost-price percentage.

If the conservative retail inventory method is used, which of the following calculations would include or exclude net markdowns?

If the conservative retail inventory method is used, which of the following calculations would include or exclude net markdowns?

Cost ratio Ending inventory at retail



A. Include Include
B. Include. Exclude
C. Exclude. Include
D. Exclude. Exclude


Answer: C. Exclude. Include

The retail inventory method would include which of the following in the calculation of the goods available for sale at both cost and retail?

The retail inventory method would include which of the following in the calculation of the goods available for sale at both cost and retail?

A. Freight in
B. Purchase returns
C. Markups
D. Markdowns


Answer: B. Purchase returns

To produce an inventory valuation which approximates the lower of cost and net realizable value using the retail inventory method, the computation of the ratio of cost to retail should

To produce an inventory valuation which approximates the lower of cost and net realizable value using the retail inventory method, the computation of the ratio of cost to retail should

A. Include markups but not markdowns

B. Include markups and markdowns

C. Ignore bothe markups and markdowns.

D. Include markdowns but not markups





Answer: A. Include markups but not markdowns

When the conventional retail inventory method is used, markdowns are ignored in the computation of the cost to retail ratio because

When the conventional retail inventory method is used, markdowns are ignored in the computation of the cost to retail ratio because

A. There may be no markdowns in a given year
B. This tends to give a better approximation of the lower of cost and net realizable value
C. Markups are also ignored
D. This tends to result in the showing of the normal profit margin in the period when no markdown goods have been sold


Answer: B. This tends to give a better approximation of the lower of cost and net realizable value

A major advantage in the retail inventory method is that it

A major advantage in the retail inventory method is that it 

A. Permits entities which use it to taking an annual physical inventory
B. Gives a more accurate amount of inventory than other methods
C. Hides costs from customers and employees
D. Provide a method for inventory control and facilitates determination of the periodic inventory


Answer: D. Provide a method for inventory control and facilitates determination of the periodic inventory