 CHAPTER 9 

Cost of Goods Sold and Inventory:

Estimation and Noncost Valuation
MULTIPLE CHOICE QUESTIONS

Theory/Definitional Questions

1 Reporting a purchase commitment

2 Assumptions of gross profit method
3 Usefulness of gross profit method
4 Constraint of the gross profit method
5 Relationship between ending inventory and net income
6 Relationship between ending inventory and net income
7 Relationship between ending inventory and net income
8 Retail inventory method--inclusion of freight-in
9 Uses of the gross profit method
10 Items included in goods available for sales under retail inventory
11 Understating ending inventory in COGS calculation
12 Relationship between ending inventory and net income
13 Advantages of the retail method
14 Characteristics of retail inventory method
15 Assumptions of the retail method
16 Calculating the cost ratio to be used with retail inventory method
17 Net realizable value
18 Net realizable value
19 Relationship of markups on cost and on selling price
20 Reporting decline in value of noncancellable purchase contract
21 Dollar-value LIFO retail and an incremental layer
22 Treatment of net markups and markdowns under retail method
23 Current rate defined by exchange rate
24 Replacement cost of inventory under the lower of cost or market method
25 When net realizable value is appropriate for inventory valuation
26 Lower of cost or market method
27 Lower of cost or market method
28 Current replacement cost as general meaning for "market"
29 Method for inventory costing needs to be disclosed

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320 Chapter 9  Cost of Goods Sold and Inventory: Estimation and Noncost
Valuation

30 Relationship between cost ratio retail inventory method and the estimated
cost of ending inventory

Computational Questions
31 Computation of ending inventory
32 Computation of ending inventory using the gross margin method
33 Computation of estimated inventory balance given gross margin
34 Computation of cost of goods sold and operating profit
35 Estimate cost of goods sold under gross profit method
36 Computation of estimated costs of missing inventory
37 Computation of loss due to theft
38 Computation of estimated inventory loss due to fire
39 Computation of LCM value for inventory
40 Computation of cost of goods available for sale
41 Recording of raw materials
42 Computation of LCM value for inventory
43 Computation of ending inventory at cost using retail method
44 Computation of estimated inventory at lower of cost or market using retail
method
45 Computation of unit price using lower of cost or market
46 Computation of unit price using lower of cost or market
47 Computation of ending inventory using LIFO retail
48 Computation of inventory under dollar-value LIFO retail method
49 Computation of cost component of LCM
50 Computation of market component of LCM
51 Computation of inventory value under LCM
52 Computation of exchange gain/loss
53 Computation of exchange gain/loss
54 Computation of estimated inventory balance given gross margin
55 The effect of undiscovered errors on subsequent year-end inventories
56 The effect of undiscovered errors on subsequent year-end inventories
57 The effect of undiscovered errors on subsequent year-end inventories
58 Computation of estimated cost of inventory
59 Computation of estimated inventory using conventional retail/weighted
average
60 Record decline in value of noncancellable inventory contract
61 Record decline in value of noncancellable inventory contract

PROBLEMS
 1 Estimation of cost of inventory given markups
2 Computation of inventory loss due to fire
3 Computation of net income after discovering inventory errors
4 Estimation of loss due to theft
5 Computation of net income after discovering inventory errors
6 Computation of ending inventory at LCM using retail method
7 Computation of ending inventory at LCM using retail method
8 Computation of ending inventory using dollar-value LIFO retail method
9 Computation of ending inventory using dollar-value LIFO retail method
10 Exchange gain/loss--record sale, adjustment, and receipt of payment
11 Determination of proper carrying value of inventory items at LCM
12 Lower-of-cost-or-market method and entries
13 Gross profit method
14 Dollar-value retail LIFO method
15 Effect of failure to apply LCM
16 Validity of retail method approximating weighted average cost
17 Uses of the retail method

MULTIPLE CHOICE QUESTIONS

c 1. An airline that enters into a commitment to purchase next month's fuel at a

set
LO6 price should
a. record an appropriation of retained earnings.
b. record an asset for the inventory and a liability for the payment
obligation at the date on which the commitment is made.
c. disclose the existence of the commitment in the financial statements.
d. disclose the existence of the commitment in the financial statements
only if prices have declined since entering the commitment.

d 2. The use of the gross profit method assumes

LO2 a. the amount of gross profit is the same as in prior years.
b. sales and cost of goods sold have not changed from previous years.
c. inventory values have not increased from previous years.
d. the relationship between selling price and cost of goods sold is similar to
prior years.

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322 Chapter 9  Cost of Goods Sold and Inventory: Estimation and Noncost
Valuation

c 3. The gross profit method of estimating inventory would not be useful when
LO2 a. a periodic system is in use and inventories are required for interim
statements.
b. inventories have been destroyed or lost by fire, theft, or other casualty,
and the specific data required for inventory valuation are not available.
c. there is a significant change in the mix of products being sold.
d. the relationship between gross profit and sales remains stable over
time.

c 4. The gross profit method of inventory valuation is invalid when

LO2 a. there is substantial increase in the quantity of inventory during the year.
b. there is substantial increase in the cost of inventory during the year.
c. the gross margin percentage changes significantly during the year.
d. all ending inventory is destroyed by fire before it can be counted.

c 5. When the current year’s ending inventory amount is overstated,

LO4 a. the current year’s cost of goods sold is overstated.
b. the current year’s total assets are understated.
c. the current year’s net income is overstated.
d. the next year’s income is overstated.

b 6. If the ending inventory balance is understated, net income of the same

period
LO4 a. will be overstated.
b. will be understated.
c. will be unaffected.
d. cannot be determined from the above information.

b 7. An overstatement of ending inventory in Period 1 would result in income of

LO4 Period 2 being
a. overstated.
b. understated.
c. correctly stated.
d. The answer cannot be determined from the information given.

c 8. Under the retail inventory method, freight-in would be included in the

LO3 calculation of the goods available for sale for which of the following?
Cost Retail
 a. No No
b. No Yes
c. Yes No
d. Yes Yes

a 9. Which statement is true about the gross profit method?

LO2 a. It may not be used to estimate inventories for annual statements.
b. It may not be used to estimate inventories for interim statements.
c. It may not be used by insurers of inventory.
d. It may not be used for internal estimates of inventory.

323
 a 10. The retail inventory method would include which of the following in the
LO3 calculation of the goods available for sale at both cost and retail?
a. Purchase returns
b. Sales returns
c. Markdowns
d. Markups

a 11. Which of the following will result if the current year’s ending inventory
amount
LO4 is understated in the cost of goods sold calculation?
a. Cost of goods sold will be overstated.
b. Total assets will be overstated.
c. Net income will be overstated.
d. Both a and c.

b 12. If ending inventory on December 31, 2001, is overstated by $30,000, what

is
LO4 the effect on net income for 2002?
a. Net income is overstated by $30,000.
b. Net income is understated by $30,000.
c. Net income is overstated by $60,000.
d. The answer cannot be determined from the information given.

d 13. The retail inventory method has the advantage that it

LO3 a. provides a value for ending inventory that closely approximates replace-
ment value.
b. hides costs from competitors and customers.
c. gives a more accurate statement of inventory costs than other methods.
d. provides a method for inventory control and facilitates determination of
the periodic inventory.

b 14. The retail inventory method is characterized by

LO3 a. the recording of sales at cost.
b. the recording of purchases at selling price.
c. the reporting of year-end inventory at retail in the financial statements.
d. the recording of markups at retail and markdowns at cost.
 d 15. The retail method is based on the assumption that the
LO3 a. ratio of gross margin to sales is approximately the same each period.
b. ratio of cost to retail changes at a constant rate.
c. beginning inventory and the cost of goods sold contain the same
proportion of high-cost and low-cost ratio goods.
d. gross margin percentage applicable to ending inventory and to the
goods sold during the period is the same.

b 16. Which statement is accurate about calculating the cost ratio to be used with
LO3 the retail inventory method?
a. The beginning inventory is excluded and markdowns are not deducted
before computing the cost ratio when using the average cost method.
b. The beginning inventory is included and markdowns are deducted
before computing the cost ratio when using the lower-of-cost-or-market
method.
c. The beginning inventory is included and markdowns are not deducted
before computing the cost ratio when using the lower-of-cost-or-market
method.
d. The beginning inventory is excluded and markdowns are deducted
before computing the cost ratio when using the average cost method.

c 17. What is the maximum amount at which inventory can be valued when the
LO1 goods have experienced a permanent decline in value?
a. Historical cost
b. Sales price
c. Net realizable value
d. Net realizable value reduced by a normal profit margin

b 18. Net realizable value can be defined as

LO1 a. selling price.
b. selling price less costs to complete and sell.
c. selling price plus costs to complete and sell.
d. acquisition cost plus costs to complete and sell.

b 19. A markup of 25 percent on cost is equivalent to what markup on selling

price?
LO2 (rounded)
a. 15 percent
b. 20 percent
c. 25 percent
d. 33 percent

d 20. During 2002, the Victor Manufacturing Company signed a noncancellable

LO6 contract to purchase 2,000 pounds of a raw material at $32 per pound
 during 2003. On December 31, 2002, the market price of the raw material
is $26 per pound, and the selling price of the finished product is expected to
decline accordingly. The financial statements prepared for 2002 should
report
a. an appropriation of retained earnings for $12,000.
b. nothing regarding this matter.
c. a note describing the expected loss on the purchase commitment.
d. a loss of $12,000 in the income statement.

c 21. When using dollar-value LIFO retail, if an incremental layer was added last
LO5 year, the layer should be multiplied by
a. this year's cost ratio and this year's index.
b. this year's cost ratio and last year's index.
c. last year's cost ratio and last year's index.
d. last year's cost ratio and this year's index.

b 22. A company uses the retail method to estimate inventory for interim
reporting
LO3 purposes. Which of the following describes the proper treatment of net
markups and markdowns in the cost-to-retail ratio calculation if the retail
method is used to approximate a lower of average cost or market
valuation?
a. Net markdowns should be included in the ratio; net markups should be
excluded.
b. Net markups should be included in the ratio; net markdowns should be
excluded.
c. Both net markups and markdowns should be included in the ratio
calculation.
d. Both net markups and markdowns should be excluded in the ratio
calculation.

a 23. The spot rate is the exchange rate

LO7 a. at which currencies can be traded immediately.
b. in effect on the date of the specific transaction.
c. in effect on the date the balance sheet is prepared.
d. in effect on the date an invoice denominated in a foreign currency is
issued.

c 24. When would the replacement cost of inventory be used as the market value
LO1 under the lower-of-cost-or-market method?
a. Always.
b. When replacement cost is above net realizable value.
c. When replacement cost is below net realizable value and above net
 realizable value less normal profit margin.
d. When replacement cost is below net realizable value less normal profit
margin.

a 25. If the replacement cost of a unit of inventory has declined below original
cost,
LO1 but the replacement cost exceeds net realizable value, the amount to be
used for purposes of inventory valuation is
a. net realizable value.
b. original cost.
c. market value.
d. net realizable value less a normal profit margin.

d 26. Under generally accepted accounting principles, the

lower-of-cost-or-market
LO1 procedure for assigning a value to inventory can be assigned to
a. total inventory.
b. groups of similar inventory items.
c. individual inventory items.
d. all of the above.

c 27. The lower-of-cost-or-market inventory procedure would be expected to

result
LO1 in the lowest inventory valuation when applied to
a. total inventory.
b. groups of similar inventory items.
c. individual inventory items.
d. none of the above.

c 28. When valuing raw materials inventory at lower of cost or market, what is the
LO1 general meaning of the term "market"?
a. Net realizable value
b. Net realizable value less a normal profit margin
c. Current replacement cost
d. Discounted present value

d 29. An example of an inventory accounting policy that should be disclosed is

the
LO4 a. effect of inventory profits caused by inflation.
b. classification of inventory into raw materials, work in process, and
finished goods.
c. identification of major suppliers.
d. method used for inventory costing.
 b 30. If the denominator used to compute the cost ratio retail inventory is
LO3 understated, the estimated cost of ending inventory would be
a. understated.
b. overstated.
c. correctly stated.
d. stated at historical cost.
 a 31. Hardy Company is a wholesale electronics distributor. On December 31,
2002,
LO2 it prepared the following partial income statement:

Gross sales................................................ $600,400

Sales discounts.......................................... 400
Net sales.................................................... $600,000
Cost of goods sold:
Beginning inventory.............................. $200,000
Net purchases....................................... 300,000

Given this information, if Hardy Company’s gross margin is 30 percent of

net sales, what is the correct ending inventory balance?
a. $80,000
b. $120,000
c. $180,000
d. $500,000

b 32. Miller Company needs an estimate of its ending inventory balance. The
LO2 following information is available:

Cost Retail
Sales revenue............................................ $180,000
Beginning inventory.................................... $ 35,000 62,000
Net purchases............................................ 100,000 135,000
Gross margin percentage.......................... 30%

Given this information, when using the gross margin estimation method,
ending inventory is approximately
a. $1,000.
b. $9,000.
c. $19,000.
d. $11,650.

c 33. The following information is available for the Becca Company for the three
LO2 months ended June 30 of this year:

Inventory, April 1 of this year.............................................. $1,200,000

Purchases........................................................................... 4,500,000
Freight-in............................................................................. 300,000
Sales................................................................................... 6,400,000
 The gross margin was 25 percent of sales. What is the estimated inventory
balance at June 30?
a. $880,000
b. $933,000
c. $1,200,000
d. $1,500,000

c 34. Petersen Menswear, Inc. maintains a markup of 60 percent based on cost.

LO2 The company's selling and administrative expenses average 30 percent of
sales. Annual sales were $1,440,000. Petersen’s cost of goods sold and
operating profit for the year are
Cost of Operating
Goods Sold Profit
a. $864,000 $144,000
b. $864,000 $432,000
c. $900,000 $108,000
d. $900,000 $432,000

c 35. On October 31, a flood at Payne Company's only warehouse caused

severe
LO2 damage to its entire inventory. Based on recent history, Payne has a gross
profit of 25 percent of net sales. The following information is available from
Payne’s records for the ten months ended October 31:

Inventory, January 1................................... $ 520,000

Purchases.................................................. 4,120,000
Purchase returns........................................ 60,000
Sales........................................................... 5,600,000
Sales discounts.......................................... 400,000

A physical inventory disclosed usable damaged goods which Payne

estimates can be sold for $70,000. Using the gross profit method, the
estimated cost of goods sold for the ten months ended October 31 should
be
a. $680,000.
b. $3,830,000.
c. $3,900,000.
d. $4,200,000.
 b 36. The following information appears in Olsen Company's records for the year
LO2 ended December 31:

Inventory, January 1................................... $ 325,000

Purchases.................................................. 1,150,000
Purchase returns........................................ 40,000
Freight-in.................................................... 30,000
Sales........................................................... 1,700,000
Sales discounts.......................................... 10,000
Sales returns.............................................. 15,000

On December 31, a physical inventory revealed that the ending inventory

was only $210,000. Olsen’s gross profit on net sales has remained
constant at 30 percent in recent years. Olsen suspects that some inventory
may have been pilfered by one of the company's employees. At December
31, what is the estimated cost of missing inventory?
a. $75,000
b. $82,500
c. $210,000
d. $292,500

a 37. Davis Company's accounting records indicated the following information:

LO2
Inventory, 1/1/02........................................ $ 1,000,000
Purchases during 2002.............................. 5,000,000
Sales during 2002...................................... 6,400,000

A physical inventory taken on December 31, 2002, revealed actual ending

inventory at cost was $1,150,000. Davis’ gross profit on sales has regularly
been about 25 percent in recent years. The company believes some
inventory may have been stolen during the year. What is the estimated
amount of missing inventory at December 31, 2002?
a. $50,000
b. $200,000
c. $350,000
d. $450,000
 a 38. On June 19, 2002, a fire destroyed the entire uninsured merchandise
inventory
LO2 of the Allen Merchandising Company. The following data are available:

Inventory, January 1................................... $ 80,000

Purchases, January 1 through June 19..... 560,000
Sales, January 1 through June 19............. 776,000
Markup percentage on cost....................... 25%

What is the approximate inventory loss as a result of the fire?

a. $19,200
b. $27,200
c. $34,000
d. $58,000

c 39. Commodity X sells for $12.00; selling expenses are $2.40; normal profit is
LO1 $3.00. If the cost of Commodity X is $7.80 and the replacement cost is
$6.00, the lower of cost or market is
a. $5.40.
b. $6.00.
c. $6.60.
d. $7.80.

c 40. The following information is available for Torino Corp. for its most recent
year:
LO2
Net sales.................................................... $3,600,000
Freight-in.................................................... 90,000
Purchase discounts.................................... 50,000
Ending inventory........................................ 240,000

The gross margin is 40 percent of net sales. What is the cost of goods
available for sale?
a. $1,680,000
b. $1,920,000
c. $2,400,000
d. $2,440,000
 a 41. A company entered into a purchase agreement on March 31, 2001, to
LO6 purchase raw materials. These materials are to be delivered on April 30,
2002. The company did not actually put these materials into production until
June 30, 2002. The contract price and the market prices for these
materials are shown below:

Contract price, 3/31/01............................... $1,200,000

Market price, 12/31/01............................... 1,000,000
Market price, 4/30/02................................. 1,400,000
Market price, 6/30/02................................. 1,600,000

At the time of delivery (4/30/02), The company should record the raw
materials at
a. $1,200,000.
b. $1,000,000.
c. $1,400,000.
d. $1,600,000.

b 42. Venus Inc. carries Product A in inventory on December 31 at its unit cost of
LO1 $22.50. Because of a sharp decline in demand for the product, the selling
price is reduced to $24.00 per unit. Venus' normal profit margin on Product
A is $4.80, disposal costs are $3.00 per unit, and the replacement cost is
$15.90. Under the rule of lower of cost or market, Venus' December 31
inventory of Product A should be valued at a unit cost of
a. $15.90.
b. $16.20.
c. $21.00.
d. $22.50.

c 43. The Ashby Sporting Goods Store uses the retail inventory method.
Information
LO3 relating to the computation of the inventory at December 31, 2002, is as
follows:
Cost Retail
Inventory at January 1, 2002................................ $ 32,000 $ 80,000
Sales...................................................................... 580,000
Purchases............................................................. 270,000 600,000
Freight-in............................................................... 7,600
Net markups.......................................................... 40,000
Net markdowns..................................................... 20,000
 What is the ending inventory at cost at December 31, 2002, using the retail
inventory method and the lower-of-cost-or-market estimation?
a. $43,000
b. $45,000
c. $51,600
d. $54,000

b 44. The Saturn Department Store uses the retail inventory method to
approximate
LO3 ending inventory. The following information is available for the month of
August:
Cost Retail
Cost of goods available for sale...................... $720,000 $900,000
Net markups (not included above).................. 100,000
Net markdowns................................................ 40,000
Sales................................................................ 680,000

What was the approximate inventory using the average cost estimate for
inventory?
a. $201,600
b. $210,000
c. $224,000
d. $230,400

a 45. A company sells four products: I, II, III, and IV. The company values all
LO1 inventories using the lower-of-cost-or-market procedure. The company has
consistently experienced a profit margin of 20 percent of sales and expects
this rate to hold for the future. Additional information, shown below, is
available for the most recent year as of December 31.

Original Cost to Estimated Cost Expected Selling

Product Cost Replace to Sell Prices
I $60 $70 $10 $100
II 70 90 20 120
III 80 60 10 60
IV 90 80 20 90

Using the lower-of-cost-or-market procedure, what is the reported inventory

value at December 31 for one unit of Product I?
a. $60
b. $70
c. $80
d. $90
 a 46. A company sells four products: I, II, III, and IV. The company values all
LO1 inventories using the lower-of-cost-or-market procedure. The company has
consistently experienced a profit margin of 20 percent of sales and expects
this rate to hold for the future. Additional information, shown below, is
available for the most recent year as of December 31.

Original Cost to Estimated Cost Expected Selling

Product Cost Replace to Sell Prices
I $60 $70 $10 $100
II 70 90 20 120
III 80 60 10 60
IV 90 80 20 90

Using the lower-of-cost-or-market procedure, what is the reported inventory

value at December 31 for one unit of Product II?
a. $70
b. $76
c. $90
d. $96

a 47. The Fairbanks Department Store uses the LIFO retail inventory method to
LO5 approximate a LIFO value for ending inventory. Information relating to the
computation of the inventory at December 31 is as follows:

Cost Retail
Inventory, January 1........................................ $ 32,000 $ 80,000
Sales................................................................ 580,000
Purchases........................................................ 246,000 600,000
Freight-in.......................................................... 7,600

What is the ending inventory at cost at December 31 using the retail

inventory method and a LIFO approximation?
a. $40,000
b. $41,000
c. $42,000
d. $43,000
 b 48. On December 31, 2001, Johnson Company adopted the dollar-value LIFO
LO5 retail inventory method. Inventory data for 2002 are as follows:

LIFO Cost Retail

Inventory, December 31, 2001........................ $180,000 $250,000
Inventory, December 31, 2002........................ ? 330,000
Increase in price level for 2002....................... 10%
Cost-to-retail ratio for 2002.............................. 70%

Under the dollar-value LIFO retail method, Johnson’s inventory at

December 31, 2002, should be
a. $215,000.
b. $218,500.
c. $231,000.
d. $236,000.

c 49. The Garrett Corporation uses the lower-of-cost-or-market method to value

LO1 inventory. Data regarding the items in work-in-process inventory are
presented below.
Markers Pens Highlighters
Historical cost.................................. $24,000 $18,880 $30,000
Selling price..................................... 36,000 36,000 36,000
Estimated cost to complete............. 4,800 4,800 6,800
Replacement cost............................ 20,800 16,800 31,800
Normal profit margin as a
percentage of selling price........... 25% 25% 10%

The value for cost to be used in the lower-of-cost-or-market comparison for

the markers is
a. $20,800.
b. $23,400.
c. $24,000.
d. $31,200.
 a 50. The Garrett Corporation uses the lower-of-cost-or-market method to value
LO1 inventory. Data regarding the items in work-in-process inventory are
presented below.
Markers Pens
Highlighters
Historical cost.................................. $24,000 $18,880 $30,000
Selling price..................................... 36,000 36,000 36,000
Estimated cost to complete............. 4,800 4,800 6,800
Replacement cost............................ 20,800 16,800 31,800
Normal profit margin as a
percentage of selling price.......... 25% 25% 10%

When valuing the pens, the market value to be used in the lower-of-cost-or-
market comparison is
a. $22,200.
b. $31,200.
c. $16,800.
d. $18,800.

b 51. The Garrett Corporation uses the lower-of-cost-or-market method to value

LO1 inventory. Data regarding the items in work-in-process inventory are
presented below.
Markers Pens Highlighters
Historical cost.................................. $24,000 $18,880 $30,000
Selling price..................................... 36,000 36,000 36,000
Estimated cost to complete............. 4,800 4,800 6,800
Replacement cost............................ 20,800 16,800 31,800
Normal profit margin as a
percentage of selling price.......... 25% 25% 10%

The inventory valuation for highlighters using the lower-of-cost-or-market

method is
a. $25,600.
b. $29,200.
c. $31,800.
d. $30,000.

c 52. Utah Enterprises purchased inventory from Tokyo Distributing for 1,000,000
LO7 yen on December 1, 2001, when the exchange rate for yen was $.004. On
December 31, 2001, Utah's year-end, the exchange rate was $.0035. The
invoice was paid by Utah Enterprises in 2002 when the exchange rate was
$.0038. How much exchange gain or loss would be recognized by Utah
Enterprises in 2002 relating to this transaction?
 a. $200 loss
b. $200 gain
c. $300 loss
d. $300 gain

d 53. Utah Enterprises purchased inventory from Tokyo Distributing for 1,000,000
LO7 yen on December 1, 2001 when the exchange rate for yen was $.004. On
December 31, 2001, Utah's year-end, the exchange rate was $.0035. The
invoice was paid by Utah Enterprises in 2002 when the exchange rate was
$.0038. How much exchange gain or loss would be recognized by Utah
Enterprises in 2001 relating to this transaction?
a. $200 loss
b. $200 gain
c. $500 loss
d. $500 gain

b 54. The following information is available for the Neptune Company for the
three
LO2 months ended March 31 of this year:

Inventory, January 1.............................................................. $ 450,000

Purchases.............................................................................. 1,700,000
Freight-in............................................................................... 100,000
Sales...................................................................................... 2,400,000

The gross margin was estimated to be 25 percent of sales. What is the

estimated inventory balance at March 31?
a. $350,000
b. $450,000
c. $562,500
d. $600,000

c 55. Elrond Company began operations in 2000. During the first two years of
LO4 operations, Elrond made undiscovered errors in taking its year-end
inventories that understated 2000 ending inventory by $40,000 and
overstated 2001 ending inventory by $50,000. The combined effect of
these errors on reported income is
2000 2001 2002
a. understated $40,000 overstated $50,000 not affected
b. understated $40,000 overstated $10,000 not affected
c. understated $40,000 overstated $90,000 understated $50,000
d. overstated $40,000 understated $50,000 overstated $10,000
 d 56. Elrond Company began operations in 2000. During the first two years of
LO4 operations, Elrond made undiscovered errors in taking its year-end
inventories that overstated 2000 ending inventory by $50,000 and
overstated 2001 ending inventory by $40,000. The combined effect of
these errors on reported income is
2000 2001 2002
a. overstated $50,000 overstated $90,000 understated $40,000
b. overstated $50,000 overstated $40,000 not affected
c. understated $50,000 understated $90,000 not affected
d. overstated $50,000 understated $10,000 understated $40,000

d 57. Elrond Company began operations in 2000. During the first two years of
LO4 operations, Elrond made undiscovered errors in taking its year-end
inventories that overstated 2000 ending inventory by $50,000 and
understated 2001 ending inventory by $40,000. The combined effect of
these errors on reported income is
2000 2001 2002
a. understated $50,000 overstated $90,000 understated $40,000
b. overstated $50,000 understated $90,000 not affected
c. overstated $50,000 understated $40,000 not affected
d. overstated $50,000 understated $90,000 overstated $40,000

b 58. Jupiter Company prepares monthly income statements. A physical

inventory
LO2 is taken only at year-end; hence, month-end inventories must be estimated.
All sales are made on account. The rate of markup on cost is 50 percent.
The following information relates to the month of May:

Accounts receivable, May 1.................................................. $20,000

Accounts receivable, May 31................................................ 30,000
Collection of accounts receivable during May...................... 50,000
Inventory, May 1.................................................................... 36,000
Purchases of inventory during May....................................... 32,000

The estimated cost of the May 31 inventory is

a. $24,000.
b. $28,000.
c. $38,000.
d. $44,000.
 a 59. A company sells four products: I, II, III and IV. The company values all
LO2 inventories using the lower-of-cost-or-market procedure. The company has
consistently experienced a profit margin of 20 percent of sales and expects
this rate to hold for the future. Additional information, shown below, is
available for the most recent year as of December 31.

Original Cost to Estimated Cost Expected Selling

Product Cost Replace to Sell Prices
I $60 $70 $10 $100
II 70 90 20 120
III 80 60 10 60
IV 90 80 20 90

Using the lower-of-cost-or-market procedure, what is the reported inventory

value at December 31 for one unit of Product III?
a. $50
b. $60
c. $70
d. $80

b 60. A company sells four products: I, II, III, and IV. The company values all
LO2 inventories using the lower-of-cost-or-market procedure. The company has
consistently experienced a profit margin of 20 percent of sales and expects
this rate to hold for the future. Additional information, shown below, is
available for the most recent year as of December 31.

Original Cost to Estimated Cost Expected Selling

Product Cost Replace to Sell Prices
I $60 $70 $10 $100
II 70 90 20 120
III 80 60 10 60
IV 90 80 20 90

Using the lower-of-cost-or-market procedure, what is the reported inventory

value at December 31 for one unit of Product IV?
a. $60
b. $70
c. $80
d. $90
 a 61. The Cartwright Corporation entered into a purchase contract during 2001 to
purchase merchandise inventory in the future for resale. The contract
contained no provisions for cancellation or revision. The total amount
payable under the contract was $900,000. At the end of 2002, the
estimated replacement cost of the goods yet to be purchased under the
contract was $825,000. Payment on the contract is due in 2003, and the
replacement cost of $825,000 likely will not increase. As a result of these
circumstances, what entry, if any, should Cartwright Corporation make at
the end of 2002 relating to this contract?
a. Estimated loss on purchase contract.........................75,000
Estimated liability on purchase contract……….. 75,000
b. Estimated inventory....................................................825,000
Estimated purchase contract……………………. 825,000
c. Estimated inventory....................................................825,000
Estimated loss on purchase contract......................... 75,000
Estimated liability on purchase contract……….. 900,000
d. No entry should be made until 2003, when the goods are received.

PROBLEMS

Problem 1
The following data relate to the records of Powell Corp. for the month of
September.

Sales................................................................................................. $160,000
Beginning inventory.......................................................................... $ 20,000
Purchases......................................................................................... 180,000
Goods available for sale................................................................... $200,000

Using these data, estimate the cost of ending inventory for each situation below:

(1) Markup is 50 percent on cost.

(2) Markup is 60 percent on sales.
(3) Markup is 25 percent on cost.
(4) Markup is 40 percent on sales.

Solution 1
LO2
(1) $160,000/1.50 = $106,667
$200,000 - $106,667 = $93,333 ending inventory

(2) $160,000 x (100% - 60%) = $64,000

$200,000 - $64,000 = $136,000 ending inventory
(3) $160,000/1.25 = $128,000
$200,000 - $128,000 = $72,000 ending inventory

(4) $160,000 x (100% - 40%) = $96,000

$200,000 - $96,000 = $104,000 ending inventory

Problem 2
Northstar Sales Corp. was organized on January 1, 2001. On December 31, 2002,
the company lost most of its inventory in a warehouse fire just before the year-end
count of inventory was to take place. Data from the records disclosed the
following:

2001 2002
Inventory, January 1.................................................... $ 0 $173,120
Purchases during year................................................. 860,000 692,000
Purchase returns and allowances during year............ 46,120 64,600
Sales during year......................................................... 788,000 836,000
Sales returns and allowances during year.................. 16,000 20,000

On January 1, 2002, Northstar's pricing policy was changed so that the gross profit
rate would be 3 percentage points higher than the one earned in 2001.

Salvaged undamaged merchandise was marked to sell at $24,000, while damaged

merchandise marked to sell at $16,000 had an estimated net realizable value of
$3,600.

Determine the company's inventory loss due to the fire that occurred on December
31, 2002.
 Solution 2
LO2
2001 2002
Gross Gross
Profit % Profit %
Sales (net)................................... $772,000 100% $816,000 100%
Cost of goods sold:
Beginning inventory................. $ 0 $173,120
Purchases (net)....................... 813,880 627,400
Goods available for sale......... $813,880 $800,520
Ending inventory..................... 173,120 147,720 ***
Cost of goods sold.................. $640,760 83% $652,800 ** 80%
Gross profit on sales................... $131,240 17% $163,200 20% *
* 17% + 3% = 20%
** $816,000 x 80% = $652,800
*** $800,520 - $652,800 = $147,720

December 31, 2002

Ending inventory (cost)........................................................... $147,720
Less: Cost of undamaged inventory ($24,000 x .80)................. $19,200
Net realizable value of damaged merchandise........... 3,600 22,800
Inventory loss due to fire........................................................ $124,920

Problem 3
Kingston Company reported the following net income amounts:
1999 $52,000
2000 $38,000
2001 $66,000

In 2002, the company discovered errors that been made in computing the ending
inventories for 1999 and 2000, as follows:
1999 Ending inventory understated by $4,000.
2000 Ending inventory understated by $8,000.

Compute the correct net incomes for (1) 1999, (2) 2000, and (3) 2001.

Solution 3
LO4
(1) 1999 net income:
As reported............................................................................ $ 52,000
Correction for 1999 inventory understatement..................... 4,000
Corrected net income............................................................ $ 56,000

(2) 2000 net income:

 As reported............................................................................ $ 38,000
Correction for 1999 inventory understatement..................... (4,000)
Correction for 2000 inventory understatement..................... 8,000
Corrected net income............................................................ $ 42,000

(3) 2001 net income:

As reported............................................................................ $ 66,000
Correction for 2000 inventory understatement..................... (8,000)
Corrected net income............................................................ $ 58,000

Problem 4
On May 17, it was discovered that a material amount of inventory had been stolen.
A physical count discloses that $55,000 of merchandise was on hand as of May 17.
The following additional data is available from the accounting records:

Inventory, January 1......................................................................... $ 62,000

Purchases, January 1 - May 17 (includes $4,000 shipped FOB
shipping point May 16, received May 19).................................................. 114,000
Sales (goods delivered to customers), January 1 - May 17....................... 90,000

Records indicate that the company's gross profit has averaged 40 percent of selling
prices. Estimate the amount of loss due to theft.

Solution 4
LO2
Inventory, January 1............................................................... $ 62,000
Purchases ($114,000 - $4,000)..................................................... 110,000
Cost of goods available for sale............................................. $172,000
Sales ..................................................................................... $90,000
Gross profit ($90,000 x 40%)....................................................... 36,000
Estimated cost of goods sold.................................................. 54,000
Estimated inventory, May 17.................................................. $118,000
Actual inventory, May 17........................................................ 55,000
Theft loss................................................................................ $ 63,000
 Problem 5
Boston Company reported the following net income amounts:
1999 $42,000
2000 $67,000
2001 $78,000

In 2002, the company discovered errors that been made in computing the ending
inventories for 1999 and 2000, as follows:
1999 Ending inventory overstated by $9,000.
2000 Ending inventory understated by $6,000.

Compute the correct net incomes for (1) 1999, (2) 2000, and (3) 2001.

Solution 5
LO4
(1) 1999 net income:
As reported............................................................................ $ 42,000
Correction for 1999 inventory overstatement........................ (9,000)
Corrected net income............................................................ $ 33,000

(2) 2000 net income:

As reported............................................................................ $ 67,000
Correction for 1999 inventory overstatement........................ 9,000
Correction for 2000 inventory understatement..................... 6,000
Corrected net income............................................................ $ 82,000

(3) 2001 net income:

As reported............................................................................ $ 78,000
Correction for 2000 inventory understatement..................... (6,000)
Corrected net income............................................................ $ 72,000

Problem 6
Gibb’s Department Store uses the retail inventory method. Information relating to
the computation of the inventory at December 31, 2002, is as follows:

Cost Retail
Inventory at January 1, 2002........................................... $ 45,000 $ 75,000
Sales................................................................................ 600,000
Purchases........................................................................ 270,000 590,000
Freight-in.......................................................................... 6,750
Markups........................................................................... 50,000
Markdowns....................................................................... 20,000
Estimated normal shrinkage............................................ 2% of sales
Prepare a schedule to calculate the estimated ending inventory at the lower of
average cost or market at December 31, 2002, using the retail inventory method.

Solution 6
LO3
Cost Retail
Inventory at January 1, 2002........................................... $ 45,000 $ 75,000
Purchases........................................................................ 270,000 590,000
Freight-in.......................................................................... 6,750
Markups........................................................................... 50,000
$321,750
$715,000

Cost ratio ($321,750/$715,000).............................................. 45%

Sales................................................................................ $600,000
Markdowns ...................................................................... 20,000
Estimated normal shrinkage (2% x $600,000)...................... 12,000
$632,00
0

Estimated inventory at retail, December 31, 2002.......... $ 83,000

Estimated inventory at lower of cost or market,
December 31, 2002 ($83,000 x 45%)............................... $ 37,350

Problem 7
The Zena Sporting Goods Store values its inventory using the retail inventory
method to approximate at the lower of cost or market. The following data are
available for the month of July:

Cost Retail
Inventory, July 1............................................................... $ 75,320 $106,400
Markdowns....................................................................... 1,470
Markups........................................................................... 8,540
Purchases........................................................................ 220,226 313,040
Sales................................................................................ 341,600
Purchase returns.............................................................. 4,200 5,040
Sales returns.................................................................... 14,700

Based on the data presented above, compute the estimated inventory at July 31 at
the lower of average cost or market under the retail inventory method. Round the
cost ratio to three decimal places.
Solution 7
LO3
Cost Retail
Inventory, July 1......................................................... $ 75,320 $106,400
Purchases................................................................... 220,226 313,040
Purchase returns........................................................ (4,200)
(5,040)
Markups...................................................................... 8,540
Goods available for sale............................................. $291,346 $422,940

Cost ratio ($291,346/$422,940)......................................... 68.9%

Sales (net) ($341,600 - $14,700)....................................... $326,900

Markdowns................................................................. 1,470
$325,430

Estimated inventory at retail, July 31......................... $ 97,510

Estimated inventory at lower of cost or
market ($97,510 x 68.9%)............................................ $ 67,184

Problem 8
The Clayton Grocery Store uses the dollar-value LIFO retail method. Information
relating to the computation of the inventory at December 31, 1999, follows:

Cost Retail
Inventory, January 1, 2002......................................... $104,400 $162,000
Purchases................................................................... 468,000 799,200
Freight-in..................................................................... 72,000
Sales........................................................................... 684,000
Markups...................................................................... 144,000
Markdowns................................................................. 43,200

Assuming that there was no change in the price index during the year, compute the
inventory at December 31, 2002, using the dollar-value LIFO retail method.
Solution 8
LO5 Cost
Retail
Purchases................................................................... $468,000 $799,200
Freight-in..................................................................... 72,000
Markups...................................................................... 144,000
Markdowns.................................................................
(43,200)
$540,000 $900,000

Cost/retail ($540,000/$900,000):....................................... 60%

Sales........................................................................... 684,000
1999 layer at retail...................................................... $216,000
1999 layer at cost ($216,000 x .60)................................. $129,600
Inventory, January 1, 2002......................................... 104,400 162,000
Inventory, December 31, 2002................................... $234,000 $378,000

Problem 9
The Brooks Department Store uses the dollar-value LIFO retail method for
determining inventory values. Information relating to the inventory for 2002 is given
below.

Cost Retail
Inventory, January 1................................................... $468,000 $ 960,000
Purchases (net).......................................................... 720,000 1,080,000
Markups...................................................................... 120,000
Markdowns................................................................. 48,000
Sales (net).................................................................. 976,800

Price index, December 31, 2001...................................................... 1.20

Price index, December 31, 2002...................................................... 1.26

Compute the 2002 ending inventory at LIFO cost using the dollar-value LIFO retail
method.

Solution 9
LO5
Beginning inventory at base-year retail: $960,000/1.20 = $800,000
Ending inventory at base-year retail: $1,135,200/1.26 = $900,952
 Cost Retail
Beginning inventory................................................. $ 468,000 $ 960,000
Purchases................................................................ 720,000 1,080,000
Markups................................................................... 120,000
Markdowns...............................................................
(48,000)
$ 1,188,000 $ 2,112,000
Sales........................................................................ 976,800
$ 1,135,200

Base-Year Price LIFO Cost/ LIFO

Retail Index Layer Retail Cost
Jan. 1, 2002 $800,000 1.20 $ 960,000 $468,000
Dec. 31, 2002 100,952 1.26 127,200 62.5% * 79,500
$900,952 $1,087,200 $547,500

* Computation of Cost to Retail Ratio

Cost Retail
Purchases................................................................... $720,000 $1,080,000
Markups...................................................................... 120,000
Markdowns.................................................................
(48,000)
$720,000
$1,152,000

Cost ratio ($720,000/$1,152,000)...................................... 62.5%

Problem 10
Wardle Inc. carries four items in inventory. The following data relate to such goods
at the end of 2002:

Replacement Estimated Selling Normal

Item Cost Cost Sales Price Cost Profit
A $11.00 $10.00 $16.00 $1.80 $4.00
B 12.00 12.00 20.00 1.60 2.50
C 5.00 4.00 9.50 1.90 1.00
D 14.00 15.00 15.00 2.40 3.50

Determine the proper carrying value of each inventory item using the lower-of-cost-
or- market method.
Solution 10
LO1
Replacement Lower of Cost
Item Cost Cost Ceiling Floor Market or Market
A $11.00 $10.00 $14.20 $10.20 $10.20 $10.20
B 12.00 12.00 18.40 15.90 15.90 12.00
C 5.00 4.00 7.60 6.60 6.60 5.00
D 14.00 15.00 12.60 9.10 12.60 12.60

Problem 11
On December 16, 2001, Big Apple Distributing, based in New York City, sold
inventory costing $9,000 to Alps Climbing Inc., a Swiss firm. The transaction was
denominated in Swiss francs and the invoice totaled 70,000 francs. Alps Climbing
paid the invoice on January 18, 2002. Relevant exchange rates are as follows:

Exchange Rate for

Swiss Francs
December 16, 2001............... $.210
December 31, 2001............... .197
January 18, 2002................... .202

Prepare journal entries on the books of Big Apple Distributing to record

(1) the initial sale (Big Apple uses a perpetual inventory system).
(2) the adjustment made on the balance sheet date.
(3) the receipt of payment.

Solution 11
LO7
(1)
2001
Dec. 16 Cost of Goods Sold............................................... 9,000
Inventory.................................................. 9,000

Accounts Receivable (francs).................................. 14,700

Sales ($.210 x 70,000 francs)......................... 14,700

(2)
Dec. 31 Exchange Loss [($.210 - $.197) x 70,000]................... 910
Accounts Receivable (francs).................... 910
(3)
2002
Jan. 18 Cash (francs) ($.202 x 70,000 francs)............................. 14,140
Accounts Receivable (francs).................... 13,790
Exchange Gain........................................ 350

Problem 12
The 49ers Company began its operations in early 2002. The company carries five
different types of inventory which are listed below along with other relevant data.
The company values its inventory at the lower of cost or market. At December 31,
2002, 49ers has exactly one unit of each item in ending inventory.

Estimated Estimated Normal Profit

Actual Replacement Selling Cost Margin on
Item Cost Cost Price to Sell Selling Price
1 $12.00 $13.00 $20.00 $4.00 20%
2 14.00 10.00 10.00 2.00 10%
3 16.00 10.00 20.00 6.00 15%
4 18.00 15.00 24.00 2.00 25%
5 20.00 22.00 30.00 4.00 30%

(1) Complete the following information using the lower-of-cost-or-market method as

of
December 31, 2002.

Item Ceiling Floor Market LCM

1
2
3
4
5

(2) Compute the inventory loss, if any, 49ers should show in 2002 using the
lower-of-cost-or-market method applied on an individual items basis.

(3) Prepare the adjusting , if any, required as of December 31, 2002, assuming all
such
entries are made directly to the inventory account.
Solution 12
LO1
(1)
Item Ceiling Floor Market LCM
1 16 12 13 12
2 8 7 8 8
3 14 11 11 11
4 22 16 16 16
5 26 17 22 20

(2) Loss = 13*

* (12 + 14 + 16 + 18 + 20) - (12 + 8 + 11 + 16 + 20)

(3) Loss from Decline in Value of Inventory.................................. 13

Inventory........................................................................ 13

Problem 13
The Steelers Company had its entire inventory destroyed when a fire swept through
the company's warehouse. Fortunately, the accounting records were locked in a
fireproof safe and were not damaged. The following information for the period up to
the date of the fire was taken from the accounting records:

Sales......................................................................................... $486,400
Purchases................................................................................ 295,000
Beginning inventory.................................................................. 147,800
Purchase returns...................................................................... 16,600
Freight-in.................................................................................. 8,200

(1) Assuming that the gross profit has averaged 25 percent of selling price, what is
the
estimated value of the inventory destroyed in the fire? Show all calculations in
good
form.

(2) Assuming that the markup percentage on cost is 28 percent, what is the
estimated
value of the inventory destroyed in the fire? Show all calculations in good form.
Solution 13
LO2
(1) Beginning Inventory $147,800
+ Purchases 295,000
+ Freight-in 8,200
Purchase returns 16,600
= Goods available for sale $434,400
Cost of goods sold (486,400 x .75) 364,800
= Inventory lost in fire $ 69,600

(2) Beginning Inventory $147,800

+ Purchases 295,000
+ Freight-in 8,200
Purchase returns 16,600
= Goods available for sale $434,400
Cost of goods sold (486,400  1.28) 380,000
= Inventory lost in fire $ 54,400

Problem 14
The following information is available for Packers Corporation which has been using
the dollar-value retail LIFO method for the past two years:

Cost Retail
Beginning inventory (1/1/00)......................... $40,000 $ 80,000

Net purchases - 2001................................... $69,600 $120,000

Net sales - 2001............................................ 106,200

Net purchases - 2002................................... $60,000 $100,000

Net sales - 2002............................................ 81,560

Price index at beginning of 2001: 1.00

Price index at end of 2001: 1.12
Price index at end of 2002: 1.22

Using the dollar-value retail LIFO method, calculate the balance sheet valuation for
inventory.

(1) at the end of 2001.

(2) at the end of 2002.
 Solution 14
LO5
(1) All inventory amounts at retail.
Dollar
Ending End-of-Year Inventory Inventory Incremental Value
Inventory Index at Base Year Layers Layer Cost LIFO
$93,800 1.12 $83,750 $80,000 1.00 x .50 * $40,000
3,750 1.12 x .58 ** 2,436
$42,436
*(40,000  80,000)
**(69,600  120,000)

(2) All inventory amounts at retail.

Dollar
Ending End-of-Year Inventory Inventory Incremental Value
Inventory Index at Base Year Layers Layer Cost LIFO
$112,240 1.22 $92,000 $80,000 1.00 x .50 $40,000
3,750 1.12 x .58 2,436
8,250 1.22 x .60 * 6,039
$48,475
*(60,000  100,000)

Problem 15
Current generally accepted accounting principles state that a departure from the
cost
basis of pricing inventory is required when the utility of the goods is no longer as
great as its cost. Accordingly, the lower-of-cost-or-market rule is applied to
inventories such that, if market is less than cost, an adjustment is made to record
the loss and to restate ending inventory at the lower value.

What effect would the failure to apply the lower-of-cost-or-market method have on
the income statement in current and future periods?

Solution 15
LO1
Failure in the current period to apply the lower-of-cost-or-market method would
result not only in the nonrecognition of a loss but would also distort gross margins in
the current and future periods. Margins in the current and future periods would be
too low as a result of matching lower selling prices against costs that are no longer
relevant. Application of the lower-of-cost-or-market method results in constant
margins on products both in current and future periods.
Problem 16
The claim is sometimes made that the retail method is an approximation of the
weighted average method since the cost to retail percentage is computed as a
weighted average of the cost-retail relationship of all goods available for sale during
the period. Evaluate the validity of the statement above.

Solution 16
LO3
An approximation of weighted average cost will result only if selling prices are
relatively stable or are unrelated to the changes in cost prices during the period. If
selling prices are moving in the same direction as costs and in approximately the
same percentages, then a first-in, first-out inventory may be approximated. Assume
that both costs and selling prices have increased by 20 percent during the period.
In this case, the mark-on percentage will have remained constant. The ending
inventory will be priced initially at the selling prices existing at the end of the period
and the conversion to cost will result in an approximation of the most recent
purchases, which is an approximation of a first-in, first-out flow.

Problem 17
A major advantage of the retail inventory method is that it provides a means for
converting inventory amounts determined by a physical count, priced at retail, to a
cost basis. The retail method allows enterprises to reduce recordkeeping and to
estimate the inventory balance without a physical count.

Explain how the retail method could be useful other than providing inventory cost
data for financial reports.

Solution 17
LO3
The following are uses of the retail method in addition to its application for financial
reporting purposes:

1. The retail method provides a method of estimating the cost of inventory without
taking a physical count for interim periods not only for interim financial reports but
also for internal management analyses, including the formulation of purchasing
policy.
2. The retail method aids management in establishing controls for inventory
regarding such issues as theft, markdowns, and additional markups in situations
where neither a traditional periodic or a perpetual inventory system is used on an
interim basis.
3. The retail method is accepted by the Internal Revenue Service and thus can be
used both for tax reporting and tax planning.
4. The retail method can be used by external and internal auditors as a test of the
overall reasonableness of a physical inventory costed in the normal manner.
CHAPTER 9 -- QUIZ A

Name _________________________
Section ________________________

T F 1. The gross profit method is based on an assumed relationship between gross

profit and net sales.

T F 2. The gross profit method is an alternative inventory costing method used in the
preparation of annual financial statements.

T F 3. The gross profit method is useful when a periodic inventory system is used
and inventories are required for interim financial statements.

T F 4. In applying the gross profit method of estimating inventory, the gross profit
may be stated as either a percentage of sales or a percentage of cost.

T F 5. The retail inventory method can be used to approximate a lower of average

cost or market valuation.

T F 6. Beginning inventory balances are disregarded in computing the cost

percentage when using the retail method to approximate a FIFO value for
ending inventory.

T F 7. When the retail inventory method is used, an annual physical count is required
to measure actual shrinkage.

T F 8. The markup percentage on sales can be expressed as the gross margin

percentage less the cost percentage.

T F 9. Markups are increases that raise sales prices above original retail.

T F 10. The retail inventory method and the gross method are both based on the ratio
of cost of goods sold to sales price.

356
CHAPTER 9 -- QUIZ B

Name _________________________
Section ________________________

T F 1. In applying the retail inventory method, sales returns, sales discounts, and
sales allowances are proper deductions from gross sales in determining the
estimated ending retail inventory.

T F 2. When using the retail inventory method to approximate a lower-of-cost-or-

market value for ending inventory, markups, as well as markdowns, are
recognized in calculating the cost percentage applicable to goods stated at
retail.

T F 3. Overstating ending inventory will affect the balance sheet, but not the income
statement.

T F 4. In the dollar-value LIFO retail inventory method, markdowns, as well as

markups, are recognized in calculating the cost percentage applicable to
goods stated at retail.

T F 5. Under the lower-of-cost-or-market rule, market value is always the lowest of

three amounts--replacement cost, floor, and ceiling.

T F 6. Overstating purchases will cause the gross margin to be understated by the

same amount.

T F 7. The lower-of-cost-or-market method may be applied to each inventory item, to

major classes or categories of inventory items, or to the inventory as a whole.

T F 8. Application of lower of cost or market to individual items results in a higher

inventory valuation than application to classes of inventory or inventory as a
whole.

T F 9. In valuing inventories at the lower of cost or market, the ceiling limitation is

applied so that inventories are not valued at more than their net realizable
value.

T F 10. Overstating ending inventory in Period 1 will cause ending inventory in Period
2 to be understated by the same amount.

357
358 Chapter 9  Cost of Goods Sold and Inventory: Estimation and Noncost Valuation

CHAPTER 9 -- QUIZ SOLUTIONS

Quiz A Quiz B

1. T 1. F
2. F 2. F
3. T 3. F
4. T 4. T
5. T 5. F
6. F 6. T
7. T 7. T
8. F 8. F
9. T 9. T
10. T 10. F