ACCT 301 Smartbook Chapter 9 Inventories Additional Issues solutions complete answers

ACCT 301 Smartbook Chapter 9 Inventories Additional Issues solutions complete answers 

 

The lower of cost or net realizable value approach is _____ for companies that use _____.

 

The selling price of inventory less any costs of completion, disposal, and transportation is

 

True or false: For financial reporting purposes, the lower of cost and net realizable value method can be applied to individual inventory items, categories of inventory, or the entire inventory.

 

Jones Company’s inventory cost is $100. The expected sales price is $110. The company estimates sales cost as 10% of the sales price. Consistent with the lower of cost and net realizable value approach, this inventory item should be valued at

 

Which of the following can be used to write-down inventory according to the lower of cost and net realizable value rule? (Select all that apply.)

 

GAAP requires companies to report inventory (Select all that apply.)

 

Feather Company’s inventory is recorded at its historical cost of $100,000. The replacement cost currently is $95,000; estimated selling price is $102,000; estimated selling cost is $5,000; normal profit is $10,000. The estimated net realizable value of the inventory is

 

Smith Company’s inventory cost is $100. The expected sales price is $110, estimated selling costs are $6. The normal gross profit ratio is 20% of selling price. The replacement cost of the inventory is $95. Smith Company uses the LIFO inventory method so must use the lower of cost or market approach and this inventory item should be valued at

 

For financial reporting, the lower of cost or net realizable value approach can be applied to (Select all that apply.)

 

Western Company recently lost its entire inventory in an earthquake. The following information is available from its accounting records: Beginning inventory: $5,000; purchases: $18,000; net sales: $40,000. The company’s average gross profit percentage is 40%. Using the gross profit method, a reasonable estimate of cost of goods sold for this past period would be

 

Smith Company’s inventory cost is $100. The expected sales price is $110, estimated selling costs are $6. Consistent with the lower of cost and net realizable value approach, this inventory item should be valued at

 

The               method uses the cost-to-retail percentage based on a current relationship between cost and selling price. (Enter one word per blank.)

 

Match each scenario with the most logical accounting treatment for recognizing an inventory market adjustment.

 

Match the terms relating to the retail inventory method to the correct explanation.

 

Smith Company’s inventory cost is $100. The expected sales price is $110, estimated selling costs are $6. The normal gross profit ratio is 20% of selling price. The replacement cost of the inventory is $106. Smith Company uses the LIFO inventory method so must use the lower of cost or market approach and this inventory item should be valued at

 

When using the retail method to approximate average cost, the cost-to-retail percentage is applied to which goods?

 

Berta Company recently lost its entire inventory in a fire. The following information is available from its accounting records: Beginning inventory: $1,000; purchases: $13,000; net sales: $20,000. The company's average gross profit percentage is 40%. Using the gross profit method, a reasonable estimate of cost of goods sold for this past period would be

 

The retail inventory method is also referred to as the        retail method. (Enter only one word.)

 

The cost to retail percentage is found by dividing goods available for sale at _____ by goods available for sale at _____.

 

Tore Company's records reveal the following information regarding its inventory. Beginning inventory was $100,000 at cost and 160,000 at retail. Purchases during the year were $300,000 at cost and $500,000 at retail. Markups were $10,000 and markdowns, $20,000. Assuming the conventional retail method is used and net sales were $500,000, ending inventory at retail would be (round the cost-to-retail percentage to two digits after the decimal point)

 

The original amount a company adds to cost to determine the selling price is known as              . (Enter one word per blank.)

 

The lower of cost or market approach is _____ for companies that use _____.

 

Retail inventory markdowns occur because of (Select all that apply.)

 

When the retail inventory method is used to approximate average cost, the cost-to-retail percentage is calculated by dividing _____ by _____. (Select all that apply.)

 

The conventional retail method gives a(n) _____ measurement for ending inventory than the lower of cost and net realizable value method.

 

Applying the retail inventory method to approximate the lower of average cost or market value is often referred to as the

 

A LIFO liquidation occurs when there is _____ in inventory quantity.

 

Tore Company's records reveal the following information regarding its inventory. Beginning inventory was $100,000 at cost and 160,000 at retail. Purchases during the year were $300,000 at cost and $500,000 at retail. Markups were $10,000 and markdowns, $20,000. Assuming the conventional retail method and net sales of $500,000, ending inventory at cost would be

 

Using the LIFO retail method, a new layer at retail is determined by subtracting what from ending inventory at retail?

 

Reduction in selling price below the original selling price is known as       . (Enter only one word.)

 

Goose Company utilizes the LIFO retail inventory method. Its cost-to-retail percentage is 60% based on beginning inventory and 64% based on current-period purchases. The company determined that during the current period a new layer was added with retail value of $50,000. The new layer at cost should be

 

When using the conventional retail method with markdowns present, the cost approximation of ending inventory will always be _____ the retail inventory method.

 

The dollar-value LIFO retail method is a combination of which of the following? (Select all that apply.)

 

True or false: The conventional retail method gives an exact amount of what ending inventory value should be.

 

Changes in inventory method generally are accounted for

 

When there is a net increase in the physical quantity of inventory during a period, the use of _____ results in an additional layer of inventory.

 

Accounting errors

 

Under the LIFO retail method, we determine that a new layer of inventory has been added during the period if

 

Under the LIFO retail inventory method, the cost of a new layer added during the period is determined by multiplying the retail value of the layer by the

 

By overstating an inventory write-down, profits _____ in future periods as the inventory is sold.

 

Changes in inventory methods, other than a change to LIFO, are treated

 

A contract that obligates a company to purchase a specific amount of merchandise, at a specific price, on or before a specific date is referred to as what?

 

Which of the following can create inventory errors? (Select all that apply.)

 

Companies utilize purchase agreements primarily to

 

If the purchase price decreases before a purchase commitment is exercised (Select all that apply.)

 

Inventory related note disclosures _____ earnings quality.

 

Using the _____ method allows a company to determine if there has been a "real" increase in quantity of inventory.

 

Which of the following are included in a purchase commitment? (Select all that apply.)

 

Why do companies enter into purchase commitment agreements? (Select all that apply.)

 

Purchase commitments carry the potential disadvantage or risk that

 

The dollar-value LIFO retail method (Select all that apply.)

 

 

 

Generally, voluntary changes in accounting principles are accounted for                   

An inventory        can occur due to a mistake in physical count or a mistake in pricing inventory quantities. (Enter only one word.)          

Jones Company’s inventory cost is $100. The expected sales price is $110, estimated selling costs are $12. Consistent with the lower of cost and net realizable value approach, this inventory item should be valued at                

Smith Company has several current product lines. In the past, the company applied the lower of cost and net realizable value method to individual inventory items. The company wants to make the process less time consuming and is exploring alternatives. What alternatives does the company have? (Select all that apply.)                  

Which of the following inventory-related events typically cause financial statement misstatements? (Select all that apply.)            

Which of the following must be known to apply the retail inventory method? (Select all that apply.)              

Smart Company rarely had to write down inventory. In the past, when inventory write-downs were necessary, the company debited cost of goods sold. Recently, write-downs have become more common and Smart is concerned about the distortion of its gross profit percentage. What alternative is available under GAAP?            

Smith Company’s inventory cost is $100. The expected sales price is $110, estimated selling costs are $6. The normal gross profit ratio is 20% of selling price. The replacement cost of the inventory is $102. Smith Company uses the LIFO inventory method so must use the lower of cost or market approach and this inventory item should be valued at                   

To use the _____ method, a company must maintain records of inventory and purchases at cost and at current selling price.             

True or false: Most changes in inventory method are accounted for prospectively.                 

The variety of inventory cost flow assumptions that can be utilized by companies typically does not impair earnings quality because          

 

 

Berta Company recently lost its entire inventory in a fire. The following information is available from its accounting records: Beginning inventory: $1,000; purchases: $13,000; net sales: $20,000. The company’s average gross profit percentage is 40%. Using the gross profit method, a reasonable estimate of the lost inventory would be

The _____ method assumes that cost of goods sold and ending inventory each consist of a mixture of all the goods available for sale.                  

Thompson Company utilizes the LIFO retail inventory method. Its cost-to-retail percentage is 50% based on beginning inventory and 55% based on current-period purchases. The company determined that during the current period a new layer was added with retail value of $100,000. The new layer at cost should be              

Tore Company’s records reveal the following information regarding its inventory: Beginning inventory was $100,000 at cost and 160,000 at retail. Purchases during the year were $300,000 at cost and $500,000 at retail. Net markups were $10,000 and net markdowns, $20,000. Assuming the conventional retail method, the cost-to-retail ratio will be                   

Using the LIFO retail method, we determine if a new layer at retail has been added by comparing beginning inventory at retail to what?                  

Western Company determines the cost of its inventory is $410,000 and net realizable value is $400,000. Western Company should (Select all that apply.)

 

credit inventory $10,000

not record a journal entry

credit cost of goods sold $10,000

debit inventory $10,000

debit cost of goods sold $10,000                  

When inventory is adjusted down to reflect net realizable value, which of the following can occur? (Select all that apply.)

 

Credit inventory income

Debit sales expense

Debit cost of goods sold

Debit inventory

Credit inventory                   

Ziegler Company properly applies the lower of cost and net realizable value rule and determines that its inventory value has declined below cost. Which of the following methods may Ziegler use to adjust its inventory to market value? (Select all that apply.)

 

Recognize the write-down as a separate line item.

 

Recognize the write-down as an addition to cost of goods sold.

 

Defer the write-down until the inventory is sold.                  

 

 

Accounting errors that are discovered during the same accounting period that they occurred must be corrected by

 

reversing the incorrect entry.

recording the correct entry.

adjusting the retained earnings balance.                   

Accounting principles should be applied consistently because this practice enhances            

The base year inventory for all future LIFO determinations is the                  

Correctly match the effect of each error with the specific error scenario.

 

Net income is overstated

Net income is understated

Net income is not affected

 

1. A purchase in transit that was shipped fob shipping point was neither counted nor recorded.

2. During the physical inventory, certain inventory items were double counted.

3. Inventory currently out on consignment was not included in the inventory count.             

If a company discovers an inventory error two years after the error occurred,            

If beginning inventory is overstated then cost of goods sold would be ____ and net income would be _____.              

Multi Company changed its inventory method from LIFO to FIFO. Multi must disclose the following information in its notes (Select all that apply.)

 

an estimation of future effect of the change on net income.

 

the effect on earnings per share amounts

 

the cumulative effect of the change on retained earnings                 

Multi Company changed its inventory method from LIFO to FIFO. Multi must disclose the following information in its notes (Select all that apply.)

 

the effect on earnings per share amounts

 

the cumulative effect of the change on retained earnings

 

an estimation of future effect of the change on net income.              

Note disclosures relating to the correction of prior-year errors include information about (Select all that apply.)

 

the nature of the error.

 

the effect on earnings per share.

 

each line item affected.

 

the effect on gross profit.                 

Omar Company uses a periodic inventory system and erroneously overstates ending inventory by $10,000 for the year ended December 31, 2017. Ignoring the tax effect, the effect on the 2017 financial statement includes an (Select all that apply.)

 

overstatement of cost of goods sold by $10,000.

 

understatement of cost of goods sold by $10,000.

 

overstatement of net income by $10,000.

 

understatement of net income by $10,000.                

Omar Company uses a periodic inventory system and erroneously overstates ending inventory by $10,000 for the year ended December 2016. If Omar discovers this error in 2017, it should               

On January 2, Allison Corp. changes from the LIFO to the FIFO method. Its prior-year financial statement notes show a LIFO reserve of $20,000 if it had utilized FIFO in prior years. Allison should make a journal entry that includes a                   

On January 2, Neumann Corp. changes from the LIFO to the FIFO method. Its financial statement notes indicate that beginning inventory would have been $10,000 higher if it had utilized FIFO during prior years. Neumann’s journal entry should include a           

Otto Company uses a periodic inventory system and erroneously understates ending inventory by $10,000 for the year ended December 2016. This error is not discovered until 2018. The company should

 

adjust retained earnings 2018 beginning balance.

adjust the inventory account for 2018.

retroactively restate its 2016 and 2017 financial statements.              

Panther Company’s bookkeeper debited supplies expense for the cost of goods sold during that month. The bookkeeper discovered the error prior to closing the books. The correcting entry would include (Select all that apply.)

 

debit to cost of goods sold.

debit to retained earnings.

credit to supplies expense.

credit to retained earnings.               

A retrospective change in inventory method would normally cause changes to          

Vogel Company changed its inventory method from FIFO to LIFO during the current year. Vogel must disclose the following information in its notes (Select all that apply.)

 

effect on current year earnings per share and income amounts

 

reason why retrospective treatment was impracticable

 

nature of and the justification for the change

 

cumulative change on prior-year retained earnings               

Werner Company’s accountant discovered that the prior-year financial statements were misstated due to a material inventory-related error. Werner must (Select all that apply.)

 

disclose the error in the notes and make no further adjustments.

 

adjust account balances that are incorrect as a result of the error.

 

restate its prior-year financial statements.

 

adjust current-year income statement accounts.                   

Werner Company’s accountant discovered that the prior-year financial statements were misstated due to a material inventory-related error. Werner must (Select all that apply.)

 

restate its prior-year financial statements.

 

adjust current-year income statement accounts.

 

adjust account balances that are incorrect as a result of the error.

 

disclose the error in the notes and make no further adjustments.                 

When a company applies a retrospective change in inventory method, they must revise beginning              to reflect the cumulative income effect of the difference in inventory methods for all prior years.                   

When a company changes to the _____ inventory method from any other method, it usually is impossible to calculate the income effect on prior years.                  

When a material inventory error is discovered in a period subsequent to when the error was made, which of the following must occur? (Select all that apply.)

 

Incorrect balances are corrected.

The effect on market stock price is disclosed in a note.

A correction of retained earnings is reported as a prior period adjustment.

Previous year’s financial statements are retrospectively restated.                   

When a material inventory error is discovered in a period subsequent to when the error was made, which of the following must occur? (Select all that apply.)

 

Previous year’s financial statements are retrospectively restated.

 

A correction of retained earnings is reported as a prior period adjustment.

 

Incorrect balances are corrected.

 

The effect on market stock price is disclosed in a note.          

When an inventory error is discovered in the period it occurred,                  

Which of the following are included in the disclosure note related to an inventory error? (Select all that apply.)

 

The nature of the error.

 

The impact of the correction on net income.

 

The impact of the correction on earnings per share.

 

The impact of the correction on stock price.              

Which of the following are required in the note disclosure of a company changing to the LIFO inventory method? (Select all that apply.)

 

justification for the change

 

effect on current year earnings per share and income amounts

 

cumulative change on prior-year retained earnings

 

the nature of the change

 

reason why retrospective application was impracticable          

Which of the following is correct regarding changes in accounting methods?

 

Changes in accounting principles violate the consistency concept and are prohibited.

 

Changes in accounting principles are permitted only once every 5 years.

 

Changes are permitted if they are made in response to changes in the company’s business environment.                 

Which of the following must be included in the disclosure note related to a change in inventory method? (Select all that apply.)

 

Justification that the change is preferable.

 

The effect of the change on items not reported on the face of the primary statements.

 

The cumulative effect of the change on retained earnings.

 

The cumulative effect of the change on market stock price.               

Which of the following must be included in the disclosure note related to a change in inventory method? (Select all that apply.)

 

The cumulative effect of the change on market stock price.

 

The cumulative effect of the change on retained earnings.

 

Justification that the change is preferable.

 

The effect of the change on items not reported on the face of the primary statements.                   

Which of the following must be included in the disclosure note related to a change in inventory method? (Select all that apply.)

 

The cumulative effect of the change on retained earnings.

 

The effect of the change on items not reported on the face of the primary statements.

 

Justification that the change is preferable.

 

The cumulative effect of the change on market stock price.               

 

 

Amber is in charge of preparing an annual budget for her company. As part of the budgeting process, she must estimate cost of goods sold and ending inventory. Which of the following statements is correct regarding the use of the gross profit method?                  

Beginning inventory plus net purchases equals          

The gross profit method is useful in situations where _____ of inventory are desirable            

Identify the situations for which ending inventory and cost of goods sold may be estimated utilizing the gross profit method. (Select all that apply.)           

Linden Company has three inventory items. Utilizing the lower of cost and net realizable value rule, Linden determines the following: Item A: cost exceeds net realizable value by $20 Item B: cost is $10 lower than net realizable value Item C, cost is $5 lower than net realizable value. If Linden applies the rule to individual items, it should recognize a loss of                 

Linden Company has three inventory items. Utilizing the lower of cost and net realizable value rule, Linden determines the following: Item A: cost is $40; net realizable value is $20 Item B, cost is $10; net realizable value is $20 Item C, cost is $5; net realizable value is $10 If Linden applies the rule to its entire inventory, it should recognize a loss of                   

The lower of average cost and net realizable value retail inventory method is also referred to as the ----- retail method. (Enter only one word.)           

The lower of cost and net realizable value method was developed to            

The lower of cost and net realizable value rule causes income to be reduced in the period when                 

Merger Company applies the lower of cost and net realizable value rule to individual inventory items. If the company were to apply the rule to the entire inventory balance, the chance of recording an inventory loss would                  

Net realizable value of inventory is determined by subtracting selling cost from the              

The retail inventory method tends to be more accurate than the gross profit method because it relies on the            

Under the LCM approach, market generally is defined as ______ cost              

Which of the following are estimated when using the gross profit method? (Select all that apply.)                

Which of the following information is needed to utilize the gross profit method? (Select all that apply.)