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Chapter 9 Inventories: Additional Issues
True/False Questions
1. Inventory is valued at the lower of cost, net realizable value, and replacement cost.
2. Net realizable value is selling price less costs of completion, disposal, and transportation.
3. The primary motivation behind the lower of cost and net realizable value rule is consistency.
4. Lower of cost and net realizable value can be applied to individual inventory items, to logical
categories of inventory, or to the entire inventory.
Chapter 9 Inventories: Additional Issues
5. Losses on reduction to NRV may be charged to either cost of goods sold or to a line item
among operating expenses.
6. An inventory written down due to the lower of cost and net realizable value may be written
back up if market value increases.
7. Under the LIFO retail method, the current period cost-to-retail percentage includes both net
markdowns and net markups.
8. Purchase returns and purchase discounts are ignored when computing cost-to-retail ratios for
the retail method.
9. The cost-to-retail percentage used in the retail method to approximate average cost
incorporates both markdowns and markups.
10. If the quantity of goods held in inventory decreased during the period, the dollar amount of
ending inventory can’t exceed the dollar amount of beginning inventory.
11. When changing from the average cost method to FIFO, the current year's income includes the
cumulative after-tax difference that would have resulted if the company had used FIFO in all
prior years.
12. A change from LIFO to any other inventory method is accounted for retrospectively.
13. For a purchase commitment contained within a single fiscal year, if the market price is less
than the contract price, the purchase is recorded at the contract price.
14. For a purchase commitment extending beyond the current fiscal year, if the market price on
the purchase date declines from the previous year-end price, the purchase is recorded at the
market price.
15. International Financial Reporting Standards allow the reversal of an inventory write-down.
Chapter 9 Inventories: Additional Issues
Multiple Choice Questions
16. Inventory is valued at:
a. Net realizable value.
b. Cost.
c. Replacement cost.
d. Lower of cost and net realizable value.
17. An argument against use of the lower of cost and net realizable value rule is its lack of:
a. Relevance.
b. Reliability.
c. Consistency.
d. Objectivity.
18. 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
Costs to sell 30,000
Replacement cost 520,000
What should be the reported value of Montana’s inventory?
a. $600,000.
b. $520,000.
c. $590,000.
d. $620,000.
Chapter 9 Inventories: Additional Issues
NRV = $590,000 which is less than cost.
Use the following to answer questions 19–22:
Data related to the inventories of Costco Medical Supply are presented below:
Surgical
Surgical
Rehab
Rehab
Equipment
Supplies
Equipment
Supplies
Selling price
$260
$100
$340
$165
Cost
170
90
250
162
Costs to sell
30
15
25
10
19. In applying the lower of cost and net realizable value rule, the inventory of surgical equipment
would be valued at:
a. $230.
b. $240.
c. $170.
d. $152.
20. In applying the lower of cost and net realizable value rule, the inventory of surgical supplies
would be valued at:
a. $100.
b. $90.
c. $85.
d. $75.
Chapter 9 Inventories: Additional Issues
21. In applying the lower of cost and net realizable value rule, the inventory of rehab equipment
would be valued at:
a. $315.
b. $340.
c. $225.
d. $250.
22. In applying the lower of cost and net realizable value rule, the inventory of rehab supplies
would be valued at:
a. $165.
b. $152.
c. $162.
d. $155.
Use the following to answer questions 23–26:
Data related to the inventories of Alpine Ski Equipment and Supplies is presented below:
Skis
Boots
Apparel
Supplies
Selling price
$180,000
$140,000
$120,000
$60,000
Cost
128,000
133,000
90,000
45,000
Replacement cost
120,000
130,000
110,000
41,000
Sales commission
10%
10%
10%
10%
23. In applying the lower of cost and net realizable value rule, the inventory of skis would be
valued at:
a. $162,000.
b. $128,000.
c. $120,000.
Chapter 9 Inventories: Additional Issues
d. $180,000.
24. In applying the lower of cost and net realizable value rule, the inventory of boots would be
valued at:
a. $140,000.
b. $133,000.
c. $126,000.
d. $130,000.
25. In applying the lower of cost and net realizable value rule, the inventory of apparel would be
valued at:
a. $108,000.
b. $ 90,000.
c. $110,000.
d. $99,000.
Chapter 9 Inventories: Additional Issues
26. In applying the lower of cost and net realizable value rule, the inventory of supplies would be
valued at:
a. $45,000.
b. $54,000.
c. $41,000.
d. $60,000.
27. 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.
28. On July 8, a fire destroyed the entire merchandise inventory on hand of Larrenaga Wholesale
Corporation. The following information is available:
Sales, January 1 through July 8 $700,000
Inventory, January 1 130,000
Purchases, January 1 through 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.
Chapter 9 Inventories: Additional Issues
29. California Inc., through no fault of its own, lost an entire plant due to an earthquake on May 1,
2016. In preparing its insurance claim on the inventory loss, the company developed the
following data: Inventory January 1, 2016, $300,000; sales and purchases from January 1,
2016, to May 1, 2016, $1,300,000 and $875,000, respectively. California consistently reports a
40% gross profit. The estimated inventory on May 1, 2016, is:
a. $302,500.
b. $360,000.
c. $395,000.
d. $455,000.
30. Howard's Supply Co. suffered a fire loss on April 20, 2016. The company's last physical
inventory was taken January 30, 2016, 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 these answer choices are correct.
31. Coastal Shores Inc. (CSI) was destroyed by Hurricane Fred on August 5, 2016. At January 1,
CSI reported an inventory of $170,000. Sales from January 1, 2016, to August 5, 2016, 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. $ 69,000.
d. None of these answer choices are correct.
32. Under the conventional retail method, the denominator in the cost-to-retail percentage
includes:
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.
33. Under the LIFO retail method, the denominator in the cost-to-retail percentage includes:
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.
34. Under the retail method, the denominator in the cost-to-retail percentage does not include:
a. Purchases.
b. Purchase returns.
c. Abnormal shortages.
d. Freight-in.
35. 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 these answer choices are correct.
36. 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.
Chapter 9 Inventories: Additional Issues
c. Purchases.
d. Net markdowns.
37. 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.
38. Under the retail method, 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 these answer choices are correct.
39. Fad City sells novel clothes that are subject to a great deal of price volatility. A recent item
that 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. $23.
b. $26.
Chapter 9 Inventories: Additional Issues
c. $29.
d. $35.
Chapter 9 Inventories: Additional Issues
Use the following to answer questions 40–43:
Harvey's Junk Jewelry started business January 1, 2016, and uses the LIFO retail method to estimate
ending inventory. Listed below is data accumulated for the year ended December 31, 2016:
Cost
Retail
Beginning inventory
$15,000
$23,000
Purchases
49,000
78,000
Freight-in
2,500
Purchase returns
1,700
2,600
Net markups
2,000
Net markdowns
4,100
Net sales
70,600
Employee discounts
700
40. The numerator for the current period's cost-to-retail percentage is:
a. $64,800.
b. $48,100.
c. $47,700.
d. $49,800.
41. The denominator for the current period's cost-to-retail percentage is:
a. $ 96,300.
b. $ 73,300.
c. $101,000.
d. $ 81,500.
42. The estimated ending inventory at retail is:
a. $27,300.
b. $25,000.
c. $26,600.
d. $26,400.
Chapter 9 Inventories: Additional Issues
43. To the nearest thousand, the estimated ending inventory at cost is (round cost-to-retail ratio to
whole percentage):
a. $16,000.
b. $15,000.
c. $13,000.
d. $19,000.
Chapter 9 Inventories: Additional Issues
44. Lacy's Linen Mart uses the average cost retail method to estimate inventories. Data for the
first six months of 2016 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, 2016, would be:
a. $ 68,200.
b. $ 55,000.
c. $ 71,500.
d. $ 63,250.
45. Hawkeye Auto Parts uses the average cost retail method to estimate inventories. Data for the
first six months of 2016 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, 2016, would be:
a. $330,000.
b. $360,000.
c. $362,300.
d. None of these answer choices are correct.
Chapter 9 Inventories: Additional Issues
Use the following to answer questions 46 and 47:
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 2016:
Cost
Retail
Beginning inventory
$ 80,000
$130,000
Net purchases
261,000
500,000
Net markups
25,000
Net markdowns
35,000
Net sales
520,000
46. The average cost-to-retail percentage is:
a. 52.2%.
b. 61.5%.
c. 56.8%
d. 55%.
47. To the nearest thousand, estimated ending inventory is:
a. $55,000.
b. $52,000.
c. $57,000.
d. None of these answer choices are correct.
Chapter 9 Inventories: Additional Issues
Use the following to answer questions 48 and 49:
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 2016.
Cost
Retail
Beginning inventory
$ 30,000
$ 50,000
Net purchases
125,000
220,000
Net markups
15,000
Net markdowns
6,000
Net sales
208,000
48. The average cost-to-retail percentage (rounded) is:
a. 74.5%.
b. 55.6%.
c. 57.4%.
d. 58.7%.
