Chapter 9 Inventories: Additional Issues
49. To the nearest thousand, estimated ending inventory is:
a. $41,000.
b. $37,000.
c. $51,000.
d. None of these answer choices are correct.
Chapter 9 Inventories: Additional Issues
Use the following to answer questions 50–52:
Data below for the year ended December 31, 2016, relates to Houdini Inc. Houdini started business
January 1, 2016, and uses the LIFO retail method to estimate ending inventory.
Cost
Retail
Beginning inventory
$66,000
$104,000
Net purchases
280,000
420,000
Net markups
20,000
Net markdowns
40,000
Net sales
375,000
50. Current period cost-to-retail percentage is:
a. 70.0%.
b. 68.7%.
c. 63.6%.
d. 63.5%.
51. Estimated ending inventory at retail is:
a. $ 65,000.
b. $169,600.
c. $ 25,000.
d. $129,000.
Chapter 9 Inventories: Additional Issues
52. Estimated ending inventory at cost is:
a. $90,720.
b. $83,500.
c. $91,600.
d. None of these answer choices are correct.
53. When computing the cost–to-retail percentage for the average cost retail method, included in
the denominator are:
a. Net markups and net markdowns.
b. Neither net markups nor net markdowns.
c. Net markups, but not net markdowns.
d. Net markdowns, but not net markups.
54. The conventional retail inventory method is based on:
a. Average cost.
b. LIFO cost.
c. Average, lower of cost and net realizable value.
d. LIFO, lower of cost and net realizable value.
55. Cloverdale, Inc., uses the conventional retail inventory method to account for inventory. The
following information relates to current year’s operations:
Cost Retail
Beginning inventory and purchases $313,500 $540,000
Net markups 30,000
Net markdowns 20,000
Net sales 480,000
What amount should be reported as cost of goods sold for the year?
a. $273,600.
b. $272,861.
c. $275,000.
d. None of these answer choices are correct.
Chapter 9 Inventories: Additional Issues
(480,000)
Use the following to answer questions 56 and 57:
Willie Nelson’s Boots uses the conventional retail method to estimate ending inventory. Cost data for
the most recent quarter is shown below:
Cost
Retail
Beginning inventory
$ 46,000
$ 63,000
Net purchases
154,000
215,000
Net markups
22,000
Net markdowns
35,000
Net sales
220,000
56. The conventional cost-to-retail percentage (rounded) is:
a. 82.6%.
b. 66.7%.
c. 71.9%.
d. 75.5%.
Chapter 9 Inventories: Additional Issues
57. To the nearest thousand, estimated ending inventory using the conventional retail method is:
a. $37,000.
b. $32,000.
c. $34,000.
d. $30,000.
Cost
$ 46,000
________
(220,000
Use the following to answer questions 58 and 59:
Clarabell Inc. uses the conventional retail method to estimate ending inventory. Cost data for the most
recent quarter is shown below:
Cost
Retail
Beginning inventory
$112,000
$191,000
Net purchases
402,000
703,000
Net markups
43,000
Net markdowns
21,000
Net sales
685,000
58. The conventional cost-to-retail percentage (rounded) is:
a. 54.9%.
b. 58.9%.
c. 53.6%.
d. 70.6%.
59. To the nearest thousand, estimated ending inventory using the conventional retail method is:
a. $163,000.
b. $124,000.
c. $127,000.
d. $136,000.
Chapter 9 Inventories: Additional Issues
60. Using the dollar-value LIFO retail method for inventory:
a. Is the same as dollar-value LIFO, except that the inventory is measured at retail, rather
than at cost.
b. Combines retail LIFO accounting with dollar-value LIFO accounting.
c. Allows companies to report inventory on the balance sheet at retail prices.
d. All of these answer choices are correct.
61. The first step, when using dollar-value LIFO retail method for inventory, is to:
a. Determine the estimated ending inventory at current year retail prices.
b. Determine the estimated cost of goods sold for the current year.
c. Determine the cost-to-retail percentage for the current year transactions.
d. Price index adjust the LIFO inventory layers.
62. The second step, when using dollar-value LIFO retail method for inventory, is to determine
the estimated:
a. Ending inventory at current year retail prices.
b. Cost of goods sold for the current year.
c. Ending inventory at cost.
d. Ending inventory at base year retail prices.
Chapter 9 Inventories: Additional Issues
63. Under the dollar-value LIFO retail method, to determine if the increase in the value of
inventory was due to an increase in quantities:
a. Compare beginning and ending inventory amounts at current year prices.
b. Compare beginning and ending inventory amounts after adjusting both amounts to the
average price level for the year.
c. Inflate beginning inventory amount to end of year prices and compare to ending inventory
amount.
d. Deflate the ending inventory amount to beginning of year prices and compare to the
beginning inventory amount.
64. Under the dollar-value LIFO retail method, to determine the value of a LIFO layer:
a. Divide the LIFO layer by the layer-year price index and multiply by the layer-year cost-
to-retail percentage.
b. Multiply the LIFO layer by the base year price index and the current year cost–to-retail
percentage.
c. Multiply the LIFO layer by the layer-year price index and by the layer-year cost-to-retail
percentage.
d. Divide the LIFO layer by the layer-year cost-to-retail percentage and multiply by the
layer-year price index.
65. Portman Inc. uses the conventional retail inventory method. Expressed in millions of dollars,
information about Portman’s 2016 inventory account is expressed in the table below:
Cost
Retail
Beginning inventory
$ 55
$ 90
Purchases
1,160
2,170
Freight-in
30
Purchase returns
45
115
Net markups
255
Net markdowns
100
Normal spoilage
60
Net sales
1,940
Chapter 9 Inventories: Additional Issues
What is the value of Portman’s inventory at 12/31/16?
a. $150 million.
b. $252 million.
c. $300 million.
d. None of these answer choices are correct.
66. Harlequin Co. has used the dollar-value LIFO retail method since it began operations in early
2015 (its base year). Its beginning inventory for 2016 was $36,000 at cost and $72,000 at retail prices.
At the end of 2016, it computed its estimated ending inventory at retail to be $120,000. Assuming its
cost-to-retail percentage for 2016 transactions was 60%, what is the inventory balance that Harlequin
Co. would report in its 12/31/16 balance sheet?
a. $64,800.
b. $72,000.
c. $120,000.
d. The balance can’t be determined with the given information.
Chapter 9 Inventories: Additional Issues
67. Retrospective treatment of prior years’ financial statements is required when there is a change
from:
a. Average cost to FIFO.
b. FIFO to average cost.
c. LIFO to average cost.
d. All of these answer choices are correct.
68. Prunedale Co. uses a periodic inventory system. Beginning inventory on January 1 was
overstated by $32,000, and its ending inventory on December 31 was understated by $62,000.
These errors were not discovered until the next year. As a result, Prunedale’s cost of goods
sold for this year was:
a. Overstated by $94,000.
b. Overstated by $30,000.
c. Understated by $94,000.
d. Understated by $30,000.
69. Poppy Co. uses a periodic inventory system. Beginning inventory on January 1 was
understated by $30,000, and its ending inventory on December 31 was understated by
$17,000. In addition, a purchase of merchandise costing $20,000 was incorrectly recorded as a
$2,000 purchase. None of these errors were discovered until the next year. As a result, Poppy’s
cost of goods sold for this year was:
a. Overstated by $31,000.
b. Overstated by $5,000.
c. Understated by $31,000.
d. Understated by $48,000.
Chapter 9 Inventories: Additional Issues
Use the following to answer questions 70 and 71:
On July 10, 2016, Johnson Corporation signed a purchase commitment to purchase inventory
for $200,000 on or before February 15, 2017. The company’s fiscal year-end is December 31.
The contract was exercised on February 1, 2017, and the inventory was purchased for cash at
the contract price. On the purchase date of February 1, the market price of the inventory was
$210,000. The market price of the inventory on December 31, 2016, was $180,000. The
company uses a perpetual inventory system.
70. How much loss on purchase commitment will Johnson recognize in 2016?
a. $10,000.
b. $20,000.
c. $30,000.
d. None.
71. At what amount will Johnson record the inventory purchased on February 1, 2017?
a. $210,000.
b. $200,000.
c. $180,000.
d. $190,000.
Chapter 9 Inventories: Additional Issues
Use the following to answer questions 72 and 73:
Sullivan Corporation has determined its year-end inventory on a FIFO basis to be $500,000.
Information pertaining to that inventory is as follows:
Selling price $520,000
Costs to sell 30,000
Replacement cost 440,000
72. What should be the reported value of Sullivan’s inventory?
a. $500,000.
b. $440,000.
c. $470,000.
d. $490,000.
73. What should be the reported value of Sullivan’s inventory if the company prepares its
financial statements according to International Financial Reporting Standards (IFRS)?
a. $500,000.
b. $440,000.
c. $470,000.
d. $490,000.
Chapter 9 Inventories: Additional Issues
74. Under International Financial Reporting Standards (IFRS), inventory is valued at the lower of
cost and:
a. Replacement cost.
b. Net realizable value.
c. Net realizable value reduced by a normal profit margin.
d. None of these answer choices are correct.
75. Haskell Corporation has determined its year-end inventory on a FIFO basis to be
$785,000. Information pertaining to that inventory is as follows:
Selling price $805,000
Costs to sell 35,000
Replacement cost 765,000
What should be the reported value of Haskell’s inventory if the company prepares its
financial statements according to International Financial Reporting Standards (IFRS)?
a. $765,000.
b. $785,000.
c. $770,000.
d. $750,000.
Chapter 9 Inventories: Additional Issues
Matching Pair Questions
76. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBER
1. Retrospective treatment
Estimates value of inventory based on historical
relationships.
____
2. LIFO retail
Requires retrospective treatment.
____
3. Gross profit method
Added in arriving at ending inventory at retail.
____
4. Net markup
Beginning inventory is not included in the
calculation of the current period’s cost–to-retail
percentage.
____
5. Change from LIFO to FIFO
Required for a change from FIFO to average
cost.
____
TERM
1. Retrospective treatment
Estimates value of inventory based on historical
2. LIFO retail
Requires retrospective treatment.
3. Gross profit method
Added in arriving at ending inventory at retail.
4. Net markup
Beginning inventory is not included in the
calculation of the current period’s cost–to-retail
percentage.
5. Change from LIFO to FIFO
Required for a change from FIFO to average cost.
Chapter 9 Inventories: Additional Issues
77. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBER
1. Requires retrospective
treatment
Change from LIFO to FIFO.
____
2. Normal spoilage
Cost-to-retail percentage is determined for all
goods available for sale.
____
3. Average cost retail method
Always deducted after arriving at the calculation
of the cost-to-retail percentage.
____
4. Net markdown
Deducted in arriving at ending inventory at retail.
____
5. Cost-to-retail percentage
Divide cost of goods available for sale by goods
available at retail.
____
TERM
1. Requires retrospective
treatment
Change from LIFO to FIFO.
goods available for sale.
3. Average cost retail method
Always deducted after arriving at the calculation of
the cost-to-retail percentage.
4. Net markdown
Deducted in arriving at ending inventory at retail.
78. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBER
1. Retail inventory method
Elimination of a price reduction.
____
2. Markdown cancellation
Gross profit divided by sales.
____
3. Normal profit margin
Gross profit divided by cost.
____
4. Markup on cost
Gross profit percentage times selling price.
____
5. Gross profit ratio
Ideal for high volume, low cost inventory.
____
Answer:
1. Retail inventory method
Elimination of a price reduction.
2. Markdown cancellation
Gross profit divided by sales.
3. Normal profit margin
Gross profit divided by cost.
4. Markup on cost
Gross profit percentage times selling price.
5. Gross profit ratio
Ideal for high volume, low cost inventory.
79. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBER
1. Conventional retail method
Increase in selling price.
____
2. Additional markup
Losses would be recognized when values decline.
____
3. Requires retrospective
restatement
Markdowns are not in the calculation of the cost–to–
retail percentage.
____
4. Lower of cost and NRV
Not GAAP for annual financial statements.
____
5. Gross profit method
Material inventory error discovered in a subsequent
year.
____
Answer:
NUMBER
1. Conventional retail method
Increase in selling price.
2. Additional markup
Losses would be recognized when values decline.
3. Requires retrospective
restatement
Markdowns are not in the calculation of the cost–
4. Lower of cost and NRV
Not GAAP for annual financial statements.
year.
80. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBER
1. Employee discounts
Must be added to sales if sales are recorded net of
discounts.
____
2. Net realizable value
Selling price less costs to sell.
____
3. Conventional retail method
Original increase in selling price above cost.
____
4. Inventory error, example
Approximates lower of average cost and NRV.
____
5. Initial markup
Purchases are unrecorded.
____
Answer:
TERM
discounts.
2. Net realizable value
Selling price less costs to sell.
3. Conventional retail method
Original increase in selling price above cost.
4. Inventory error, example
Approximates lower of average cost and NRV.
5. Initial markup
Purchases are unrecorded.
81. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBER
1. Change to LIFO from
FIFO
Reduction in selling price.
____
2. Dollar-value LIFO retail
method
Requires base year retail to be converted to layer
year retail and then to cost.
____
3. Markdown
Deducted from selling price when calculating
NRV.
____
4. Costs to sell
Selling price less costs to sell.
____
5. NRV
Usually impossible to calculate the effect on prior
years’ financial statements.
____
Answer:
1. Change to LIFO from
FIFO
Reduction in selling price.
2. Dollar-value LIFO retail
Requires base year retail to be converted to layer
3. Markdown
Deducted from selling price when calculating NRV.
4. Costs to sell
Selling price less costs to sell.
5. NRV
Usually impossible to calculate the effect on prior
years’ financial statements.