Chapter 8: Inventories: Special Valuation Issues
49. As a result of taking a physical inventory count on December 31, 20106 the Cookie Company inventory was
determined to be $425,000. The auditors for Cookie suspected an inventory shortage and used the gross profit method
to estimate the ending inventory. The accounting records for the company contained the following information:
Inventory (1/1/16)
$ 330,000
Purchases (2016)
1,770,000
Sales (2016)
2,200,000
Sales returns (2016)
100,000
Gross profit ratio
25% of sales
Using the gross profit method, what did the auditors estimate as the amount of the inventory shortage at December 31,
2016?
a.
$100,000
b.
$75,000
c.
$15,000
d.
$0
a
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50. The gross profit method is not used to
a.
b.
c.
d.
a
1
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51. The Jamison Company’s inventory was destroyed on July 4, 2016, when its warehouse caught on fire early in the
morning. Inventory was totally destroyed. The accounting records, which were located in a fireproof vault, contained
the following information:
Sales (1/1/16 through 7/3/16)
$240,000
Purchases (1/1/16 through 7/3/16)
180,000
Inventory (1/1/16)
45,000
Gross profit ratio
25% of cost
Using the gross profit method, what is the estimated cost of the inventory that was destroyed by the fire?
a.
$15,000
b.
$23,250
c.
$33,000
d.
$45,000
d
1
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United States – OH – Default City – AICPA: FN-Measurement
52. As a result of taking a physical inventory count on December 31, 2016, the Mona Lisa Company inventory was
determined to be $61,500. The auditors for Mona Lisa suspected an inventory shortage and used the gross profit
method to estimate the ending inventory. The accounting records for the company contained the following
information:
Inventory (1/1/16)
$ 130,000
Purchases (2016)
760,000
Sales (2016)
1,020,000
Sales returns (2016)
60,000
Gross profit ratio
25% of sales
Using the gross profit method, what did the auditors estimate as the amount of the inventory that should have been on
hand at December 31, 2016?
a.
$240,000
b.
$170,000
c.
$125,000
d.
$ 61,500
b
1
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53. Which one of the following statements regarding the gross profit method is not true?
a.
The gross profit method is not a practical method to use in real-world situations.
b.
The gross profit method is often used to estimate the year-end inventory for comparison to actual on-hand
inventory.
c.
The gross profit method is an acceptable method to estimate the cost of inventory destroyed by a casualty.
d.
The gross profit method results in a less accurate inventory valuation than the retail inventory method.
a
1
Easy
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54. Which one of the following statements regarding the gross profit method is true?
a.
The gross profit method is a complicated method to use in practice.
b.
The gross profit method results in a more accurate inventory valuation than the retail inventory method.
c.
The gross profit method is an acceptable method to estimate the cost of inventory destroyed by a casualty.
d.
The gross profit method is often used to calculate the year-end inventory for financial accounting purposes.
c
1
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55. At the beginning of 2016, the Joan Company had an inventory valued at $34,375 at cost ($50,000 at retail). During the
year, Joan purchased inventory for $50,000 ($70,000 at retail), and made markdowns of $7,500. Joan’s sales in 2016
were $62,500. What is Joan’s estimated ending inventory at FIFO cost using the retail inventory method?
a.
$37,500
b.
$40,000
c.
$39,000
d.
$34,375
b
1
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56. With the retail inventory method, how is the total beginning inventory value used in the calculation of the cost-to–
retail ratio for the current period under the following cost flow assumptions?
FIFO
Average Cost
LIFO
I.
Include
Include
Exclude
II.
Include
Exclude
Exclude
III.
Exclude
Exclude
Exclude
IV.
Exclude
Include
Exclude
a.
I
b.
II
c.
III
d.
IV
d
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United States – OH – Default City – AICPA: FN-Decision Modeling
57. If the net markdowns are excluded from the calculation of the cost-to-retail ratio in the retail inventory method, what
is the effect on the cost-to-retail ratio?
a.
The denominator of the ratio will be lower, which results in a higher cost-to–retail ratio.
b.
The denominator of the ratio will be higher, which results in a lower cost-to–retail ratio.
c.
The numerator of the ratio will be higher, which results in a higher cost-to-retail ratio.
d.
The numerator of the ratio will be lower, which results in a lower cost-to-retail ratio.
b
1
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58. The Alpha Company uses the retail inventory method for valuation of its inventory. If an item had a cost of $45, was
originally marked to sell at $60, was later priced at $55, and finally was priced at $68, the resulting price change is a
a.
net markup of $13.
b.
net markdown of $5 and a markup of $8.
c.
net markdown of zero and an a markup of $8.
d.
net markup of $23.
c
1
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59. The Alexandra Company uses the retail inventory method and the average cost flow assumption for preparation of its
interim reports. Information about Alexandra’s inventory in the second quarter of 2016 is shown below:
Cost
Retail
Beginning inventory
$255
$ 800
Purchases
600
1,400
Net markups
200
Net markdowns
(500)
Sales
1,300
What is the estimated cost of Alexandra’s inventory on June 30, 2016?
a.
$270
b.
$300
c.
$585
d.
$600
a
1
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60. The Rebecca Company provided the following data for its December 31, 2016, inventory maintained on the retail
basis.
At Cost
At Retail
Beginning inventory
$165,000
$225,000
Purchases
275,000
446,000
Markups (net)
45,750
Markdowns (net)
(32,000)
Sales
575,000
What is the estimated inventory at December 31, 2016, valued at lower of average cost or market?
a.
$87,018
b.
$70,522
c.
$62,951
d.
$44,069
a
1
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61. When using the cost-to-retail ratio for the retail inventory method,
a.
neither net markups nor markdowns are included in the computation of ending inventory for FIFO inventory.
b.
net markups but not net markdowns are included in the computation of ending inventory for LIFO inventory.
c.
net markups but not net markdowns are included in the computation of ending inventory for lower-of-cost-or-
market inventory.
d.
net markdowns but not net markups are included in the computation of ending inventory for Average Cost
inventory.
c
1
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62. Barbara Co. presents the following information:
Cost
Retail
Net markups
$ 785
Sales
2,850
Purchases
$1,570
2,150
Net markdowns
50
Beginning inventory
300
350
The company uses the average cost retail inventory method. What is the cost of ending inventory?
a.
$233.55
b.
$255.98
c.
$275.80
d.
$222.55
d
1
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63. Which one of the following statements is false concerning the retail inventory method?
a.
Net markups and markdowns are always added and subtracted in order to compute the retail value of ending
inventory.
b.
Markups and markdowns are recorded only at retail.
c.
In the lower of average cost or market method, net markups are excluded from the computation of the cost-to–
retail ratio.
d.
In computing the cost-to–retail ratio, purchase discounts affect only the cost of purchases and not the retail
amount of purchases.
c
1
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United States – OH – Default City – AICPA: FN-Decision Modeling
64. Which one of the following statements is false concerning the retail inventory method?
a.
In arriving at a cost-to–retail ratio, sales discounts are deducted from goods available for sale to determine
ending inventory at retail.
b.
Employee discounts are subtracted from goods available for sale to compute ending inventory at retail.
c.
Abnormal inventory spoilage would be subtracted at both cost and retail in the determination of goods
available for sale.
d.
Purchase returns and allowances must be subtracted from both the cost and retail value of the purchases.
a
1
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United States – OH – Default City – AICPA: FN-Decision Modeling
65. Eloise Corp. uses the FIFO retail inventory method and reports the following information:
Cost
Retail
Purchases
$21,450
$28,000
Sales
24,800
Net markups
1,000
Beginning inventory
2,100
3,000
Net markdowns
400
What is the FIFO value of ending inventory for Eloise Corp.?
a.
$5,004
b.
$5,053
c.
$5,068
d.
$5,100
d
1
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United States – OH – Default City – AICPA: FN-Measurement
66. Audrey Company uses the LIFO retail inventory method and reports the following information:
Cost
Retail
Beginning inventory
$ 540
$ 900
Net markups
1,000
Sales
4,500
Net markdowns
500
Purchases
3,150
4,000
What is the cost of ending inventory for Audrey Company?
a.
$540
b.
$562
c.
$615
d.
$630
a
1
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67. Leslie, Ltd. used the LIFO retail inventory method to determine its ending inventory. The accounting records for the
company contained the following relevant information:
Cost
Retail
Net purchases
$48,000
$79,000
Sales
91,000
Beginning inventory
12,000
25,000
Net markups
5,000
Net markdowns
4,000
What is the LIFO cost of the ending inventory?
a.
$6,720
b.
$7,706
c.
$8,000
d.
$8,400
a
1
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68. Darla’s Card Shop uses the average cost retail inventory method to determine the ending inventory. Darla’s accounting
records for the current year contained the following information:
Cost
Retail
Purchases
$216,000
$317,500
Sales
350,000
Beginning inventory
64,000
78,500
Net markups
12,000
Net markdowns
8,000
In addition, sales returns for the year were $28,000, and employee discounts taken were $6,000. What is the cost of
the ending inventory
a.
$35,000
b.
$50,400
c.
$54,600
d.
$58,800
b
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69. Stacie’s Shoes uses the FIFO retail inventory method to determine its ending inventory. The accounting records for
Stacie’s Shoes contained the following information:
Cost
Retail
Purchases
$242,000
$348,830
Sales
394,000
Sales returns
5,076
Beginning inventory
60,500
107,294
Net markups
32,800
Net markdowns
12,000
The freight-in charges for the merchandise were $7,500. What is the cost of ending inventory for Stacie’s Shoes?
a.
$55,792
b.
$57,200
c.
$59,400
d.
$61,281
d
1
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70. Debbie’s Bling Shop uses the lower of average cost or market retail inventory method to determine its ending
inventory. The accounting records for the current year for Debbie’s contained the following information:
Cost
Retail
Beginning inventory
$19,000
$ 27,500
Purchases
71,500
94,000
Sales
105,000
Net markups
5,167
Net markdowns
3,067
In addition, the accounting records for Debbie’s disclosed that freight-in charges were $6,700 and sales returns were
$2,833. What is the cost-to–retail percentage to be used for ending inventory calculations?
a.
71.4%
b.
73.2%
c.
76.7%
d.
78.6%
c
1
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United States – OH – Default City – AICPA: FN-Measurement
71. Laura’s Department Store uses the average cost retail inventory method to determine its ending inventory. The
accounting records for the current year for Laura’s contained the following information:
Cost
Retail
Purchases
$71,200
$87,750
Beginning inventory
17,000
23,500
Sales
98,000
Net markups
6,500
Net markdowns
3,000
In addition, the accounting records for Laura’s disclosed that purchases returns at cost and retail were $1,950 and
$4,250, respectively. What is the cost-to-retail percentage to be used for ending inventory calculations?
a.
75.1%
b.
79.8%
c.
76.8%
d.
78.1%
d
1
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United States – OH – Default City – AICPA: FN-Measurement
72. Caroline’s Music Store uses the average cost retail inventory method to determine its ending inventory. The
accounting records for the current year for Caroline’s contained the following information:
Cost
Retail
Purchases
$108,000
$137,750
Beginning inventory
28,000
34,000
Sales
156,900
Net markups
21,500
Net markdowns
7,500
Employee discounts
14,500
What is the cost-to-retail percentage to be used for ending inventory calculations?
a.
70.0%
b.
73.2%
c.
79.4%
d.
77.8%
b
1
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73. The Sherri’s Retail Shop uses the FIFO retail inventory method to determine its ending inventory. The accounting
records for the current year for Sherri’s contained the following information:
Cost
Retail
Purchases
$225,000
$362,250
Beginning inventory
55,000
73,000
Sales
385,750
Net markups
32,500
Net markdowns
19,750
Employee discounts
12,500
What is the cost-to-retail percentage to be used for ending inventory calculations?
a.
59.9%
b.
60.0%
c.
62.1%
d.
62.5%
b
1
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74. Which of the following variations of the retail inventory method would generally result in the lowest cost-to-retail
ratio in a period of declining prices?
a.
FIFO
b.
LIFO
c.
average cost
d.
lower of average cost or market
a
1
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75. Which of the following variations of the retail inventory method would generally result in the lowest cost-to-retail
ratio in a period of rising prices?
a.
FIFO
b.
LIFO
c.
average cost
d.
lower of average cost or market
b
1
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76. Which of the following items would not be used in the calculation of the cost-to-retail ratio if the FIFO retail
inventory method were used to determine the ending inventory?
a.
net markdowns
b.
purchases
c.
beginning inventory
d.
freight-in charges
c
1
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United States – OH – Default City – AICPA: FN-Decision Modeling
77. Which of the following is not a general assumption that underlies the retail inventory method?
a.
All inventory items are homogenous and have the same markup.
b.
The items in ending inventory are in proportion to the items available for sale.
c.
There were no changes in the retail price of inventory purchased during the period except the changes captured
by markups and markdowns.
d.
The cost-to-retail ratio remains constant over the accounting period
a
1
Easy
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78. Ann Co. uses the dollar-value LIFO retail method. The beginning inventory, purchased when the price index was 100,
had a retail value of $4,000 and a cost of $3,600. During the period, purchases amounted to $60,000 at retail ($52,800
at cost). Sales amounted to $56,300. The year-end price index was 110. What is the cost of ending inventory?
a.
$6,240
b.
$6,504
c.
$6,570
d.
$6,900
b
1
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79. Kelcie Sports uses the dollar-value LIFO retail method. The price index on January 1, 2016, was 100, and on that date
the inventory was $20,000 (retail) and $14,000 (cost). Additional information follows:
2016
2017
Purchases, retail
$160,000
$204,000
Purchases, cost
115,200
150,960
Sales
160,416
202,160
Price index, Dec. 31.
102
103
What is the cost of the December 31, 2017, inventory (to the nearest dollar)?
a.
$14,610
b.
$14,638
c.
$14,660
d.
$15,854
c
1
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80. Which of the following statements is true?
a.
Application of LIFO for financial reporting purposes must follow the tax laws applicable to LIFO.
b.
A company must use FIFO for both tax reporting and financial statement reporting.
c.
A company may use FIFO to valuate inventory and LIFO for financial statement reporting purposes.
d.
LIFO must be used for financial reporting if it is used for tax purposes.
d
1
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81. The dollar-value LIFO cost-to–cost retail ratio does not include
a.
beginning inventory.
b.
net markups and markdowns.
c.
ending inventory.
d.
purchases.
a
1
Easy
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82. The dollar-value LIFO retail method
a.
combines the principle of retail LIFO with dollar-value LIFO.
b.
does not really include retail LIFO in the calculation process.
c.
is a new principle.
d.
is an interesting theoretical exercise that is rarely used in practice.
a
1
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83. What is the effect on net income if a company fails to record a purchase in transit (FOB shipping point) and also fails
to include the purchase in physical inventory?
a.
Income is overstated.
b.
Income is understated.
c.
Income is correct.
d.
Not enough information is provided to determine the answer.
c
1
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84. If purchases are recorded correctly but ending physical inventory is understated, which one of the following situations
occurs for the current year?
a.
Working capital is understated and net income is overstated.
b.
Working capital and net income are understated.
c.
Working capital is overstated and net income is understated.
d.
Working capital and net income are overstated.
b
1
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85. The accountant for Angie Company made the following errors related to purchases of merchandise and ending
inventory in 2016:
1.
A $2,200 purchase of merchandise on credit was not recorded or included in ending
inventory.
2.
A $3,180 purchase of merchandise on credit was recorded, but it was inadvertently omitted
from the end-of-year physical inventory count.
Assuming a periodic inventory system, Angie’s Company’s 2016 net income will be
a.
understated by $3,180.
b.
understated by $2,380.
c.
overstated by $5,380.
d.
overstated by $3,180.
a
1
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86. The accountant for the Daneen Company made the following errors related to purchases of merchandise and ending
inventory in 2016:
1.
A $3,100 purchase of merchandise on credit early in 2015 was recorded and included in
ending inventory at December 31, 2016.
2.
A $2,750 purchase of merchandise on credit in 2014 was recorded, but it was not included
in the end-of-year physical inventory count.
Assuming a periodic inventory system, Daneen Company’s 2016 net income will be
a.
understated by $350.
b.
understated by $5,850.
c.
overstated by $5,850.
d.
overstated by $350.
d
1
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87. Barry Corp. reported 2016 net income of $40,000. However, the ending inventory in 2015 had been understated by
$3,000, and 2016’s ending inventory had been overstated by $6,000. Barry’s correct net income for 2016 was
a.
$31,000
b.
$34,000
c.
$43,000
d.
$46,000
a
1
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88. A purchase on credit is recorded twice and not corrected during the year-end physical inventory. Which of the
following statements correctly describes the impact of this error?
a.
The current year income on the income statement is correct because purchases are overstated and ending
inventory is overstated.
b.
The current year balance sheet ending inventory and accounts payable are understated.
c.
The succeeding year income on the income statement is incorrect because beginning inventory is understated.
d.
The succeeding year purchases are understated when the prior year purchases are corrected.
a
1
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