CH 09

CHAPTER 9
INVENTORIES: ADDITIONAL VALUATION ISSUES

IFRS questions are availale at t!e en" o# t!is $!a%ter&
TRUE'FALSE(Con$e%tual
Ans)er No& Des$ri%tion
T 1. When to use lower-of-cost-or-market.
F 2. Lower-of-cost-or-market and conservatism.
F 3. Purpose of the floor in L!".
T #. Lower-of-cost-or-market and consistenc$.
F %. &eportin' inventor$ at net reali(a)le value.
T *. +aluin' inventor$ at net reali(a)le value.
T ,. +aluation usin' relative sales value.
F -. .efinition of a )asket purchase.
F /. &ecordin' purchase commitments.
T 10. Loss on purchase commitments.
F 11. &ecordin' noncancela)le purchase contract.
T 12. 1ross profit method.
F 13. 1ross profit percenta'e.
T 1#. .isadvanta'e of 'ross profit method.
F 1%. !onventional retail method.
F 1*. .efinition of markup.
T 1,. 2ccountin' for a)normal shorta'es.
F 1-. !omputin' inventor$ turnover ratio.
T 1/. 2vera'e da$s to sell inventor$.
T 20 L3F4 retail method.
*ULTIPLE CHOICE(Con$e%tual
d 21. 5nowled'e of lower-of-cost-or-market valuations.
d 22. 2ppropriate use of L!" valuation.
c 23. .efinition of 6market6 under L!".
) 2#. .efinition of 6ceilin'.6
a 2%. .efinition of 6desi'nated market value.6
c 2*. 2pplication of lower-of-cost-or-market valuation.
d 2,. 7ffect of inventor$ write-down.
d
8
2-. &ecordin' inventor$ loss under direct method.
a 2/. Lower-of-cost-or-market description.
) 30. .efinition of 6floor6.
d 31. &ationale of the 6ceilin'6.
c 32. &eason inventories are stated at L!".
a 33. 2ccepta)le approaches in appl$in' L!".
d 3#. "ethods used to record inventor$ loss.
a 3%. &eason for reportin' inventor$ at sales price.
Test +an, #or Inter-e"iate A$$ountin./ T!irteent! E"ition
c
8
3*. &ecordin' inventor$ at net reali(a)le value.
*ULTIPLE CHOICE(Con$e%tual 0$ont&1
) 3,. 9et reali(a)le value under L!".
d 3-. .efinition of 6net reali(a)le value.6
a 3/. +aluation of inventor$ at net reali(a)le value.
d #0. 2ppropriate use of net reali(a)le value.
a #1. "aterial purchase commitments.
a #2. Loss reco'nition on purchase commitments.
)
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#3. &eportin' purchase commitments loss.
d ##. 2ccountin' for purchase commitments.
c #%. &ecord unreali(ed losses on purchase commitments.
a #*. :se of 'ross profit method.
d
8
#,. 1ross profit method assumptions.
d #-. 2ppropriate use of the 'ross profit method.
) #/. 2ppropriate use of the 'ross profit method.
d %0. 2dvanta'e of retail inventor$ method.
c %1. !onventional retail inventor$ method.
a %2. 2ssumptions of the retail inventor$ method.
d %3. 2ppropriate use of the retail inventor$ method.
) %#. "arkdowns and the conventional retail method.
a %%. "arkups and the conventional retail method.
) ;%*. 5nowled'e of the cost ratio for retail inventor$ methods.
a
8
%,. 3nformation needed in retail inventor$ method.
d
8
%-. &easons for usin' retail inventor$ method.
a %/. !ondition necessar$ to use retail method.
) *0. !onventional retail method.
d *1. 9et markups and the conventional retail method.
a *2. Frei'ht-in and the conventional retail method.
) *3. !ommon inventor$ disclosures.
)
P
*#. 3nventor$ cost flow assumptions.
a
P
*%. !omputin' avera'e da$s to sell inventor$.
c **. 3nventor$ turnover ratio.
c ;*,. .ollar-value L3F4 retail method.
*ULTIPLE CHOICE(Co-%utational
a *-. +alue inventor$ at L!".
) */. Lower-of-cost-or-market.
) ,0. Lower-of-cost-or-market.
d ,1. +alue inventor$ at L!".
) ,2. +alue inventor$ at L!".
c ,3. +alue inventor$ at L!".
c ,#. .etermine market value under L!".
) ,%. +alue inventor$ under L!".
d ,*. .etermine cost amount under L!".
c ,,. +alue inventor$ under L!".
) ,-. +alue inventor$ under L!".
a ,/. +alue inventor$ under L!".
9 ' 2
3nventories< 2dditional +aluation 3ssues
c -0. +alue inventor$ under L!".
*ULTIPLE CHOICE(Co-%utational 0$ont&1
c -1. .eterminin' net reali(a)le value.
c -2. .eterminin' net reali(a)le value.
) -3. &elative sales value method.
) -#. &elative sales value method.
c -%. &elative sales method of inventor$ valuation.
) -*. !alculate cost usin' relative sales value method.
d -,. !alculate cost usin' relative sales value method.
a --. !alculate cost usin' relative sales value method.
a -/. 7ntr$ for purchase commitment loss.
c /0. &ecordin' purchase under purchase commitment.
c /1. 7ntr$ for purchase commitment loss.
c /2. &eco'ni(in' loss on purchase commitments.
) /3. &eco'ni(in' loss on purchase commitments.
a /#. 7stimatin' endin' inventor$ usin' 'ross profit method.
a /%. 7stimatin' endin' inventor$ usin' 'ross profit method.
d /*. !alculate cost of 'oods sold 'iven a markup on cost.
d /,. !alculate merchandise purchases 'iven a markup on cost.
a /-. !alculate total sales from cost information.
a //. "arkup on cost e=uivalent to a markup on sellin' price.
) 100. 7stimate endin' inventor$ usin' 'ross profit method.
c 101. !alculate endin' inventor$ usin' 'ross profit method
. ) 102. !alculate endin' inventor$ usin' 'ross profit method.
a 103. 7stimate cost of inventor$ destro$ed )$ fire.
a 10#. .etermine items to )e included in inventor$.
c 10%. .etermine 'ross profit as percenta'e of cost.
c 10*. !alculate 'ross profit amount.
d 10,. !alculate endin' inventor$ usin' 'ross profit method.
d 10-. !alculate endin' inventor$ usin' 'ross profit method.
c 10/. !alculate endin' inventor$ usin' 'ross profit method.
a 110. !alculate endin' inventor$ usin' conventional retail.
c 111. !alculate endin' inventor$ usin' conventional retail.
) 112. !alculate endin' inventor$ usin' conventional retail.
) 113. !alculate cost of retail ratio to appro>imate L!".
) 11#. !alculate endin' inventor$ at retail.
a 11%. !alculate cost to retail ratio appro>imatin' L!".
) 11*. !alculate cost of inventor$ lost usin' retail method.
) ;11,. !alculate endin' inventor$ at cost usin' L3F4 retail.
c ;11-. .etermine cost to retail ratio usin' L3F4 retail.
a 11/. !alculate endin' inventor$ at retail.
a 120. !alculate endin' inventor$ at retail.
c 121. 2vera'e da$s to sell inventor$.
c 122. 2vera'e da$s to sell inventor$.
) 123. !alculate inventor$ turnover ratio.
d 12#. !alculate inventor$ turnover ratio.
d 12%. .etermine cost to retail ratio to appro>imate L!".
d 12*. !alculate endin' inventor$ at retail.
a 12,. !alculate endin' inventor$ usin' conventional retail.
c ;12-. .etermine cost to retail ratio usin' L3F4 cost.
9 ' 3
a ;12/. !alculate endin' inventor$ cost usin' dollar-value L3F4.
*ULTIPLE CHOICE(Co-%utational 0$ont&1
) ;130. !alculate cost of endin' inventor$ usin' L3F4 retail.
a ;131. !alculate endin' inventor$ cost usin' dollar-value L3F4.
P
These =uestions also appear in the Pro)lem-8olvin' 8urvival 1uide.
8
These =uestions also appear in the 8tud$ 1uide.
; This topic is dealt with in an 2ppendi> to the chapter.
*ULTIPLE CHOICE(CPA A"a%te"
d 132. &eco'ni(in' a loss due to L!".
) 133. 2ppropriate use of replacement costs in L!".
) 13#. 3dentification of the desi'nated market value.
a 13%. 7stimate cost of inventor$ lost )$ theft.
a 13*. .etermine cost of endin' inventor$ usin' retail method.
d 13,. .etermine cost of endin' inventor$ usin' retail method.
a ;13-. !alculate endin' inventor$ usin' L3F4 retail.
E4ERCISES
Ite- Des$ri%tion
7/-13/ Lower-of-cost-or-market.
7/-1#0 Lower-of-cost-or-market.
7/-1## &elative sales value method.
7/-1#% 1ross profit method.
7/-1#* 1ross profit method.
7/-1#, 1ross profit method.
7/-1#- !omparison of inventor$ methods.
9 ' 5
PRO+LE*S
Ite- Des$ri%tion
P/-1#/ 1ross profit method.
P/-1%0 &etail inventor$ method.
;P/-1%1 &etail inventor$ method.
;P/-1%2 L3F4 retail inventor$ method? fluctuatin' prices.
;P/-1%3 L3F4 retail inventor$ method? sta)le prices.
;P/-1%# .ollar-value L3F4 retail method.
;P/-1%% &etail L3F4.
CHAPTER LEARNIN6 O+7ECTIVES
1. .escri)e and appl$ the lower-of-cost-or-market rule.
2. 7>plain when companies value inventories at net reali(a)le value.
3. 7>plain when companies use the relative sales value method to value inventories.
#. .iscuss accountin' issues related to purchase commitments.
%. .etermine endin' inventor$ )$ appl$in' the 'ross profit method.
*. .etermine endin' inventor$ )$ appl$in' the retail inventor$ method.
,. 7>plain how to report and anal$(e inventor$.
;-. .etermine endin' inventor$ )$ appl$in' the L3F4 retail methods.
9 ' 8
9SU**AR: OF LEARNIN6 O+7ECTIVES +: ;UESTIONS
Item Type Item Type Item Type Item Type Item Type Item Type Item Type
Learnin. O<e$tive =
1. TF 23. "! 2/. "! *-. "! ,#. "! -0. "! 1#1. 7
2. TF 2#. "! 30. "! */. "! ,%. "! 132. "! 1#2. 7
3. TF 2%. "! 31. "! ,0. "! ,*. "! 133. "! 1#3. 7
#. TF 2*. "! 32. "! ,1. "! ,,. "! 13#. "! 1#-. 7
21. "! 2,. "! 33. "! ,2. "! ,-. "! 13/. 7
22. "!
8
2-. "! 3#. "! ,3. "! ,/. "! 1#0. 7
Learnin. O<e$tive 2
%. TF 3%. "! 3,. "! 3/. "! -1. "!
*. TF
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3*. "! 3-. "! #0. "! -2. "!
Learnin. O<e$tive 3
,. TF -3. "! -%. "! -,. "! 1##. 7
-. TF -#. "! -*. "! --. "!
Learnin. O<e$tive 5
/. TF 11. TF #2. "! ##. "! -/. "! /1. "! /3. "!
10. TF #1. "!
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#3. "! #%. "! /0. "! /2. "!
Learnin. O<e$tive 8
12. TF
8
#,. "! /%. "! //. "! 103. "! 10,. "! 1#%. 7
13. TF #-. "! /*. "! 100. "! 10#. "! 10-. "! 1#*. 7
1#. TF #/. "! /,. "! 101. "! 10%. "! 10/. "! 1#,. 7
#*. "! /#. "! /-. "! 102. "! 10*. "! 13%. "! 1#/. P
Learnin. O<e$tive >
1%. TF %2. "!
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%,. "! *2. "! 11#. "! 12%. "! 1#-. 7
1*. TF %3. "!
8
%-. "! 110. "! 11%. "! 12*. "! 1%0. P
1,. TF %#. "! %/. "! 111. "! 11*. "! 12,. "!
%0. "! %%. "! *0. "! 112. "! 11/. "! 13*. "!
%1. "! %*. "! *1. "! 113. "! 120. "! 13,. "!
Learnin. O<e$tive ?
1-. TF *3. "!
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*%. "! 121. "! 123. "!
1/. TF
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*#. "! **. "! 122. "! 12#. "!
Learnin. O<e$tive 9@
20. TF 11,. "! 12/. "! 13-. "! 1%2. P 1%%. P
%*. "! 11-. "! 130. "! 1#-. 7 1%3. P
*,. "! 12-. "! 131. "! 1%1. P 1%#. P
9ote< TF @ True-False
"! @ "ultiple !hoice
7 @ 7>ercise
P @ Pro)lem
9 ' >
TRUE'FALSE(Con$e%tual
1. 2 compan$ should a)andon the historical cost principle when the future utilit$ of the
inventor$ item falls )elow its ori'inal cost.
2. The lower-of-cost-or-market method is used for inventor$ despite )ein' less conservative
than valuin' inventor$ at market value.
3. The purpose of the floor in lower-of-cost-or-market considerations is to avoid overstatin'
inventor$.
#. 2pplication of the lower-of-cost-or-market rule results in inconsistenc$ )ecause a
compan$ ma$ value inventor$ at cost in one $ear and at market in the ne>t $ear.
%. 122P re=uires reportin' inventor$ at net reali(a)le value? even if a)ove cost? whenever
there is a controlled market with a =uoted price applica)le to all =uantities.
*. 2 reason for valuin' inventor$ at net reali(a)le value is that sometimes it is too difficult to
o)tain the cost fi'ures.
,. 3n a )asket purchase? the cost of the individual assets ac=uired is determined on the )asis
of their relative sales value.
-. 2 )asket purchase occurs when a compan$ a'rees to )u$ inventor$ weeks or months in
advance.
/. "ost purchase commitments must )e recorded as a lia)ilit$.
10. 3f the contract price on a noncancela)le purchase commitment e>ceeds the market price?
the )u$er should record an$ e>pected losses on the commitment in the period in which
the market decline takes place.
11. When a )u$er enters into a formal? noncancela)le purchase contract? an asset and a
lia)ilit$ are recorded at the inception of the contract.
12. The 'ross profit method can )e used to appro>imate the dollar amount of inventor$ on
hand.
13. 3n most situations? the 'ross profit percenta'e is stated as a percenta'e of cost.
1#. 2 disadvanta'e of the 'ross profit method is that it uses past percenta'es in determinin'
the markup.
1%. When the conventional retail method includes )oth net markups and net markdowns in the
cost-to-retail ratio? it appro>imates a lower-of-cost-or-market valuation.
1*. 3n the retail inventor$ method? the term markup means a markup on the ori'inal cost of an
inventor$ item.
1,. 3n the retail inventor$ method? a)normal shorta'es are deducted from )oth the cost and
retail amounts and reported as a loss.
9 ' ?
1-. The inventor$ turnover ratio is computed )$ dividin' the cost of 'oods sold )$ the endin'
inventor$ on hand.
1/. The avera'e da$s to sell inventor$ represents the avera'e num)er of da$sA sales for
which a compan$ has inventor$ on hand.
;20. The L3F4 retail method assumes that markups and markdowns appl$ onl$ to the 'oods
purchased durin' the period.
True False Ans)ers(Con$e%tual
Ite- Ans& Ite- Ans& Ite- Ans& Ite- Ans&
1. T *. T 11. F 1*. F
2. F ,. T 12. T 1,. T
3. F -. F 13. F 1-. F
#. T /. F 1#. T 1/. T
%. F 10. T 1%. F 20. T
*ULTIPLE CHOICE(Con$e%tual
21. Which of the followin' is true a)out lower-of-cost-or-marketB
a. 3t is inconsistent )ecause losses are reco'ni(ed )ut not 'ains.
). 3t usuall$ understates assets.
c. 3t can increase future income.
d. 2ll of these.
22. The primar$ )asis of accountin' for inventories is cost. 2 departure from the cost )asis of
pricin' the inventor$ is re=uired where there is evidence that when the 'oods are sold in
the ordinar$ course of )usiness their
a. sellin' price will )e less than their replacement cost.
). replacement cost will )e more than their net reali(a)le value.
c. cost will )e less than their replacement cost.
d. future utilit$ will )e less than their cost.
23. When valuin' raw materials inventor$ at lower-of-cost-or-market? what is the meanin' of
the term 6market6B
a. 9et reali(a)le value
). 9et reali(a)le value less a normal profit mar'in
c. !urrent replacement cost
d. .iscounted present value
2#. 3n no case can 6market6 in the lower-of-cost-or-market rule )e more than
a. estimated sellin' price in the ordinar$ course of )usiness.
). estimated sellin' price in the ordinar$ course of )usiness less reasona)l$ predicta)le
costs of completion and disposal.
c. estimated sellin' price in the ordinar$ course of )usiness less reasona)l$ predicta)le
costs of completion and disposal and an allowance for an appro>imatel$ normal profit
mar'in.
d. estimated sellin' price in the ordinar$ course of )usiness less reasona)l$ predicta)le
costs of completion and disposal? an allowance for an appro>imatel$ normal profit
mar'in? and an ade=uate reserve for possi)le future losses.
9 ' @
2%. .esi'nated market value
a. is alwa$s the middle value of replacement cost? net reali(a)le value? and net reali(a)le
value less a normal profit mar'in.
). should alwa$s )e e=ual to net reali(a)le value.
c. ma$ sometimes e>ceed net reali(a)le value.
d. should alwa$s )e e=ual to net reali(a)le value less a normal profit mar'in.
2*. Lower-of-cost-or-market
a. is most conservative if applied to the total inventor$.
). is most conservative if applied to maCor cate'ories of inventor$.
c. is most conservative if applied to individual items of inventor$.
d. must )e applied to maCor cate'ories for ta>es.
2,. 2n item of inventor$ purchased this period for D1%.00 has )een incorrectl$ written down to
its current replacement cost of D10.00. 3t sells durin' the followin' period for D30.00? its
normal sellin' price? with disposal costs of D3.00 and normal profit of D12.00. Which of the
followin' statements is not trueB
a. The cost of sales of the followin' $ear will )e understated.
). The current $earEs income is understated.
c. The closin' inventor$ of the current $ear is understated.
d. 3ncome of the followin' $ear will )e understated.
8
2-. When the direct method is used to record inventor$ at market
a. there is a direct reduction in the sellin' price of the product that results in a loss )ein'
recorded on the income statement prior to the sale.
). a loss is recorded directl$ in the inventor$ account )$ creditin' inventor$ and de)itin'
loss on inventor$ decline.
c. onl$ the portion of the loss attri)uta)le to inventor$ sold durin' the period is recorded
in the financial statements.
d. the market value fi'ure for endin' inventor$ is su)stituted for cost and the loss is
)uried in cost of 'oods sold.
2/. Lower-of-cost-or-market as it applies to inventor$ is )est descri)ed as the
a. drop of future utilit$ )elow its ori'inal cost.
). method of determinin' cost of 'oods sold.
c. assumption to determine inventor$ flow.
d. chan'e in inventor$ value to market value.
30. The floor to )e used in appl$in' the lower-of-cost-or-market method to inventor$ is
determined as the
a. net reali(a)le value.
). net reali(a)le value less normal profit mar'in.
c. replacement cost.
d. sellin' price less costs of completion and disposal.
31. What is the rationale )ehind the ceilin' when appl$in' the lower-of-cost-or-market method
to inventor$B
a. Prevents understatement of the inventor$ value.
). 2llows for a normal profit to )e earned.
c. 2llows for items to )e valued at replacement cost.
d. Prevents overstatement of the value of o)solete or dama'ed inventories.
9 ' 9
32. Wh$ are inventories stated at lower-of-cost-or-marketB
a. To report a loss when there is a decrease in the future utilit$.
). To )e conservative.
c. To report a loss when there is a decrease in the future utilit$ )elow the ori'inal cost.
d. To permit future profits to )e reco'ni(ed.
33. Which of the followin' is not an accepta)le approach in appl$in' the lower-of-cost-or-
market method to inventor$B
a. 3nventor$ location.
). !ate'ories of inventor$ items.
c. 3ndividual item.
d. Total of the inventor$.
3#. Which methodFsG ma$ )e used to record a loss due to a price decline in the value of
inventor$B
a. 2llowance method.
). 8ales method.
c. .irect method
d. Hoth a and c.
3%. Wh$ mi'ht inventor$ )e reported at sales prices Fnet reali(a)le value or market priceG
rather than costB
a. When there is a controlled market with a =uoted price applica)le to all =uantities and
when there are no si'nificant costs of disposal.
). When there are no si'nificant costs of disposal.
c. When a non-cancella)le contract e>ists to sell the inventor$.
d. When there is a controlled market with a =uoted price applica)le to all =uantities.
8
3*. &ecordin' inventor$ at net reali(a)le value is permitted? even if it is a)ove cost? when
there are no si'nificant costs of disposal involved and
a. the endin' inventor$ is determined )$ a ph$sical inventor$ count.
). a normal profit is not anticipated.
c. there is a controlled market with a =uoted price applica)le to all =uantities.
d. the internal revenue service is assured that the practice is not used onl$ to distort
reported net income.
3,. When inventor$ declines in value )elow ori'inal FhistoricalG cost? and this decline is
considered other than temporar$? what is the ma>imum amount that the inventor$ can )e
valued atB
a. 8ales price
). 9et reali(a)le value
c. Iistorical cost
d. 9et reali(a)le value reduced )$ a normal profit mar'in
9 ' =A
3-. 9et reali(a)le value is
a. ac=uisition cost plus costs to complete and sell.
). sellin' price.
c. sellin' price plus costs to complete and sell.
d. sellin' price less costs to complete and sell.
3/. 3f a unit of inventor$ has declined in value )elow ori'inal cost? )ut the market value
e>ceeds net reali(a)le value? the amount to )e used for purposes of inventor$ valuation is
). ori'inal cost.
c. market value.
d. net reali(a)le value less a normal profit mar'in.
#0. 3nventor$ ma$ )e recorded at net reali(a)le value if
a. there is a controlled market with a =uoted price.
). there are no si'nificant costs of disposal.
c. the inventor$ consists of precious metals or a'ricultural products.
d. all of these.
#1. 3f a material amount of inventor$ has )een ordered throu'h a formal purchase contract at
the )alance sheet date for future deliver$ at firm prices?
a. this fact must )e disclosed.
). disclosure is re=uired onl$ if prices have declined since the date of the order.
c. disclosure is re=uired onl$ if prices have since risen su)stantiall$.
d. an appropriation of retained earnin's is necessar$.
#2. The credit )alance that arises when a net loss on a purchase commitment is reco'ni(ed
should )e
a. presented as a current lia)ilit$.
). su)tracted from endin' inventor$.
c. presented as an appropriation of retained earnin's.
d. presented in the income statement.
P
#3. 3n 2010? 4rear "anufacturin' si'ned a contract with a supplier to purchase raw materials
in 2011 for D,00?000. Hefore the .ecem)er 31? 2010 )alance sheet date? the market price
for these materials dropped to D%10?000. The Cournal entr$ to record this situation at
.ecem)er 31? 2010 will result in a credit that should )e reported
a. as a valuation account to 3nventor$ on the )alance sheet.
). as a current lia)ilit$.
c. as an appropriation of retained earnin's.
d. on the income statement.
##. 2t the end of the fiscal $ear? 2pha 2irlines has an outstandin' non-cancella)le purchase
commitment for the purchase of 1 million 'allons of Cet fuel at a price of D#.10 per 'allon
for deliver$ durin' the comin' summer. The compan$ prices its inventor$ at the lower of
cost or market. 3f the market price for Cet fuel at the end of the $ear is D#.%0? how would
this situation )e reflected in the annual financial statementsB
a. &ecord unreali(ed 'ains of D#00?000 and disclose the e>istence of the purchase commitment.
). 9o impact.
c. &ecord unreali(ed losses of D#00?000 and disclose the e>istence of the purchase commitment.
d. .isclose the e>istence of the purchase commitment.
9 ' ==
#%. 2t the end of the fiscal $ear? 2pha 2irlines has an outstandin' purchase commitment for
the purchase of 1 million 'allons of Cet fuel at a price of D#.*0 per 'allon for deliver$ durin'
the comin' summer. The compan$ prices its inventor$ at the lower of cost or market. 3f the
market price for Cet fuel at the end of the $ear is D#.2%? how would this situation )e
reflected in the annual financial statementsB
a. &ecord unreali(ed 'ains of D3%0?000 and disclose the e>istence of the purchase commitment.
). 9o impact.
c. &ecord unreali(ed losses of D3%0?000 and disclose the e>istence of the purchase commitment.
d. .isclose the e>istence of the purchase commitment.
#*. Iow is the 'ross profit method used as it relates to inventor$ valuationB
a. +erif$ the accurac$ of the perpetual inventor$ records.
). +erit$ the accurac$ of the ph$sical inventor$.
c. To estimate cost of 'oods sold.
d. To provide an inventor$ value of L3F4 inventories.
8
#,. Which of the followin' is not a )asic assumption of the 'ross profit methodB
a. The )e'innin' inventor$ plus the purchases e=ual total 'oods to )e accounted for.
). 1oods not sold must )e on hand.
c. 3f the sales? reduced to the cost )asis? are deducted from the sum of the openin'
inventor$ plus purchases? the result is the amount of inventor$ on hand.
d. The total amount of purchases and the total amount of sales remain relativel$
unchan'ed from the compara)le previous period.
#-. The 'ross profit method of inventor$ valuation is invalid when
a. a portion of the inventor$ is destro$ed.
). there is a su)stantial increase in inventor$ durin' the $ear.
c. there is no )e'innin' inventor$ )ecause it is the first $ear of operation.
d. none of these.
#/. Which statement is not true a)out the 'ross profit method of inventor$ valuationB
a. 3t ma$ )e used to estimate inventories for interim statements.
). 3t ma$ )e used to estimate inventories for annual statements.
c. 3t ma$ )e used )$ auditors.
d. 9one of these.
%0. 2 maCor advanta'e of the retail inventor$ method is that it
a. provides relia)le results in cases where the distri)ution of items in the inventor$ is
different from that of items sold durin' the period.
). hides costs from competitors and customers.
c. 'ives a more accurate statement of inventor$ costs than other methods.
d. provides a method for inventor$ control and facilitates determination of the periodic
inventor$ for certain t$pes of companies.
%1. 2n inventor$ method which is desi'ned to appro>imate inventor$ valuation at the lower of
cost or market is
a. last-in? first-out.
). first-in? first-out.
c. conventional retail method.
d. specific identification.
9 ' =2
%2. The retail inventor$ method is )ased on the assumption that the
a. final inventor$ and the total of 'oods availa)le for sale contain the same proportion of
hi'h-cost and low-cost ratio 'oods.
). ratio of 'ross mar'in to sales is appro>imatel$ the same each period.
c. ratio of cost to retail chan'es at a constant rate.
d. proportions of markups and markdowns to sellin' price are the same.
%3. Which statement is true a)out the retail inventor$ methodB
a. 3t ma$ not )e used to estimate inventories for interim statements.
). 3t ma$ not )e used to estimate inventories for annual statements.
c. 3t ma$ not )e used )$ auditors.
d. 9one of these.
%#. When the conventional retail inventor$ method is used? markdowns are commonl$ i'nored
in the computation of the cost to retail ratio )ecause
a. there ma$ )e no markdowns in a 'iven $ear.
). this tends to 'ive a )etter appro>imation of the lower of cost or market.
c. markups are also i'nored.
d. this tends to result in the showin' of a normal profit mar'in in a period when no
markdown 'oods have )een sold.
%%. To produce an inventor$ valuation which appro>imates the lower of cost or market usin'
the conventional retail inventor$ method? the computation of the ratio of cost to retail
should
a. include markups )ut not markdowns.
). include markups and markdowns.
c. i'nore )oth markups and markdowns.
d. include markdowns )ut not markups.
;%*. When calculatin' the cost ratio for the retail inventor$ method?
a. if it is the conventional method? the )e'innin' inventor$ is included and markdowns
are deducted.
). if it is the L3F4 method? the )e'innin' inventor$ is e>cluded and markdowns are
deducted.
c. if it is the L3F4 method? the )e'innin' inventor$ is included and markdowns are not
deducted.
d. if it is the conventional method? the )e'innin' inventor$ is e>cluded and markdowns
are not deducted.
8
%,. Which of the followin' is not re=uired when usin' the retail inventor$ methodB
a. 2ll inventor$ items must )e cate'ori(ed accordin' to the retail markup percenta'e
which reflects the itemEs sellin' price.
). 2 record of the total cost and retail value of 'oods purchased.
c. 2 record of the total cost and retail value of the 'oods availa)le for sale.
d. Total sales for the period.
8
%-. Which of the followin' is not a reason the retail inventor$ method is used widel$B
a. 2s a control measure in determinin' inventor$ shorta'es
). For insurance information
c. To permit the computation of net income without a ph$sical count of inventor$
d. To defer income ta> lia)ilit$
9 ' =3
%/. What condition is not necessar$ in order to use the retail method to provide inventor$
resultsB
a. &etailer keeps a record of the total costs of products sold for the period.
). &etailer keeps a record of the total costs and retail value of 'oods purchased.
c. &etailer keeps a record of the total costs and retail value of 'oods availa)le for sale.
d. &etailer keeps a record of sales for the period.
*0. What method $ields results that are essentiall$ the same as those of the conventional
retail methodB
a. F3F4.
). Lower-of-avera'e-cost-or-market.
c. 2vera'e cost.
d. L3F4.
*1. What is the effect of net markups on the cost-retail ratio when usin' the conventional retail
methodB
a. 3ncreases the cost-retail ratio.
). 9o effect on the cost-retail ratio.
c. .epends on the amount of the net markdowns.
d. .ecreases the cost-retail ratio.
*2. What is the effect of frei'ht-in on the cost-retail ratio when usin' the conventional retail
methodB
a. 3ncreases the cost-retail ratio.
). 9o effect on the cost-retail ratio.
c. .epends on the amount of the net markups.
d. .ecreases the cost-retail ratio.
*3. Which of the followin' is not a common disclosure for inventoriesB
a. 3nventor$ composition.
). 3nventor$ location.
c. 3nventor$ financin' arran'ements.
d. 3nventor$ costin' methods emplo$ed.
P
*#. Which of the followin' statements is false re'ardin' an assumption of inventor$ cost flowB
a. The cost flow assumption need not correspond to the actual ph$sical flow of 'oods.
). The assumption selected ma$ )e chan'ed each accountin' period.
c. The F3F4 assumption uses the earliest ac=uired prices to cost the items sold durin' a
period.
d. The L3F4 assumption uses the earliest ac=uired prices to cost the items on hand at
the end of an accountin' period.
P
*%. The avera'e da$s to sell inventor$ is computed )$ dividin'
a. 3*% da$s )$ the inventor$ turnover ratio.
). the inventor$ turnover ratio )$ 3*% da$s.
c. net sales )$ the inventor$ turnover ratio.
d. 3*% da$s )$ cost of 'oods sold.
9 ' =5
**. The inventor$ turnover ratio is computed )$ dividin' the cost of 'oods sold )$
a. )e'innin' inventor$.
). endin' inventor$.
c. avera'e inventor$.
d. num)er of da$s in the $ear.
;*,. When usin' dollar-value L3F4? if the incremental la$er was added last $ear? it should )e
multiplied )$
a. last $earEs cost ratio and this $earEs inde>.
). this $earEs cost ratio and this $earEs inde>.
c. last $earEs cost ratio and last $earEs inde>.
d. this $earEs cost ratio and last $earEs inde>.
*ulti%le C!oi$e Ans)ers(Con$e%tual
Ite- Ans& Ite- Ans& Ite- Ans& Ite- Ans& Ite- Ans& Ite- Ans& Ite- Ans&
21. d 2-. d 3%. a #2. a #/. ) ;%*. ) *3. )
22. d 2/. a 3*. c #3. ) %0. d %,. a *#. )
23. c 30. ) 3,. ) ##. d %1. c %-. d *%. a
2#. ) 31. d 3-. d #%. c %2. a %/. a **. c
2%. a 32. c 3/. a #*. a %3. d *0. ) ;*,. c
2*. c 33. a #0. d #,. d %#. ) *1. d
2,. d 3#. d #1. a #-. d %%. a *2. a
8olutions to those "ultiple !hoice =uestions for which the answer is none of these.
#-. The 'ross profit percenta'e applica)le to the 'oods in endin' inventor$ is different from
the percenta'e applica)le to the 'oods sold durin' the period.
%3. "an$ answers are possi)le.
*ULTIPLE CHOICE(Co-%utational
*-. 4slo !orporation has two products in its endin' inventor$? each accounted for at the lower
of cost or market. 2 profit mar'in of 30J on sellin' price is considered normal for each
product. 8pecific data with respect to each product follows<
Product K1 Product K2
Iistorical cost D#0.00 D ,0.00
&eplacement cost #%.00 %#.00
7stimated cost to dispose 10.00 2*.00
7stimated sellin' price -0.00 130.00
3n pricin' its endin' inventor$ usin' the lower-of-cost-or-market? what unit values should
4slo use for products K1 and K2? respectivel$B
a. D#0.00 and D*%.00.
). D#*.00 and D*%.00.
c. D#*.00 and D*0.00.
d. D#%.00 and D%#.00.
9 ' =8
*/. "uckenthaler !ompan$ sells product 200%W8! for D20 per unit. The cost of one unit of
200%W8! is D1-? and the replacement cost is D1,. The estimated cost to dispose of a unit
is D#? and the normal profit is #0J. 2t what amount per unit should product 200%W8! )e
reported? appl$in' lower-of-cost-or-marketB
a. D-.
). D1*.
c. D1,.
d. D1-.
,0. Le>in'ton !ompan$ sells product 1/,*9L! for D#0 per unit. The cost of one unit of
1/,*9L! is D3*? and the replacement cost is D3#. The estimated cost to dispose of a unit
is D-? and the normal profit is #0J. 2t what amount per unit should product 1/,*9L! )e
reported? appl$in' lower-of-cost-or-marketB
a. D1*.
). D32.
c. D3#.
d. D3*.
,1. 1iven the ac=uisition cost of product L is D32.00? the net reali(a)le value for product L is
D2/.00? the normal profit for product L is D2.%0? and the market value Freplacement costG
for product L is D30.00? what is the proper per unit inventor$ price for product LB
a. D32.00.
). D30.00.
c. D2*.%0.
d. D2/.00.
,2. 1iven the ac=uisition cost of product 2LPI2 is D-.%0? the net reali(a)le value for product
2LPI2 is D-.3%? the normal profit for product 2LPI2 is D0.*2? and the market value
Freplacement costG for product 2LPI2 is D,.3*? what is the proper per unit inventor$ price
for product 2LPI2B
a. D-.%0.
). D,.,3
c. D,.3*.
d. D-.3%.
,3. 1iven the ac=uisition cost of product .ominoe is D-*.*2? the net reali(a)le value for
product .ominoe is D,*./-? the normal profit for product .ominoe is D-.*3? and the
market value Freplacement costG for product .ominoe is D-1.3*? what is the proper
per unit inventor$ price for product .ominoeB
a. D-1.3*.
). D*-.3%.
c. D,*./-.
d. D-*.*2.
,#. 1iven the historical cost of product L is D1*0? the sellin' price of product L is D1/0? costs
to sell product L are D21? the replacement cost for product L is D1**? and the normal profit
mar'in is #0J of sales price? what is the market value that should )e used in the lower-of-
cost-or-market comparisonB
a. D1*0.
). D1*/.
c. D1**.
d. D /3.
9 ' =>
,%. 1iven the historical cost of product L is D1*0? the sellin' price of product L is D1/? costs to
sell product L are D21? the replacement cost for product L is D1**? and the normal profit
mar'in is #0J of sales price? what is the amount that should )e used to value the
inventor$ under the lower-of-cost-or-market methodB
a. D /3.
). D1*0.
c. D1*/.
d. D1**.
,*. 1iven the historical cost of product .ominoe is D*%? the sellin' price of product .ominoe
is D/0? costs to sell product .ominoe are D1*? the replacement cost for product .ominoe
is D*0? and the normal profit mar'in is 20J of sales price? what is the cost amount that
should )e used in the lower-of-cost-or-market comparisonB
a. D,#.
). D*0.
c. D%*.
d. D*%.
,,. 1iven the historical cost of product .ominoe is D*%? the sellin' price of product .ominoe
is D/0? costs to sell product .ominoe are D1*? the replacement cost for product .ominoe
is D*0? and the normal profit mar'in is 20J of sales price? what is the amount that should
)e used to value the inventor$ under the lower-of-cost-or-market methodB
a. D*%.
). D%*.
c. D*0.
d. D,#.
,-. &o)ust 3nc. has the followin' information related to an item in its endin' inventor$.
Product ** has a cost of D*?%00? a replacement cost of D*?100? a net reali(a)le value of
D*?200? and a normal profit mar'in of D#00. What is the final lower-of-cost-or-market
inventor$ value for product **B
a. D%?-00.
). D*?100.
c. D*?%00.
d. D*?200.
,/. &o)ust 3nc. has the followin' information related to an item in its endin' inventor$. Packit
FProduct K -,#G has a cost of D*/-? a replacement cost of D%3*? a net reali(a)le value of
D*2#? and a normal profit mar'in of D2-. What is the final lower-of-cost-or-market
inventor$ value for PackitB
a. D%/*.
). D*/-.
c. D%3*.
d. D*2#.
9 ' =?
-0. &o)ust 3nc. has the followin' information related to an item in its endin' inventor$. 2cer
Top has a cost of D%02? a replacement cost of D#*-? a net reali(a)le value of D%31? and a
normal profit mar'in of D*-. What is the final lower-of-cost-or-market inventor$ value for
2cer TopB
a. D#*3.
). D%02.
c. D#*-.
d. D%31.
-1. "ortenson !orporation sells its product? a rare metal? in a controlled market with a =uoted
price applica)le to all =uantities. The total cost of %?000 pounds of the metal now held in
inventor$ is D2%0?000. The total sellin' price is D*00?000? and estimated costs of disposal
are D10?000. 2t what amount should the inventor$ of %?000 pounds )e reported in the
)alance sheetB
a. D2#0?000.
). D2%0?000.
c. D%/0?000.
d. D*00?000.
-2. &odri'ue( !orporation sells its product? a rare metal? in a controlled market with a =uoted
price applica)le to all =uantities. The total cost of %?000 pounds of the metal now held in
inventor$ is D1%0?000. The total sellin' price is D3%0?000? and estimated costs of disposal
are D%?000. 2t what amount should the inventor$ of %?000 pounds )e reported in the
)alance sheetB
a. D1#%?000.
). D1%0?000.
c. D3#%?000.
d. D3%0?000.
-3. Turner !orporation ac=uired two inventor$ items at a lump-sum cost of D%0?000. The
ac=uisition included 3?000 units of product LF? and ,?000 units of product 1H. LF normall$
sells for D1% per unit? and 1H for D% per unit. 3f Turner sells 1?000 units of LF? what amount
of 'ross profit should it reco'ni(eB
a. D1?-,%
). D%?*2%.
c. D10?000.
d. D11?-,%.
-#. &o)ertson !orporation ac=uired two inventor$ items at a lump-sum cost of D#0?000. The
ac=uisition included 3?000 units of product !F? and ,?000 units of product 3H. !F normall$
sells for D12 per unit? and 3H for D# per unit. 3f &o)ertson sells 1?000 units of !F? what
amount of 'ross profit should it reco'ni(eB
a. D1?%00.
). D#?%00.
c. D-?000.
d. D/?%00.
9 ' =@
-%. 2t a lump-sum cost of D#-?000? Pratt !ompan$ recentl$ purchased the followin' items for
resale<
3tem 9o. of 3tems Purchased &esale Price Per :nit
" #?000 D2.%0
9 2?000 -.00
4 *?000 #.00
The appropriate cost per unit of inventor$ is<
" 9 4
a. D2.%0 D-.00 D#.00
). D2.0, D13.2# D2.21
c. D2.#0 D,.*- D3.-#
d. D#.00 D#.00 D#.00
-*. !onfectioners? a chain of cand$ stores? purchases its cand$ in )ulk from its suppliers. For
a recent shipment? the compan$ paid D3?000 and received -?%00 pieces of cand$ that are
allocated amon' three 'roups. 1roup 1 consists of 2?%00 pieces that are e>pected to sell
for D0.2% each. 1roup 2 consists of %?%00 pieces that are e>pected to sell for 0.*0 each.
1roup 3 consists of %00 pieces that are e>pected to sell for D1.20 each. :sin' the relative
sales value method? what is the cost per item in 'roup 1B
a. D0.2%0.
). D0.1**.
c. D0.200.
d. D.03,%.
-,. !onfectioners? a chain of cand$ stores? purchases its cand$ in )ulk from its suppliers. For
a. D0.3,%.
). D0.*00.
c. D0.3%0.
d. D.03/-.
--. !onfectioners? a chain of cand$ stores? purchases its cand$ in )ulk from its suppliers. For
a. D0.,/*.
). D0.3,%.
c. D1.200.
d. D0./00.
9 ' =9
-/. .urin' the current fiscal $ear? Meremiah !orp. si'ned a lon'-term noncancella)le
purchase commitment with its primar$ supplier. Meremiah a'reed to purchase D2.% million
of raw materials durin' the ne>t fiscal $ear under this contract. 2t the end of the current
fiscal $ear? the raw material to )e purchased under this contract had a market value of
D2.3 million. What is the Cournal entr$ at the end of the current fiscal $earB
a. .e)it :nreali(ed Loss for D200?000 and credit 7stimated Lia)ilit$ on Purchase
!ommitment for D200?000.
). .e)it 7stimated lia)ilit$ on Purchase !ommitment for D200?000 and credit :nreali(ed
1ain for D200?000.
c. .e)it :nreali(ed Loss for D2?300?000 and credit 7stimated Lia)ilit$ on Purchase
!ommitment for D2?300?000.
d. 9o Cournal entr$ is re=uired.
/0. .urin' the prior fiscal $ear? Meremiah !orp. si'ned a lon'-term noncancella)le purchase
commitment with its primar$ supplier to purchase D2.% million of raw materials. Meremiah
paid the D2.% million to ac=uire the raw materials when the raw materials were onl$ worth
D2.2 million. 2ssume that the purchase commitment was properl$ recorded. What is the
Cournal entr$ to record the purchaseB
a. .e)it 3nventor$ for D2?200?000? and credit !ash for D2?200?000.
). .e)it 3nventor$ for D2?200?000? de)it :nreali(ed Loss for D300?000? and credit !ash
for D2?%00?000.
c. .e)it 3nventor$ for D2?200?000? de)it 7stimated Lia)ilit$ on Purchase !ommitment for
D300?000 and credit !ash for D2?%00?000.
d. .e)it 3nventor$ for D2?%00?000? and credit !ash for D2?%00?000.
/1. .urin' 2010? Larue !o.? a manufacturer of chocolate candies? contracted to purchase
100?000 pounds of cocoa )eans at D#.00 per pound? deliver$ to )e made in the sprin' of
2011. Hecause a record harvest is predicted for 2011? the price per pound for cocoa
)eans had fallen to D3.10 )$ .ecem)er 31? 2010.
4f the followin' Cournal entries? the one which would properl$ reflect in 2010 the effect of
the commitment of Larue !o. to purchase the 100?000 pounds of cocoa is
a. !ocoa 3nventor$............................................................. #00?000
2ccounts Pa$a)le............................................... #00?000
). !ocoa 3nventor$............................................................. 310?000
Loss on Purchase !ommitments................................... /0?000
2ccounts Pa$a)le............................................... #00?000
c. 7stimated Loss on Purchase !ommitments................... /0?000
7stimated Lia)ilit$ on Purchase !ommitments... /0?000
d. 9o entr$ would )e necessar$ in 2010
/2. &8 !orporation? a manufacturer of ethnic foods? contracted in 2010 to purchase %00
pounds of a spice mi>ture at D%.00 per pound? deliver$ to )e made in sprin' of 2011. H$
12N31N10? the price per pound of the spice mi>ture had risen to D%.*0 per pound. 3n 2010?
2M should reco'ni(e
a. a loss of D2?%00.
). a loss of D300.
c. no 'ain or loss.
d. a 'ain of D300.
9 ' 2A
/3. LF !orporation? a manufacturer of "e>ican foods? contracted in 2010 to purchase 1?000
pounds of a spice mi>ture at D%.00 per pound? deliver$ to )e made in sprin' of 2011. H$
12N31N10? the price per pound of the spice mi>ture had dropped to D#.*0 per pound. 3n
2010? LF should reco'ni(e
a a loss of D%?000.
). a loss of D#00.
c. no 'ain or loss.
d. a 'ain of D#00.
/#. The followin' information is availa)le for 4cto)er for Harton !ompan$.
He'innin' inventor$ D %0?000
9et purchases 1%0?000
9et sales 300?000
Percenta'e markup on cost **.*,J
2 fire destro$ed HartonAs 4cto)er 31 inventor$? leavin' undama'ed inventor$ with a cost
of D3?000. :sin' the 'ross profit method? the estimated endin' inventor$ destro$ed )$ fire
is
a. D1,?000.
). D,,?000.
c. D-0?000.
d. D100?000.
/%. The followin' information is availa)le for 4cto)er for 9orton !ompan$.
He'innin' inventor$ D100?000
9et purchases 300?000
9et sales *00?000
Percenta'e markup on cost **.*,J
2 fire destro$ed 9ortonAs 4cto)er 31 inventor$? leavin' undama'ed inventor$ with a cost
of D*?000. :sin' the 'ross profit method? the estimated endin' inventor$ destro$ed )$ fire
is
a. D3#?000.
). D1%#?000.
c. D1*0?000.
d. D200?000.
:se the followin' information for =uestions /* and /,.
"iles !ompan$? a wholesaler? )ud'eted the followin' sales for the indicated months<
Mune Mul$ 2u'ust
8ales on account D1?-00?000 D1?-#0?000 D1?/00?000
!ash sales 1-0?000 200?000 2*0?000
Total sales D1?/-0?000 D2?0#0?000 D2?1*0?000
2ll merchandise is marked up to sell at its invoice cost plus 20J. "erchandise inventories at the
)e'innin' of each month are at 30J of that monthEs proCected cost of 'oods sold.
9 ' 2=
/*. The cost of 'oods sold for the month of Mune is anticipated to )e
a. D1?##0?000.
). D1?%00?000.
c. D1?%20?000.
d. D1?*%0?000.
/,. "erchandise purchases for Mul$ are anticipated to )e
a. D1?*32?000.
). D2?0,*?000.
c. D1?,00?000.
d. D1?,30?000.
/-. &e$es !ompan$ had a 'ross profit of D3*0?000? total purchases of D#20?000? and an
endin' inventor$ of D2#0?000 in its first $ear of operations as a retailer. &e$esAs sales in
its first $ear must have )een
a. D%#0?000.
). D**0?000.
c. D1-0?000.
d. D*00?000.
//. 2 markup of #0J on cost is e=uivalent to what markup on sellin' priceB
a. 2/J
). #0J
c. *0J
d. ,1J
100. 5esler? 3nc. estimates the cost of its ph$sical inventor$ at "arch 31 for use in an interim
financial statement. The rate of markup on cost is 2%J. The followin' account )alances
are availa)le<
3nventor$? "arch 1 D220?000
Purchases 1,2?000
Purchase returns -?000
8ales durin' "arch 300?000
The estimate of the cost of inventor$ at "arch 31 would )e
a. D-#?000.
). D1##?000.
c. D1%/?000.
d. D112?000.
101. 4n Manuar$ 1? 2010? the merchandise inventor$ of 1laus? 3nc. was D-00?000. .urin' 2010
1laus purchased D1?*00?000 of merchandise and recorded sales of D2?000?000. The
'ross profit rate on these sales was 2%J. What is the merchandise inventor$ of 1laus at
.ecem)er 31? 2010B
a. D#00?000.
). D%00?000.
c. D/00?000.
d. D1?%00?000.
9 ' 22
102. For 2010? cost of 'oods availa)le for sale for Tate !orporation was D/00?000. The 'ross
profit rate was 20J. 8ales for the $ear were D-00?000. What was the amount of the
endin' inventor$B
a. D0.
). D2*0?000.
c. D1-0?000.
d. D1*0?000.
103. 4n 2pril 1% of the current $ear? a fire destro$ed the entire uninsured inventor$ of a retail
store. The followin' data are availa)le<
8ales? Manuar$ 1 throu'h 2pril 1% D300?000
3nventor$? Manuar$ 1 %0?000
Purchases? Manuar$ 1 throu'h 2pril 1% 2%0?000
"arkup on cost 2%J
The amount of the inventor$ loss is estimated to )e
a. D*0?000.
). D30?000.
c. D,%?000.
d. D%0?000.
10#. The inventor$ account of 3rick !ompan$ at .ecem)er 31? 2010? included the followin'
items<
3nventor$ 2mount
"erchandise out on consi'nment at sales price
Fincludin' markup of #0J on sellin' priceG D1%?000
1oods purchased? in transit Fshipped f.o.). shippin' pointG 12?000
1oods held on consi'nment )$ 3rick 13?000
1oods out on approval Fsales price D,?*00? cost D*?#00G ,?*00
Hased on the a)ove information? the inventor$ account at .ecem)er 31? 2010? should )e
reduced )$
a. D20?200.
). D22?*00.
c. D32?200.
d. D32?000.
10%. The sales price for a product provides a 'ross profit of 2%J of sales price. What is the
'ross profit as a percenta'e of costB
a. 2%J.
). 20J.
c. 33J.
d. 9ot enou'h information is provided to determine.
10*. 1amma &a$ !orp. has annual sales totalin' D*%0?000 and an avera'e 'ross profit of 20J
of cost. What is the dollar amount of the 'ross profitB
a. D130?000.
). D/,?%00.
c. D10-?333.
d. D1*2?%00.
9 ' 23
10,. 4n 2u'ust 31? a hurricane destro$ed a retail location of +inn$Es !lothier includin' the
entire inventor$ on hand at the location. The inventor$ on hand as of Mune 30 totaled
D320?000. 8ince Mune 30 until the time of the hurricane? the compan$ made purchases of
D-%?000 and had sales of D2%0?000. 2ssumin' the rate of 'ross profit to sellin' price is
#0J? what is the appro>imate value of the inventor$ that was destro$edB
a. D320?000.
). D1-1?%00.
c. D20%?000.
d. D2%%?000.
10-. 4n 4cto)er 31? a fire destro$ed PI 3nc.Es entire retail inventor$. The inventor$ on hand as
of Manuar$ 1 totaled D*-0?000. From Manuar$ 1 throu'h the time of the fire? the compan$
made purchases of D1*%?000 and had sales of D3*0?000. 2ssumin' the rate of 'ross
profit to sellin' price is #0J? what is the appro>imate value of the inventor$ that was
destro$edB
a. D*-0?000.
). D*,3?000.
c. D#-%?000.
d. D*2/?000.
10/. 4n "arch 1%? a fire destro$ed 3nterlock !ompan$Es entire retail inventor$. The inventor$
on hand as of Manuar$ 1 totaled D1?*%0?000. From Manuar$ 1 throu'h the time of the fire?
the compan$ made purchases of D*-3?000? incurred frei'ht-in of D,-?000? and had sales
of D1?210?000. 2ssumin' the rate of 'ross profit to sellin' price is 30J? what is the
appro>imate value of the inventor$ that was destro$edB
a. D2?0#-?000.
). D1?#-*?000.
c. D1?%*#?000.
d. D2?#11?000.
110. .icer uses the conventional retail method to determine its endin' inventor$ at cost.
2ssume the )e'innin' inventor$ at cost FretailG were D130?000 FD1/-?000G? purchases
durin' the current $ear at cost FretailG were D*-%?000 FD1?100?000G? frei'ht-in on these
purchases totaled D#3?000? sales durin' the current $ear totaled D1?0%0?000? and net
markups FmarkdownsG were D2#?000 FD3*?000G. What is the endin' inventor$ value at
costB
a. D1%3?1*#.
). D1%*?1*%.
c. D1%,?#12.
d. D23*?000.
111. Ho>er 3nc. uses the conventional retail method to determine its endin' inventor$ at cost.
2ssume the )e'innin' inventor$ at cost FretailG were D*%?%00 FD//?000G? purchases durin'
the current $ear at cost FretailG were D%*-?000 FD-*%?*00G? frei'ht-in on these purchases
totaled D2*?%00? sales durin' the current $ear totaled D-11?000? and net markups were
D*/?000. What is the endin' inventor$ value at costB
a. D222?*00.
). D1,#?3**.
c. D1#2?2#1.
d. D1%2?30-.
9 ' 25
112. Harker Pet suppl$ uses the conventional retail method to determine its endin' inventor$ at
cost. 2ssume the )e'innin' inventor$ at cost FretailG were D2*%?*00 FD32*?/00G?
purchases durin' the current $ear at cost FretailG were D1?0*-?*00 FD1?3-*?100G? frei'ht-in
on these purchases totaled D*3?/00? sales durin' the current $ear totaled D1?302?000? and
net markups FmarkdownsG were D2?000 FD/*?300G. What is the endin' inventor$ value at
costB
a. D31*?,00.
). D2%-?111.
c. D#11?000.
d. D2#*?**,.
113. !rane 8ales !ompan$ uses the retail inventor$ method to value its merchandise
inventor$. The followin' information is availa)le for the current $ear<
!ost &etail
He'innin' inventor$ D 30?000 D %0?000
Purchases 1#%?000 200?000
Frei'ht-in 2?%00 O
9et markups O -?%00
9et markdowns O 10?000
7mplo$ee discounts O 1?000
8ales O 20%?000
3f the endin' inventor$ is to )e valued at the lower-of-cost-or-market? what is the cost to
retail ratioB
a. D1,,?%00 P D2%0?000
). D1,,?%00 P D2%-?%00
c. D1,%?000 P D2*0?000
d. D1,,?%00 P D2#-?%00
:se the followin' information for =uestions 11# throu'h 11-.
The followin' data concernin' the retail inventor$ method are taken from the financial records of
Welch !ompan$.
!ost &etail
He'innin' inventor$ D #/?000 D ,0?000
Purchases 22#?000 320?000
Frei'ht-in *?000 O
9et markups O 20?000
9et markdowns O 1#?000
8ales O 33*?000
11#. The endin' inventor$ at retail should )e
a. D,#?000.
). D*0?000.
c. D*#?000.
d. D#2?000.
9 ' 28
11%. 3f the endin' inventor$ is to )e valued at appro>imatel$ the lower of cost or market? the
calculation of the cost to retail ratio should )e )ased on 'oods availa)le for sale at F1G cost
and F2G retail? respectivel$ of
a. D2,/?000 and D#10?000.
). D2,/?000 and D3/*?000.
c. D2,/?000 and D3/0?000.
d. D2,3?000 and D3/0?000.
11*. 3f the fore'oin' fi'ures are verified and a count of the endin' inventor$ reveals that
merchandise actuall$ on hand amounts to D%#?000 at retail? the )usiness has
a. reali(ed a windfall 'ain.
). sustained a loss.
c. no 'ain or loss as there is close coincidence of the inventories.
d. none of these.
;11,. 2ssumin' no chan'e in the price level if the L3F4 inventor$ method were used in
conCunction with the data? the endin' inventor$ at cost would )e
a. D#2?*00.
). D#2?000.
c. D#0?-00.
d. D#3?200.
;11-. 2ssumin' that the L3F4 inventor$ method were used in conCunction with the data and that
the inventor$ at retail had increased durin' the period? then the computation of retail in the
cost to retail ratio would
a. e>clude )oth markups and markdowns and include )e'innin' inventor$.
). include markups and e>clude )oth markdowns and )e'innin' inventor$.
c. include )oth markups and markdowns and e>clude )e'innin' inventor$.
d. e>clude markups and include )oth markdowns and )e'innin' inventor$.
11/. .rake !orporation had the followin' amounts? all at retail<
He'innin' inventor$ D 3?*00 Purchases D120?000
Purchase returns *?000 9et markups 1-?000
2)normal shorta'e #?000 9et markdowns 2?-00
8ales ,2?000 8ales returns 1?-00
7mplo$ee discounts 1?*00 9ormal shorta'e 2?*00
What is .rakeAs endin' inventor$ at retailB
a. D%#?#00.
). D%*?000.
c. D%,?*00.
d. D%-?#00
9 ' 2>
120. 1oren !orporation had the followin' amounts? all at retail<
He'innin' inventor$ D 3?*00 Purchases D100?000
Purchase returns *?000 9et markups 1-?000
2)normal shorta'e #?000 9et markdowns 2?-00
8ales ,2?000 8ales returns 1?-00
7mplo$ee discounts 1?*00 9ormal shorta'e 2?*00
What is 1orenAs endin' inventor$ at retailB
a. D3#?#00.
). D3*?000.
c. D3,?*00.
d. D3-?#00
121. Fr$ !orporationAs computation of cost of 'oods sold is<
He'innin' inventor$ D *0?000
2dd< !ost of 'oods purchased #0%?000
!ost of 'oods availa)le for sale #*%?000
7ndin' inventor$ /0?000
!ost of 'oods sold D3,%?000
The avera'e da$s to sell inventor$ for Fr$ are
a. %-.# da$s.
). *,.* da$s.
c. ,3.0 da$s.
d. -,.* da$s.
122. 7ast !orporationAs computation of cost of 'oods sold is<
He'innin' inventor$ D *0?000
2dd< !ost of 'oods purchased #0%?000
!ost of 'oods availa)le for sale #*%?000
7ndin' inventor$ -0?000
!ost of 'oods sold D3-%?000
The avera'e da$s to sell inventor$ for 7ast are
a. %*./ da$s.
). *3.1 da$s.
c. **.# da$s.
d. ,%.- da$s.
123. The 2010 financial statements of 8ito !ompan$ reported a )e'innin' inventor$ of
D-0?000? an endin' inventor$ of D120?000? and cost of 'oods sold of D*00?000 for the
$ear. 8itoAs inventor$ turnover ratio for 2010 is
a. ,.% times.
). *.0 times.
c. %.0 times.
d. #.3 times.
9 ' 2?
12#. Ho>er 3nc. reported inventor$ at the )e'innin' of the current $ear of D3*0?000 and at the
end of the current $ear of D#11?000. 3f net sales for the current $ear are D2?21#?*00 and
the correspondin' cost of sales totaled D1?-,/?#00? what is the inventor$ turnover ratio for
the current $earB
a. %.,#.
). #.%,.
c. %.3/.
d. #.--.
:se the followin' information for =uestions 12% throu'h 12/.
Plank !o. uses the retail inventor$ method. The followin' information is availa)le for the current
$ear.
!ost &etail
He'innin' inventor$ D ,-?000 D122?000
Purchases 2/%?000 #1%?000
Frei'ht-in %?000 O
7mplo$ee discounts O 2?000
9et markups O 1%?000
9et "arkdowns O 20?000
8ales O 3/0?000
12%. 3f the endin' inventor$ is to )e valued at appro>imatel$ lower of avera'e cost or market?
the calculation of the cost ratio should )e )ased on cost and retail of
a. D300?000 and D#30?000.
). D300?000 and D#2-?000.
c. D3,3?000 and D%%0?000.
d. D3,-?000 and D%%2?000.
12*. The endin' inventor$ at retail should )e
a. D1*0?000.
). D1%0?000.
c. D1##?000.
d. D1#0?000.
12,. The appro>imate cost of the endin' inventor$ )$ the conventional retail method is
a. D/%?/00.
). D/#?/20.
c. D/-?000.
d. D102?#-0.
;12-. 3f the endin' inventor$ is to )e valued at appro>imatel$ L3F4 cost? the calculation of the
cost ratio should )e )ased on cost and retail of
a. D3,-?000 and D%%2?000.
). D3,-?000 and D%32?000.
c. D300?000 and D#10?000.
d. D300?000 and D#30?000.
9 ' 2@
;12/. 2ssumin' that the L3F4 inventor$ method is used? that the )e'innin' inventor$ is the )ase
inventor$ when the inde> was 100? and that the inde> at $ear end is 112? the endin'
inventor$ at dollar-value L3F4 retail cost is
a. D-0?#*0.
). D/2?,%,.
c. D/%?/00.
d. D102?#-0.
:se the followin' information for =uestions 130 and 131.
7aton !ompan$? which uses the retail L3F4 method to determine inventor$ cost? has provided the
followin' information for 2010<
!ost &etail
3nventor$? 1N1N10 D /#?000 D1#0?000
9et purchases 3,-?000 %*2?000
9et markups *-?000
9et markdowns 30?000
9et sales %30?000
;130. 2ssumin' sta)le prices Fno chan'e in the price inde> durin' 2010G? what is the cost of
7atonEs inventor$ at .ecem)er 31? 2010B
a. D12-?100.
). D13-?100.
c. D13*?000.
d. D132?300.
;131. 2ssumin' that the price inde> was 10% at .ecem)er 31? 2010 and 100 at Manuar$ 1? 2010?
what is the cost of 7atonEs inventor$ at .ecem)er 31? 2010 under the dollar-value-L3F4
retail methodB
a. D133?*/0.
). D13-?/1%.
c. D1#0?30%.
d. D131?-00.
*ulti%le C!oi$e Ans)ers(Co-%utational
*-. a ,-. ) --. a /-. a 10-. d ;11-. c ;12-. c
*/. ) ,/. a -/. a //. a 10/. c 11/. a ;12/. a
,0. ) -0. c /0. c 100. ) 110. a 120. a ;130. )
,1. d -1. c /1. c 101. c 111. c 121. c ;131. a
,2. ) -2. c /2. c 102. ) 112. ) 122. c
,3. c -3. ) /3. ) 103. a 113. ) 123. )
,#. c -#. ) /#. a 10#. a 11#. ) 12#. d
,%. ) -%. c /%. a 10%. c 11%. a 12%. d
,*. d -*. ) /*. d 10*. c 11*. ) 12*. d
,,. c -,. d /,. d 10,. d ;11,. ) 12,. a
9 ' 29
*ULTIPLE CHOICE(CPA A"a%te"
132. &$an .istri)ution !o. has determined its .ecem)er 31? 2010 inventor$ on a F3F4 )asis at
D2%0?000. 3nformation pertainin' to that inventor$ follows<
7stimated sellin' price D2%%?000
7stimated cost of disposal 10?000
9ormal profit mar'in 30?000
!urrent replacement cost 22%?000
&$an records losses that result from appl$in' the lower-of-cost-or-market rule. 2t .ecem)er
31? 2010? the loss that &$an should reco'ni(e is
a. D0.
). D%?000.
c. D20?000.
d. D2%?000.
133. :nder the lower-of-cost-or-market method? the replacement cost of an inventor$ item
would )e used as the desi'nated market value
a. when it is )elow the net reali(a)le value less the normal profit mar'in.
). when it is )elow the net reali(a)le value and a)ove the net reali(a)le value less the
normal profit mar'in.
c. when it is a)ove the net reali(a)le value.
d. re'ardless of net reali(a)le value.
13#. The ori'inal cost of an inventor$ item is a)ove the replacement cost and the net reali(a)le
value. The replacement cost is )elow the net reali(a)le value less the normal profit
mar'in. 2s a result? under the lower-of-cost-or-market method? the inventor$ item should
)e reported at the
). net reali(a)le value less the normal profit mar'in.
c. replacement cost.
d. ori'inal cost.
13%. 5een !ompan$Es accountin' records indicated the followin' information<
3nventor$? 1N1N10 D *00?000
Purchases durin' 2010 3?000?000
8ales durin' 2010 3?-00?000
2 ph$sical inventor$ taken on .ecem)er 31? 2010? resulted in an endin' inventor$ of
D,00?000. 5eenEs 'ross profit on sales has remained constant at 2%J in recent $ears.
5een suspects some inventor$ ma$ have )een taken )$ a new emplo$ee. 2t .ecem)er
31? 2010? what is the estimated cost of missin' inventor$B
a. D%0?000.
). D1%0?000.
c. D200?000.
d. D2%0?000.
9 ' 3A
13*. Ienke !o. uses the retail inventor$ method to estimate its inventor$ for interim statement
purposes. .ata relatin' to the computation of the inventor$ at Mul$ 31? 2010? are as
follows<
!ost &etail
3nventor$? 2N1N10 D 200?000 D 2%0?000
Purchases 1?000?000 1?%,%?000
"arkups? net 1,%?000
8ales 1?,%0?000
7stimated normal shopliftin' losses 20?000
"arkdowns? net 110?000
:nder the lower-of-cost-or-market method? IenkeEs estimated inventor$ at Mul$ 31? 2010
is
a. D,2?000.
). D-#?000.
c. D/*?000.
d. D120?000.
13,. 2t .ecem)er 31? 2010? the followin' information was availa)le from 5ohl !o.Es accountin'
records<
!ost &etail
3nventor$? 1N1N10 D1#,?000 D 203?000
Purchases -33?000 1?1%%?000
2dditional markups #2?000
2vaila)le for sale D/-0?000 D1?#00?000
8ales for the $ear totaled D1?0%0?000. "arkdowns amounted to D10?000. :nder the lower-
of-cost-or-market method? 5ohlEs inventor$ at .ecem)er 31? 2010 was
a. D2/#?000.
). D2#%?000.
c. D2%2?000.
d. D23-?000.
;13-. 4n .ecem)er 31? 2010? Pacer !o. adopted the dollar-value L3F4 retail inventor$ method.
3nventor$ data for 2011 are as follows<
L3F4 !ost &etail
3nventor$? 12N31N10 D300?000 D#20?000
3nventor$? 12N31N11 B %%0?000
3ncrease in price level for 2011 10J
!ost to retail ratio for 2011 ,0J
:nder the L3F4 retail method? PacerEs inventor$ at .ecem)er 31? 2011? should )e
a. D3*1?*00.
). D3-%?000.
c. D3/1?000.
d D#00?100.
*ulti%le C!oi$e Ans)ers(CPA A"a%te"
132. d 133. ) 13#. ) 13%. a 13*. a 13,. d ;13-. a
9 ' 3=
DERIVATIONS ( Co-%utational
No& Ans)er Derivation
*-. a Product 1< &! @ D#%? 9&+ @ D-0 Q D10 @ D,0
9&+ Q P" @ D,0 Q FD-0 R .3G @ D#*? cost @ D#0.
Product 2< &! @ D%#? 9&+ @ D130 Q D2* @ D10#
9&+ Q P" @ D10# Q FD130 R .3G @ D*%? cost @ D,0.
*/. ) 9&+ @ D20 Q D# @ D1*? &! @ D1,
9&+ Q P" @ D1* Q FD20 R .#0G @ D-? cost @ D1-.
,0. ) 9&+ @ D#0 Q D- @ D32? &! @ D3#
9&+ Q P" @ D32 Q FD#0 R .#0G @ D1*? cost @ D3*.
,1. d D2/.00 "+? D32.00 !ost? L!" @ D2/.00.
,2. ) D,.,3 FD-.3% Q D0.*2G "+? D-.%0 !ost? L!" @ D,.,3.
,3. c D,*./- "+? D-*.*2 !ost? L!" @ D,*./-.
,#. c !eilin' D1*/ FD1/0 Q D21GS Floor D/3 FD1*/ Q D,*G? &! D1**S D1** "+.
,%. ) !eilin' D1*/ FD1/0 Q D21G? Floor D/3 FD1*/ Q D,*G? &! D1**S D1** "+?
D1*0 !ost? L!" @ D1*0.
,*. d D*% !ost.
,,. c !eilin' D,# FD/0 Q D1*G? Floor D%* FD,# Q D1-G? &! D*0S D*0 "+?
D*% !ost? L!" @ D*0.
,-. ) D*?100 "+? D*?%00 !ost? L!" @ D*?100.
,/. a D%/* FD*2# Q D2-G "+? D*/- !ost? L!" @ D%/*.
-0. c D#*- "+? D%02 !ost? L!" @ D#*-.
-1. c D*00?000 Q D10?000 @ D%/0?000.
-2. c D3%0?000 Q D%?000 @ D3#%?000.
-3. ) LF 3?000 R D1% @ FD#%?000 P D-0?000G R D%0?000 @ D2-?12%
1H ,?000 R D% @ D3%?000S D3%?000 T D#%?000 @ D-0?000
F1?000 R D1%G Q FD2-?12% R 1?000N3?000G @ D%?*2%.
-#. ) !F 3?000 R D12 @ FD3*?000 P D*#?000G R D#0?000 @ D22?%00
3H ,?000 R D# @ D2-?000S D2-?000 T D3*?000 @ D*#?000
F1?000 R D12G Q FD22?%00 R 1?000N3?000G @ D#?%00.
9 ' 32
DERIVATIONS ( Co-%utational Fcont.G
-%. c 3tem K of 3tems R Price
" #?000 R D2.%0 @10?000 10 P %0 R D#-?000 @ D/?*00 P #?000 @ D2.#0
9 2?000 R D-.00 @1*?000 1* P %0 R D#-?000 @ D1%?3*0 P 2?000 @ D,.*-
4 *?000 R D#.00 @2#?000 2# P %0 R D#-?000 @ D23?0#0 P *?000 @ D3.-#
%0?000
-*. ) F2?%00 R D0.2%G T F%?%00 R D0.*0G T F%00 R D1.20G @ D#?%2%S
UF2?%00 R D0.2%G P D#?%2%V R D3?000 @ D#1# P 2?%00 @ D0.1**.
-,. d F2?%00 R D0.2%G T F%?%00 R D0.*0G T F%00 R D1.20G @ D#?%2%S
UF%?%00 R D0.*0G P D#?%2%V R D3?000 @ D2?1-- P %?%00 @ D0.3/-.
--. a F2?%00 R D0.2%G T F%?%00 R D0.*0G T F%00 R D1.20G @ D#?%2%S
UF%00 R D1.20G P D#?%2%V R D3?000 @ D3/- P %00 @ D0.,/*.
-/. a D2.% million Q D2.3 million @ D200?000.
/0. c D2.% million Q D2.2 million @ D300?000.
/1. c FD#.00 Q D3.10G R 100?000 @ D/0?000.
/2. c 9o 'ain or loss since 12N31 price FD%.*0G W contract price FD%?00G.
/3. ) FD%.00 Q D#.*0G R 1?000 @ D#00.
/#. a FD%0?000 T D1%0?000G Q FD300?000 P %N3G Q D3?000 @ D1,?000.
/%. a FD100?000 T D300?000G Q FD*00?000 P %N3G Q D*?000 @ D3#?000.
/*. d F1 T .2G! @ 1?/-0?000S ! @ D1?*%0?000.
/,. d !418< Mul$ @ D2?0#0?000 P 1.2 @ D1?,00?000
2u'. @ D2?1*0?000 P 1.2 @ D1?-00?000
Mul$Es purchase @ FD1?,00?000 R .,G T FD1?-00?000 R .3G @ D1?,30?000.
/-. a D3*0?000 T FD#20?000 Q D2#0?000G @ D%#0?000.
//. a
.#0
2./ 2/J
1 .#0
= =
+
100. ) !418 @ D300?000 P 1.2% @ D2#0?000
FD220?000 T D1,2?000 Q D-?000G Q D2#0?000 @ D1##?000.
101. c !418 @ D2?000?000 R .,% @ D1?%00?000
D-00?000 T D1?*00?000 Q D1?%00?000 @ D/00?000.
102. ) D/00?000 Q FD-00?000 R .-0G @ D2*0?000.
9 ' 33
D300?000
103. a D%0?000 T D2%0?000 Q OOOOO @ D*0?000.
1.2%
10#. a FD1%?000 R #0JG T D13?000 T FD,?*00 Q D*?#00G @ D20?200.
10%. c 2%J P F100J Q 2%JG @ 33J.
10*. c D*%0?000 Q FD*%0?000 P 1.20G @ D10-?333.
10,. d FD320?000 T D-%?000G Q UD2%0?000 R F1 Q .#0GV @ D2%%?000.
10-. d FD*-0?000 T D1*%?000G Q UD3*0?000 R F1 Q .#0GV @ D*2/?000.
10/. c D1?*%0?000 T D*-3?000 T D,-?000 Q UD1?210?000 R F1 Q .30GV @ D1?%*#?000.
110. a D1/-?000 T D1?100?000 T D2#?000 Q D1?0%0?000 Q D3*?000 @ D23*?000S
FD130?000 T D*-%?000 T D#3?000G P FD1/-?000 T D1?100?000 T D2#?000G @ .*#/S
D23*?000 R .*#/ @ D1%3?1*#.
111. c D//?000 T D-*%?*00 T D*/?000 Q D-11?000 @ D222?*00S
FD*%?%00 T D%*-?000 T D2*?%00G P FD//?000 T D-*%?*00 T D*/?000G @ *3./JS
D222?*00 R .*3/ @ D1#2?2#1.
112. ) D32*?/00 T D1?3-*?100 T D2?000 Q D1?302?000 Q D/*?300 @ D31*?,00S
FD2*%?*00 T D1?0*-?*00 T D*3?/00G P FD32*?/00 T D1?3-*?100 T D2?000G @
-1.%JS
D31*?,00 R .-1% @ D2%-?111.
113. ) !ost< D30?000 T D1#%?000 T D2?%00 @ D1,,?%00.
&etail< D%0?000 T D200?000 T D-?%00 @ D2%-?%00.
11#. ) D,0?000 T D320?000 T D20?000 Q D1#?000 Q D33*?000 @ D*0?000.
11%. a !ost< D#/?000 T D22#?000 T D*?000 @ D2,/?000.
&etail< D,0?000 T D320?000 T D20?000 @ D#10?000.
11*. ) !onceptual.
D#/?000
;11,. ) OOOO R D*0?000 @ D#2?000.
D,0?000
;11-. c !onceptual.
11/. a D3?*00 T D11#?000 T D1-?000 Q D#?000 Q D,0?200 Q D1?*00 Q D2?-00 Q D2?*00
@ D%#?#00.
120. a D3?*00 T D/#?000 T D1-?000 Q D#?000 Q D,0?200 Q D1?*00 Q D2?-00 Q D2?*00
9 ' 35
@ D3#?#00.
121. c D3,%?000 P UFD*0?000 T D/0?000G P 2V @ %S 3*% P % @ ,3.0.
122. c D3-%?000 P UFD*0?000 T D-0?000G P 2V @ %.%S 3*% P %.% @ **.#.
123. ) D*00?000 P UFD-0?000 T D120?000G P 2V @ * times
12#. d D1?-,/?#00 P UFD3*0?000 T D#11?000G P 2V @ #.--.
12%. d !ost< D,-?000 T D2/%?000 T D%?000 @ D3,-?000.
&etail< D122?000 T D#1%?000 T D1%?000 @ D%%2?000.
12*. d D122?000 T D#1%?000 Q D2?000 T D1%?000 Q D20?000 Q D3/0?000 @ D1#0?000.
12,. a D1#0?000 R .*-% @ D/%?/00.
;12-. c !ost< D2/%?000 T D%?000 @ D300?000.
&etail< D#1%?000 T D1%?000 Q D20?000 @ D#10?000.
;12/. a Hase $ear price @ 73 @
D1#0?000
D12%?000
1.12
=
D122?000 X cost @ D,-?000
D3?000 R .,32; R 1.12 @ 2?#*0
D-0?#*0
D300?000
; OOOOO @ .,32
D#10?000
;130. ) !ost to retail ratio @ D3,-?000 P FD%*2?000 T D*-?000 Q D30?000G @ 0.*3
73 @ D1#0?000 T D%*2?000 T D*-?000 Q D30?000 Q D%30?000
@ D210?000 at retail
D210?000 Q D1#0?000 @ D,0?000
!ost of inventor$ @ D/#?000 T FD,0?000 R .*3G @ D13-?100.
;131. a Hase $ear price< 73 @ D210?000 P 1.0% @ D200?000
D1#0?000 X cost @ D /#?000
*0?000 R .*3 R 1.0% @ 3/?*/0
D200?000 D133?*/0
DERIVATIONS ( CPA A"a%te"
132. d D2%0?000 Q D22%?000 F&!G @ D2%?000.
133. ) !onceptual.
9 ' 38
13#. ) !onceptual.
9 ' 3>
DERIVATIONS ( CPA A"a%te" Fcont.G
13%. a D3?-00?000 R .,% @ D2?-%0?000 F!418G
D*00?000 T D3?000?000 Q D2?-%0?000 Q D,00?000 @ D%0?000.
13*. a FD200?000 T D1?000?000G P FD2%0?000 T D1?%,%?000 T D1,%?000G @ 0.*
FD2%0?000 T D1?%,%?000 T D1,%?000 Q D20?000 Q D110?000 Q
D1?,%0?000G R 0.* @ D,2?000.
13,. d D/-0?000 P D1?#00?000 @ 0.,
FD1?#00?000 Q D10?000 Q D1?0%0?000G R 0., @ D23-?000.
;13-. a D%%0?000 P 1.1 @ D%00?000
D300?000 T FD-0?000 R 1.1 R .,G @ D3*1?*00.
E4ERCISES
EB& 9'=39OLower-of-cost-or-market.
.etermine the proper unit inventor$ price in the followin' independent cases )$ appl$in' the
lower of cost or market rule. !ircle $our choice.
1 2 3 # %
!ost D-.00 D10.%0 D12.00 D*.00 D,.20
9et reali(a)le value -.-% 10.00 12.20 #.2% *./0
9et reali(a)le value less normal profit -.1% /.00 11.#0 3.,% *.00
"arket replacement cost ,./0 10.10 12.%0 #.00 %.#0
Solution 9'=39
!ase 1 D -.00 !ase # D#.00
!ase 2 D10.00 !ase % D*.00
!ase 3 D12.00
EB& 9'=5AOLower-of-cost-or-market.
.etermine the unit value that should )e used for inventor$ costin' followin' 6lower of cost or
market value6 as descri)ed in 2&H 9o. #3.
2 H ! . 7 F
!ost D2.3% D2.#- D2.2% D2.%# D2.3# D2.#3
&eplacement cost 2.2* 2.%% 2.20 2.%2 2.32 2.#*
9et reali(a)le value 2.%0 2.%0 2.%0 2.%0 2.%0 2.%0
9et reali(a)le value less normal profit 2.30 2.30 2.30 2.30 2.30 2.30
9 ' 3?
Solution 9'=5A
!ase 2 D2.30 !ase . D2.%0
!ase H D2.#- !ase 7 D2.32
!ase ! D2.2% !ase F D2.#3
EB& 9'=5=OLower-of-cost-or-market.
2ssume in each case that the sellin' e>penses are D- per unit and that the normal profit is D% per
unit. !alculate the limits for each case. Then enter the amount that should )e used for lower of
cost or market.
8ellin' &eplacement
Price :pper Limit !ost Lower Limit !ost L!"
FaG D%# DYYYYYY D3- DYYYYYY D#3 DYYYYYY
F)G #, YYYYYY 3* YYYYYY #0 YYYYYY
FcG %* YYYYYY 3/ YYYYYY #0 YYYYYY
FdG #, YYYYYY #2 YYYYYY #0 YYYYYY
Solution 9'=5=
:pper Limit Lower Limit L!"
FaG D#* D#1 D#1
F)G 3/ 3# 3*
FcG #- #3 #0
FdG 3/ 3# 3/
The .ecem)er 31? 2010 inventor$ of 1w$nn !ompan$ consisted of four products? for which
certain information is provided )elow.
&eplacement 7stimated 7>pected 9ormal Profit
Product 4ri'inal !ost !ost .isposal !ost 8ellin' Price on 8ales
2 D2%.00 D22.00 D*.%0 D#0.00 20J
H D#2.00 D#0.00 D12.00 D#-.00 2%J
! D120.00 D11%.00 D2%.00 D1/0.00 30J
. D1-.00 D1%.-0 D3.00 D2*.00 10J
Instru$tions
:sin' the lower-of-cost-or-market approach applied on an individual-item )asis? compute the
inventor$ valuation that should )e reported for each product on .ecem)er 31? 2010.
9 ' 3@
Solution 9'=52
Lower-of-
.esi'nated !ost-or-
Product !eilin' Floor "arket !ost "arket
2 D#0.00 Q D*.%0 D33.%0 Q D-.00
@ D33.%0 @ D2%.%0 D2%.%0 D2%.00 D2%.00
H D#-.00 Q D12.00 D3*.00 Q D12.00
@ D3*.00 @ D2#.00 D3*.00 D#2.00 D3*.00
! D1/0.00 Q D2%.00 D1*%.00 Q D%,.00
@ D1*%.00 @ D10-.00 D11%.00 D120.00 D11%.00
. D2*.00 Q D3.00 D23.00 Q D2.*0
@ D23.00 @ D20.#0 D20.#0 D1-.00 D1-.00
2t 12N31N10? the end of Menner !ompan$Es first $ear of )usiness? inventor$ was D#?100 and
D2?-00 at cost and at market? respectivel$.
Followin' is data relative to the 12N31N11 inventor$ of Menner<
4ri'inal 9et 9et &eali(a)le 2ppropriate
!ost &eplacement &eali(a)le +alue Less 3nventor$
3tem Per :nit !ost +alue 9ormal Profit +alue
2 D .*% D .#%
H .#% .#0
! .,0 .,%
. .,% .*%
7 ./0 .-%
8ellin' price is D1.00Nunit for all items. .isposal costs amount to 10J of sellin' price and a
6normal6 profit is 30J of sellin' price. There are 1?000 units of each item in the 12N31N11
inventor$.
Instru$tions
FaG Prepare the entr$ at 12N31N10 necessar$ to implement the lower-of-cost-or-market procedure
assumin' Menner uses a contra account for its )alance sheet.
F)G !omplete the last three columns in the 12N31N11 schedule a)ove )ased upon the lower-of-
cost-or-market rules.
FcG Prepare the entr$FiesG necessar$ at 12N31N11 )ased on the data a)ove.
FdG Iow are inventor$ losses disclosed on the income statementB
Solution 9'=53
FaG Loss .ue to "arket .ecline of 3nventor$................................... 1?300
2llowance to &educe 3nventor$ to "arket...................... 1?300
9 ' 39
Solution 9'=53 F!ont.G
F)G 4ri'inal 9et 9et &eali(a)le 2ppropriate
!ost &eplacement &eali(a)le +alue Less 3nventor$
3tem Per :nit !ost +alue 9ormal Profit +alue
2 D .*% D .#% D ./0 D .*0 D .*0
H .#% .#0 ./0 .*0 .#%
! .,0 .,% ./0 .*0 .,0
. .,% .*% ./0 .*0 .*%
7 ./0 .-% ./0 .*0 .-%
D3.#% D3.2%;
;D3.2% R 1?000 @ D3?2%0
FcG 2llowance to &educe 3nventor$ to "arket.................................. 1?300
!ost of 1oods 8old........................................................ 1?300
Loss .ue to "arket .ecline of 3nventor$................................... 200
2llowance to &educe 3nventor$ to "arket...................... 200
F!ost of inventor$ at 12N31N0, @ D,?2%0G
4&
2 student can record a recover$ of D1?100.
FdG 3nventor$ losses can )e disclosed separatel$ F)elow 'ross profit in operatin' e>pensesG or
the$ can )e shown as part of cost of 'oods sold.
EB& 9'=55 Q &elative sales value method.
.oran &ealt$ !ompan$ purchased a plot of 'round for D-00?000 and spent D2?100?000 in
developin' it for )uildin' lots. The lots were classified into Ii'hland? "idland? and Lowland
'rades? to sell at D100?000? D,%?000? and D%0?000 each? respectivel$.
Instru$tions
!omplete the ta)le )elow to allocate the cost of the lots usin' a relative sales value method.
9o. of 8ellin' Total J of 2pportioned !ost
1rade Lots Price &evenue Total 8ales Total Per Lot
Ii'hland 20 D D D D
"idland #0 D D
Lowland 100 D D
1*0 D D
Solution 9'=55
9o. of 8ellin' Total J of 2pportioned !ost
1rade Lots Price &evenue Total 8ales Total Per Lot
Ii'hland 20 D100?000 D 2?000?000 20J D %-0?000 D2/?000
"idland #0 D,%?000 3?000?000 30J -,0?000 D21?,%0
Lowland 100 D%0?000 %?000?000 %0J 1?#%0?000 D1#?%00
1*0 D10?000?000 D2?/00?000
9 ' 5A
EB& 9'=58O1ross profit method.
2n inventor$ taken the mornin' after a lar'e theft discloses D*0?000 of 'oods on hand as of
"arch 12. The followin' additional data is availa)le from the )ooks<
3nventor$ on hand? "arch 1 D -#?000
Purchases received? "arch 1 Q 11 *3?000
8ales F'oods delivered to customersG 120?000
Past records indicate that sales are made at %0J a)ove cost.
Instru$tions
7stimate the inventor$ of 'oods on hand at the close of )usiness on "arch 11 )$ the 'ross profit
method and determine the amount of the theft loss. 8how appropriate titles for all amounts in
$our presentation.
Solution 9'=58
He'innin' 3nventor$ D -#?000
Purchases *3?000
1oods 2vaila)le 1#,?000
1oods 8old FD120?000 P 1%0JG -0?000
7stimated 7ndin' 3nventor$ *,?000
Ph$sical 3nventor$ *0?000
Theft Loss D ,?000
EB& 9'=5>O1ross profit method.
4n Manuar$ 1? a store had inventor$ of D#-?000. Manuar$ purchases were D#*?000 and Manuar$
sales were D/0?000. 4n Fe)ruar$ 1 a fire destro$ed most of the inventor$. The rate of 'ross profit
was 2%J of cost. "erchandise with a sellin' price of D%?000 remained undama'ed after the fire.
!ompute the amount of the fire loss? assumin' the store had no insurance covera'e. La)el all
fi'ures.
Solution 9'=5>
He'innin' 3nventor$ D #-?000
Purchases #*?000
1oods availa)le /#?000
!ost of sale FD/0?000 P 12%JG F,2?000G
7stimated endin' inventor$ 22?000
!ost of undama'ed inventor$ FD%?000 P 12%JG F#?000G
7stimated fire loss D1-?000
9 ' 5=
EB& 9'=5?O1ross profit method.
:tle$ !o. prepares monthl$ income statements. 3nventor$ is counted onl$ at $ear endS thus?
month-end inventories must )e estimated. 2ll sales are made on account. The rate of mark-up on
cost is 20J. The followin' information relates to the month of "a$.
2ccounts receiva)le? "a$ 1 D21?000
2ccounts receiva)le? "a$ 31 2,?000
!ollections of accounts durin' "a$ /0?000
3nventor$? "a$ 1 #%?000
Purchases durin' "a$ %-?000
Instru$tions
!alculate the estimated cost of the inventor$ on "a$ 31.
Solution 9'=5?
!ollections of accounts D /0?000
2dd accounts receiva)le? "a$ 31 2,?000
.educt accounts receiva)le? "a$ 1 F21?000G
8ales durin' "a$ D /*?000
3nventor$? "a$ 1 D #%?000
Purchases durin' "a$ %-?000
1oods availa)le 103?000
!ost of sales FD/*?000 P 120JG F-0?000G
7stimated cost of inventor$? "a$ 31 D 23?000
EB& 9'=5@O!omparison of inventor$ methods.
3n the cases cited )elow? five different conditions are possi)le when Z is compared with [. These
possi)ilities are as follows<
a. Z e=uals [ d. Z is e=ual to or 'reater than [
). Z is 'reater than [ e. Z is e=ual to or less than [
c. Z is less than [
Instru$tions
3n the space provided show the relationship of Z and [ for each of the followin' independent
statements.
YYYYY 1. 6!ost or market? whichever is lower?6 ma$ )e applied to F1G the inventor$ as a whole or
to F2G cate'ories of inventor$ items. !ompare FZG the reported value of inventor$ when
procedure F1G is used with F[G the reported value of inventor$ when procedure F2G is
used.
YYYYY 2. Prices have )een risin' steadil$. Ph$sical turnover of 'oods has occurred appro>i-
matel$ # times in the last $ear. !ompare FZG the endin' inventor$ computed )$ L3F4
method with F[G the same endin' inventor$ computed )$ the movin' avera'e method.
9 ' 52
EB& 9'=5@ F!ont.G
YYYYY 3. The retail inventor$ method has )een used )$ a store durin' its first $ear of operation.
!ompare FZG markdown cancellations with F[G markdowns.
YYYYY #. Prices have )een risin' steadil$. 2t the )e'innin' of the $ear a compan$ adopted a
new inventor$ methodS the ph$sical =uantit$ of the endin' inventor$ is the same as
that of the )e'innin' inventor$. !ompare FZG the reported value of inventor$ if L3F4
was the new method with F[G the reported value of inventor$ if F3F4 was the new
method.
YYYYY %. Prices have )een risin' steadil$. Ph$sical turnover of 'oods has occurred five times in
the last $ear. !ompare FZG unit prices of endin' inventor$ items at movin' avera'e
pricin' with F[G those at wei'hted avera'e pricin'.
Solution 9'=5@
1. d 2. c 3. e #. c %. )
PRO+LE*S
Pr& 9'=59O1ross profit method.
4n .ecem)er 31? 2010 Felt !ompan$Es inventor$ )urned. 8ales and purchases for the $ear had
)een D1?#00?000 and D/-0?000? respectivel$. The )e'innin' inventor$ FMan. 1? 2010G was
D1,0?000S in the past FeltEs 'ross profit has avera'ed #0J of sellin' price.
Instru$tions
!ompute the estimated cost of inventor$ )urned? and 'ive entries as of .ecem)er 31? 2010 to
close merchandise accounts.
Solution 9'=59
He'innin' inventor$ D 1,0?000
2dd< Purchases /-0?000
!ost of 'oods availa)le 1?1%0?000
8ales D1?#00?000
Less #0J F%*0?000G -#0?000
7stimated inventor$ lost D 310?000
8ales............................................................................................... 1?#00?000
3ncome 8ummar$................................................................. 1?#00?000
!ost of 1oods 8old......................................................................... -#0?000
Fire Loss......................................................................................... 310?000
3nventor$.............................................................................. 1,0?000
Purchases............................................................................ /-0?000
9 ' 53
Pr& 9'=8AO&etail inventor$ method.
When $ou undertook the preparation of the financial statements for Telfer !ompan$ at Manuar$
31? 2011? the followin' data were availa)le<
2t !ost 2t &etail
3nventor$? Fe)ruar$ 1? 2010 D,0?-00 D /-?%00
"arkdowns 3%?000
"arkups *3?000
"arkdown cancellations 20?000
"arkup cancellations 10?000
Purchases 21/?%00 2/#?000
8ales 3#%?000
Purchases returns and allowances #?300 %?%00
8ales returns and allowances 10?000
Instru$tions
!ompute the endin' inventor$ at cost as of Manuar$ 31? 2011? usin' the retail method which
appro>imates lower of cost or market. [our solution should )e in 'ood form with amounts clearl$
la)eled.
Solution 9'=8A
2t !ost 2t &etail
He'innin' inventor$? 2N1N10 D ,0?-00 D /-?%00
Purchases D21/?%00 D2/#?000
Less purchase returns #?300 21%?200 %?%00 2--?%00
Totals D2-*?000 3-,?000
2dd markups FnetG %3?000
Totals ##0?000
.educt markdowns FnetG 1%?000
8ales price of 'oods availa)le #2%?000
8ales less sales returns 33%?000
7ndin' inventor$? 1N31N11 at retail D /0?000
7ndin' inventor$ at cost< &atio of cost to retail @
D2-*?000 P D##0?000 @ *%JS
D/0?000 R *%J @ D%-?%00 D %-?%00
9Pr& 9'=8=O&etail inventor$ method.
The records of Lohse 8tores included the followin' data<
3nventor$? "a$ 1? at retail? D1#?%00S at cost? D10?##0
Purchases durin' "a$? at retail? D#2?/00S at cost? D31?%%0
Frei'ht-in? D2?000S purchase discounts? D2%0
2dditional markups? D3?-00S markup cancellations? D#00S net markdowns? D1?300
8ales durin' "a$? D#*?%00
Instru$tions
!alculate the estimated inventor$ at "a$ 31 on a L3F4 )asis. 8how $our calculations in 'ood
form and la)el all amounts.
9 ' 55
9Solution 9'=8=
!ost &etail &atio
3nventor$? "a$ 1 D10?##0 D1#?%00 .,2
Purchases 31?%%0 #2?/00
Frei'ht-in 2?000
Purchase discounts F2%0G
9et markups 3?#00
9et markdowns F1?300G
Totals e>cludin' )e'innin' inventor$ 33?300 #%?000 .,#
1oods availa)le D#3?,#0 %/?%00
8ales F#*?%00G
3nventor$? "a$ 31 D13?000
7stimated inventor$? "a$ 31 FD13?000 R .,2G D /?3*0
9Pr& 9'=82OL3F4 retail inventor$ method? fluctuatin' prices.
Flint .epartment 8tore wishes to use the retail L3F4 method of valuin' inventories for 2011. The
appropriate data are as follows<
2t !ost 2t &etail
.ecem)er 31? 2010 inventor$ F)ase la$erG D1?1%0?000 D2?100?000
Purchases Fnet of returns? allowances? markups? and markdownsG 2?100?000 3?%00?000
8ales 2?-,0?000
Price inde> for 2011 10%
Instru$tions
!omplete the followin' schedule Ffill in all )lanks and show calculations in the parenthesesG<
!omputation of &etail 3nventor$ for 2011 !ost &etail &atio
3nventor$? .ecem)er 31? 2010 D1?1%0?000 D2?100?000
Purchases Fnet of returns? allowances?
markups? and markdownsG J
Total availa)le D
YYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYYY
3nventor$? .ecem)er 31? 2011? at retail D
9 ' 58
9Pr& 9'=82 F!ont.G
2dCustment of 3nventor$ to L3F4 Hasis !ost &etail
7ndin' inventor$ at )ase $ear prices D
F G
He'innin' inventor$ at )ase $ear prices D
3ncrease at )ase $ear prices D
3ncrease at 2011 retail F G D
3ncrease at 2011 cost F G
3nventor$? .ecem)er 31? 2011? at L3F4 cost D
9Solution 9'=82
!omputation of &etail 3nventor$ for 2011 !ost &etail &atio
3nventor$? .ecem)er 31? 2010 D1?1%0?000 D2?100?000
Purchases Fnet of returns? allowances? markups? and
markdownsG 2?100?000 3?%00?000 *0J
Total availa)le D3?2%0?000 %?*00?000
Less< 8ales 2?-,0?000
3nventor$? .ecem)er 31? 2011? at retail D2?,30?000
2dCustment of 3nventor$ to L3F4 Hasis !ost &etail
7ndin' inventor$ at )ase $ear prices
FD2?,30?000 P 1.0%G D2?*00?000
He'innin' inventor$ at )ase $ear prices D1?1%0?000 2?100?000
3ncrease at )ase $ear prices D %00?000
3ncrease at 2011 retail FD%00?000 R 1.0%G D %2%?000
3ncrease at 2011 cost FD%2%?000 R *0JG 31%?000
3nventor$? .ecem)er 31? 200, at L3F4 cost D1?#*%?000
9Pr& 9'=83OL3F4 retail inventor$ method? sta)le prices.
Potter +ariet$ 8tore uses the L3F4 retail inventor$ method. 3nformation relatin' to the
computation of the inventor$ at .ecem)er 31? 2010? follows<
!ost &etail
3nventor$? Manuar$ 1? 2010 D13*?000 D220?000
Purchases #-0?000 ,00?000
Frei'ht-in -0?000
8ales ,20?000
9et markups 1*0?000
9et markdowns *0?000
9 ' 5>
Instru$tions
2ssumin' that there was no chan'e in the price inde> durin' the $ear? compute the inventor$ at
.ecem)er 31? 2010? usin' the L3F4 retail inventor$ method.
9Solution 9'=83
Potter +ariet$ 8tore
L3F4 &etail !omputation
.ecem)er 31? 2010
2t !ost 2t &etail &atio
3nventor$? Manuar$ 1? 2010 D13*?000 D 220?000
Purchases #-0?000 ,00?000
Frei'ht-in -0?000
9et markups 1*0?000
9et markdowns F*0?000G
Total Fe>cludin' )e'innin' inventor$G %*0?000 -00?000 ,0J
Total Fincludin' )e'innin' inventor$G D*/*?000 1?020?000
Less sales ,20?000
3nventor$? .ec. 31? 2010? at retail D 300?000
7ndin' inventor$ D 300?000
He'innin' inventor$ D13*?000 F220?000G
3ncrement D -0?000
3ncrement at cost FD-0?000 R ,0JG %*?000
7ndin' inventor$ at L3F4 cost D1/2?000
9Pr& 9'=85O.ollar-value L3F4-retail method.
The records of Ieese 8tores provided the followin' data for the $ear<
!ost &etail
FHase inventor$G 3nventor$? Manuar$ 1 D1%%?000 D 2%0?000
9et purchases -30?-00 1?31-?000
8ales 1?2#0?000
4ther data are< Frei'ht-in? D1#?000S net markups? D-?000S net markdowns? D*?000S and the price
inde> for the $ear is 110.
Instru$tions
.etermine the appro>imate valuation of the final inventor$ )$ the dollar-value? L3F4-retail method.
La)el all fi'ures.
!ost &etail &atio
9 ' 5?
9Solution 9'=85
!ost &etail &atio
3nventor$? Manuar$ 1 D1%%?000 D 2%0?000
9et purchases -30?-00 1?31-?000
Frei'ht-in 1#?000
9et markups -?000
9et markdowns F*?000G
Totals e>cludin' )e'innin' inventor$ -##?-00 1?320?000 .*#
1oods availa)le D///?-00 1?%,0?000
8ales F1?2#0?000G
7ndin' inventor$ D 330?000
7ndin' inventor$ deflated FD330?000 P 1.10G D 300?000
Hase inventor$ D1%%?000 F2%0?000G
La$er added D %0?000
9ew la$er at end of $ear dollars FD%0?000 R 1.10 R .*#G 3%?200
7stimated inventor$ at dollar value? L3F4 D1/0?200
9Pr& 9'=88O&etail L3F4.
5lein Hook 8tore uses the conventional retail method and is now considerin' convertin' to the
L3F4 retail method for the period )e'innin' 1N1N11. 2vaila)le information consists of the followin'<
2010 2011
!ost &etail !ost &etail
3nventor$ 1N1 D 12?%00 D 22?%00 D B D B
Purchases FnetG 2%0?000 3#,?%00 2#%?000 3#%?000
9et markups O %?000 O 10?000
9et markdowns O 2?%00 O %?000
8ales FnetG O 30/?000 O 311?000
Loss from )reaka'e O %00 O -0-
2pplica)le price inde> O 100 O 110
Followin' is a schedule showin' the computation of the cost of inventor$ on hand at 12N31N10
)ased on the conventional retail method.
!ost &etail &atio
3nventor$ 1N1N10 D 12?%00 D 22?%00
Purchases FnetG 2%0?000 3#,?%00
9et markups O %?000
1oods availa)le D2*2?%00 3,%?000 ,0J
8ales FnetG F30/?000G
9et markdowns F2?%00G
Loss from )reaka'e F%00G
3nventor$ 12N31N10 at retail D *3?000
3nventor$ 12N31N10 at L!" FD*3?000 R ,0JG D ##?100
9 ' 5@
Instru$tions
FaG Prepare the Cournal entr$ to convert the inventor$ from the conventional retail to the L3F4
retail method. 8how detailed calculations to support $our entr$.
F)G Prepare a schedule showin' the computation of the 12N31N11 inventor$ )ased on the L3F4
retail method as adCusted for fluctuatin' prices. Without preCudice to $our answer to FaG a)ove?
assume that $ou computed the 1N1N11 inventor$ Fretail value D#/?000G under the L3F4 retail
method at a cost of D3#?000.
9Solution 9'=88
FaG !ost &etail
1oods availa)le D2*2?%00 D3,%?000
Less< He'innin' inventor$ F12?%00G F22?%00G
9et markdowns F2?%00G
!ost to retail D2%0?000 D3%0?000
%N, R D*3?000 @ D#%?000 Q D##?100 @ D/00 adCustment
3nventor$.................................................................................. /00
2dCustment to &ecord 3nventor$ at !ost......................... /00
F)G !ost &etail &atio
3nventor$ D 3#?000 D #/?000
Purchases 2#%?000 3#%?000
9et markups 10?000
9et markdowns F%?000G
Total 2#%?000 3%0?000 ,0J
Total 'oods availa)le D2,/?000 3//?000
8ales F311?000G
7ndin' inventor$ at retailOend of $ear dollars D --?000
7ndin' inventor$ deflated FD--?000 P 1.10G D -0?000
He'innin' D 3#?000 #/?000
La$er added FD31?000 R 1.10 R ,0JG 23?-,0 D 31?000
7ndin' inventor$ at cost D %,?-,0
9 ' 59
IFRS ;UESTIONS
True C False
1. i122P permits an entit$ to reverse inventor$ write-downs in certain situations? whereas :.8.
122P does not.
2. i122P defines market as replacement cost su)Cect to certain constraints.
3. i122P uses a ceilin' to determine market.
#. 8imilar to :.8. 122P? certain a'ricultural products and mineral products can )e reported at
net reali(a)le value usin' i122P.
%. i122P records market in the lower-of-cost-or-market differentl$ than :.8. 122P.
Ans)ers to TrueCFalse
1. True
2. False
3. False
#. True
%. True
*ulti%le C!oi$e ;uestions
1. Where is the authoritative i122P 'uidance related to accountin' and reportin' for inventories
foundB
a. 328 2
). 328 1-
c. 328 #1
d. 2ll of these standards deal with inventor$.
2. 2ll of the followin' are ke$ similarities )etween :.8. 122P and i122P with respect to
accountin' for inventories e>cept
a. 'uidelines on ownership of 'oods are similar.
). costs to include in inventories are similar.
c. L3F4 cost flow assumption where appropriate is used )$ )oth sets of standards.
d. fair value valuation of inventories is prohi)ited )$ )oth sets of standards.
3. 2ll of the followin' are ke$ differences )etween :.8. 122P and i122P with respect to
accountin' for inventories e>cept the
a. definition of the lower-of-cost-or-market test for inventor$ valuation differs )etween :.8.
122P and i122P.
). inventor$ )asis determination for writedowns differs )etween :.8. 122P and i122P.
c. 'uidelines are more principles )ased under i122P than the$ are under :.8. 122P.
d. avera'e costin' method is prohi)ited under i122P.
9 ' 8A
#. 2lon(o !ompan$ in 3tal$ prepares its financial statements in accordance with i122P. 3n 2010?
it reported cost of 'oods sold of \*00 million and avera'e inventor$ of \1%0 million. What is
2lon(oEs inventor$ turnover ratioB
a. # da$s
). 2% da$s
c. /1.2% da$s
d. 100 da$s
%. 8tarfish !ompan$ Fa compan$ usin' :.8. 122P and L3F4 inventor$ methodG is considerin'
chan'in' to i122P and the F3F4 inventor$ method. Iow would a comparison of these
methods affect 8tarfishEs financialsB
a. .urin' a period of inflation? the current ratio would decrease when i122P and the F3F4
inventor$ method are used as compared to :.8. 122P and L3F4.
). .urin' a period of inflation? the ta>es will decrease when i122P and the F3F4 inventor$
method are used as compared to :.8. 122P and L3F4.
c. .urin' a period of inflation? net income would )e 'reater if i122P and the F3F4
inventor$ method are used as compared to :.8.122P and L3F4.
d. .urin' a period of inflation? workin' capital would decrease when i122P and the F3F4
inventor$ method are used as compared to :.8. 122P and L3F4.
*. Which of the followin' statements is true re'ardin' i122P and inventoriesB
a. 3n order to determine market valuation of inventories? i122P uses a ceilin' and a floor.
). i122P permits the option of valuin' inventories at fair value.
c. With respect to inventories? i122P defines market as net reali(a)le value.
d. i122P allows inventor$ to )e written up a)ove its ori'inal cost.
,. 8tate !ompan$ manufactured a forklift machine at a cost of D%0?000. The product is sold for
D%%?000 at a %J discount. The deliver$ costs are estimated to )e D%?000. :nder i122P? how
much should )e the carr$in' amount of this inventor$B
a. D%0?000
). D%%?000
c. D#%?000
d. D#,?2%0
!alculation< !ost< D%0?000
9et &eali(a)le +alue @ D%%?000 D2?,%0 discount D%?000 @ D#,?2%0
Lower of !ost and 9&+ @ D#,?2%0
-. The followin' information relates to "oore !ompan$Es inventor$<
!ost of inventor$ @ D-*0
8ellin' price of inventor$ @ D1?000
9ormal profit mar'in @ 10J of sellin' price
!urrent replacement cost @ D,#0
!ost of completion and disposal @ D100
:nder i122P? which of the followin' would )e the correct measurement value for the
inventor$B
a. D-*0
). D,#0
c. D1?000
9 ' 8=
d. D/00
9 ' 82
/. 2ssume that .arc$ 3ndustries had the followin' inventor$ values<
3nventor$ cost Fon .ecem)er 31? 2011G @ D1?%00
3nventor$ market Fon .ecem)er 31? 2011G @ D1?3%0
3nventor$ net reali(a)le value Fon .ecem)er 31? 2011G @ D1?320
3nventor$ market Fon Mune 30? 2012G @ D1?%*0
3nventor$ net reali(a)le value Fon Mune 30? 2012G @ D1?%,0
:nder i122P? what is the inventor$ carr$in' value on .ecem)er 31? 2011B
a. D1?%00
). D1?3%0
c. D1?320
d. D1?3/0
9 ' 83
10. 2ssume that .arc$ 3ndustries had the followin' inventor$ values<
3nventor$ cost Fon .ecem)er 31? 2011G @ D1?%00
3nventor$ market Fon .ecem)er 31? 2011G @ D1?3%0
3nventor$ net reali(a)le value Fon .ecem)er 31? 2011G @ D1?320
3nventor$ market Fon Mune 30? 2012G @ D1?%*0
3nventor$ net reali(a)le value Fon Mune 30? 2012G @ D1?%,0
:nder i122P? what is the inventor$ carr$in' value on Mune 30? 2012B
a. D1?%00
). D1?%*0
c. D1?%,0
d. D1?320
Ans)ers to *ulti%le C!oi$e
1. d
2. c
3. d
#. c
%. c
*. c
,. d
-. d
/. c
10. a
S!ort Ans)er
1. Hriefl$ descri)e some of the similarities and differences )etween :.8. 122P and i122P with
respect to the accountin' for inventories.
1. DeE Si-ilarities are F1G the 'uidelines on who owns the 'oodsO'oods in transit?
consi'ned 'oods? special sales a'reements? and the costs to include in inventor$ are
essentiall$ accounted for the same under i122P and :.8. 122PS F2G use of specific
identification cost flow assumption? where appropriateS F3G unlike propert$ plant and
e=uipment? i122P does not permit the option of valuin' inventories at fair value. 2s indicated
a)ove? i122P re=uires inventor$ to )e written down? )ut inventor$ cannot )e written up a)ove
its ori'inal costS F#G certain a'ricultural products and minerals and mineral products can )e
reported at net reali(ed value usin' i122P.
DeE "i##eren$es are related to F1G the L3F4 cost flow assumptionO:.8. 122P permits the
use of L3F4 for inventor$ valuation. i122P prohi)its it use. F3F4 and avera'e-cost are the
onl$ two accepta)le cost flow assumptions permitted under i122PS F2G lower-of-cost-or-
market test for inventor$ valuationOi122P defines market as net reali(a)le value. :.8.
122P on the other hand defines market as replacement cost su)Cect to the constraints of net
reali(a)le value Fthe ceilin'G and net reali(a)le value less a normal markup Fthe floorG. That is?
i122P does not use a ceilin' or a floor to determine marketS F3G inventor$ write-downsO
under :.8. 122P? if inventor$ is written down under the lower-of-cost-or-market valuation? the
new )asis is now considered its cost. 2s a result? the inventor$ ma$ )e written )ack up to its
ori'inal cost in a su)se=uent period. :nder i122P? the write-down ma$ )e reversed in a
su)se=uent period up to the amount of the pervious write-down. Hoth the write-down and an$
su)se=uent reversal should )e reported on the income statementS F#G The re=uirements for
9 ' 85
accountin' and reportin' for inventories are more principles-)ased under i122P. That is?
:.8. 122P provides more detailed 'uidelines in inventor$ accountin'.
2. 7>plain the main o)stacle to achievin' conver'ence in the area of inventor$ accountin'.
2. i122P specificall$ prohi)its the L3F4 cost flow method. !onversel$? the L3F4 cost flow
assumption is widel$ used in the :nited 8tates )ecause of its favora)le ta> advanta'es. 3n
addition? man$ ar'ue that L3F4 from a financial reportin' point of view provides a )etter
matchin' of current costs a'ainst revenue and therefore a more realistic income is computed.
The pro)lem is compounded in the :nited 8tates )ecause L3F4 cannot )e used for ta>
purposes unless it is used for financial reportin' purposes. 2s a result? unless the ta> law is
chan'ed? it is unlikel$ that :.8. 122P will eliminate the use of the L3F4 cost flow assumption
)ecause of its su)stantial ta> advanta'es for man$ companies.
2lso? :.8. 122P has more detailed rules related to accountin' and reportin' of inventories
than i122P. We e>pect that these more detailed rules will )e used internationall$ )ecause
the$ provide practical 'uidance for some inventor$ accountin' and reportin' issues.
9 ' 88

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CHAPTER 9

INVENTORIES: ADDITIONAL VALUATION ISSUES

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