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Chapter 8-Inventories: Special Valuation Issues
Student: ___________________________________________________________________________
1. Reporting inventory at the lower of cost or market provides a representationally faithful value of inventory
therefore the application of the lower of cost or market rule is consistent with the materiality principle.
True False
2. The Net Realizable Value is considered the ceiling or the upper bound that prevents inventory from being
valued at amount higher than what the company could reasonably sell it.
True False
3. GAAP allows a company to report its inventory above cost with justifiable exceptions which include the
inability to determine a cost.
True False
4. Precious metals can be valued above costs because they are immediately marketable at a quoted market
price.
True False
5. An auditor would most likely not use the gross profit method to verify the accuracy of the reported cost of
inventory.
True False
6. The gross profit method is an excellent method to determine the cost of inventory for interim financial
statements. The method of estimation must be disclosed.
True False
7. One of the main advantages to the retail inventory method over the gross profit is the retail method uses
current-period estimates whereas the gross profit used past periods.
True False
8. The gross profit method is more sensitive to price changes and produces a more accurate estimate of current
period ending inventory.
True False
9. The purpose of dollar-value LIFO retail method is to eliminate the effects of price changes during a period.
True False
10. Under the dollar-value LIFO the cost-to-retail ratio includes net markups and net markdowns but includes
the beginning inventory.
True False
11. A purchase on credit is omitted from the purchase account in error, ending inventory is correct. The effect
on the current year financial statements would be net income is understated because purchases are understated
also causing cost of goods sold to be understated.
True False
12. Ending inventory is overstated due to a costing error but purchases are correct. The balance sheet would be
correct in the succeeding year because the previous years error would have been counterbalanced.
True False
13. A company using the periodic inventory system to record the reduction of inventory to market would record
the following journal entry to close beginning inventory using the direct method:
Income Summary x,xxx

Allowance to x,xxx
Reduce Inventory
to Market
Inventory x,xxx
True False
the following journal entry to record inventory at market using the allowance method:
Loss due to x,xxx

Market Valuation
Allowance to Reduce Inventory to x,xxx
Market
True False
15. The most common approach to implementing the lower of cost or market rule for inventory valuation is to
apply it
A. separately to each item of inventory
B. to each major category of inventory
C. to the total inventory
D. in a combination of these methods
16. Which application of the lower of cost or market rule will generally result in the lowest valuation for the
ending inventory?
A. to each item of the inventory
D. all of these applications result in the same valuation for inventory
17. When applying lower of cost or market, market value

A. is defined as the selling price
B. should not exceed the net realizable value
C. should not exceed the net realizable value less an allowance for a normal profit margin
D. should not exceed the net realizable value plus an allowance for a normal profit margin
18. Exhibit 8-1

Rival Inc. uses the lower of cost or market rule in valuing its inventory. One unit has a ceiling constraint of
$45.50. The following is other information concerning this unit:
Estimated transportation costs for delivery $3.80

Normal profit margin 7.50
Packaging costs prior to delivery 3.60
Refer to Exhibit 8-1. The selling price of this unit must be

A. $49.30
B. $53.00
C. $52.90
D. $49.10
19. Exhibit 8-1

Refer to Exhibit 8-1. The floor constraint of this unit must be

A. $41.90
B. $38.00
C. $41.70
D. $38.10
20. When comparing the lower of cost to market

A. the appropriate market value is determined before comparing it to the cost
B. the purpose of the ceiling is to ensure that the write-down is sufficient to cover all expected gains
C. the purpose of the floor is to prevent an excessive gain from being recognized in the future
D. the process is consistent with the principle of conservatism because the goal is to limit excessive swings in
gross margin
21. Morris Company uses the lower of cost or market rule in valuing its inventory. The floor constraint for one
item in the inventory is $68.20. The following is other information concerning this unit:
Transportation costs $ 4.00

Packaging costs 4.20
The net realizable value for this item is

A. $72.40
B. $55.50
C. $80.90
D. $76.40
22. When applying the lower of cost or market rule to the valuation of inventory, the allowance method is
considered preferable to the direct method because
A. the allowance method reports smaller losses than the direct method
B. the allowance method reports a higher inventory net valuation for balance sheet purposes than the direct
method
C. the allowance method reports the inventory loss or loss recovery in a separate income statement account
D. the allowance method discloses the inventory loss in a separate account in the stockholders' equity section of
the balance sheet
23. In comparison to the allowance method of applying the lower of cost or market rule to the valuation of
inventory, the direct method has which of the following deficiencies?
A. The direct method reports a more conservative amount for net income.
B. For the direct method, the loss or loss recovery due to market valuation changes is included in the cost of
goods sold amount.
C. With the direct method, the inventory amount reported on the balance sheet is the historical cost.
D. The direct method can only be used with a perpetual inventory system.
24. Given the following information for the Raquel Company:
Date Cost Market

December 31, 2014 $500 $500
December 31, 2015 700 650
December 31, 2016 800 730
Under the periodic system, if the direct method of recording lower of cost or market is in use, which December 31, 2016 entry is correct?
A. Loss Due to Market Valuation 20
Allowance to Reduce Inventory to Market 20
B. Inventory 730
Income Summary 730
C. Loss Due to Market Valuation 70
D. Inventory 800
Income Summary 800
25. Given the following information for the Tea Company:
Date Cost Market

December 31, 2014 $ 800 $ 800
December 31, 2015 1,000 940
December 31, 2016 1,100 1,060
Under the periodic system, if the allowance method of recording lower of cost or market is in use, which December 31, 2016 entry is not correct?
B. Allowance to Reduce Inventory to Market 20
Loss Recovery Due to Market Valuation 20
C. Inventory 1,100
Income Summary 1,100
D. Income Summary 1,000
Inventory 1,000
26. Zoe Company has provided the following values for its 400 units of inventory at the end of 2014:
Item Per Unit

Historical cost $65.00
Replacement cost $54.20
Net realizable value $54.50
Normal profit margin $ 35.80
Under IFRS requirements, the per-unit reported value for Zoe's inventory will be
A. $55.00
B. $54.50
C. $54.20
D. $53.70
27. The Maxa Company normally sells its inventory at a 20% profit margin on sales. In 2014, the net realizable
value of inventory purchased for $75,000 declined to $66,000. There are no costs to complete and dispose of
this inventory. What is the floor constraint on the valuation of this inventory using the lower of cost or market
rule?
A. $60,000
B. $66,000
C. $79,200
D. $52,800
28. Which one of the following statements is true with regard to the lower of cost or market rule?
A. If the direct method is used in applying the lower of cost or market rule, the loss or loss recovery due to
market valuation changes is included in cost of goods sold.
B. The lower of cost or market rule must be applied on an individual item basis for financial accounting
purposes.
C. With the application of the lower of cost or market rule using the direct method, the account, Allowance to
Reduce Inventory to Market, is reported on the balance sheet as a contra asset.
D. The lower of cost or market rule is primarily an application of the going concern assumption.
29. Although IFRS require the use of the lower of cost or market method to value inventory, some differences
from GAAP still exist. Which of the following is not one of the differences?
A. Market is defined only as net realizable value in IFRS.
B. When write-downs occur, IFRS do not specify how the loss must be categorized in the income statement.
C. IFRS allow the reversal of a previous write-down.
D. IFRS define market only as replacement cost.
30. The major criticism of the lower of cost or market rule for valuation of inventory is that
A. holding losses are recognized, but holding gains are not
B. holding gains are recognized, but holding losses are not
C. the total difference between selling price and cost is usually recognized in the period of the sale
D. the conservatism principle is violated because of the use of the floor constraint
31. Which application of the lower of cost or market rule will generally result in the highest valuation for the
ending inventory?
32. Concerning application of the lower of cost or market method, which one of the following statements is true
regarding the constraints on market value?
A. The upper constraint is estimated selling price less costs of completion and disposal.
B. The lower constraint is net realizable value less costs of completion and disposal.
C. The upper constraint is estimated selling price less a normal profit margin.
D. The upper constraint is estimated selling price less costs of completion and disposal and a normal profit
margin.
33. Major Company uses the lower of cost or market rule in valuing its inventory. The floor constraint for one

The market value for this item is

A. $58.20
B. $70.90
C. $78.90
D. $81.10
34. In general, it is argued that the lower of cost or market rule is supported most closely by which of the
following theoretical assumptions?
A. revenue recognition
B. conservatism
C. historical cost
D. going concern
35. The application of the lower of cost or market rule to inventory valuation is an example of
A. the revenue realization principle
B. the going concern assumption
C. special industry practices
D. conservatism
36. For valuation of inventory, the lower of cost or market rule may be applied to
A. the total inventory
B. each item or the total of inventory
C. each item, the total of inventory, or major categories of inventory
D. each item
37. Which one of the following inventories may not be valued for balance sheet purposes at the inventory's
selling price less distribution costs even if it is above the cost of the inventory?
A. grain for an agricultural company
B. crude oil for an oil company
C. gold for a mining corporation
D. laptops for a computer manufacturer
38. Generally, valuing inventory above cost

A. violates conservatism and is never allowed
B. violates the lower of cost or market rule and is never allowed
C. is acceptable when revenue recognition is not applicable
D. is acceptable only in selected industries and in certain circumstances
39. Which one of the following inventories may be valued for balance sheet purposes at the inventory's selling
price less distribution costs even if it is above the cost of the inventory?
A. automobiles for an automobile manufacturer
B. gold for a mining corporation
C. steel for a steel manufacturer
D. athletic shoes for a retail store
40. For the period from 2014 through 2015, the Charlie Company had net sales of $500,000 and a gross profit
of $200,000. During the first quarter of 2016, the company made purchases of $19,500 and recorded sales of
$47,500. The inventory value at the beginning of the year was 15,500. What is the estimated cost of Charlie’s
inventory on March 31, 2016, using the gross profit method?
A. $22,500
B. $15,000
C. $ 6,500
D. $ 6,000
41. Exhibit 8-2

The Dormer Company uses the gross profit method to estimate its inventory in interim financial statements. The
markup on cost is 50%. The following information is available:
January 1, 2014, inventory balance $12,500

Purchases 25,000
Sales during January 24,000
Refer to Exhibit 8-2. The estimated inventory at January 31, 2014, is

A. $25,500
B. $21,500
C. $16,000
D. $12,000
42. Exhibit 8-2


Purchases 25,000
Refer to Exhibit 8-2. The estimated cost of goods sold at January 31, 2014, is
A. $25,500
B. $21,500
C. $16,000
D. $12,000
43. Consider the following:
Code: A = Gross profit to net sales ratio

B = Gross profit to cost of goods sold ratio
Which equation is correct?
A. A = B / (1 - B)
B. A = (1 + B) / B
C. A = (1 - B) / B
D. A = B / (1 + B)
44. Relevance of the gross profit margin depends upon

A. the accuracy of the gross profit percentage
B. the net sales
C. applying the overall profit margin to each individual department
D. averaging prior periods' net sales and total sales to verify which is best to use
45. Which one of the following statements is not true with regard to the gross profit method of estimating
inventories?
A. The gross profit method may be used to determine inventory for interim financial reporting purposes without
taking a physical count.
B. The percentage used for the gross profit method is determined by using previous years' historical data.
C. The gross profit method is not as accurate as the retail inventory method.
D. The gross profit method may only be used with a perpetual inventory accounting system.
46. The Sahara Company's inventory was partially destroyed on June 4, 2014, when its warehouse caught on
fire early in the morning. Inventory that had a cost of $8,000 was saved. The accounting records, which were
located in a fireproof vault, contained the following information:
Sales (1/1/14 through 6/3/14) $260,000

Purchases (1/1/14 through 7/3/14) 190,000
Inventory (1/1/14) 40,000
Gross profit ratio 30% of cost
Using the gross profit method, what is the estimated cost of the inventory destroyed by the fire?
A. $40,000
B. $30,000
C. $25,000
D. $22,000
47. Given the following information for Bonnie Bunny Company:
Freight-in $ 650
Purchases 12,550
Sales returns 300
Beginning inventory 1,950
Sales 23,450
Gross profit on sales 45%
Calculate ending inventory of Bonnie Bunny using the gross profit method.
A. $1,360
B. $1,075
C. $4,597
D. $2,253
48. As a result of taking a physical inventory count on December 31, 20104 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 (1/1/14) $ 330,000

Purchases (2014) 1,770,000
Sales (2014) 2,200,000
Sales returns (2014) 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, 2014?
A. $100,000
B. $75,000
C. $15,000
D. $25,000
49. The gross profit method is not used to

A. replace the year-end physical inventory
B. check the cost generated by a perpetual inventory system
C. determine the cost of inventory destroyed by fire
D. develop a sales budget
50. The Jamison Company's inventory was destroyed on July 4, 2013, 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 (1/1/13 through 7/3/13) $250,000

Inventory (1/1/13) 45,000
Using the gross profit method, what is the estimated cost of the inventory that was destroyed by the fire?
A. $17,500
B. $25,000
C. $30,000
D. $37,500
51. As a result of taking a physical inventory count on December 31, 2014, 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 (1/1/14) $ 130,000

Purchases (2014) 760,000
Sales (2014) 1,020,000
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, 2014?
A. $240,000
B. $ 61,500
C. $125,000
D. $170,000
52. Which one of the following statements regarding the gross profit method is not true?
A. The gross profit method is a complicated method to use in practice.
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.
53. Which one of the following statements regarding the gross profit method is true?
B. The gross profit method results in a more accurate inventory valuation than the retail inventory method.
D. The gross profit method is often used to calculate the year-end inventory for financial accounting purposes.
54. At the beginning of 2014, 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 2014 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
55. 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
56. If the net markdowns are excluded from the calculation of the cost-to-retail ratio in the retail inventory
method, the ending inventory's valuation is lower because of which of the following effects 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.
57. 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 final price
change is a
A. net markup of $18
B. markdown of $5 and a markup of $8
C. net markdown of zero and an additional markup of $8
D. net markdown of $5 and a net markup of $18
58. 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 2014 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, 2014?
A. $270
B. $300
C. $585
D. $600
59. The Rebecca Company provided the following data for its December 31, 2014, 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, 2014, valued at lower of average cost or market?
A. $67,333
B. $75,000
C. $67,374
D. $50,000
60. When using the cost-to-retail ratio, net markups and markdowns are
A. always included in the computation of the ending inventory at retail
B. always included in the computation of the ending inventory at cost
C. never computed at retail
D. computed differently in each industry
61. 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
62. 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.
63. Which one of the following statements is not true 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.
64. 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 cost of ending inventory for Eloise Corp.?

A. $4,760
B. $5,100
C. $5,209
D. $5,552
65. 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. $580
C. $630
D. $900
66. 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
Net markups 5,000
Net markdowns 4,000
What is the cost of the ending inventory?

A. $6,720
B. $7,700
C. $7,980
D. $8,400
67. Darla’s Card Shop uses the average cost retail inventory method to determine the ending inventory. Darla's
accounting records for 2014 contained the following information:
Cost Retail
Purchases $216,000 $317,500
Sales 350,000
Net markups 12,000
Net markdowns 8,000
In addition, sales returns for 2014 were $28,000, and employee discounts taken were $6,000. What is the cost of the ending inventory at December
31, 2014?
A. $21,000
B. $35,000
C. $50,400
D. $54,600
68. 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
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. $49,280
B. $55,792
C. $57,200
D. $59,400
69. 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. 76.9%
70. 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
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%
71. 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
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%
72. 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
Sales 385,750
Net markups 32,500

A. 57.0%
B. 60.0%
C. 62.1%
D. 62.5%
73. 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
cost-to-retail ratio in a period of rising prices?
A. FIFO
B. LIFO
C. average cost
75. 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
76. Which of the following general assumptions underlie the retail inventory method?
A. The inventory is sufficiently homogeneous to have the same markup and the cost-to-retail ratio changes
inversely to the costs of purchases.
B. The inventory is sufficiently homogeneous to have the same markup and the cost-to-retail ratio changes
relative to the costs of purchases.
C. The inventory is sufficiently homogeneous to have a different markup and the cost-to-retail ratio changes
D. The inventory is sufficiently homogeneous to have a different markup and the cost-to-retail ratio changes
77. 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. $6,169
B. $6,504
C. $6,570
D. $6,900
78. Kelcie Sports uses the dollar-value LIFO retail method. The price index on January 1, 2014, was 100, and
on that date the inventory was $20,000 (retail) and $14,000 (cost). Additional information follows:
2014 2015
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, 2015, inventory (to the nearest dollar)?
A. $14,610
B. $14,638
C. $14,660
D. $15,854
79. 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.
80. 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
81. The dollar-value LIFO retail method combines

A. the principle of retail LIFO with dollar-value LIFO.
B. does not really include retail LIFO in the process.
C. while the name may suggest a combination of the two methods, dollar-value LIFO retail is a new principle.
D. the principle of retail LIFO with dollar value LIFO but is rarely used in practice.
82. 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.
83. 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.
84. The accountant for Angie Company made the following errors related to purchases of merchandise and
ending inventory in 2013:
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 2013 net income will be
A. understated by $3,180
B. understated by $2,380
C. overstated by $5,380
D. overstated by $3,180
85. The accountant for the Daneen Company made the following errors related to purchases of merchandise and
1. A $3,100 purchase of merchandise on credit early in 2015 was recorded and included in ending inventory at December 31, 2014.
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 2014 net income will be
A. understated by $350
D. overstated by $350
86. Barry Corp. reported 2014 net income of $40,000. However, the ending inventory in 2013 had been
understated by $3,000, and 2014's ending inventory had been overstated by $6,000. Barry's correct net income
for 2014 was
A. $31,000
B. $34,000
C. $43,000
D. $46,000
87. A purchase on credit is recorded twice and not corrected during the 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.
88. The correct net income for Sarah Corp. was $53,500. The company reported incorrect net income because
beginning inventory was understated by $2,500, purchases were overstated by $2,000, and ending inventory
was overstated by $2,000. What net income did Sarah Corp. report?
A. $49,000
B. $51,000
C. $56,000
D. $58,000
89. The accountant for Ella Company made the following errors related to the inventory in 2014:
1. The beginning inventory for 2014 was understated by $1,350 due to an error in the physical count.
Assuming a periodic inventory system, Ella Company's 2014 net income will be
B. overstated by $1,350
90. Bennett Company's accountant made the following errors related to merchandise inventory in 2013:
1. The beginning inventory for 2013 was overstated by $1,900 due to an error in the physical count.
2. A $1,150 purchase of merchandise on credit was not recorded, but the items were included in the ending inventory.
Assuming a periodic inventory system, Bennett Company's 2013 cost of goods sold will be
C. overstated by $750
91. The accountant for Lee Company made the following errors related to merchandise inventory in 2014:
1. The beginning inventory for 2014 was overstated by $750 due to an error in the physical count.
2. A $1,300 purchase of merchandise on credit was not recorded or included in the ending inventory.
Assuming a periodic inventory system, Lee Company's 2014 cost of goods sold will be
92. The accountant for Frieda Company did not record a purchase of merchandise on credit or include the items
in the ending inventory. Assuming a periodic inventory system, the effect of these omissions on assets,
liabilities, and retained earnings would be
Assets Liabilities Retained Earnings

I. Understate Understate Understate
II. Understate Understate No effect
III. No effect Understate No effect
IV. Understate No effect Understate
A. I
B. II
C. III
D. IV
93. The accountant for the Issenock Company did not record a purchase of merchandise on credit for the current
year, but the merchandise was correctly included in the ending inventory. Assuming a periodic inventory
system, how would assets, liabilities, and retained earnings be affected on the year-end balance sheet?

I. No effect Understated Understated
II. Understated Understated No effect
III. No effect No effect Overstated
IV. No effect Understated Overstated
A. I
B. II
C. III
D. IV
94. The accountant for Suzanne Company made the following errors related to inventory in 2015:
1. The beginning inventory for 2015was overstated by $1375 due to an error in the physical count.
2. A $1650 purchase of merchandise on credit in 2015 was not recorded or included in the ending inventory.
Assuming a periodic inventory system, how would Sue's cost of goods sold, gross profit, and net income be affected in 2015 by these errors?
Cost of Goods Sold Gross Profit Net Income

I. Overstated Understated Understated
II. Overstated Understated No effect
III. Understated Overstated Overstated
IV. No effect No effect No effect
A. I
B. II
C. III
D. IV
95. What is the effect on net income for the current year if a company fails to record a purchase of materials in
transit (FOB shipping point) but includes the materials in physical inventory at year-end?
A. Net income is overstated.
B. Net income is understated.
C. Net income is unaffected.
96. If in the current year a purchase was not recorded but the purchased item was included in ending physical
inventory, which one of the following situations occurs for the current year?
A. Working capital is understated, and net income is overstated.
C. Working capital is overstated, and net income is understated.
97. The accountant for the Hilga Company recorded a purchase of merchandise on credit for the current year,
but the merchandise was shipped FOB destination and did not arrive until after current year-end. Assuming a
periodic inventory system, how would assets, liabilities, and retained earnings be affected on the year-end
balance sheet?

II. Understated Understated Understated
III. No effect Overstated Overstated
IV. No effect Overstated Understated
A. I
B. II
C. III
D. IV
98. Exhibit 8-3

The J. Love Company uses a periodic inventory accounting system and values its inventory by using the lower
of cost or market rule. The allowance method is used in applying the lower of cost or market rule. The company
adjusts and closes its books annually on December 31. Below are the cost and market values of the company's
year-end inventories for a three-year period:
Date Cost Market

December 31, 2014 $70,000 $70,000
December 31, 2015 56,000 46,000
December 31, 2016 64,000 58,000
Refer to Exhibit 8-3. Which of the following journal entries would be correct as of December 31, 2015, to apply the lower of cost or market rule to
the valuation of inventory?
A. Inventory 46,000
B. Loss Due to Market Valuation 10,000
Allowance to Reduce Inventory
to Market 10,000
C. Cost of Goods Sold 10,000
Inventory 10,000
D. Cost of Goods Sold 10,000
to Market 10,000
99. Exhibit 8-3

Date Cost Market

December 31, 2014 $70,000 $70,000
December 31, 2015 56,000 46,000
December 31, 2016 64,000 58,000
Refer to Exhibit 8-3. Which of the following journal entries would be correct as of December 31, 2016, to apply the lower of cost or market rule?
A. Inventory 58,000
to Market 6,000
C. Allowance to Reduce Inventory to Market 4,000
Loss Recovery Due to Market Valuation 4,000
to Market 6,000
Date Cost Market

December 31, 2014 $500 $500
December 31, 2015 700 650
December 31, 2016 800 730
If the allowance method of recording lower of cost or market is in use, which December 31, 2016, entry is correct?
B. Inventory 730
Income Summary 730
D. Allowance to Reduce Inventory to Market 800
Income Summary 800
101. Below are a list of key terms.
a) additional Mark up
b) allowance method
c) conventional retail method
d) markdown cancellation
e) net realizable value
f) net additional markup
g) markup
h) gross profit method
Required:
Match each key term with the appropriate definition.
______ 1) Total markup less markup cancellations.
______ 2) Increase in selling price after there has been a markdown.
______ 3) Cost to selling price.
______ 4) Can be used by an auditor to verify the cost of inventory.
______ 5) Also known as the retail inventory method.
______ 6) Increase above the original sale price.
______ 7) The loss is recorded in a separate inventory account.
______ 8) Estimated selling price less costs of completion or disposal.
102. The following information was taken from the inventory records of the Walker Company:
Product A B C D E
Units 175 200 250 200 300
Unit cost $5.50 $10.00 $5.10 $5.10 $5.00
Replacement cost $6.00 $9.00 $4.60 $4.50 $4.50
Net realizable value (NRV) $5.20 $12.50 $7.00 $7.00 $7.00
NRV–Normal profit $4.80 $10.30 $5.25 $4.00 $4.80
Required:
Determine the valuation of the inventory at the lower of cost or market applied to:
a. individual items
b. the inventory as a whole
103. Given the following information for Gator Company:
Net NRV Minus

Realizable Replacement Normal
Unit Quantity Cost Value Cost Profit
1 1 $17.70 $24.60 $18.00 $17.10
2 1 10.80 8.28 9.30 5.58
3 1 72.00 64.80 67.20 57.60
4 1 4.80 3.12 2.88 2.64
5 1 12.00 12.30 12.60 11.10
6 1 48.00 45.60 38.40 40.80
Required:
a. Determine the lower of cost or market value for each inventory item for Gator Company.
b. Determine the lower of cost or market value for Gator Company's inventory if the lower of cost or market rule is applied to the total
inventory.
104. Given the following information for the Lawrence Company:
NRV Minus Net

Normal Realizable Replacement
Unit Cost Profit Value Cost
a $ 3.40 $ 2.79 $ 4.14 $ 4.65
b 36.00 28.80 32.40 27.60
c 2.40 1.32 1.56 1.94
d 6.00 5.55 6.15 6.30
e 24.00 20.40 22.80 21.00
f 13.35 10.55 12.30 12.90
Required:
Determine the lower of cost or market for each inventory item.

105. Farmington Company uses a perpetual inventory system and values its inventory at lower of cost or
market. Its accounting records indicate the following information relating to inventory:
Inventory
Date Cost Market
January 1, 2014 $ 60,000 $ 60,000
December 31, 2014 100,000 88,000
December 31, 2015 115,000 104,000
Required:
Prepare the required journal entries at December 31, 2014, and December 31, 2015, to record the inventory at lower of cost or market using the
following methods:
a. Direct method
b. Allowance method
106. The Peter Park Company began operations in early 2013. At December 31, 2013, the company's ending
inventory's cost was $12,950. The market value of the inventory at this date was $11,800. Peterson values its
inventory at lower of cost or market applied on an individual item basis and uses a perpetual inventory system.
Below is information relating to Peter's inventory at December 31, 2014:
Estimated Estimated Normal

No. of Unit Replacement Selling Costs of Profit
Item Units Cost Cost Price Disposal Margin
1 200 $5.00 $4.00 $ 7.50 $1.00 $2.00
2 400 9.00 8.00 10.00 1.50 2.00
3 350 6.00 7.00 8.00 2.50 1.00
4 450 7.50 8.80 10.00 2.00 1.50
5 500 3.00 2.50 5.00 .50 1.50
Required:
a. Assuming that the company uses the allowance method, prepare the required entry at December 31, 2013, to record the inventory at
lower of cost or market.
b. Prepare a schedule to calculate the inventory's value as of December 31, 2014, using the lower of cost or market method. The schedule
should contain the following column headings: Item, Upper Constraint, Lower Constraint, Applicable Unit Inventory Value, Number of
Units, and Total Inventory Value.
c. Prepare the required entry at December 31, 2014, to record the inventory at lower of cost or market. Assume the allowance method is
used.
107. A fire destroyed the Churchill Company's warehouse on March 15, 2014. Only goods with a normal selling
price of $12,500 and a net realizable value of $5,000 were saved. The following information is available from
the company's records:
Inventory in warehouse, 1/1/14 $250,000

Purchases, 1/1/14-3/15/14 620,000
Purchase returns 9,500
Freight-in 14,000
Sales, 1/1/13-3/15/14 850,000
Sales returns 20,000
For the period from 2009 through 2013, Churchill had a gross profit of $2,100,000 on net sales of $6,000,000.
Required:
a. Estimate Churchill’s inventory loss from the fire using the gross profit method.
b. What assumptions allow the use of the gross profit method in these circumstances?
108. After the auditors counted the inventory of the Cracker Jack Manufacturing Co. and reviewed the
accounting records something appeared to be amiss. Inventory that was counted totaled $ 295,000.
Inventory (1/1/14) $130,000

Purchases (2014) 760,000
Sales (2014) 1,020,000
109. Scotland Inc. incurred a fire loss. Certain information follows:
Gross profit on cost 25%

Purchase returns $1,250
Sales 45,675
Cost of goods not burned 7,465
Accounts receivable 8,780
Purchases 43,500
Purchase discounts 850
Required:
Using the gross profit method, compute the amount of the fire loss.
110. Yamachi Inc. incurred a loss from a flash flood on July 20, 2014. The following information was available
from the company's accounting records:

Beginning inventory, 1/1/14 $18,000
Sales, 1/1/14-7/20/14 85,000
Sales returns 2,500
Cost of goods not destroyed 3,500
All purchases of merchandise are on account. The accounts payable balance on January 1, 2014, was $16,500, and cash paid to suppliers during 2014
to the date of the flood loss was $60,000. Purchase discounts taken during the period were $1,200. The unpaid purchase invoices as of July 20, 2014,
totaled $35,050. The accounts payable account is used only to record purchases of merchandise.
Required:
Using the gross profit method, compute the amount of the loss from the flash flood. (Hint: The accounts payable account must be analyzed to
determine purchases.)
111. Companies may express their gross profit as a percentage of net sales or as a percentage of cost of goods
sold. The following data are available on two different companies:
Company A gross profit as a percentage of net sales 25%

Company B gross profit as a percentage of cost of goods sold 65%
Required:
a. Compute the gross profit as a percentage of cost of goods sold for Company A.
b. Compute the gross profit as a percentage of net sales for Company B.
112. The Brad’s Farm Company uses the retail inventory method to compute ending inventory. Information for
2015 is as follows:
Cost Retail
Net markups 8,000
Purchases 40,000 80,000
Freight-in 7,100
Purchase returns 3,000 6,000
Sales 50,000
Net markdowns 4,000
Required:
Determine Brad’s Farm Company's ending inventory based on the retail lower of average cost or market method.
113. The Baby Super Store uses the average cost retail inventory method to determine its ending inventory. The
accounting records for the current year for the Baby Super Store contained the following information:
Cost Retail
Purchases 59,500 84,000
Sales 95,000
Net markups 5,167
Net markdowns 2,067
In addition, the accounting records for Baby Super Store disclosed that freight-in charges were $6,700. What is the cost-to-retail percentage to be
used for ending inventory calculations?
114. Laura’s Homemade cannot decide which inventory method to use to determine its ending inventory. The
accounting records for the current year contain the following information:
Cost Retail
Purchases $67,800 $99,500
Sales 98,000
Net markups 6,500
Net markdowns 3,000
Compute the ending inventory under the following cost flow assumptions.
1) FIFO
2) lower of cost or market (based on average cost)
Cost Retail
Purchases $67,800 $99,500
Sales 98,000
Net markups 6,500
Net markdowns 3,000
Compute the cost of inventory under the following cost flow assumptions.
1) LIFO
2) Average Cost
116. The Smith Company uses the retail inventory method to estimate inventory for interim financial
statements. The following inventory information is available:
Cost Retail
Purchases 38,500 59,000
Freight-in 500
Net markups 7,050
Sales 51,500
Net markdowns 1,050
Required:
a. Determine the inventory value using the retail inventory method and the FIFO cost flow assumption.
b. Determine the inventory value using the retail inventory method and the LIFO cost flow assumption.
117. Given the following information for Miller, Inc.:
Cost Retail
Markdown cancellations $950
Markup cancellations 3,500
Employee discounts 1020
Purchase returns $1,030 1,520
Purchases 35,400 46,787
Inventory, January 1 7,160 13,820
Purchase discounts taken 756
Freight-in 4,000
Markups 14,500
Markdowns 2,600
Sales 56,700
Required:
a. Determine the inventory value using the retail inventory method and the FIFO cost flow assumption. Round off any decimals to two
places.
b. Determine the inventory value using the retail inventory method and the lower of average cost or market cost flow assumption.
118. Guinea, Inc. adopted the dollar-value LIFO retail inventory method on January 1, 2013, when the price
index was 100. The following information was taken from company records on December 31, 2013, when the
price index was 110.
Cost Retail
Sales $190,000
Additional markups 18,000
Markdowns 8,000
Markdown cancellations 2,000
Inventory, January 1 $ 14,400 20,000
Purchases 158,000 199,000
Required:
Compute the cost of the December 31, 2013, inventory. (Round off calculations to the nearest dollar.)
119. Dahlia adopted the dollar-value LIFO retail inventory method on January 1, 2014. The following
information for 2014 was taken from the company's records:
Cost Retail
Sales $173,350
Net markups 2,000
Inventory, January 1, 2010 $ 24,300 30,000
Purchases 147,740 180,000
Net markdowns 4,000
The price index on January 1, 2014, was 100. On December 31, 2014, it was 105.
Required:
Compute the inventory value for December 31, 2014.
120. Donahue adopted the dollar-value LIFO retail inventory method on January 1, 2014. The following
Cost Retail
Sales $189,000
Net markups 6,000
Purchases 147,000 200,000
The price index on January 1, 2014, was 100. On December 31, 2014, it was 110. Round cost/retail percentages to the nearest whole percent if
necessary.
Required:
121. A list of errors is shown below:
Year-End
Cost of Retained Working
Errors Goods Sold Earnings Capital
Ending inventory is overstated ________ ________ ________
Beginning inventory is overstated ________ ________ ________
Ending inventory is understated ________ ________ ________
Beginning inventory is understated ________ ________ ________
Purchases is overstated (recorded twice) ________ ________ ________
Purchases is understated (not recorded) ________ ________ ________
Required:
Show the effects of the errors on the indicated balance sheet and income statement items. Use the following symbols: O = Overstated; U =
Understated; N = No Effect.
122. Information:
Net Income Error in

Year per Books Ending Inventory
2013 $75,000 $2,000 Overstatement
2014 54,000 2,800 Understatement
2015 96,000 1,900 Overstatement
Required:
Assuming that no corrections were made in any year, compute the correct income for each of the three years.
123. Certain errors are listed below.
Effect on
Cost of Accounts
Error Goods Sold Payable
a. Ending inventory is overstated

because of a miscount. ________ ________
b. Merchandise received was not recorded
in the purchases account, but it was
included in the physical count. ________ ________
c. Merchandise shipped FOB shipping
point was not included in purchases
or the ending physical count. ________ ________
Required:
Indicate the effect the errors will have on cost of goods sold and accounts payable. Use +, -, and 0.
124. Walker Towel & Linen Shop uses the lower of cost or market method and has a periodic inventory system.
Additional information follows:
Inventory
Date Cost Market
January 1, 2014 $4,600 $4,000
December 31, 2014 6,000 5,000
December 31, 2015 9,000 8,200
Required:
a. If the direct method of recording the reduction of inventory to market is in use, what would be the amount of the debit to Inventory on
December 31, 2015?
b. If the allowance method is in use, what would be the debit to Income Summary on December 31, 2014?
125. The Slayton Company uses a periodic inventory system and values its inventory at lower of cost or market.
Its accounting records indicate the following information relating to inventory:
Inventory
Date Cost Market
January 1, 2015 $ 75,000 $ 75,000
December 31, 2015 110,000 80,000
December 31, 2016 140,000 128,000
Required:
following methods:
a. Direct method
b. Allowance method
126. Information about the ending inventories of Charleston Chair Company is shown below:
Current Normal
Replacement Selling Cost of Profit
Year Cost Cost Price Completion Margin
2013 $10,000 $11,500 $12,000 $1,000 $1,100
2014 15,000 13,000 14,000 1,500 1,250
2015 20,000 18,600 24,000 2,200 2,900
Required:
a. Determine
the value
of the
inventory
for each
year using
the lower
of cost or
market
rule.
b. Assuming
that
Charlesto
n Chair
Company
maintains
a periodic
inventory
system,
prepare
journal
entries for
2015 to
record the
reduction
of the
inventory
to market
value
using:
(1) the direct method
(2) the allowance method
127. Describe the lower of cost or market rule.

128. Replacement costs are measured based upon GAAP’s requirement of an upper and a lower constraint on
the market value. What are the upper and lower constraints?
129. Under special circumstances GAAP allows a company to report its inventory above cost. How must this
exception be justified?
130. In what situations would the gross profit method be used to estimate ending inventory?
131. Define the following:

Markup
Additional Markup
Net Additional Markup
Markdown Cancellation
132. What are the four alternative valuations used in the application of the Retail Inventory Method?
133. What is dollar value LIFO retail method?
134. A purchase on credit is omitted from the purchases account, but ending inventory is correct. What is the
effect of this error on the balance sheet for the current year? What is the effect on the income statement for the
current year?
135. Ending inventory is over stated due to an error, purchases were verified to be correct. What is the effect on
the current year’s income statement?
136. Lower of cost or market rule can be applied to periodic inventory. What are the two methods? Which one
requires an entry to the loss due to market valuation account?
137. Draper Company's controller was explaining to the company's president, Dana Draper, that if the
inventory's value should decrease below its original cost, the inventory must be written down and a loss must be
recognized. The controller told the president that this is called the lower of cost or market rule. The president
was unclear as to the purpose of this rule and wanted to know the disadvantages of this method.
Required:
a. State the accounting convention that supports the lower of cost or market rule, and in this context, discuss the purpose of the rule.
b. Discuss the criticisms of the lower of cost or market rule in the valuation of inventories.
138. Describe the differences in the application of lower of the cost or market consideration between U.S.
GAAP and IFRS.
139. The gross profit method may be used to estimate the cost of inventory.
Required:
a. List four situations when it might be appropriate to use the gross profit method to estimate the cost of inventory.
b. Discuss the potential disadvantages of the gross profit method.
140. The retail inventory method is used extensively in the retail industry.
Required:
Discuss the assumptions and benefits of the retail inventory method.
141. Careful valuation of the ending inventory is necessary because errors can result in inaccurate values on
both the income statement and balance sheet. Assume that a company overstates its ending inventory for 2010.
Required:
Explain the effects of the error on the income statements and balance sheets for 2010 and 2011.
Chapter 8-Inventories: Special Valuation Issues Key
1. Reporting inventory at the lower of cost or market provides a representationally faithful value of inventory
therefore the application of the lower of cost or market rule is consistent with the materiality principle.
FALSE
2. The Net Realizable Value is considered the ceiling or the upper bound that prevents inventory from being
valued at amount higher than what the company could reasonably sell it.
TRUE
3. GAAP allows a company to report its inventory above cost with justifiable exceptions which include the
inability to determine a cost.
TRUE
4. Precious metals can be valued above costs because they are immediately marketable at a quoted market
price.
TRUE
5. An auditor would most likely not use the gross profit method to verify the accuracy of the reported cost of
inventory.
FALSE
6. The gross profit method is an excellent method to determine the cost of inventory for interim financial
statements. The method of estimation must be disclosed.
TRUE
7. One of the main advantages to the retail inventory method over the gross profit is the retail method uses
current-period estimates whereas the gross profit used past periods.
TRUE
8. The gross profit method is more sensitive to price changes and produces a more accurate estimate of current
period ending inventory.
FALSE
9. The purpose of dollar-value LIFO retail method is to eliminate the effects of price changes during a period.
TRUE
10. Under the dollar-value LIFO the cost-to-retail ratio includes net markups and net markdowns but includes
the beginning inventory.
FALSE
11. A purchase on credit is omitted from the purchase account in error, ending inventory is correct. The effect
on the current year financial statements would be net income is understated because purchases are understated
also causing cost of goods sold to be understated.
FALSE
12. Ending inventory is overstated due to a costing error but purchases are correct. The balance sheet would be
correct in the succeeding year because the previous years error would have been counterbalanced.
TRUE
the following journal entry to close beginning inventory using the direct method:
Income Summary x,xxx

Allowance to x,xxx
Reduce Inventory
to Market
Inventory x,xxx
FALSE
the following journal entry to record inventory at market using the allowance method:
Loss due to x,xxx

Market Valuation
Allowance to Reduce Inventory to x,xxx
Market
TRUE
15. The most common approach to implementing the lower of cost or market rule for inventory valuation is to
apply it
A. separately to each item of inventory
D. in a combination of these methods
16. Which application of the lower of cost or market rule will generally result in the lowest valuation for the
ending inventory?
17. When applying lower of cost or market, market value

A. is defined as the selling price
B. should not exceed the net realizable value
C. should not exceed the net realizable value less an allowance for a normal profit margin
D. should not exceed the net realizable value plus an allowance for a normal profit margin
18. Exhibit 8-1


Refer to Exhibit 8-1. The selling price of this unit must be

A. $49.30
B. $53.00
C. $52.90
D. $49.10
19. Exhibit 8-1

Refer to Exhibit 8-1. The floor constraint of this unit must be

A. $41.90
B. $38.00
C. $41.70
D. $38.10
20. When comparing the lower of cost to market

A. the appropriate market value is determined before comparing it to the cost
B. the purpose of the ceiling is to ensure that the write-down is sufficient to cover all expected gains
C. the purpose of the floor is to prevent an excessive gain from being recognized in the future
D. the process is consistent with the principle of conservatism because the goal is to limit excessive swings in
gross margin
21. Morris Company uses the lower of cost or market rule in valuing its inventory. The floor constraint for one

The net realizable value for this item is

A. $72.40
B. $55.50
C. $80.90
D. $76.40
22. When applying the lower of cost or market rule to the valuation of inventory, the allowance method is
considered preferable to the direct method because
A. the allowance method reports smaller losses than the direct method
B. the allowance method reports a higher inventory net valuation for balance sheet purposes than the direct
method
C. the allowance method reports the inventory loss or loss recovery in a separate income statement account
D. the allowance method discloses the inventory loss in a separate account in the stockholders' equity section of
the balance sheet
23. In comparison to the allowance method of applying the lower of cost or market rule to the valuation of
inventory, the direct method has which of the following deficiencies?
A. The direct method reports a more conservative amount for net income.
B. For the direct method, the loss or loss recovery due to market valuation changes is included in the cost of
goods sold amount.
C. With the direct method, the inventory amount reported on the balance sheet is the historical cost.
D. The direct method can only be used with a perpetual inventory system.
Date Cost Market

December 31, 2014 $500 $500
December 31, 2015 700 650
December 31, 2016 800 730
Under the periodic system, if the direct method of recording lower of cost or market is in use, which December 31, 2016 entry is correct?
B. Inventory 730
Income Summary 730
D. Inventory 800
Income Summary 800
25. Given the following information for the Tea Company:
Date Cost Market

December 31, 2014 $ 800 $ 800
December 31, 2015 1,000 940
December 31, 2016 1,100 1,060
Under the periodic system, if the allowance method of recording lower of cost or market is in use, which December 31, 2016 entry is not correct?
B. Allowance to Reduce Inventory to Market 20
Loss Recovery Due to Market Valuation 20
C. Inventory 1,100
D. Income Summary 1,000
Inventory 1,000
26. Zoe Company has provided the following values for its 400 units of inventory at the end of 2014:
Item Per Unit

Historical cost $65.00
Replacement cost $54.20
Net realizable value $54.50
Normal profit margin $ 35.80
Under IFRS requirements, the per-unit reported value for Zoe's inventory will be
A. $55.00
B. $54.50
C. $54.20
D. $53.70
27. The Maxa Company normally sells its inventory at a 20% profit margin on sales. In 2014, the net realizable
value of inventory purchased for $75,000 declined to $66,000. There are no costs to complete and dispose of
this inventory. What is the floor constraint on the valuation of this inventory using the lower of cost or market
rule?
A. $60,000
B. $66,000
C. $79,200
D. $52,800
28. Which one of the following statements is true with regard to the lower of cost or market rule?
A. If the direct method is used in applying the lower of cost or market rule, the loss or loss recovery due to
market valuation changes is included in cost of goods sold.
B. The lower of cost or market rule must be applied on an individual item basis for financial accounting
purposes.
C. With the application of the lower of cost or market rule using the direct method, the account, Allowance to
Reduce Inventory to Market, is reported on the balance sheet as a contra asset.
D. The lower of cost or market rule is primarily an application of the going concern assumption.
29. Although IFRS require the use of the lower of cost or market method to value inventory, some differences
from GAAP still exist. Which of the following is not one of the differences?
A. Market is defined only as net realizable value in IFRS.
B. When write-downs occur, IFRS do not specify how the loss must be categorized in the income statement.
C. IFRS allow the reversal of a previous write-down.
D. IFRS define market only as replacement cost.
30. The major criticism of the lower of cost or market rule for valuation of inventory is that
A. holding losses are recognized, but holding gains are not
B. holding gains are recognized, but holding losses are not
C. the total difference between selling price and cost is usually recognized in the period of the sale
D. the conservatism principle is violated because of the use of the floor constraint
31. Which application of the lower of cost or market rule will generally result in the highest valuation for the
ending inventory?
32. Concerning application of the lower of cost or market method, which one of the following statements is true
regarding the constraints on market value?
A. The upper constraint is estimated selling price less costs of completion and disposal.
B. The lower constraint is net realizable value less costs of completion and disposal.
C. The upper constraint is estimated selling price less a normal profit margin.
D. The upper constraint is estimated selling price less costs of completion and disposal and a normal profit
margin.
33. Major Company uses the lower of cost or market rule in valuing its inventory. The floor constraint for one

The market value for this item is

A. $58.20
B. $70.90
C. $78.90
D. $81.10
34. In general, it is argued that the lower of cost or market rule is supported most closely by which of the
following theoretical assumptions?
A. revenue recognition
B. conservatism
C. historical cost
D. going concern
35. The application of the lower of cost or market rule to inventory valuation is an example of
A. the revenue realization principle
B. the going concern assumption
C. special industry practices
D. conservatism
36. For valuation of inventory, the lower of cost or market rule may be applied to
A. the total inventory
B. each item or the total of inventory
C. each item, the total of inventory, or major categories of inventory
D. each item
37. Which one of the following inventories may not be valued for balance sheet purposes at the inventory's
selling price less distribution costs even if it is above the cost of the inventory?
A. grain for an agricultural company
B. crude oil for an oil company
C. gold for a mining corporation
D. laptops for a computer manufacturer
38. Generally, valuing inventory above cost

A. violates conservatism and is never allowed
B. violates the lower of cost or market rule and is never allowed
C. is acceptable when revenue recognition is not applicable
D. is acceptable only in selected industries and in certain circumstances
39. Which one of the following inventories may be valued for balance sheet purposes at the inventory's selling
price less distribution costs even if it is above the cost of the inventory?
A. automobiles for an automobile manufacturer
B. gold for a mining corporation
C. steel for a steel manufacturer
D. athletic shoes for a retail store
40. For the period from 2014 through 2015, the Charlie Company had net sales of $500,000 and a gross profit
of $200,000. During the first quarter of 2016, the company made purchases of $19,500 and recorded sales of
$47,500. The inventory value at the beginning of the year was 15,500. What is the estimated cost of Charlie’s
inventory on March 31, 2016, using the gross profit method?
A. $22,500
B. $15,000
C. $ 6,500
D. $ 6,000
41. Exhibit 8-2


Purchases 25,000
Refer to Exhibit 8-2. The estimated inventory at January 31, 2014, is

A. $25,500
B. $21,500
C. $16,000
D. $12,000
42. Exhibit 8-2


Purchases 25,000
Refer to Exhibit 8-2. The estimated cost of goods sold at January 31, 2014, is
A. $25,500
B. $21,500
C. $16,000
D. $12,000
43. Consider the following:
Code: A = Gross profit to net sales ratio

B = Gross profit to cost of goods sold ratio
Which equation is correct?
A. A = B / (1 - B)
B. A = (1 + B) / B
C. A = (1 - B) / B
D. A = B / (1 + B)
44. Relevance of the gross profit margin depends upon

A. the accuracy of the gross profit percentage
B. the net sales
C. applying the overall profit margin to each individual department
D. averaging prior periods' net sales and total sales to verify which is best to use
45. Which one of the following statements is not true with regard to the gross profit method of estimating
inventories?
A. The gross profit method may be used to determine inventory for interim financial reporting purposes without
taking a physical count.
B. The percentage used for the gross profit method is determined by using previous years' historical data.
C. The gross profit method is not as accurate as the retail inventory method.
D. The gross profit method may only be used with a perpetual inventory accounting system.
46. The Sahara Company's inventory was partially destroyed on June 4, 2014, when its warehouse caught on
fire early in the morning. Inventory that had a cost of $8,000 was saved. The accounting records, which were
located in a fireproof vault, contained the following information:
Sales (1/1/14 through 6/3/14) $260,000

Inventory (1/1/14) 40,000
Using the gross profit method, what is the estimated cost of the inventory destroyed by the fire?
A. $40,000
B. $30,000
C. $25,000
D. $22,000
47. Given the following information for Bonnie Bunny Company:
Freight-in $ 650
Purchases 12,550
Sales returns 300
Sales 23,450
Gross profit on sales 45%
Calculate ending inventory of Bonnie Bunny using the gross profit method.
A. $1,360
B. $1,075
C. $4,597
D. $2,253
48. As a result of taking a physical inventory count on December 31, 20104 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 (1/1/14) $ 330,000

Purchases (2014) 1,770,000
Sales (2014) 2,200,000
Using the gross profit method, what did the auditors estimate as the amount of the inventory shortage at December 31, 2014?
A. $100,000
B. $75,000
C. $15,000
D. $25,000
49. The gross profit method is not used to

A. replace the year-end physical inventory
B. check the cost generated by a perpetual inventory system
C. determine the cost of inventory destroyed by fire
D. develop a sales budget
50. The Jamison Company's inventory was destroyed on July 4, 2013, 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 (1/1/13 through 7/3/13) $250,000

Inventory (1/1/13) 45,000
Using the gross profit method, what is the estimated cost of the inventory that was destroyed by the fire?
A. $17,500
B. $25,000
C. $30,000
D. $37,500
51. As a result of taking a physical inventory count on December 31, 2014, 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 (1/1/14) $ 130,000

Purchases (2014) 760,000
Sales (2014) 1,020,000
A. $240,000
B. $ 61,500
C. $125,000
D. $170,000
52. Which one of the following statements regarding the gross profit method is not true?
B. The gross profit method is often used to estimate the year-end inventory for comparison to actual on-hand
inventory.
D. The gross profit method results in a less accurate inventory valuation than the retail inventory method.
53. Which one of the following statements regarding the gross profit method is true?
B. The gross profit method results in a more accurate inventory valuation than the retail inventory method.
D. The gross profit method is often used to calculate the year-end inventory for financial accounting purposes.
54. At the beginning of 2014, 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 2014 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
55. 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
56. If the net markdowns are excluded from the calculation of the cost-to-retail ratio in the retail inventory
method, the ending inventory's valuation is lower because of which of the following effects 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.
57. 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 final price
change is a
A. net markup of $18
B. markdown of $5 and a markup of $8
C. net markdown of zero and an additional markup of $8
D. net markdown of $5 and a net markup of $18
58. 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 2014 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, 2014?
A. $270
B. $300
C. $585
D. $600
59. The Rebecca Company provided the following data for its December 31, 2014, inventory maintained on the
retail basis.
At Cost At Retail
Purchases 275,000 446,000
Markups (net) 45,750
Markdowns (net) (32,000)
Sales 575,000
What is the estimated inventory at December 31, 2014, valued at lower of average cost or market?
A. $67,333
B. $75,000
C. $67,374
D. $50,000
60. When using the cost-to-retail ratio, net markups and markdowns are
A. always included in the computation of the ending inventory at retail
B. always included in the computation of the ending inventory at cost
C. never computed at retail
D. computed differently in each industry
61. 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
62. 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.
63. Which one of the following statements is not true 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.
64. 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
Net markdowns 400
What is the cost of ending inventory for Eloise Corp.?

A. $4,760
B. $5,100
C. $5,209
D. $5,552
65. 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. $580
C. $630
D. $900
66. 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
Net markups 5,000
Net markdowns 4,000
What is the cost of the ending inventory?

A. $6,720
B. $7,700
C. $7,980
D. $8,400
67. Darla’s Card Shop uses the average cost retail inventory method to determine the ending inventory. Darla's
accounting records for 2014 contained the following information:
Cost Retail
Purchases $216,000 $317,500
Sales 350,000
Net markups 12,000
Net markdowns 8,000
In addition, sales returns for 2014 were $28,000, and employee discounts taken were $6,000. What is the cost of the ending inventory at December
31, 2014?
A. $21,000
B. $35,000
C. $50,400
D. $54,600
68. 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
Net markups 32,800
The freight-in charges for the merchandise were $7,500. What is the cost of ending inventory for Stacie’s Shoes?
A. $49,280
B. $55,792
C. $57,200
D. $59,400
69. 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
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. 76.9%
70. 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
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%
71. 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
Sales 156,900
Net markups 21,500
Net markdowns 7,500

A. 70.0%
B. 73.2%
C. 79.4%
D. 77.8%
72. 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
Sales 385,750
Net markups 32,500

A. 57.0%
B. 60.0%
C. 62.1%
D. 62.5%
cost-to-retail ratio in a period of declining prices?
A. FIFO
B. LIFO
C. average cost
cost-to-retail ratio in a period of rising prices?
A. FIFO
B. LIFO
C. average cost
75. 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
76. Which of the following general assumptions underlie the retail inventory method?
A. The inventory is sufficiently homogeneous to have the same markup and the cost-to-retail ratio changes
B. The inventory is sufficiently homogeneous to have the same markup and the cost-to-retail ratio changes
C. The inventory is sufficiently homogeneous to have a different markup and the cost-to-retail ratio changes
D. The inventory is sufficiently homogeneous to have a different markup and the cost-to-retail ratio changes
77. 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. $6,169
B. $6,504
C. $6,570
D. $6,900
78. Kelcie Sports uses the dollar-value LIFO retail method. The price index on January 1, 2014, was 100, and
on that date the inventory was $20,000 (retail) and $14,000 (cost). Additional information follows:
2014 2015
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, 2015, inventory (to the nearest dollar)?
A. $14,610
B. $14,638
C. $14,660
D. $15,854
79. 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.
80. 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
81. The dollar-value LIFO retail method combines

A. the principle of retail LIFO with dollar-value LIFO.
B. does not really include retail LIFO in the process.
C. while the name may suggest a combination of the two methods, dollar-value LIFO retail is a new principle.
D. the principle of retail LIFO with dollar value LIFO but is rarely used in practice.
82. 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.
83. 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.
C. Working capital is overstated and net income is understated.
84. The accountant for Angie Company made the following errors related to purchases of merchandise and
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 2013 net income will be
A. understated by $3,180
85. The accountant for the Daneen Company made the following errors related to purchases of merchandise and
1. A $3,100 purchase of merchandise on credit early in 2015 was recorded and included in ending inventory at December 31, 2014.
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 2014 net income will be
86. Barry Corp. reported 2014 net income of $40,000. However, the ending inventory in 2013 had been
understated by $3,000, and 2014's ending inventory had been overstated by $6,000. Barry's correct net income
for 2014 was
A. $31,000
B. $34,000
C. $43,000
D. $46,000
87. A purchase on credit is recorded twice and not corrected during the 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.
88. The correct net income for Sarah Corp. was $53,500. The company reported incorrect net income because
beginning inventory was understated by $2,500, purchases were overstated by $2,000, and ending inventory
was overstated by $2,000. What net income did Sarah Corp. report?
A. $49,000
B. $51,000
C. $56,000
D. $58,000
89. The accountant for Ella Company made the following errors related to the inventory in 2014:
1. The beginning inventory for 2014 was understated by $1,350 due to an error in the physical count.
Assuming a periodic inventory system, Ella Company's 2014 net income will be
B. overstated by $1,350
90. Bennett Company's accountant made the following errors related to merchandise inventory in 2013:
1. The beginning inventory for 2013 was overstated by $1,900 due to an error in the physical count.
2. A $1,150 purchase of merchandise on credit was not recorded, but the items were included in the ending inventory.
Assuming a periodic inventory system, Bennett Company's 2013 cost of goods sold will be
C. overstated by $750
91. The accountant for Lee Company made the following errors related to merchandise inventory in 2014:
1. The beginning inventory for 2014 was overstated by $750 due to an error in the physical count.
2. A $1,300 purchase of merchandise on credit was not recorded or included in the ending inventory.
Assuming a periodic inventory system, Lee Company's 2014 cost of goods sold will be
92. The accountant for Frieda Company did not record a purchase of merchandise on credit or include the items
in the ending inventory. Assuming a periodic inventory system, the effect of these omissions on assets,
liabilities, and retained earnings would be

I. Understate Understate Understate
II. Understate Understate No effect
III. No effect Understate No effect
IV. Understate No effect Understate
A. I
B. II
C. III
D. IV
93. The accountant for the Issenock Company did not record a purchase of merchandise on credit for the current
year, but the merchandise was correctly included in the ending inventory. Assuming a periodic inventory
system, how would assets, liabilities, and retained earnings be affected on the year-end balance sheet?

II. Understated Understated No effect
III. No effect No effect Overstated
IV. No effect Understated Overstated
A. I
B. II
C. III
D. IV
94. The accountant for Suzanne Company made the following errors related to inventory in 2015:
1. The beginning inventory for 2015was overstated by $1375 due to an error in the physical count.
2. A $1650 purchase of merchandise on credit in 2015 was not recorded or included in the ending inventory.
Assuming a periodic inventory system, how would Sue's cost of goods sold, gross profit, and net income be affected in 2015 by these errors?
Cost of Goods Sold Gross Profit Net Income

I. Overstated Understated Understated
II. Overstated Understated No effect
III. Understated Overstated Overstated
IV. No effect No effect No effect
A. I
B. II
C. III
D. IV
95. What is the effect on net income for the current year if a company fails to record a purchase of materials in
transit (FOB shipping point) but includes the materials in physical inventory at year-end?
A. Net income is overstated.
B. Net income is understated.
C. Net income is unaffected.
96. If in the current year a purchase was not recorded but the purchased item was included in ending physical
inventory, which one of the following situations occurs for the current year?
A. Working capital is understated, and net income is overstated.
C. Working capital is overstated, and net income is understated.
97. The accountant for the Hilga Company recorded a purchase of merchandise on credit for the current year,
but the merchandise was shipped FOB destination and did not arrive until after current year-end. Assuming a
periodic inventory system, how would assets, liabilities, and retained earnings be affected on the year-end
balance sheet?

II. Understated Understated Understated
III. No effect Overstated Overstated
IV. No effect Overstated Understated
A. I
B. II
C. III
D. IV
98. Exhibit 8-3

Date Cost Market

December 31, 2014 $70,000 $70,000
December 31, 2015 56,000 46,000
December 31, 2016 64,000 58,000
Refer to Exhibit 8-3. Which of the following journal entries would be correct as of December 31, 2015, to apply the lower of cost or market rule to
the valuation of inventory?
A. Inventory 46,000
to Market 10,000
C. Cost of Goods Sold 10,000
Inventory 10,000
to Market 10,000
99. Exhibit 8-3

Date Cost Market

December 31, 2014 $70,000 $70,000
December 31, 2015 56,000 46,000
December 31, 2016 64,000 58,000
Refer to Exhibit 8-3. Which of the following journal entries would be correct as of December 31, 2016, to apply the lower of cost or market rule?
A. Inventory 58,000
to Market 6,000
C. Allowance to Reduce Inventory to Market 4,000
to Market 6,000
Date Cost Market

December 31, 2014 $500 $500
December 31, 2015 700 650
December 31, 2016 800 730
If the allowance method of recording lower of cost or market is in use, which December 31, 2016, entry is correct?
B. Inventory 730
Income Summary 730
D. Allowance to Reduce Inventory to Market 800
Income Summary 800
101. Below are a list of key terms.
a) additional Mark up
b) allowance method
c) conventional retail method
d) markdown cancellation
e) net realizable value
f) net additional markup
g) markup
h) gross profit method
Required:
Match each key term with the appropriate definition.
______ 1) Total markup less markup cancellations.
______ 2) Increase in selling price after there has been a markdown.
______ 3) Cost to selling price.
______ 4) Can be used by an auditor to verify the cost of inventory.
______ 5) Also known as the retail inventory method.
______ 6) Increase above the original sale price.
______ 7) The loss is recorded in a separate inventory account.
______ 8) Estimated selling price less costs of completion or disposal.
1 f
2 d
3 g
4 h
5 c
6 a
7 b
8 e
102. The following information was taken from the inventory records of the Walker Company:
Product A B C D E
Units 175 200 250 200 300
Unit cost $5.50 $10.00 $5.10 $5.10 $5.00
Replacement cost $6.00 $9.00 $4.60 $4.50 $4.50
Net realizable value (NRV) $5.20 $12.50 $7.00 $7.00 $7.00
NRV–Normal profit $4.80 $10.30 $5.25 $4.00 $4.80
Required:
Determine the valuation of the inventory at the lower of cost or market applied to:
a. individual items
b. the inventory as a whole
a. ($5.20 ´ 175) + ($10.00 ´ 200) + ($5.10 ´ 250) +

($4.50 ´ 200) + ($4.80 ´ 300) = $6,525
b. Cost = $962.50 + $2,000 + $1,275 + $1,020 + $1,500 = $6,757.50

Market = $910 + $2,060 + $1,312.50 + $900 + $1,440 = $6,622.50
103. Given the following information for Gator Company:
Net NRV Minus

Unit Quantity Cost Value Cost Profit
1 1 $17.70 $24.60 $18.00 $17.10
2 1 10.80 8.28 9.30 5.58
3 1 72.00 64.80 67.20 57.60
4 1 4.80 3.12 2.88 2.64
5 1 12.00 12.30 12.60 11.10
6 1 48.00 45.60 38.40 40.80
Required:
a. Determine the lower of cost or market value for each inventory item for Gator Company.
b. Determine the lower of cost or market value for Gator Company's inventory if the lower of cost or market rule is applied to the total
inventory.
a. 1. $1 4. $ 2.88
7.7
0
2. $ 5. $12.00
8.2
8
3. $6 6. $40.80
4.8
0
b. Net NRV
Minus
Unit Qu Cost Value Cost Profit M
ant ar
ity k
et
1 1 $ 17.70 $24.60 $18.00 $17.10 $
1
8.
0
0
2 1 10.80 8.28 9.30 5.58 8.
2
8
3 1 72.00 64.80 67.20 57.60 6
4.
8
0
4 1 4.80 3.12 2.88 2.64 2.
8
8
5 1 12.00 12.30 12.60 11.10 1
2.
3
0
6 1 48.00 45.60 38.40 40.80
4
0.
8
0
Tot$165.30 $
al 1
4
7.
0
6
Inventory
at lower
of cost or
market:
$147.06
104. Given the following information for the Lawrence Company:
NRV Minus Net

Normal Realizable Replacement
Unit Cost Profit Value Cost
a $ 3.40 $ 2.79 $ 4.14 $ 4.65
b 36.00 28.80 32.40 27.60
c 2.40 1.32 1.56 1.94
d 6.00 5.55 6.15 6.30
e 24.00 20.40 22.80 21.00
f 13.35 10.55 12.30 12.90
Required:
Determine the lower of cost or market for each inventory item.
a. $ 3.40 d. $ 6.00
b. $28.80 e. $21.00
c. $ 1.56 f. $12.30
105. Farmington Company uses a perpetual inventory system and values its inventory at lower of cost or
market. Its accounting records indicate the following information relating to inventory:
Inventory
Date Cost Market
January 1, 2014 $ 60,000 $ 60,000
December 31, 2014 100,000 88,000
December 31, 2015 115,000 104,000
Required:
following methods:
a. Direct method
b. Allowance method
a. Direct
Method:
12/31/14
Cost of 12,000
Goods
Sold
Inventory 12,000
12/31/15
:
Cost of 11,000
Goods
Sold
Inventory 11,000
b. Allowan
ce
Method:
12/31/14
:
Loss 12,000
Due to
Market
Valuatio
n
Allowance to Reduce Inventory to Market 12,000
12/31/15
:
Allowan 1,000
ce to
Reduce
Inventor
y to
Market
106. The Peter Park Company began operations in early 2013. At December 31, 2013, the company's ending
inventory's cost was $12,950. The market value of the inventory at this date was $11,800. Peterson values its
inventory at lower of cost or market applied on an individual item basis and uses a perpetual inventory system.
Below is information relating to Peter's inventory at December 31, 2014:
Estimated Estimated Normal

No. of Unit Replacement Selling Costs of Profit
Item Units Cost Cost Price Disposal Margin
1 200 $5.00 $4.00 $ 7.50 $1.00 $2.00
2 400 9.00 8.00 10.00 1.50 2.00
3 350 6.00 7.00 8.00 2.50 1.00
4 450 7.50 8.80 10.00 2.00 1.50
5 500 3.00 2.50 5.00 .50 1.50
Required:
a. Assuming that the company uses the allowance method, prepare the required entry at December 31, 2013, to record the inventory at
lower of cost or market.
b. Prepare a schedule to calculate the inventory's value as of December 31, 2014, using the lower of cost or market method. The schedule
should contain the following column headings: Item, Upper Constraint, Lower Constraint, Applicable Unit Inventory Value, Number of
Units, and Total Inventory Value.
c. Prepare the required entry at December 31, 2014, to record the inventory at lower of cost or market. Assume the allowance method is
used.
a. 12/31/13
:
Loss 1,150
Due to
Market
Valuatio
n
($12,950
-
$11,800)
Allowan 1,150
ce to
Reduce
Inventor
y to
Market
b. Applicable Total
Upper Lower Unit Inventory No. of Invent
ory
Item Constrai Constraint Value Units Value
nt
1 $6.50 $4.50 $4.50 200 $ 9
00
2 8.50 6.50 8.00 400 3,200
3 5.50 4.50 5.50 350 1,925
4 8.00 6.50 7.50 450 3,375
5 4.50 3.00 3.00 500 1,5
00
$10,9
00
Cost:
12/31/11
=
$11,575
c. 12/31/14
Allowan 475
ce to
Reduce
Inventor
y to
Market
Loss 475
Recover
y Due to
Market
Valuatio
n
($11,5
75 -
$10,900
= $675
allowanc
e
needed);
$1,150
cr. –
$675 cr.
= $475
debit
107. A fire destroyed the Churchill Company's warehouse on March 15, 2014. Only goods with a normal selling
price of $12,500 and a net realizable value of $5,000 were saved. The following information is available from
the company's records:
Inventory in warehouse, 1/1/14 $250,000

Purchases, 1/1/14-3/15/14 620,000
Purchase returns 9,500
Freight-in 14,000
Sales, 1/1/13-3/15/14 850,000
Sales returns 20,000
For the period from 2009 through 2013, Churchill had a gross profit of $2,100,000 on net sales of $6,000,000.
Required:
a. Estimate Churchill’s inventory loss from the fire using the gross profit method.
b. What assumptions allow the use of the gross profit method in these circumstances?
a. Historical gross profit % = $2,100,000/$6,000,000 = 35%
Estimated current gross profit = 35% ´ ($850,000 - $20,000) = $290,500
Estimated cost of goods sold = $830,000 - $290,500 = $539,500
Estimated cost of ending inventory = $250,000 + $620,000 - $9,500 + $14,000

- $539,500
= $335,000
Estimated fire loss = $335,000 - $5,000 = $330,000
b. The gross profit method assumes that a company's gross

profit rate in the current period (1/1/10-3/15/10) is not
materially different from the previous period or periods (in
this case the years 2006-2009). This implies that the product
mix and profit and cost ratios have not materially changed.
108. After the auditors counted the inventory of the Cracker Jack Manufacturing Co. and reviewed the
accounting records something appeared to be amiss. Inventory that was counted totaled $ 295,000.
Inventory (1/1/14) $130,000

Purchases (2014) 760,000
Sales (2014) 1,020,000
Estimated Gross Profit Rate 35%

Beginning Inventory $ 130,000
Net Purchases 760,000
Cost of goods available for sale $ 890,000
Net sales $ 960,000
Gross profit rate 35%
Estimated gross profit 336,000
Sales $ 960,000
Estimated gross profit -336,000
Cost of goods sold 624,000
Estimated ending inventory $266,000
A difference of $29,000.
109. Scotland Inc. incurred a fire loss. Certain information follows:

Purchase returns $1,250
Sales 45,675
Cost of goods not burned 7,465
Accounts receivable 8,780
Purchases 43,500
Purchase discounts 850
Required:
Using the gross profit method, compute the amount of the fire loss.
Beginning inventory $13,450

Purchases 43,500
Purchases returned 1,250
Purchases discounts 850
Cost of goods available for sale $54,850
Cost of goods sold 36,540
Estimated ending inventory $18,310
Less: Cost of inventory not destroyed 7,465
Fire loss $10,845
* $45,675/1.25 =
36,540.00
110. Yamachi Inc. incurred a loss from a flash flood on July 20, 2014. The following information was available
from the company's accounting records:

Beginning inventory, 1/1/14 $18,000
Sales, 1/1/14-7/20/14 85,000
Sales returns 2,500
Cost of goods not destroyed 3,500
All purchases of merchandise are on account. The accounts payable balance on January 1, 2014, was $16,500, and cash paid to suppliers during 2014
to the date of the flood loss was $60,000. Purchase discounts taken during the period were $1,200. The unpaid purchase invoices as of July 20, 2014,
totaled $35,050. The accounts payable account is used only to record purchases of merchandise.
Required:
Using the gross profit method, compute the amount of the loss from the flash flood. (Hint: The accounts payable account must be analyzed to
determine purchases.)
Beginnin $1
g 8,0
inventor 00
y
Purchase 79,
s 75
0*
Purchase (
s 1,2
discount 00)
s
Cost of $9
goods 6,5
available 50
for sale
Cost of (68
goods ,75
sold 0)*
*
Estimate $2
d ending 7,8
inventor 00
y
Less: (
Cost of 3,5
goods 00)
not
destroye
d
Flo $24,300
od
los
s
* $1
6,5
00
+x
-
$6
0,0
00
-
$1,
20
0=
$3
5,0
50
x=
$3
5,0
50
-
$1
6,5
00
+
$6
0,0
00
+
$1,
20
0
x=
$7
9,7
50
** $8
2,5
00/
1.2
=
$6
8,7
50
111. Companies may express their gross profit as a percentage of net sales or as a percentage of cost of goods
sold. The following data are available on two different companies:
Company A gross profit as a percentage of net sales 25%

Company B gross profit as a percentage of cost of goods sold 65%
Required:
a. Compute the gross profit as a percentage of cost of goods sold for Company A.
b. Compute the gross profit as a percentage of net sales for Company B.
a. 0.25/(1 - 0.25) = 0.25/0.75 = 33% (rounded)
b. 0.65/(1 + 0.65) = 0.65/1.65 = 39% (rounded)

112. The Brad’s Farm Company uses the retail inventory method to compute ending inventory. Information for
2015 is as follows:
Cost Retail
Net markups 8,000
Purchases 40,000 80,000
Freight-in 7,100
Sales 50,000
Net markdowns 4,000
Required:
Determine Brad’s Farm Company's ending inventory based on the retail lower of average cost or market method.
Cost Retail
Net markups 8,000
Purchases 40,000 80,000
Freight-in 7,100
Purchase returns (3,000) (6,000)
$56,100 $102,000
Cost-to-retail ratio = $56,100/$102,000 = 0.55
Net markdowns (4,000)

Goods available for sale $56,100 $98,000
Less: Sales (50,000)
Ending inventory at retail $48,000
Ending inventory at lower of average cost or market
($48,000 ´ 0.55) $26,400
113. The Baby Super Store uses the average cost retail inventory method to determine its ending inventory. The
accounting records for the current year for the Baby Super Store contained the following information:
Cost Retail
Purchases 59,500 84,000
Sales 95,000
Net markups 5,167
Net markdowns 2,067
In addition, the accounting records for Baby Super Store disclosed that freight-in charges were $6,700. What is the cost-to-retail percentage to be
used for ending inventory calculations?
Cost Retail
Beginning inventory $18,600 24,500
Purchases 59,500 84,000
Net markups 5,167
Net markdowns -2,067
Freight 6,700
Goods Available for Sale $84,800 $111,600

Cost to retail ratio:
84,800/ 111,600=
.76 (rounded)
Cost Retail
Purchases $67,800 $99,500
Sales 98,000
Net markups 6,500
Net markdowns 3,000
Compute the ending inventory under the following cost flow assumptions.
1) FIFO
1)FIFO
Purchases $67,800 $99,500

Net markups 6,500
$67,800 $103,000
67,800/103,000 = .66 (rounded)
(for purchases)
0.66
Goods available for sale 84,800 126,500
Less: Sales 98,000
Ending inventory at FIFO $18,810
Cost Retail
Purchases $ 67,800 $ 99,500
Sales 98,000
Net markups 6,500
Net markdowns 3,000

Purchases 67,800 99,500
Net markups 6,500
$ 84,800 $ 129,500
84,800/129,500 = .66 (rounded)
0.66
Less: Sales 98,000
Ending inventory at retail $ 28,500
Ending inventory at lower of cost
or market $ 18,810
Cost Retail
Purchases $67,800 $99,500
Sales 98,000
Net markups 6,500
Net markdowns 3,000
Compute the cost of inventory under the following cost flow assumptions.
1) LIFO
2) Average Cost
1) LIFO
Beginning inventory $ 17,000 $ 23,500

17,000/ 23,500 = .72
(For beginning inventory)
Purchases 67,800 99,500
Net markups 6,500
Cost to retail ratio: 103,000
67,800/99,500 = .68
(for purchases)
Ending inventory at LIFO cost:
23,500 * .72 (beginning layer) 17,000
5,000 * .68 (added layer) 3,400
$ 20,400
2) Average Cost
Cost Retail
Purchases $67,800 $99,500
Sales 98,000
Net markups 6,500
Net markdowns 3,000

Purchases 67,800 99,500
Net markups 6,500
84,800/126,500 = .67
0.67
Less: Sales 98,000
Ending inventory at average cost $ 19,095
116. The Smith Company uses the retail inventory method to estimate inventory for interim financial
statements. The following inventory information is available:
Cost Retail
Purchases 38,500 59,000
Freight-in 500
Net markups 7,050
Sales 51,500
Net markdowns 1,050
Required:
a. Determine the inventory value using the retail inventory method and the FIFO cost flow assumption.
b. Determine the inventory value using the retail inventory method and the LIFO cost flow assumption.
a. FIFO inventory = $15,300, determined as follows:

Cost Retail
Purchases $38,500 $59,000
Freight-in 500
Net markups 7,050
$37,200 $62,000
Cost-to-retail ratio: $37,200/$62,000 = 0.60

Goods available for sale $49,700 $77,000
Less: Sales 51,500
Ending inventory at FIFO cost
(0.60 ´ $25,500) $15,300
b. LIFO inventory = $18,800, determined as

follows:
Cost Retail
Cost-to-retail ratio (for beginning inventory):

$12,500/$15,000 = 0.8333
Purchases $38,500 $59,000

Freight-in 500
Net markups 7,050
$37,200 $62,000
Cost-to-retail ratio (for purchases):

$37,200/$62,000 = 0.60
Goods available $49,700 $77,000

Less: Sales 51,500
Ending inventory at LIFO cost:
$15,000 ´ 0.8333 = $12,500 (Beginning inventory
layer, at original cost)
$10,500 ´ 0.60 = 6,300
$18,800
117. Given the following information for Miller, Inc.:
Cost Retail
Markdown cancellations $950
Employee discounts 1020
Purchase returns $1,030 1,520
Purchases 35,400 46,787
Inventory, January 1 7,160 13,820
Purchase discounts taken 756
Freight-in 4,000
Markups 14,500
Markdowns 2,600
Sales 56,700
Required:
a. Determine the inventory value using the retail inventory method and the FIFO cost flow assumption. Round off any decimals to two
places.
b. Determine the inventory value using the retail inventory method and the lower of average cost or market cost flow assumption.
a FIFO inventory
= $7,395,
determined as
follows:
Cost Retail
Purchases $35,400 $46,787
Purchase returns(1,030) (1,520)
Purchase (756)
discounts
Freight-in 4,000
Net markups 11,000
$37,614 $54,617
Cost-to-retail
ratio:
$37,614/$54,
617 = 0.69
(rounded)
Beginning 7,160 13,820

inventory
Goods available $44,744 $68,437
for sale
Employee (2,020)
discounts
Ending $10,717
inventory at
retail
Ending $7,395
inventory at
FIFO cost (0.69
´ $10,717)
b. Lower of
average cost or
market
inventory:
Cost ratio: $44,744/( = 0.64 (rounded)
$68,437 +
$1,650)
0.64 ´ $10,717 = $6,859
118. Guinea, Inc. adopted the dollar-value LIFO retail inventory method on January 1, 2013, when the price
index was 100. The following information was taken from company records on December 31, 2013, when the
price index was 110.
Cost Retail
Sales $190,000
Additional markups 18,000
Markdowns 8,000
Markdown cancellations 2,000
Inventory, January 1 $ 14,400 20,000
Purchases 158,000 199,000
Required:
Compute the cost of the December 31, 2013, inventory. (Round off calculations to the nearest dollar.)
Cost of inventory = $20,560, determined as follows:
Cost percentages:
Beginning inventory: $14,400/$20,000 = 0.72

Purchases: ($158,000 - $4,000)/($199,000 - $5,000 + $18,000 - $6,000 - $8,000 + $2,000) = 0.77
Ending inventory at retail: $20,000 + $199,000 - $5,000 - $190,000 + $18,000 - $6,000 - $8,000 + $2,000 = $30,000
Ending inventory at retail at base year prices: 30,000/1.10 = 27,273

Inventory change at retail at base year prices: 27,273 - 20,000 = 7,273
Inventory change at retail at relevant current prices: 7,273 ´ 1.10 = 8,000
Inventory change at current costs: 8,000 ´ 0.77 = 6,160
Layers
Cost
$14,400
6,160
$20,560
119. Dahlia adopted the dollar-value LIFO retail inventory method on January 1, 2014. The following
Cost Retail
Sales $173,350
Net markups 2,000
Purchases 147,740 180,000
Net markdowns 4,000
The price index on January 1, 2014, was 100. On December 31, 2014, it was 105.
Required:
Inventory value = $26,915, determined as follows:
Cost percentages:

Purchases: $147,740/($180,000 + $2,000 - $4,000) = 0.83
Ending inventory at retail: $34,650

Ending inventory at base year retail: $34,650/1.05 = $33,000
Layers:
Retail Index Cost % Cost
$30,000 100 0.81 $24,300
3,000 105 0.83 2,615
$33,000 $26,915
120. Donahue adopted the dollar-value LIFO retail inventory method on January 1, 2014. The following
Cost Retail
Sales $189,000
Net markups 6,000
Purchases 147,000 200,000
The price index on January 1, 2014, was 100. On December 31, 2014, it was 110. Round cost/retail percentages to the nearest whole percent if
necessary.
Required:
Inventory value = $23,475, computed as follows:
Cost percentages:

Purchases: $147,000/($200,000 + $6,000 - $10,700) = 0.75
Ending inventory at retail: $36,300

Ending inventory at base year retail: ($36,300/1.10) = $33,000
Layers
Retail Index Cost % Cost
$30,000 100 0.70 $21,000
3,000 110 0.75 2,475
$33,000 $23,475
121. A list of errors is shown below:
Year-End
Errors Goods Sold Earnings Capital
Ending inventory is overstated ________ ________ ________
Beginning inventory is overstated ________ ________ ________
Ending inventory is understated ________ ________ ________
Beginning inventory is understated ________ ________ ________
Purchases is overstated (recorded twice) ________ ________ ________
Purchases is understated (not recorded) ________ ________ ________

Required:
Show the effects of the errors on the indicated balance sheet and income statement items. Use the following symbols: O = Overstated; U =
Understated; N = No Effect.
Year-End
Goods Sold Earnings Capital
Ending U O O
inventory
is
overstated
Beginning O N* N
inventory
is
overstated
Ending O U U
inventory
is
understate
d
Beginning U N* N
inventory
is
understate
d
Purchases O U U
is
overstated
(recorded
twice)
Purchases U O O
is
understate
d (not
recorded)
* Retained earnings is not affected because the current period's

understatement of net income is offset by the previous period's
overstatement of net income.
122. Information:
Net Income Error in

Year per Books Ending Inventory
2013 $75,000 $2,000 Overstatement
2014 54,000 2,800 Understatement
2015 96,000 1,900 Overstatement
Required:
Assuming that no corrections were made in any year, compute the correct income for each of the three years.
2013: $75,000 - 2,000 = $73,000

2014: $54,000 + $2,000 + $2,800 = $58,800
2015: $96,000 - $2,800 - $1,900 = $91,300
123. Certain errors are listed below.
Effect on
Cost of Accounts
Error Goods Sold Payable
a. Ending inventory is overstated

because of a miscount. ________ ________
b. Merchandise received was not recorded
in the purchases account, but it was
included in the physical count. ________ ________
c. Merchandise shipped FOB shipping
point was not included in purchases
or the ending physical count. ________ ________
Required:
Indicate the effect the errors will have on cost of goods sold and accounts payable. Use +, -, and 0.
Effect on
Cost of Goods Sold Accounts Payable
a. - 0
b. - -
c. 0 -
124. Walker Towel & Linen Shop uses the lower of cost or market method and has a periodic inventory system.
Additional information follows:
Inventory
Date Cost Market
January 1, 2014 $4,600 $4,000
December 31, 2014 6,000 5,000
December 31, 2015 9,000 8,200
Required:
a. If the direct method of recording the reduction of inventory to market is in use, what would be the amount of the debit to Inventory on
December 31, 2015?
b. If the allowance method is in use, what would be the debit to Income Summary on December 31, 2014?
a. $8,200
b. $4,600
125. The Slayton Company uses a periodic inventory system and values its inventory at lower of cost or market.
Its accounting records indicate the following information relating to inventory:
Inventory
Date Cost Market
January 1, 2015 $ 75,000 $ 75,000
December 31, 2015 110,000 80,000
December 31, 2016 140,000 128,000
Required:
following methods:
a. Direct method
b. Allowance method
a. Direct
Method:
12/31/15
:
Income 75,000
Summar
y
Inventory 75,000
Inventor 80,000
y
12/31/16
:
Income 80,000
Summar
y
Inventory 80,000
Inventor 128,000
y
b. Allowan
ce
Method:
12/31/15
:
Income 75,000
Summar
y
Inventory 75,000
Inventor 110,000
y
Loss 30,000
Due to
Market
Valuatio
n
Allowance to Reduce Inventory to Market 30,000
12/31/16
:
Income 110,000
Summar
y
Inventory 110,000
Inventor 140,000
y
Allowan 18,000
ce to
Reduce
Inventor
y to
Market
126. Information about the ending inventories of Charleston Chair Company is shown below:
Current Normal
Replacement Selling Cost of Profit
Year Cost Cost Price Completion Margin
2013 $10,000 $11,500 $12,000 $1,000 $1,100
2014 15,000 13,000 14,000 1,500 1,250
2015 20,000 18,600 24,000 2,200 2,900
Required:
a. Determine
the value
of the
inventory
for each
year using
the lower
of cost or
market
rule.
b. Assuming
that
Charlesto
n Chair
Company
maintains
a periodic
inventory
system,
prepare
journal
entries for
2015 to
record the
reduction
of the
inventory
to market
value
using:
(1) the direct method
(2) the allowance method
a. 2013:
$10,000
Cost =
$10,000
Market = (upper
$11,000 constrain
t=
$12,000
- $1,000
=
$11,000)
(lower
constrain
t=
$11,000
- $1,100
=
$9,900)
2014:
$12,500
Cost =
$15,000
Market = (upper
$12,500 constrain
t=
$14,000
- $1,500
=
$12,500)
(lower
constrain
t=
$12,500
- $1,250
=
$11,250)
2015:
$18,900
Cost =
$20,000
Market = (upper
$18,900 constrain
t=
$24,000
- $2,200
=
$21,800)
(lower
constrain
t=
$21,800
- $2,900
=
$18,900)
b. (1) Direct
method:
Income 12,500
Summar
y
Inventory 12,500
Inventor 18,900
y
(2) Allowan
ce
method:
Income 15,000
Summar
y
Inventory 15,000
Inventor 20,000
y
Allowan 1,400
ce to
Reduce
Inventor
y to
Market
Loss Recovery
Due to Market
Valuation 1,400
($2,500 - $1,100)
127. Describe the lower of cost or market rule.
Due to the life cycle of assets they decline in value, become obsolete, or wear out. This decline requires the
value of assets to be reviewed to see whether or not the value is impaired. GAAP requires assets to be valued at
lower of cost or market. The declining value could potentially mislead decision makers, which is why
companies are required to write down the inventory to its market value.
128. Replacement costs are measured based upon GAAP’s requirement of an upper and a lower constraint on
the market value. What are the upper and lower constraints?
The upper constraint (ceiling) is the net realizable value. The net realizable value is the estimated selling price
less the costs of completion and or disposal.
The lower constraint (floor) is the net realizable value minus a normal profit margin.
129. Under special circumstances GAAP allows a company to report its inventory above cost. How must this
exception be justified?
* an inability to determine appropriate costs
* immediate marketability of the inventory at a quoted market price
* the interchangeability of the units of inventory

130. In what situations would the gross profit method be used to estimate ending inventory?
* To determine cost of inventory for interim financial statements.

* To check the reasonableness of the reported costs of inventory.
* To estimate the cost of inventory destroyed by a casualty.
* To estimate the cost of inventory from incomplete records.
* To develop budgeted amounts for cost of goods sold and ending inventory.
131. Define the following:

Markup
Additional Markup
Net Additional Markup
Markdown Cancellation
Markup: the original markup from cost to the original selling price
Additional Markup: an increase above the original sale price.
Net Additional Markup: total additional markups less the total markup cancellations.
Markdown cancellation: an increase in selling price after there has been a markdown. The markdown
cancellation cannot be greater than the markdown.
132. What are the four alternative valuations used in the application of the Retail Inventory Method?
FIFO
LIFO
Average Cost
Lower of Average Cost or Market
133. What is dollar value LIFO retail method?
Companies can combine the retail LIFO with the dollar value LIFO in order to smooth out fluctuations in
prices.
134. A purchase on credit is omitted from the purchases account, but ending inventory is correct. What is the
effect of this error on the balance sheet for the current year? What is the effect on the income statement for the
current year?
Accounts payable is understated due to the omission. Retained earnings is overstated because it caused net
income to be overstated. Net income was overstated because purchases are understated causing cost of goods
sold to be understated.
135. Ending inventory is over stated due to an error, purchases were verified to be correct. What is the effect on
the current year’s income statement?
Net income would be over stated because cost of goods sold was under stated.
136. Lower of cost or market rule can be applied to periodic inventory. What are the two methods? Which one
requires an entry to the loss due to market valuation account?
Direct method
Allowance method
The Allowance method requires the use of the loss due to market valuation account.
137. Draper Company's controller was explaining to the company's president, Dana Draper, that if the
inventory's value should decrease below its original cost, the inventory must be written down and a loss must be
recognized. The controller told the president that this is called the lower of cost or market rule. The president
was unclear as to the purpose of this rule and wanted to know the disadvantages of this method.
Required:
a. State the accounting convention that supports the lower of cost or market rule, and in this context, discuss the purpose of the rule.
b. Discuss the criticisms of the lower of cost or market rule in the valuation of inventories.
a. The
accountin
g
conventio
n that
supports
the lower
of cost or
market
rule is
conservati
sm.
Conservat
ism can be
described
as
"anticipate
no profit
and
provide
for all
possible
losses."
Within
this
context, it
would be
appropriat
e to record
the
inventory
at
"market,"
which is
defined as
replaceme
nt cost if
the market
value is
lower.
This
prevents
the
balance
sheet's
valuation
of
inventory
from
being
overstated
. The
income
statement
will
reflect the
loss in the
period
when the
decline in
inventory
value
occurs. In
addition,
this
method
provides a
better
indication
of
expected
future
cash
b. The
criticisms
of the
lower of
cost or
market
rule are as
follows:
(1) The rule is applied in only one direction. Inventory holding losses are recognized, but inventory holding gains are ignored.
(2) The revenue recognition principle is violated because the inventory holding loss is recognized before the earning process is
complete and before an exchange transaction has taken place.
(3) The method may not always result in a conservative earnings figure on the income statement. In the year that the inventory's
value decreases, a loss is recognized, which results in a "conservative" net income figure, but if the inventory's decline in
value does not result in reduced selling prices in the subsequent year, the income in the subsequent year will be higher than
expected.
138. Describe the differences in the application of lower of the cost or market consideration between U.S.
GAAP and IFRS.
While both U.S. GAAP and IFRS require certain lower of cost or market adjustments, IFRS do not consider
ceiling and floor limits, nor is replacement cost considered as a possible market estimate to be compared to
historical cost. IFRS, instead, simply compare net realizable value to historical cost. Furthermore, only U.S.
GAAP prohibits recording reversals of previous write-downs, while IFRS permit such gains to be recorded in
income. IFRS do not provide guidance regarding how inventory write-downs should be disclosed in the income
statement. GAAP requires such write-downs to be an adjustment to cost of goods sold.
139. The gross profit method may be used to estimate the cost of inventory.
Required:
a. List four situations when it might be appropriate to use the gross profit method to estimate the cost of inventory.
b. Discuss the potential disadvantages of the gross profit method.
a. (1) To determine the cost of the inventory for interim financial statements without taking a physical count.
(2) To verify the accuracy and reasonableness of a physical inventory count or of the perpetual inventory records.
(3) To estimate the cost of inventory destroyed by a casualty.
(4) To determine an ending inventory figure and a cost of goods sold amount for budgeting purposes.
b. Potential
disadvanta
ges of the
gross
profit
method
are as
follows:
(1) It is normally not an acceptable approach for determining the cost of inventory for the annual financial statements.
(2) The accuracy of the inventory's cost is a function of the accuracy of the gross profit percentage developed. If a company uses
one overall gross profit percentage in applying the method, but uses different markup percentages in different departments,
the results may not be accurate.
(3) The gross profit rate used with this method is determined by using the gross profit rates from previous periods. If the current
period's markups are different from those of previous periods, the results obtained with the gross profit method will not be
accurate.
140. The retail inventory method is used extensively in the retail industry.
Required:
Discuss the assumptions and benefits of the retail inventory method.
The retail inventory method relies on two basic assumptions. First, that all inventory items have the same
markup, or if they have different markups, the proportion of the different items in ending inventory is identical
to that of the goods available for sale. Second, the cost-to-retail ratio remains constant throughout the reporting
period or the changes in retail prices parallel changes in costs during the period.
The major advantages of the retail inventory method are: (1) it permits preparation of interim reports without
taking a physical inventory, (2) it simplifies record-keeping procedures because the costs of individual
purchases do not need to be maintained and inventory records are based on retail prices, and (3) it expedites
year-end inventory counts based on retail prices that can then be compared directly with the accounting records.
Intermediate Accounting Reporting and Analysis 2nd Edition Wahlen Test Bank
141. Careful valuation of the ending inventory is necessary because errors can result in inaccurate values on
both the income statement and balance sheet. Assume that a company overstates its ending inventory for 2010.
Required:
Explain the effects of the error on the income statements and balance sheets for 2010 and 2011.
Overstating ending inventory in 2010 will understate cost of goods sold and overstate both gross profit and
income on the 2010 income statement. On the 2010 balance sheet, both inventory and retained earnings will be
overstated.
On the 2011 income statement, beginning inventory will be overstated, cost of goods sold will be overstated,
and both gross profit and income will be understated. However, on the 2011 balance sheet, both inventory and
retained earnings will be correct. The errors will counterbalance themselves by the end of 2011.
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The shape of the body is short, thick, and very compact. The
composition of the individual segments resembles that found in
Chilopoda rather than that of Chilognatha.
The antennae are very long, longer than in any of the Chilopods, and
are composed of a great number of very small joints. The mouth
parts show a greater length and slenderness than do those of the
other Orders mentioned as yet. They consist of—
1. An upper lip partly free, but fused at the sides with the rest of the head. The
upper lip is in three parts, as in the Chilopoda, but with the middle part very small
and the lateral pieces large.
2. A pair of jaws or mandibles. These are provided not only with teeth, as in the
other Myriapods, but also with a sort of comb of stiff bristles.
3 and 4. Two pairs of maxillae or foot jaws distinguished by their length and
slenderness.
5. The poison claws long, slender, and not sharply curved. The bases of the
poison claws hardly fused together and short.
The respiratory system in the Schizotarsia differs from that in all

other Myriapods in the fact before mentioned, that they breathe by
means of lungs and not by tracheae. There are, as before
mentioned, eight dorsal scales in these animals; each dorsal scale
except the last bears one of the peculiar organs which I have called
lungs. At the hinder end of the scale there is a slit which leads into
an air sac, from which a number of short tubes project into the blood
in the space round the heart and serve to aerate it before it enters
the heart. The heart, therefore, sends aerated blood to the organs,
while in the tracheal-breathing Myriapods the blood is aerated in the
organs themselves by means of tracheae.
The poison claws are followed by segments bearing fifteen pairs of

true ambulatory legs. These are covered by eight large dorsal plates,
increasing in size from before to the middle of the body, the middle
plate being the largest, and then diminishing in size.
The nervous system resembles that of the Chilopoda, but there is a

special pair of nerves which supply the sense organ, which has been
mentioned as peculiar to the Order. The ventral nerve cord shows a
very clear division into two, the ganglia of the two cords being almost
entirely separate. The first few ganglia are fused, as has been
mentioned in the Chilopoda.
The digestive tube resembles that of the Chilopoda. The legs are
very long and slender, and the joints are beset with bristles. Both
sexes have small hook-like appendages at the sides of the genital
openings.
The eyes have already been mentioned as being more highly

developed than in other classes, in correspondence with the more
active habits of the animal. The generative organs open at the hind
end of the body, as in Chilopoda.
The heart is highly developed, quite as much so as the Chilopod

heart, the alary muscles being strong and broad, and the arteries
being quite as perfect as those in any Myriapod. The muscular coats
which govern the pulsations by their contractions are powerful and
well developed.
Order IV. Symphyla.
We next come to one of the last two Orders which have been
recently added to the Myriapoda. These little animals have a great
resemblance to the Thysanura among the Insects, and especially to
Campodea among the Thysanura. It will be well, therefore, to begin
our account with a few of the reasons which have induced naturalists
to include them among the Myriapods rather than among the
Thysanura.
1. Campodea has three pairs of mouth appendages, while Scolopendrella has only
two.
2. Scolopendrella has broad plates covering the back, not only on the anterior
(thoracic) segments, but on the whole body.
3. The terminal appendages of Scolopendrella differ from those in Campodea.
4. Scolopendrella has a sense organ which is absent in Campodea.
5. Campodea breathes by means of three stigmata in the anterior part of the body.
The stigmata of Scolopendrella are hard to see, and are not in the same position.
6. Scolopendrella has twelve pairs of legs, and Campodea, like all Insects, has
only three.
I will now go on to an account of their anatomy. The body is small

and slender, and is covered with a delicate shell or exoskeleton of
chitin, which is so thin as to be almost transparent.
The antennae are long, and are composed of many joints of equal
size.
The mouth parts consist of—
1. An upper lip.
2. A pair of mandibles.
3. A pair of maxillae.
The segments are not all of equal size. Some are larger than others.
The larger and smaller segments are arranged alternately, and the
smaller do not bear legs. As before stated, there are twelve leg-
bearing segments.
At the end of the body there are two hook-like appendages which are
pierced by a canal, through which is poured the secretion of a pair of
glands. Near the sides of these appendages are a pair of sense
organs, consisting of long hairs connected with nerves.
The digestive canal is a long straight tube passing through the length
of the body. In the middle it is much enlarged, so as to form a
stomach with a glandular coat. Posterior to the stomach the digestive
tube receives the contents of two Malpighian tubes which act as
kidneys.
The tracheal system consists of a single pair of stigmata on the

under surface of the head, and the tracheae connected with them.
Order V. Pauropoda.
The Pauropoda, which form the fifth Order of Myriapods, are as yet
very imperfectly known. Pauropus was discovered by Sir John
Lubbock, and its discovery was announced by him in 1866. He found
this little Centipede in his kitchen garden among some Thysanura,
and at first considered it as a larval form, but continued observation
showed that it was a mature creature. He described it as a small,
white, bustling, intelligent little creature about 1⁄25 inch in length.
The antennae are very curious and highly characteristic of the Order.
They resemble those of Crustacea rather than those of Myriapoda.
Each antenna is composed in the following manner. First there is a
shaft of four joints. From the fourth joint of this shaft spring two
branches; one of these two branches is narrower than the other, and
ends in a long thin bristle composed of a great number of joints. The
other and broader branch bears two such bristles, and between them
a small pear-shaped or globular body, the function of which is
unknown.
The mouth parts consist of two minute pairs of appendages, the
anterior pair toothed and the posterior pointed. The body is rather
narrower in front; the segment behind the head has one pair of legs,
the second, third, fourth, and fifth behind the head two each. The
posterior legs are the longest; the genital organs open at the base of
the second pair of legs, between these and the third pair. The
manner of breathing is as yet unknown, tracheae not having been
discovered.
Pauropus at first looks most like a Chilopod, but differs from that
Order—
1. In the form of the antennae.
2. In the absence of poison claws and in the form of the mouth parts.
3. The opening of the generative organs being in the front part of the body.
It differs from Chilognatha in the following respects:—
1. The legs are not of equal length, the posterior legs being the longest, as in
Chilopods.
2. The mouth parts differ from those of Chilognaths almost as much as from those
of Chilopods.
3. The form of the antennae.
Only a few Pauropoda have been discovered as yet.
Embryology.
The preceding account of the anatomy of Myriapods would be

incomplete without some reference to the wonderful manner in which
the different organs of the body are built up; the whole of the
complex organism proceeding by a gradual and regulated process of
development from a simple cell called the ovum derived from the
female body, and united with a cell from the male body (called the
spermatozoon). I hope to be able to give my readers some idea of
the interest which the pursuit of the difficult study of embryology
adds to anatomy, by offering us a key to the interpretation of the
relations between our knowledge of the forms at present living on the
earth and those which, we learn from Palaeontology, have inhabited
our planet in past ages.
Fig. 36.—Young ovum of Julus terrestris: nucl, nucleolus; nu, nucleus;

R, first appearance of yolk; F, follicle cells.
Like all living creatures with which we are acquainted, the starting-
point of Myriapod life is the ovum, as it is called. This ovum is a cell
resembling the cells of which the body of all living animals are built
up, and which may be compared to the bricks of which a building is
composed. This cell or ovum is a small sphere of living transparent
substance called protoplasm, and it is nucleated—that is, it contains
a small spot of denser protoplasm called the nucleus, and within that
a still smaller spot of still more dense protoplasm called the
nucleolus. In the process of impregnation the ovum unites with the
male cell, and the cell so formed is called the impregnated ovum.
This ovum has the property of dividing into two cells, each
resembling the parent cell from which it is derived; each of these
cells has, like the parent cell, the same property of dividing into two
more, and so on. Thus from this continual process of division or
reproduction of every living cell, the materials are provided for the
building up of the body.
The regularity of the process of the division of the ovum, or, as it is

called, segmentation of the ovum, is interfered with by the presence
of food yolk. The cells formed by the process of cell division just
described need nourishment, and this nourishment is supplied to
them by the food yolk formed in the body of the ovum before the
process of segmentation begins. It is easy to understand that this
yolk, which is not alive like the cells, cannot divide like them, and
therefore the segmentation of the ovum in Myriapods is irregular, as
it is called.
Fig. 37.—Later stage: nu, nucleolus; c.p, nucleus; y.sp, yolk spherules;
ch, shell.
I will now go back a little and describe what happens to the ovum
before the process of segmentation is complete. It increases in size
and forms the supply of food yolk which is to provide the nutriment of
the ovum. Then after impregnation the egg-shell is formed round it,
and it becomes what we know as the egg. This egg is not a perfect
sphere, but is oval (in most Myriapods) in shape. The egg is laid, and
the process of segmentation begins shortly after it is laid, as has
already been described.
When it has been laid for about 36 hours, if we take an egg and,
after proper preparation, cut it into thin slices known to microscopists
by the name of sections, and examine it by means of the
microscope, we shall see that segmentation has resulted in this. Just
beneath the egg-shell there is a thin layer of cells, one cell thick,
which completely surrounds the egg. Inside this coat of cells is the
food yolk, with a few cells scattered about in it at rare intervals,
something like the raisins in a plum-pudding.
With the next process the formation of the young Myriapod may be
said to begin. A strip along the length of the oval-shaped egg is
thickened, and this thick mass of cells represents the future ventral
surface of the animal. The rest of the thin layer of cells already
mentioned just below the shell will form the shell or exoskeleton of
the future animal. The thick strip of cells at the ventral surface has by
this time split into layers, so that, resorting to our microscope again,
a section through the short axis of the oval-shaped egg—a
transverse section—will show us—
1. The egg-shell.
2. A layer of cells completely surrounding the egg, thin everywhere but on the
ventral surface. This layer is known to embryologists as the epiblast. The thick part
of the epiblast on the ventral surface gives rise to the nervous system.
3 and 4. Two layers of cells connected in the middle, along the line of the thick
strip, but separate elsewhere, and not extending round the whole of the inside.
These layers constitute what is known as the mesoblast, and give rise to the
muscles and most of the internal organs.
5. The scattered cells in the yolk. They are known as the hypoblast and give rise to
the digestive canal.
After this point is reached the formation of the organs begins. The
segments are formed in order from before backwards. First the head,
then the next segment, and so on. When the number of segments
with which the animal will be hatched are formed, another process
begins, and the tail end of the animal, which can already be
distinguished, is bent towards the head. This is a process that takes
place in many animals besides Myriapods, and is called the
formation of the ventral flexure. Shortly after this the animal bursts
the shell and comes into the outer world. The various processes may
be understood by reference to the Figs. 36, 37, 38, 39, which are
successive stages in the development of a Chilognath. Figs. 37, 38,
are thin slices through the shorter diameter of the egg, which, as
before mentioned, is an oval in shape. Fig. 39 is a section through
the longer diameter of an egg in a more advanced stage of
development, in fact just about to burst the shell. The body of the
future animal is marked by constrictions, the future segments. Some
of the organs are already formed, as the brain and the digestive
tube, the openings of which will form the mouth (st) and the anus
(pr).
Fig. 38.—Transverse section through next stage: mk, keel-like mass of

cells from which the mesoblast is produced; ec, epiblast. (From
Heathcote, Post. Emb. Dev. of Julus terrestris; Phil. Trans. vol.
179, 1888, B.)
Fig. 39.—Longitudinal section through later stage: Segs. 2, 3, etc.,

segments; Ceph. Seg, head; mes, mesoblast; en, hypoblast; st,
future mouth; pr, future anus; mesen, gut; mem.ex, as in Fig. 41.
(From Heathcote, Post. Emb. Dev. of Julus terrestris.)
Myriapods are hatched at different stages of development. The

Chilognatha have only three appendages, which are so little
developed that they are only small shapeless stumps, while the
Chilopoda have the full number of legs in some cases; in others only
a small number of legs, but yet more than the three pairs of legs of
the Chilognatha, and fully developed instead of stump-like. The eyes
are usually developed late in the life of the young animal. The
bursting of the egg-shell is assisted in some Myriapods by a special
kind of spike on the back part of the head.
The Fig. 40 shows a young Chilognath which has just burst the shell
and come into the outer world. It is still surrounded with a membrane
which has been formed by its skin or epiblast within the egg. One
eye-spot has been formed.
Fig. 40.—Young Julus terrestris just hatched.
Fig. 41 shows a longitudinal section through the young Chilognath

shown in Fig. 40, and the next (Fig. 42) a transverse section through
the same. In comparing the two Figs. 41 and 42 it must be
remembered that they are sections in different planes through the
animal shown in Fig. 40, and therefore they only show a small
portion, a thin slice, of the organs.
Fig. 41.—Longitudinal section through late stage: Sup.oe.gl, First

appearance of brain; st, mouth; pr, anus; mesen, gut; n, nerve
cord; n.gang, nerve ganglion; mem.ex, membrane surrounding
the animal; v.f, ventral flexure; mes, mesoblast cells. (Heathcote,
Post. Emb. Dev. of Julus terrestris.)
The first appearance of the mouth appendages has been already

mentioned, and these are shown in Fig. 43, where the small stumps
that later on change to jaws are shown. The figure shows the head
of a young Chilognath seen from the lower side, and the second pair
of stumps fuse together later on and produce the broad plate already
mentioned as the characteristic mouth appendage of the Order.
Fig. 42.—G, gut; Malp.T, Malpighian tube; N.C, nerve cord; Tr.I, deep
invagination by which the tracheae are formed; y.s, yolk spherules
still present; L, first appearance of legs; S.S, part of mesoblast.
(Heathcote, Post. Emb. Dev. of Julus terrestris.)
Fig. 43.—Under surface of the head of a young Julus terrestris: pro.m,

rudimentary jaws; Deut.m, rudimentary mouth plate; an,
antennae.
After the animal is hatched it has still, in the case of most Myriapods
(those which are not hatched with all the segments complete), to
undergo a further development, and in particular the eyes are still
unformed. The process of development of the eye has only been
followed out as yet in the Chilognatha, and in only one form, Julus,
and is so curious that a short account may be of interest here. The
development of the eye begins (in Julus) on the fourth day after
hatching, and continues until the animal is full grown. A single
ocellus or eye-spot appears first, and the rest are added one by one
until the full number are reached.
The first appearances connected with the formation of the eye take
place in the cellular layer just beneath the chitinous exoskeleton.
This layer, called the hypodermis, plays an important part in the
organisation of the animal. It forms the inner layer of what we may
call the skin of the animal, and the cells of which it is composed
secrete the chitin of which the shell or exoskeleton of the animal is
composed, and which is moulted every year.
The first process in the formation of the eye-spot is the thickening of

the hypodermis beneath the chitin, just in the place where the eye
will come. At the same time the cells of this thickened mass of
hypodermis secrete a quantity of pigment of a dark red brown colour.
Next the cells of the thick mass of hypodermis begin to separate
from one another in such a way that a vesicle is formed. This vesicle
is hollow inside, and the thick walls are formed from the cells of the
thickened hypodermic mass. This can be seen from Fig. 44, which
represents a section through an ocellus when it is partly formed.
From this vesicle the eye is formed.
The wall of the vesicle nearest the exoskeleton gives rise to the lens
of the eye, while the other walls of the vesicle form the retinal parts
of the eye. The cells from the brain grow out and form the optic
nerve connecting the retina with the brain. The whole eye spot is
covered internally by a thin membrane, formed not from the
hypodermis but by cells from the inside of the body (mesoblast
cells).
Fig. 44.—Section through eye when first forming: Hyp, hypodermis; Ln,
lens; F.W.V, front wall of optic vesicle; b.w.v, back wall of vesicle;
cap, capsule.
In the Chilognatha, the first Order of Myriapods, the young animal

leaves the egg with three pairs of appendages; the first have already
the form of antennae, the second will form the jaws, but have not yet
taken their proper form, while the third pair will fuse together and
alter their shape so as to form the curious plate that has already
been mentioned as forming the second pair of mouth appendages.
Behind the mouth appendages will come the first three pairs of legs.
The whole young animal on leaving the egg is enveloped in two
membranes. These membranes are secreted by the outside layer of
cells in the same way that the shell or exoskeleton of the animal will
be eventually formed, and represent the first two moults of the
animal, which continues to moult its shell every year throughout life.
Of the Chilopoda, the second Order of Myriapods, all the families

leave the egg-shell with the full number of legs, with the exception of
the Lithobiidae, which have seven pairs of legs including the poison-
claws. The Schizotarsia, the third Order, also have seven pairs of
legs when hatched.
The legs make their appearance not one by one but in batches (in
Julus terrestris in batches of five). The addition of legs and segments
to the body takes place, not at the end of the body, but between the
end segment and the penultimate.
This is a short sketch of the gradual development of the Myriapoda

from the ovum to the fully-grown animal. It is, I am aware, a short
and insufficient account of all the beautiful processes by which the
different organs take their rise, but space is insufficient here, and too
much detail would be out of place in a work of this nature, which only
aims at giving an outline sketch of the group, which shall be
intelligible to the general reader who has not made a special study of
such matters. Before leaving the subject, however, I must mention a
few of the points of interest which are to be learned from the
examination of the course of development which has been sketched
here. One of the greatest puzzles in the natural history of the Order
Chilognatha has always been the double segments, as they are
called; that is, in fact, the possession of two pairs of legs to each
segment, which is, as we have already said, a distinguishing
characteristic of the Order. As we have seen, the Chilognatha at an
early stage of existence do not possess this characteristic, which is
only peculiar to the adult and half-grown forms. Now what does this
mean? Does each double segment in the full-grown Millepede
represent two segments which have become fused together, or is
each double segment, so called, a real segment resembling the
segments present in the other Orders (for instance, Chilopoda),
which has grown an extra pair of legs? Both these views have been
advocated by distinguished naturalists. Neither of them is, in my
opinion, quite right when viewed in the light cast on the subject by
recent investigations into the life history of the Chilognatha.
A close examination into the minutiae of the growth of the different

organs has shown us that the double characters of the double
segments are more deeply seated than was imagined. The
circulatory system, the nerve cord, and the first traces of
segmentation in the mesoblast all show this double character, and
the only single part about the segment is the broad plate covering
the segment. Now in some of the most ancient of the fossil
Myriapods this broad plate shows traces of a division, as if it were in
reality two plates fused together. We have also to consider that the
life history of the Chilognatha allows us to believe that the peculiar
cylindrical shape of the body shown in the greatest degree in the
Julidae is attained by the unequal development of the dorsal and
ventral surfaces of the body; the ventral surface being compressed
together till it is extremely narrow, and the dorsal surface, as it were,
growing round it till the originally dorsal surface forms almost a
complete ring round the body. Taking all this into consideration, we
are justified, in my opinion, in concluding that each double segment
in the Chilognatha is not two segments fused together, nor a single
segment bearing two pairs of legs, but is two complete segments
perfect in all particulars, but united by a large dorsal plate which was
originally two plates which have been fused together, and which in
most Chilognatha surrounds almost the whole of two segments in
the form of a ring.
Again in the Chilopoda we see that a great distinctive feature that
separates them from the Chilognatha is the character of the ventral
nerve cord, the cord being double and not single, a character
connected with the fact that the bases of the legs are widely
separated from one another, and not closely approached to each
other, as in the Chilognatha. As we before said, a more minute
anatomical examination showed us that this difference was not so
great as appeared at first sight, the cord showing traces of a
duplication. Well, are these traces superficial, or do they represent a
state of affairs more or less similar to that in the Chilopoda?
Embryology helps us to answer this question also. In the early
stages of the Chilognatha we find that the nerve cord has exactly the
form of that in Chilopoda, showing us that the appearances in the
anatomy had led us to a right conclusion, and giving us a valuable
confirmation of our views. These two examples will serve to show
the kind of interest which attaches to embryology.
Palaeontology.
We have seen that embryology enables us to look at the structure of

the Myriapods from a new standpoint, and to correct and supplement
the knowledge gained from an examination of the adult animal. In
the same way a study of the forms of Myriapods which have become
extinct on the globe, and have been preserved to us in a fossil form,
gives a further opportunity of considering the relations of one form to
another, and again of the relations of our group to other groups of
animals now existing on the earth. Myriapod fossils have been found
in strata of great antiquity. The oldest of such fossils must have been
among the first land animals. The figure below shows a fossil
Myriapod found in America, belonging to the Order of the
Protosyngnatha which are only found in the Palaeozoic strata. It is a
good example of the manner in which Myriapods were protected by
bundles of bristles in the same way as the Polyxenus of the present
time.
The oldest fossil Myriapods which have been discovered at the
present time are two species which have been found in the Old Red
Sandstone in Scotland. To realise the antiquity of these Myriapods, it
will be worth while recalling the typical fossils found in the Old Red
Sandstone, so as to see what the contemporaries of these ancient
Myriapods were like. Among the plants there were Algae, Ferns, and
Conifers, belonging to the lower divisions of the plant tribe. Among
the animals there were Sponges, Corals, Starfish, Worms, Shell-fish,
and Fishes, but none of the more highly organised of the animal or
vegetable tribe had appeared on the earth. The Myriapods of the Old
Red Sandstone, as has been before said, differ considerably from
those of the present day, and as we proceed towards the species
found in the more recent strata we find them more and more like the
ones at present living, till we get to the Polyxenus and other species
found in amber, which are hardly to be distinguished from living
forms.
The next oldest fossil Myriapods are found in the coal measures,
when both the animal and vegetable kingdoms were represented by
more numerous and more specialised forms. The fossil fauna of this
period is characterised by the number of gigantic Amphibia, many
remains of which have been found. The great forests and the
abundant vegetation of this time must have been favourable to the
existence of our class, and accordingly we find no less than 32
species of fossil Myriapods. Of these most have been found in
America, some in Great Britain, and some in Germany. One well-
preserved fossil of Xylobius sigillariae was found by Dr. Dawson in
America in the stump of a tree in the remains of a fossil forest. The
eyes, head, and legs were plainly seen under the microscope. All
these fossils belong to the earliest or Palaeozoic period.
Fig. 45.—Palaeocampa anthrax. (After Meek and Worth.) From Mazon
Creek, Illinois.
The figure below (Fig. 46) shows a fossil also from the coal
formations of Illinois, America, belonging to the family of the
Euphoberiidae mentioned further on. It shows a nearer approach to
the Julidae of the present time. The limbs, however, were of very
curious shape, and may possibly have been adapted to locomotion
in water as well as on land, and the small supposed branchiae on
the ventral surface shown in Fig. 46, B, may possibly have been an
arrangement to render respiration in the water possible.
In the secondary period the Myriapods were scantily represented, or,

at any rate, geologists have failed to find their fossils. The class is
represented by a single specimen found in the chalk in Greenland.
This fossil, which has been included in the Julidae under the name of
Julopsis cretacea, may perhaps belong to the Archipolypoda.
Passing on to the Tertiary or Recent period, we find the Myriapods

again numerous, and more nearly resembling those living at the
present time. They belong mostly to the Chilognatha and Chilopoda.
They have been found in the fresh-water gypsum of Provence in
France, the brown coal of Germany, and the green river formations
of America. Several have been found in amber.
Fig. 46.—Acantherpestes major. (After Meek and Worth.) Mazon

Creek, America. A, The whole animal; B, branchiae on the ventral
surface.
Fossil Myriapods have been divided into four Orders, two of which
coincide with the Orders of living Myriapods; the differences between
the fossils and the living Myriapods having been held insufficient to
warrant the establishment of a new Order. These two Orders are the
Chilopoda and the Diplopoda or Chilognatha (Diplopoda is another
name used by some writers for the group which we have hitherto
called Chilognatha). The other two Orders have sufficient differences
from living forms to render it necessary to include them in separate
Orders.
The fossil Myriapods, then, are arranged as follows:—
Order I. Protosyngnatha.
Order II. Chilopoda.
Order III. Archipolypoda.
Order IV. Chilognatha (or Diplopoda).
The following table will show the species that have been discovered
in the different strata:—
Devonian, or
2 species of Archipolypoda
Old Red Sandstone
1 species Protosyngnatha
Carboniferous
31 species Archipolypoda
Permian (Rothliegendes of Germany), 4 specimens belonging to
the
Julidae or Archipolypoda.
Archipolypoda or
Cretaceous 1 species
Chilognatha
17 species Chilopoda
Oligocene Diplopoda
23 species
(Chilognatha)
Diplopoda
Miocene, 1 species
(Chilognatha)
I will now give a short account of the different Orders, and the fossil
forms which are included in them.
Order I. Protosyngnatha.
This Order is represented by a single fossil (Fig. 45), discovered in

the coal at Mazon Creek, Illinois, America, by Meek and Worth. It
differs greatly from any of those in existence at the present day. The
body is cylindrical, and composed of ten segments. The cephalic
appendages (that is, the antennae and mouth parts) are inserted into
a single unsegmented cephalic mass (the head). Each segment
behind the head bears a single dorsal and ventral plate of equal
breadth and length. The limbs are placed in these plates with a wide
space between the base of each leg and that of the opposite one of
the pair. Along the back, bundles of bristles are arranged in
longitudinal rows.
Order II. Chilopoda.
The fossil forms of this Order resemble those of the Chilopoda of the
present day. The oldest of them are found in amber. The following
families have been found:—
Lithobiidae. Several species have been found in amber.
Scolopendridae. One species in amber, several species in later Tertiary

formations.
Geophilidae. Three species in amber.
Two species resembling the Schizotarsia of the present day have

been found in amber.
Order III. Archipolypoda.
The most numerous of the fossil families. With a few exceptions, all
the Palaeozoic (that is, the oldest) Myriapods belong to this Order.
The Carboniferous Archipolypoda seem to be much more numerous
in the coal of America than in that of England. They resemble for the
most part the Myriapods of the present day, except that all the
segments without exception bear legs.
The families are three in number.
Family 1. Archidesmidae.
Resemble the Polydesmidae of the present day. Two species have been found by
Page in the Old Red Sandstone of Forfarshire. He named them Kampecaris. One
found by Peach in the same formation is called Archidesmus.
Family 2. Euphoberiidae.
They show some resemblance to the Julidae of the present day, but the dorsal
scutes, or plates of the back, are more or less perfectly divided into two divisions
corresponding with the pairs of legs. The following are the principal fossils of this
family:—
Acantherpestes. Found by Meek and Worth in the coal at Mazon Creek in

America (Fig. 46).
Euphoberia. About 12 species found at the same place as the last named.
Amylispes. Found by Scudder, Mazon Creek, America.
Eileticus. Scudder, Mazon Creek, America.
Family 3. Archijulidae.
The dorsal plates nearly consolidated, but the division still apparent. Fossil forms
are—

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Income Summary x,xxx

Loss due to x,xxx

17. When applying lower of cost or market, market value

18. Exhibit 8-1

Estimated transportation costs for delivery $3.80

Refer to Exhibit 8-1. The selling price of this unit must be

Estimated transportation costs for delivery $3.80

Refer to Exhibit 8-1. The floor constraint of this unit must be

20. When comparing the lower of cost to market

Transportation costs $ 4.00

The net realizable value for this item is

24. Given the following information for the Raquel Company:

Date Cost Market

25. Given the following information for the Tea Company:

Date Cost Market

Item Per Unit

Transportation costs $ 5.00

The market value for this item is

38. Generally, valuing inventory above cost

41. Exhibit 8-2

January 1, 2014, inventory balance $12,500

Refer to Exhibit 8-2. The estimated inventory at January 31, 2014, is

42. Exhibit 8-2

January 1, 2014, inventory balance $12,500

43. Consider the following:

Code: A = Gross profit to net sales ratio

44. Relevance of the gross profit margin depends upon

Sales (1/1/14 through 6/3/14) $260,000

47. Given the following information for Bonnie Bunny Company:

Inventory (1/1/14) $ 330,000

49. The gross profit method is not used to

Sales (1/1/13 through 7/3/13) $250,000

Inventory (1/1/14) $ 130,000

FIFO Average Cost LIFO

61. Barbara Co. presents the following information:

What is the cost of ending inventory for Eloise Corp.?

What is the cost of the ending inventory?

What is the cost-to-retail percentage to be used for ending inventory calculations?

What is the cost-to-retail percentage to be used for ending inventory calculations?

79. Which of the following statements is true?

81. The dollar-value LIFO retail method combines

Assets Liabilities Retained Earnings

Assets Liabilities Retained Earnings

Cost of Goods Sold Gross Profit Net Income

Assets Liabilities Retained Earnings

98. Exhibit 8-3

Date Cost Market

99. Exhibit 8-3

Date Cost Market

100. Given the following information for the Raquel Company:

Date Cost Market

101. Below are a list of key terms.

Net NRV Minus

104. Given the following information for the Lawrence Company:

NRV Minus Net

Determine the lower of cost or market for each inventory item.

Estimated Estimated Normal

Inventory in warehouse, 1/1/14 $250,000

Ending inventory is overstated

Beginning inventory is overstated

Ending inventory is understated

Beginning inventory is understated

Purchases is overstated (recorded twice)

Purchases is understated (not recorded)