NAME:____________________________

ACCOUNTING 205 – QUIZ 1

Financial Accounting Volume 1: Chapters 20-21
A.Y. 2016-2017 BSA-2207

TRUE OR FALSE
Write TRUE if the statement is correct and FALSE.
NO ERASURE, USE BALLPEN ONLY.
There are two widely accepted procedures for approximating the value of inventory, namely the gross
1 profit method and the retail inventory method. Retail
The cost of goods sold can be computed as net sales multiplied by cost ratio. This formula is used
2 when the gross profit rate is based on sales.
3 The “sales ratio” is simply computed by adding 100% to the gross profit rate based on cost.
The gross profit rate on sales is the common way of quoting gross margin because goods are stated
4 on a sale price basis, rather than on a cost basis.
If the gross profit is cost of goods sold, then cost is 100% and if the basis is sales then the net sales is
5 100%.
Sales allowance and sales discount are ignored, that is, not deducted from sales. The reason is that
6 while these items decrease the amount of sales, they do not affect the physical volume of goods sold.
In sales allowance, there is no physical transfer of goods from the customer but a mere reduction in
7
the sales price.
The gross profit method is not valid when the gross margin percentage changes significantly during
8 the year.
The use of gross profit method assumed the relationship between selling price and cost of goods sold
9 is similar to prior years.
1 The retail inventory method came to its name because the selling price or retail price is tagged to each
0 item.
1 The term “retail” simply means selling price.
1
1 Retail inventory method; Treatment of item:
2 Purchase discount – deducted from purchases at cost only.
1 Retail inventory method; Treatment of item:
3 Sales discount and sales allowance – disregarded, meaning not deducted from sales.
1 Retail inventory method; Treatment of item:
4 Employee discounts – added to sales.
1 Retail inventory method; Treatment of item:
5 Departmental transfer out or credit – deduction from purchases at cost and retail.
1 Markup cancelation is the decrease in sales price that does not decrease the sales price below the
6 original sales price.
1 Net markdown is the markdown minus markdown cancelation.
7
1 To obtain the appropriate inventory value under the retail inventory method, three approaches are
8 followed, namely conservative, average and FIFO approach.
1 The average cost approach includes both net markup and net markdown in determining cost ratio.
9
2 The FIFO retail approach is similar to the average cost approach in that it considers both net markup
0 and net markdown in computing the cost ratio.
2 The FIFO approach is based on the assumption that markup and markdown apply to goods
1 purchased during the year and not to beginning inventory.
2 An inventory method which is designed to approximate inventory valuation at the lower of cost and net
2 realizable value is conventional retail method.
2 In retail method, it is necessary that the goods available for sale should be determined not only in
3 terms of selling price but also in terms of cost.
2 The retail inventory method is generally employed by department stores, supermarkets and other
4 retail concerns where there is a wide variety of goods.

ACCOUNTING 205 – QUIZ 1 [BSA-2207] mrabagsit | 1

2 Retail inventory method; Treatment of item:
5 Sales return – deducted from sales.

ACCOUNTING 205 – QUIZ 1 [BSA-2207] mrabagsit | 2

 NO ERASURES ON FINAL ANSWERS.
USE BALLPEN ONLY for FINAL ANSWERS.
Write your final answer on the space provided. Show your solutions on separate sheets of paper.

Problem 1 (15 points) Problem 3 (5 points)

On December 31, 2016, Christyl Company had fire which Joane Company used the average cost retail inventory
completely destroyed the goods in process inventory. A method.
physical inventory was taken after the fire.
Cost Retail
Dec. 31 Jan. 1 Beginning inventory 1,650,000 2,200,000
Finished goods 4,500,000 6,000,000 Net purchases 3,725,000 4,950,000
Goods in process 0 4,300,000 Departmental transfer – credit 200,000 300,000
Raw materials 2,000,000 1,700,000 Net markup 150,000
Factory Supplies 400,000 500,000 Inventory shortage – sales price 100,000
Employee discounts 200,000
During the year, the entity reported sales P20,000,000, Sales (including sales of 4,000,000
purchases P3,800,000, freight P200,000, direct labor P400,000 of items which were
P5,000,000 and manufacturing overhead at 60% of direct marked down from P500,000)
labor. The average gross profit rate is 30% on sales.
Required:
Required: Compute the ending inventory. _________________
1. What is the cost of raw materials used?
________________
2. What is the total manufacturing cost? Problem 4 (10 points)
________________ Michael Company which employed the FIFO retail method
3. What is the manufacturing overhead cost? provided the following inventory data:
________________
4. What is the cost of goods sold? 2016 Cost Retail
________________ Beginning inventory 420,000 600,000
5. What is the cost of goods in process inventory
Purchases 5,011,200 6,890,000
destroyed by fire?
Net markup 160,000
________________
Net markdown 90,000
Sales 6,839,000
2017
Problem 2 (5 points)
Purchases 4,970,000 7,110,000
Mary Anne Company provided the following data:
Net markup 100,000
Net markdown 110,000
Cost Retail
Sales 7,033,000
Beginning inventory 168,000 400,000
Purchases 2,806,000 3,100,000
Required:
Freight In 42,000
1. Determine the estimated cost of inventory on
Markup 300,000 December 31, 2016. _________________
Markup cancelation 30,000 2. Determine the estimated cost of goods sold on
Markdown 150,000 December 31, 2017. _________________
Markdown cancelation 40,000
Sales 3,000,000
Physical inventory at yearend 500,000
Estimated normal shrinkage is
4% of sales

Required:
Compute the ending inventory applying the conservative
retail and determine any inventory shortage.
_________________

ACCOUNTING 205 – QUIZ 1 [BSA-2207] mrabagsit | 3