Prelim-Quiz20

When using the lower-of-cost-or-market rule, what would be the effect on

inventory valuation if the normal profit margin was increased?
The lower limit for inventory value would decrease.

What has happened if the selling price has increased, but the gross profit
percentage remains the same?
The costs have increased.

The turnover ratio needs to represent the entire period, as a result, the ________
inventory level is used.
average

How is the inventory turnover ratio computed?

Cost of goods sold divided by ending inventory

What will happen when the cost-of-goods-sold method is used to record inventory
at NRV?
The market value figure for ending inventory is substituted for cost and the loss is
buried in cost of goods sold.

The ____ account is debited when the cost-of-goods-sold method is used adjust
cost to net realizable value.
Cost of Goods Sold

How do managers use the inventory turnover ratio?

to evaluate the liquidity of the inventory

What is the expected result if the cost of goods sold decreases while the average
inventory level increases?
The inventory turnover ratio will decrease.

Which of the following is a reason the retail inventory method is widely used?
To permit the computation of net income without a physical count of inventory

Which of the following is a basic assumption of the conventional retail method?

The net markdowns apply only to the goods sold.

The retail method has been used by a retail department store during its first year
of operations. How will markdowns compare to markdown cancellations at the
end of the year?
The markdown cancellations will be equal to or less than the markdowns.

What should the computation of the cost to retail percentage include in order to
find an inventory value that approximates lower of average cost or market using
the retail method?
Net markups

Falcon Security sells a security camera for $50.00 per unit. This price is set to yield
a gross margin on selling price of 25%. This camera has a cost of ___ and a markup
on cost of
$37.50, 33%

What is the estimate for the amount lost in the January 3 fire that destroyed the
entire inventory of Ephesus Corporation given the following data?
Sales for January $75K
Inventory, January 1 $15K
Purchases for January $55K
Markup on cost 25%
$10,000

First determine the cost of the goods available to sell in January by adding
purchases to inventory.
$55,000 + $15,000 = $70,000

Then find the cost-of-goods-sold.

$75,000/1.25 = $60,000

Subtract the cost of goods sold from the cost of goods available for sale to find the
remaining inventory.
$70,000 - $60,000 = $10,000

Which of the following are assumptions about the gross profit method?
1. The total amount of purchases and the total amount of sales remain relatively
unchanged from the comparable previous period
2. Goods not sold must be on hand
3. If sales, reduced to the cost basis, are deducted from the sum of the opening
inventory plus purchases, the result is the amount of inventory on hand
4. The beginning inventory plus the purchases equal total goods to be accounted
for
2, 3, and 4 but not 1

On December 31, 2016, Artemis Corporation signed a non-cancellable purchase

commitment to buy 10,000 units of archery targets between 2017 and 2018. What
must the company formally recognize in its balance sheet at the end of the year in
which the contract was signed?
Neither an asset nor a liability

Why is there controversy about recording the loss on a noncancelable contract in

the period in which it occurs?
Because the asset that suffered the loss has not yet been obtained or recorded.

Why would a company report inventories at sales price less distribution costs?
in a situation where the cost of each product is difficult to determine

When is recording inventory at net realizable value permitted, even if it is above

cost?
There are no significant costs of disposal involved and there is a controlled market
with a quoted price applicable to all quantities.