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Chapter 8
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.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
LEARNING OBJECTIVES: ACCT.WHAL.16.8.1 - LO: 8.1
NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking
LOCAL STANDARDS: United States - OH - Default City - AICPA: FN-Decision Modeling
KEYWORDS: Bloom's: Remembering
2. Under the LIFO or retail inventory method the Net Realizable Value is considered the ceiling that prevents inventory
from being valued at amount higher than what the company could reasonably sell it.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
3. The lower-of-cost-or-market rule must be applied to each individual inventory item but not to groups of items
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
Copyright Cengage Learning. Powered by Cognero. Page 1

Chapter 8
4. If a company recognizes a loss due to inventory write-down then the inventory value subsequently increases due to a
market reversal the following year, GAAP does not permit the loss to be recovered.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
NATIONAL STANDARDS: United States - BUSPROG: Technology
LOCAL STANDARDS: United States - OH - Default City - AICPA - FN-Decision Modeling
5. Precious metals can be valued above costs because they are immediately marketable at a quoted market price.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
6. An auditor may not use the gross profit method to verify the accuracy of the reported cost of inventory.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy

Chapter 8
7. The gross profit method is an appropriate method for determining the cost of inventory for interim financial
statements.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
8. An advantage of the retail inventory method over the gross profit is the retail method uses current-period estimates
whereas the gross profit used past periods.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
9. The gross profit method is more sensitive to price changes than the FIFO method and produces a more accurate
estimate of current period ending inventory.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy

Chapter 8
10. The purpose of dollar-value LIFO retail method is to eliminate the effects of price changes during a period.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
11. Under the dollar-value LIFO the cost-to-retail ratio includes net markups and net markdowns from both the current
period and beginning inventory. during the current period.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
12. If a purchase on credit is omitted from the purchase account in error and ending inventory is correctly determined,
net income for the period would be understated.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Moderate
KEYWORDS: Bloom's: Understanding

Chapter 8
13. If ending inventory is overstated for the current period due to a costing error but purchases are correct, the balance
sheet at the end of the succeeding year would be correctly stated.
a. True
b. False
ANSWER: True
POINTS: 1
14. A company using the periodic inventory system to record the reduction of inventory to NRV value would record the
following journal entry to close beginning inventory using the direct method:
Allowance to Reduce Inventory to NRV x,xxx

Inventory x,xxx
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy

Chapter 8
15. A company using the periodic inventory system to record the reduction of inventory to NRV would record the
following journal entry to record inventory at market using the allowance method:
Loss Due to Write-Down of Inventory x,xxx

Allowance to Reduce Inventory to NRV x,xxx
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
16. The most common approach to implementing the LCNRV or LCM rule for inventory valuation is to apply it to
a. each individual item of inventory separately.
b. each major category of inventory.
c. the total inventory in the aggregate.
d. inventory items that have increased in value but not to items that have decreased in value.
ANSWER: a
POINTS: 1
DIFFICULTY: Easy

Chapter 8
17. Which application of the LCNRV or LCM rule will generally result in the lowest valuation for the ending inventory?
a. to each item of the inventory
b. to each major category of inventory
c. to the total inventory in the aggregate
d. To high-cost items but not to low-cost items
ANSWER: a
POINTS: 1
18. When applying lower of cost or net realizable value under the FIFO, average cost, or specific identification method,
market value
a. is defined as the selling price.
b. is defined as 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.
ANSWER: b
POINTS: 1
DIFFICULTY: Easy
19. When applying lower of cost or market under the LIFO or retail inventory method, market value should not be less
than
a. replacement value.
b. net realizable value.
c. net realizable value less an allowance for a normal profit margin.
d. replacement value less an allowance for a normal profit margin.
ANSWER: c
POINTS: 1
DIFFICULTY: Easy

Chapter 8
Exhibit 8-1
Rival Inc. uses the lower of cost or market rule in valuing its inventory. Assume the company uses the LIFO
method and that one unit has a ceiling constraint of $45.50. The following is other information concerning this unit:
Estimated transportation costs for delivery $3.90

Normal profit margin 7.50
Packaging costs prior to delivery 3.40
20. Refer to Exhibit 8-1. The selling price of this unit must be
a. $49.30
b. $53.00
c. $52.80
d. $49.10
ANSWER: c
POINTS: 1
NATIONAL STANDARDS: United States - BUSPROG: Comprehension
LOCAL STANDARDS: United States - OH - Default City - AICPA: FN-Measurement
KEYWORDS: Bloom's: Analyzing
21. 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
ANSWER: b
POINTS: 1

Chapter 8
22. When comparing the lower of cost to market rule under any of the methods
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.
ANSWER: a
POINTS: 1
DIFFICULTY: Easy
23. Morris Company uses the lower of cost or market rule and applies it using the LIFO method 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
ANSWER: c
POINTS: 1

Chapter 8
24. 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, unlike the direct method, reduces the value of inventory reported on the balance sheet.
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
25. 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. The direct method makes changes to the historical cost of inventory reported on the balance sheet.
d. The direct method can only be used with a perpetual inventory system.
ANSWER: b
POINTS: 1

Chapter 8
26. Given the following information for the Raquel Company:
Date Cost Market

December 31, 2018 $500 $500
December 31, 2019 700 700
December 31, 2020 800 730
Under the perpetual system, if the direct method of recording lower of cost or market is in use, which December 31,
2020 entry is correct?
a. Inventory 70
Cost of Goods Sold 70
b. Cost of Goods Sold 70
Inventory 70
c. Loss Due to Write-Down of Inventory 70
Allowance to Reduce Inventory to NRV 70
d. Cost of Goods Sold 70
ANSWER: b
POINTS: 1

Chapter 8
27. Given the following information for the Tea Company:

Date Cost Market
December 31, 2018 $ 800 $ 800
December 31, 2019 1,000 1,000
December 31, 2020 1,200 1,060
Under the periodic system, if the allowance method of recording lower of cost or market is in use, which December
31, 2020 entry is correct?
a. Loss Due to Write-Down of Inventory 140
b. Allowance to Reduce Inventory to NRV 140
Loss Recovery Due to Write-Down of Inventory 140
c. Inventory 140
Cost of Goods Sold 140
d. Cost of Goods Sold 140
Inventory 140
ANSWER: a
POINTS: 1

Chapter 8
28. 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 $ 13.80
Under IFRS requirements, the per-unit reported value for Zoe's inventory will be
a. $65.00
b. $54.50
c. $54.20
d. $40.70
ANSWER: b
POINTS: 1
29. The Maxa Company normally sells its inventory at a 20% profit margin on sales. In 2016, 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.
Using the LIFO method 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
ANSWER: d
POINTS: 1

Chapter 8
30. 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.
ANSWER: a
POINTS: 1
31. IFRS, like U.S. GAAP, require the use of the lower of cost or market method to value inventory, however some
differences do exist. Which of the following is not one of the differences?
a. IFRS eliminate the need to use a ceiling in determining market value.
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 value.
ANSWER: d
POINTS: 1
32. 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.
ANSWER: a
POINTS: 1

Chapter 8
33. Concerning application of the lower of cost or market method under either the LIFO or retail inventory 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 lower 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.
ANSWER: a
POINTS: 1
34. Major Company uses the lower of cost or market rule in valuing its inventory and applies it using the LIFO method.
The floor constraint for one item in the inventory is $58.20. The following is other information concerning this unit:
Transportation costs $ 5.00

Packaging costs 5.20
The market value for this item is
a. $58.20
b. $70.90
c. $75.90
d. $81.10
ANSWER: d
POINTS: 1

Chapter 8
35. 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. Representational faithfulness
c. historical cost
d. going concern
ANSWER: b
POINTS: 1
36. Assume that there is a decline in inventory value in one period, then there is a reversal of value to the original or
higher value and a later period. Which of the following statements about recognition of the loss is true?
a. The decline in inventory value and related loss should be recognized in the first period and reversed in the
second period in all situations.
b. The decline in inventory value and related loss should be recognized in the first period and reversed in the
second period but only if the second period is within the same fiscal year.
c. The decline in inventory value and related loss should be recognized in the first period and reversed in the
second period but only if the second period is within a different fiscal year.
d. The decline in inventory value and related loss should never be recognized.
ANSWER: b
POINTS: 1
DIFFICULTY: Easy

Chapter 8
37. Which of the following is a justification for valuing inventory above historical cost?
a. Immediate marketability of the inventory at a quoted market price
b. Interchangeability of the units of inventory
c. All of the items listed are justifications for valuing inventory above historical cost
d. Inability to determine appropriate prices
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
38. 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
ANSWER: d
POINTS: 1
39. 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.
ANSWER: d
POINTS: 1
DIFFICULTY: Easy

Chapter 8
40. 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
ANSWER: b
POINTS: 1
DIFFICULTY: Easy
41. For the period from 2016 through 2016, the Charlie Company had net sales of $500,000 and a gross profit of
$200,000. During the first quarter of 2018, 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, 2018, using the gross profit method?
a. $22,500
b. $15,000
c. $6,500
d. $6,000
ANSWER: c
POINTS: 1

Chapter 8
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, 2016, inventory balance $12,500

Purchases 25,000
Sales during January 24,000
42. Refer to Exhibit 8-2. The estimated inventory at January 31, 2016, is
a. $25,500
b. $21,500
c. $16,000
d. $12,000
ANSWER: b
POINTS: 1
43. Refer to Exhibit 8-2. The estimated cost of goods sold at January 31, 2016, is
a. $25,500
b. $21,500
c. $16,000
d. $12,000
ANSWER: c
POINTS: 1

Chapter 8
44. 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)
ANSWER: d
POINTS: 1
45. 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
ANSWER: a
POINTS: 1
DIFFICULTY: Easy

Chapter 8
46. 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.
ANSWER: d
POINTS: 1
47. The Sahara Company's inventory was partially destroyed on June 4, 2016, 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 (1/1/16 through 6/3/16) $260,000

Purchases (1/1/16 through 7/3/16) 190,000
Inventory (1/1/16) 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. $130,,000
b. $48,000
c. $39,000
d. $30,000
ANSWER: d
POINTS: 1

Chapter 8
48. Given the following information for Bonnie Bunny Company:
Freight-in $ 650
Purchases 12,550
Sales returns 350
Beginning inventory 1,950
Sales 23,450
Gross profit on sales 45%
Calculate ending inventory of Bonnie Bunny using the gross profit method.
a. $4,755
b. $4,373
c. $2,445
d. $2,060
ANSWER: c
POINTS: 1
DIFFICULTY: Challenging

Chapter 8
49. As a result of taking a physical inventory count on December 31, 20106 the Cookie Company inventory was
determined to be $425,000. The auditors for Cookie suspected an inventory shortage and used the gross profit
method to estimate the ending inventory. The accounting records for the company contained the following
information:
Inventory (1/1/16) $ 330,000

Purchases (2016) 1,770,000
Sales (2016) 2,200,000
Sales returns (2016) 100,000
Gross profit ratio 25% of sales
Using the gross profit method, what did the auditors estimate as the amount of the inventory shortage at December
31, 2016?
a. $100,000
b. $75,000
c. $15,000
d. $0
ANSWER: a
POINTS: 1
50. 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.
ANSWER: a
POINTS: 1

Chapter 8
51. The Jamison Company's inventory was destroyed on July 4, 2016, when its warehouse caught on fire early in the
morning. Inventory was totally destroyed. The accounting records, which were located in a fireproof vault, contained
the following information:
Sales (1/1/16 through 7/3/16) $240,000

Purchases (1/1/16 through 7/3/16) 180,000
Inventory (1/1/16) 45,000
Gross profit ratio 25% of cost
Using the gross profit method, what is the estimated cost of the inventory that was destroyed by the fire?
a. $15,000
b. $23,250
c. $33,000
d. $45,000
ANSWER: d
POINTS: 1

Chapter 8
52. As a result of taking a physical inventory count on December 31, 2016, the Mona Lisa Company inventory was
determined to be $61,500. The auditors for Mona Lisa suspected an inventory shortage and used the gross profit
method to estimate the ending inventory. The accounting records for the company contained the following
information:
Inventory (1/1/16) $ 130,000

Purchases (2016) 760,000
Sales (2016) 1,020,000
Using the gross profit method, what did the auditors estimate as the amount of the inventory that should have been
on hand at December 31, 2016?
a. $240,000
b. $170,000
c. $125,000
d. $ 61,500
ANSWER: b
POINTS: 1
53. Which one of the following statements regarding the gross profit method is not true?
a. The gross profit method is not a practical method to use in real-world situations.
b. The gross profit method is often used to estimate the year-end inventory for comparison to actual on-hand
inventory.
c. The gross profit method is an acceptable method to estimate the cost of inventory destroyed by a casualty.
d. The gross profit method results in a less accurate inventory valuation than the retail inventory method.
ANSWER: a
POINTS: 1
DIFFICULTY: Easy

Chapter 8
54. Which one of the following statements regarding the gross profit method is true?
a. The gross profit method is a complicated method to use in practice.
b. The gross profit method results in a more accurate inventory valuation than the retail inventory method.
c. The gross profit method is an acceptable method to estimate the cost of inventory destroyed by a casualty.
d. The gross profit method is often used to calculate the year-end inventory for financial accounting purposes.
ANSWER: c
POINTS: 1
55. At the beginning of 2016, the Joan Company had an inventory valued at $34,375 at cost ($50,000 at retail). During
the year, Joan purchased inventory for $50,000 ($70,000 at retail), and made markdowns of $7,500. Joan’s sales in
2016 were $62,500. What is Joan’s estimated ending inventory at FIFO cost using the retail inventory method?
a. $37,500
b. $40,000
c. $39,000
d. $34,375
ANSWER: b
POINTS: 1

Chapter 8
56. With the retail inventory method, how is the total beginning inventory value used in the calculation of the cost-to-retail
ratio for the current period under the following cost flow assumptions?
FIFO Average Cost LIFO

I. Include Include Exclude
II. Include Exclude Exclude
III. Exclude Exclude Exclude
IV. Exclude Include Exclude
a. I
b. II
c. III
d. IV
ANSWER: d
POINTS: 1
57. If the net markdowns are excluded from the calculation of the cost-to-retail ratio in the retail inventory method, what
is the effect on the cost-to-retail ratio?
a. The denominator of the ratio will be lower, which results in a higher cost-to-retail ratio.
b. The denominator of the ratio will be higher, which results in a lower cost-to-retail ratio.
c. The numerator of the ratio will be higher, which results in a higher cost-to-retail ratio.
d. The numerator of the ratio will be lower, which results in a lower cost-to-retail ratio.
ANSWER: b
POINTS: 1

Chapter 8
58. The Alpha Company uses the retail inventory method for valuation of its inventory. If an item had a cost of $45, was
originally marked to sell at $60, was later priced at $55, and finally was priced at $68, the resulting price change is a
a. net markup of $13.
b. net markdown of $5 and a markup of $8.
c. net markdown of zero and an a markup of $8.
d. net markup of $23.
ANSWER: c
POINTS: 1
59. The Alexandra Company uses the retail inventory method and the average cost flow assumption for preparation of
its interim reports. Information about Alexandra’s inventory in the second quarter of 2016 is shown below:
Cost Retail
Beginning inventory $255 $ 800
Purchases 600 1,400
Net markups 200
Net markdowns (500)
Sales 1,300
What is the estimated cost of Alexandra’s inventory on June 30, 2016?
a. $270
b. $300
c. $585
d. $600
ANSWER: a
POINTS: 1

Chapter 8
60. The Rebecca Company provided the following data for its December 31, 2016, inventory maintained on the retail
basis.
At Cost At Retail
Beginning inventory $165,000 $225,000
Purchases 275,000 446,000
Markups (net) 45,750
Markdowns (net) (32,000)
Sales 575,000
What is the estimated inventory at December 31, 2016, valued at lower of average cost or market?
a. $87,018
b. $70,522
c. $62,951
d. $44,069
ANSWER: a
POINTS: 1
61. When using the cost-to-retail ratio for the retail inventory method,
a. neither net markups nor markdowns are included in the computation of ending inventory for FIFO inventory.
b. net markups but not net markdowns are included in the computation of ending inventory for LIFO inventory.
c. net markups but not net markdowns are included in the computation of ending inventory for lower-of-cost-or-
market inventory.
d. net markdowns but not net markups are included in the computation of ending inventory for Average Cost
inventory.
ANSWER: c
POINTS: 1

Chapter 8
62. Barbara Co. presents the following information:

Cost Retail
Net markups $ 785
Sales 2,850
Purchases $1,570 2,150
Net markdowns 50
Beginning inventory 300 350
The company uses the average cost retail inventory method. What is the cost of ending inventory?
a. $233.55
b. $255.98
c. $275.80
d. $222.55
ANSWER: d
POINTS: 1
63. Which one of the following statements is false concerning the retail inventory method?
a. Net markups and markdowns are always added and subtracted in order to compute the retail value of ending
inventory.
b. Markups and markdowns are recorded only at retail.
c. In the lower of average cost or market method, net markups are excluded from the computation of the cost-
to-retail ratio.
d. In computing the cost-to-retail ratio, purchase discounts affect only the cost of purchases and not the retail
amount of purchases.
ANSWER: c
POINTS: 1
DIFFICULTY: Easy

Chapter 8
64. Which one of the following statements is false concerning the retail inventory method?
a. In arriving at a cost-to-retail ratio, sales discounts are deducted from goods available for sale to determine
ending inventory at retail.
b. Employee discounts are subtracted from goods available for sale to compute ending inventory at retail.
c. Abnormal inventory spoilage would be subtracted at both cost and retail in the determination of goods
available for sale.
d. Purchase returns and allowances must be subtracted from both the cost and retail value of the purchases.
ANSWER: a
POINTS: 1
DIFFICULTY: Easy
65. Eloise Corp. uses the FIFO retail inventory method and reports the following information:
Cost Retail
Purchases $21,450 $28,000
Sales 24,800
Net markups 1,000
Beginning inventory 2,100 3,000
Net markdowns 400
What is the FIFO value of ending inventory for Eloise Corp.?

a. $5,004
b. $5,053
c. $5,068
d. $5,100
ANSWER: d
POINTS: 1

Chapter 8
66. Audrey Company uses the LIFO retail inventory method and reports the following information:
Cost Retail
Beginning inventory $ 540 $ 900
Net markups 1,000
Sales 4,500
Net markdowns 500
Purchases 3,150 4,000
What is the cost of ending inventory for Audrey Company?

a. $540
b. $562
c. $615
d. $630
ANSWER: a
POINTS: 1

Chapter 8
67. Leslie, Ltd. used the LIFO retail inventory method to determine its ending inventory. The accounting records for the
company contained the following relevant information:
Cost Retail
Net purchases $48,000 $79,000
Sales 91,000
Net markups 5,000
Net markdowns 4,000
What is the LIFO cost of the ending inventory?

a. $6,720
b. $7,706
c. $8,000
d. $8,400
ANSWER: a
POINTS: 1

Chapter 8
68. Darla’s Card Shop uses the average cost retail inventory method to determine the ending inventory. Darla's
accounting records for the current year contained the following information:
Cost Retail
Purchases $216,000 $317,500
Sales 350,000
Net markups 12,000
Net markdowns 8,000
In addition, sales returns for the year were $28,000, and employee discounts taken were $6,000. What is the cost of
the ending inventory
a. $35,000
b. $50,400
c. $54,600
d. $58,800
ANSWER: b
POINTS: 1

Chapter 8
69. Stacie’s Shoes uses the FIFO retail inventory method to determine its ending inventory. The accounting records for
Stacie’s Shoes contained the following information:
Cost Retail
Purchases $242,000 $348,830
Sales 394,000
Sales returns 5,076
Net markups 32,800
Net markdowns 12,000
The freight-in charges for the merchandise were $7,500. What is the cost of ending inventory for Stacie’s Shoes?
a. $55,792
b. $57,200
c. $59,400
d. $61,281
ANSWER: d
POINTS: 1

Chapter 8
70. Debbie’s Bling Shop uses the lower of average cost or market retail inventory method to determine its ending
inventory. The accounting records for the current year for Debbie’s contained the following information:
Cost Retail
Beginning inventory $19,000 $ 27,500
Purchases 71,500 94,000
Sales 105,000
Net markups 5,167
Net markdowns 3,067
In addition, the accounting records for Debbie’s disclosed that freight-in charges were $6,700 and sales returns were
$2,833. What is the cost-to-retail percentage to be used for ending inventory calculations?
a. 71.4%
b. 73.2%
c. 76.7%
d. 78.6%
ANSWER: c
POINTS: 1

Chapter 8
71. Laura’s Department Store uses the average cost retail inventory method to determine its ending inventory. The
accounting records for the current year for Laura’s contained the following information:
Cost Retail
Purchases $71,200 $87,750
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%
ANSWER: d
POINTS: 1

Chapter 8
72. Caroline’s Music Store uses the average cost retail inventory method to determine its ending inventory. The
accounting records for the current year for Caroline’s contained the following information:
Cost Retail
Purchases $108,000 $137,750
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%
ANSWER: b
POINTS: 1

Chapter 8
73. The Sherri’s Retail Shop uses the FIFO retail inventory method to determine its ending inventory. The accounting
records for the current year for Sherri’s contained the following information:
Cost Retail
Purchases $225,000 $362,250
Sales 385,750
Net markups 32,500
What is the cost-to-retail percentage to be used for ending inventory calculations?

a. 59.9%
b. 60.0%
c. 62.1%
d. 62.5%
ANSWER: b
POINTS: 1
74. Which of the following variations of the retail inventory method would generally result in the lowest cost-to-retail
ratio in a period of declining prices?
a. FIFO
b. LIFO
c. average cost
d. lower of average cost or market
ANSWER: a
POINTS: 1

Chapter 8
75. Which of the following variations of the retail inventory method would generally result in the lowest cost-to-retail
ratio in a period of rising prices?
a. FIFO
b. LIFO
c. average cost
d. lower of average cost or market
ANSWER: b
POINTS: 1
76. Which of the following items would not be used in the calculation of the cost-to-retail ratio if the FIFO retail
inventory method were used to determine the ending inventory?
a. net markdowns
b. purchases
c. beginning inventory
d. freight-in charges
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
77. Which of the following is not a general assumption that underlies the retail inventory method?
a. All inventory items are homogenous and have the same markup.
b. The items in ending inventory are in proportion to the items available for sale.
c. There were no changes in the retail price of inventory purchased during the period except the changes
captured by markups and markdowns.
d. The cost-to-retail ratio remains constant over the accounting period
ANSWER: a
POINTS: 1
DIFFICULTY: Easy
Chapter 8
78. Ann Co. uses the dollar-value LIFO retail method. The beginning inventory, purchased when the price index was
100, had a retail value of $4,000 and a cost of $3,600. During the period, purchases amounted to $60,000 at retail
($52,800 at cost). Sales amounted to $56,300. The year-end price index was 110. What is the cost of ending
inventory?
a. $6,240
b. $6,504
c. $6,570
d. $6,900
ANSWER: b
POINTS: 1
79. Kelcie Sports uses the dollar-value LIFO retail method. The price index on January 1, 2016, was 100, and on that
date the inventory was $20,000 (retail) and $14,000 (cost). Additional information follows:
2016 2017
Purchases, retail $160,000 $204,000
Purchases, cost 115,200 150,960
Sales 160,416 202,160
Price index, Dec. 31. 102 103
What is the cost of the December 31, 2017, inventory (to the nearest dollar)?
a. $14,610
b. $14,638
c. $14,660
d. $15,854
ANSWER: c
POINTS: 1

Chapter 8
80. Which of the following statements is true?

a. Application of LIFO for financial reporting purposes must follow the tax laws applicable to LIFO.
b. A company must use FIFO for both tax reporting and financial statement reporting.
c. A company may use FIFO to valuate inventory and LIFO for financial statement reporting purposes.
d. LIFO must be used for financial reporting if it is used for tax purposes.
ANSWER: d
POINTS: 1
DIFFICULTY: Easy
81. The dollar-value LIFO cost-to-cost retail ratio does not include
a. beginning inventory.
b. net markups and markdowns.
c. ending inventory.
d. purchases.
ANSWER: a
POINTS: 1
DIFFICULTY: Easy
82. The dollar-value LIFO retail method

a. combines the principle of retail LIFO with dollar-value LIFO.
b. does not really include retail LIFO in the calculation process.
c. is a new principle.
d. is an interesting theoretical exercise that is rarely used in practice.
ANSWER: a
POINTS: 1
DIFFICULTY: Easy

Chapter 8
83. What is the effect on net income if a company fails to record a purchase in transit (FOB shipping point) and also
fails to include the purchase in physical inventory?
a. Income is overstated.
b. Income is understated.
c. Income is correct.
d. Not enough information is provided to determine the answer.
ANSWER: c
POINTS: 1
KEYWORDS: Bloom's: Applying
84. If purchases are recorded correctly but ending physical inventory is understated, which one of the following
situations occurs for the current year?
a. Working capital is understated and net income is overstated.
b. Working capital and net income are understated.
c. Working capital is overstated and net income is understated.
d. Working capital and net income are overstated.
ANSWER: b
POINTS: 1

Chapter 8
85. The accountant for Angie Company made the following errors related to purchases of merchandise and ending
inventory in 2016:
1. A $2,200 purchase of merchandise on credit was not recorded or included in ending

inventory.
2. A $3,180 purchase of merchandise on credit was recorded, but it was inadvertently omitted
from the end-of-year physical inventory count.
Assuming a periodic inventory system, Angie’s Company's 2016 net income will be
a. understated by $3,180.
b. understated by $2,380.
c. overstated by $5,380.
d. overstated by $3,180.
ANSWER: a
POINTS: 1
86. The accountant for the Daneen Company made the following errors related to purchases of merchandise and ending
inventory in 2016:
1. A $3,100 purchase of merchandise on credit early in 2015 was recorded and included in
ending inventory at December 31, 2016.
2. A $2,750 purchase of merchandise on credit in 2014 was recorded, but it was not included
in the end-of-year physical inventory count.
Assuming a periodic inventory system, Daneen Company's 2016 net income will be
a. understated by $350.
d. overstated by $350.
ANSWER: d
POINTS: 1

Chapter 8
87. Barry Corp. reported 2016 net income of $40,000. However, the ending inventory in 2015 had been understated by
$3,000, and 2016's ending inventory had been overstated by $6,000. Barry's correct net income for 2016 was
a. $31,000
b. $34,000
c. $43,000
d. $46,000
ANSWER: a
POINTS: 1
88. A purchase on credit is recorded twice and not corrected during the year-end physical inventory. Which of the
following statements correctly describes the impact of this error?
a. The current year income on the income statement is correct because purchases are overstated and ending
inventory is overstated.
b. The current year balance sheet ending inventory and accounts payable are understated.
c. The succeeding year income on the income statement is incorrect because beginning inventory is understated.
d. The succeeding year purchases are understated when the prior year purchases are corrected.
ANSWER: a
POINTS: 1

Chapter 8
89. The correct net income for Sarah Corp. was $53,500. However, 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
ANSWER: c
POINTS: 1
90. The accountant for Ella Company made the following errors related to the inventory in 2016:
1. The beginning inventory for 2016 was understated by $1,350 due to an error in the physical
count.
2. A $1,500 purchase of merchandise in transit was not recorded as a purchase and was
not included in ending inventory.
Assuming a periodic inventory system, Ella Company's 2016 net income will be
b. overstated by $1,350.
ANSWER: b
POINTS: 1

Chapter 8
91. Bennett Company's accountant made the following errors related to merchandise inventory in 2016:
1. The beginning inventory for 2016 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 2016 cost of goods sold will be
c. overstated by $750.
d. overstated by $1,900.
ANSWER: c
POINTS: 1
92. The accountant for Lee Company made the following errors related to merchandise inventory in 2016:
1. The beginning inventory for 2016 was overstated by $750 due to an error in the physical
count.
2. A $1,300 purchase of merchandise on credit was not recorded and was not included in the
ending inventory.
Assuming a periodic inventory system, Lee Company's 2016 cost of goods sold will be
ANSWER: d
POINTS: 1

Chapter 8
93. 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 balance sheet effects of these omissions on assets,
liabilities, and retained earnings would be
Set 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. Set I
b. Set II
c. Set III
d. Set IV
ANSWER: b
POINTS: 1
94. 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?
Set Assets Liabilities Retained Earnings

I. No effect Understated Understated
II. Understated Understated No effect
III. No effect No effect Overstated
IV. No effect Understated Overstated
a. Set I
b. Set II
c. Set III
d. Set IV
ANSWER: d
POINTS: 1

Chapter 8
95. The accountant for Suzanne Company made the following errors related to inventory in 2017:
1. The beginning inventory for 2017 was overstated by $1,375 due to an error in the physical
count.
2. A $1,650 purchase of merchandise on credit in 2017 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 2017 by these errors?
Set 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. Set I
b. Set II
c. Set III
d. Set IV
ANSWER: a
POINTS: 1
96. 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.
d. Not enough information is provided to determine the answer.
ANSWER: a
POINTS: 1

Chapter 8
97. 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.
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.
ANSWER: d
POINTS: 1
98. 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?
Assets Liabilities Retained Earnings

I. No effect Understated Understated
II. Understated Understated Understated
III. No effect Overstated Overstated
IV. No effect Overstated Understated
a. I
b. II
c. III
d. IV
ANSWER: d
POINTS: 1

Chapter 8
Exhibit 8-3
The J. Love Company uses a periodic inventory accounting system and values its inventory by using the lower of
cost or NRV rule. The allowance method is used in applying the lower of cost or NRV 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, 2018 $70,000 $70,000
December 31, 2019 56,000 46,000
December 31, 2020 64,000 58,000
99. Refer to Exhibit 8-3. Which of the following journal entries would be correct as of December 31, 2019, to apply the
lower of cost or market rule to the valuation of inventory?
a. Inventory 46,000
Income Summary 46,000
b. Loss Due to Write-Down of Inventory 10,000
Allowance to Reduce Inventory
to NRV 10,000
c. Cost of Goods Sold 10,000
Inventory 10,000
d. Cost of Goods Sold 10,000
to NRV 10,000
ANSWER: b
POINTS: 1

Chapter 8
100. Refer to Exhibit 8-3. Which of the following journal entries would be correct as of December 31, 2020, to apply the
lower of cost or market rule?
a. Inventory 58,000
b. Loss Due to Write-Down of Inventory 6,000
to NRV 6,000
c. Allowance to Reduce Inventory to NRV 4,000
Loss Recovery Due to Write-Down of Inventory 4,000
d. Cost of Goods Sold 6,000
to NRV 6,000
ANSWER: b
POINTS: 1

Chapter 8
101. Given the following information for the Raquel Company who uses the periodic inventory system:
Date Cost Market

December 31, 2018 $500 $500
December 31, 2019 700 650
December 31, 2020 800 730
If the allowance method of recording lower of cost or NRV is in use, which December 31, 2020, journal entry is
correct?
a. Loss Due to Write-Down of Inventory 20
b. Inventory 730
Income Summary 730
c. Loss Due to Write-Down of Inventory 70
d. Allowance to Reduce Inventory to NRV 800
Income Summary 800
ANSWER: c
POINTS: 1
102. Using a periodic inventory system, Bertram Company records inventory at lower of cost or NRV using the direct
method. The end-of-the-year journal entries to adjust inventories would include
a. a debit to Inventory to close beginning inventory at cost value.
b. a debit to Inventory to close ending inventory at market value.
c. a debit to Loss Due to Write-Down of Inventory for the excess of cost over market value.
d. a credit to Allowance to Reduce Inventory for the excess of market over cost value.
ANSWER: b
POINTS: 1

Chapter 8
103. Using a periodic inventory system, Bertram Company records inventory at lower of cost or NRV using the
allowance method. The end-of-the-year journal entries to adjust inventories would include
a. a debit to Inventory to close beginning inventory at cost value.

b. a debit to Inventory to close ending inventory at market value.
c. a debit to Loss Due to Write-Down of Inventory for the excess of cost over market value.
d. a credit to Allowance to Reduce Inventory for the excess of market over cost value.
ANSWER: c
POINTS: 1

Chapter 8
104. Below is 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.
ANSWER: 1 f
2 d
3 g
4 h
5 c
6 a
7 b
8 e
POINTS: 1
ACCT.WHAL.16.8.3 - LO: 8.3
ACCT.WHAL.16.8.4 - LO: 8.4
ACCT.WHAL.16.8.5 - LO: 8.5

Chapter 8
105. The following information for five products (A-E) was taken from the inventory records of the Walker Company
who use the LIFO method:
Product A B C D E
# of Units 175 200 250 200 300
Unit cost $5.50 $10.00 $5.10 $5.10 $5.00
Replacement cost per unit $6.00 $9.00 $4.60 $4.50 $4.50
Net realizable value (NRV) per unit $5.20 $12.50 $7.00 $7.00 $7.00
NRV–Normal profit per unit $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
ANSWER: 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
Inventory at lower of cost or market: $6,622.50

POINTS: 1

Chapter 8
106. Given the following information for Gator Company who uses the LIFO method:
Net NRV Minus

Realizable Replacement Normal
Item 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.
ANSWER: a. 1. $17.70 4. $ 2.88

2. $ 8.28 5. $12.00
3. $64.80 6. $40.80
b. Net NRV
Minus
Item Quantity Cost Value Cost Profit Market
1 1 $ 17.70 $24.60 $18.00 $17.10 $ 18.00
2 1 10.80 8.28 9.30 5.58 8.28
3 1 72.00 64.80 67.20 57.60 64.80
4 1 4.80 3.12 2.88 2.64 2.88
5 1 12.00 12.30 12.60 11.10 12.30
6 1 48.00 45.60 38.40 40.80 40.80
Total $165.30 $147.06
Inventory at lower of cost or market: $147.06

POINTS: 1

Chapter 8
107. Given the following information for the Lawrence Company who uses the LIFO method:
NRV Minus Net

Normal Realizable Replacement
Item 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:
1.) Determine the lower of cost or market for each inventory item.
2.) Now assume instead that the company uses FIFO and the inventory is valued using the LCNRV rule, determine the value
each inventory item.
Answers for part 1
ANSWER: a. $ 3.40 d. $ 6.00
b. $28.80 e. $21.00
c. $ 1.56 f. $12.30
Answers for part 2:

Item:
a. 4.14
b. 27.60
c. 1.56
d. 6.15
e. 21.00
f. 12.30
POINTS: 1

Chapter 8
108. 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, 2017 $ 60,000 $ 60,000
December 31, 2017 100,000 88,000
December 31, 2018 115,000 104,000
Required:
Prepare the required journal entries at December 31, 2017, and December 31, 2018, to record the inventory at lower
of cost or market using the following methods:
a. Direct method
b. Allowance method
ANSWER: a. Direct Method:

12/31/17
Cost of Goods Sold 12,000
Inventory 12,000
12/31/18:
Cost of Goods Sold 11,000
Inventory 11,000
b. Allowance Method:
12/31/17:
Loss Due to Market Valuation 12,000
Allowance to Reduce Inventory to 12,000
Market
12/31/18:
Allowance to Reduce Inventory to Market 1,000
Loss Recovery Due to Market 1,000
Valuation
POINTS: 1
109. The Peter Park Company began operations in early 2018. At December 31, 2018, the company's ending inventory's cost was
the inventory at this date was $11,800. Peter Park values its inventory at lower of cost or market applied on an individual item
inventory system. Below is information relating to Peter's inventory at December 31, 2019:
Estimated Estimated Normal

No. of Unit Replacement Selling Costs of Profit
Chapter 8
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, 2018, to record the inventory at lower of cost or market.
b. Prepare a schedule to calculate the inventory's value as of December 31, 2019, using the
lower of cost or market method applied using the LIFO 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, 2019, to record the inventory at lower of cost
or market. Assume the allowance method is used.
ANSWER: a. 12/31/18:
Loss Due to Market Valuation ($12,950 - $11,800)
Allowance to Reduce Inventory to Market
b. Applicable
Upper Lower Unit Inventory
Item Constraint Constraint Value
1 $6.50 $4.50 $4.50
2 8.50 6.50 8.00
3 5.50 4.50 5.50
4 8.00 6.50 7.50
5 4.50 3.00 3.00
Cost: 12/31/11 = $11,575
c. 12/31/19
Allowance to Reduce Inventory to Market
Loss Recovery Due to Market Valuation
($11,575 - $10,900 = $675 allowance needed);
$1,150 cr. – $675 cr. = $475 debit
POINTS: 1

Chapter 8
110. A fire destroyed the Churchill Company's warehouse on March 15, 2016. 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, 1/1/16 $250,000

Purchases, 1/1/16-3/15/16 620,000
Purchase returns 9,500
Freight-in 14,000
Sales, 1/1/16-3/15/16 850,000
Sales returns 20,000
For the period from 2011 through 2015, 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?
ANSWER: 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
The gross profit method assumes that a company's gross profit rate in the current
period (1/1/16-3/15/16) is not materially different from the previous period or
b.
periods (in this case the years 2011-2015). This implies that the product mix and
profit and cost ratios have not materially changed.
POINTS: 1

Chapter 8
111. 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 (1/16) $130,000

Purchases (2016) 760,000
Sales (2016) 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, 2016?
ANSWER: 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.
POINTS: 1

Chapter 8
112. 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.
ANSWER: 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
Less: Cost of inventory not destroyed 7,465
Fire loss $10,845
* $45,675/1.25 =
36,540.00
POINTS: 1

Chapter 8
113. Yamachi Inc. incurred a loss from a flash flood on July 20, 2016. The following information was available from the
company's accounting records:
Gross profit on cost 20%

Beginning inventory, 1/1/6 $18,000
Sales, 1/1/14-7/20/6 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, 2016, was $16,500, and
cash paid to suppliers during 2016 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, 2016, 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.)
ANSWER: Beginning inventory $18,000

Purchases 79,750*
Purchases discounts (1,200)
Cost of goods available for sale $96,550
Cost of goods sold (68,750)**
Less: Cost of goods not destroyed (3,500)
Flood loss $24,300
* Accounts Payable:
$16,500 + Purchases - $60,000 - $1,200 =
$35,050
Purchases = $35,050 - $16,500 + $60,000
+ $1,200
Purchases = $79,750
** $82,500/1.2 = $68,750
POINTS: 1

Chapter 8
114. 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.
ANSWER: a. 0.25/(1 − 0.25) = 0.25/0.75 = 33% (rounded)
b. 0.65/(1 + 0.65) = 0.65/1.65 = 39% (rounded)

POINTS: 1

Chapter 8
115. The Brad’s Farm Company uses the retail inventory method to compute ending inventory. Information for last year 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.
ANSWER: Cost Retail

Beginning inventory $12,000 $ 20,000
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
POINTS: 1

Chapter 8
116. 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?
ANSWER: 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)
POINTS: 1
117. 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)
ANSWER: 1)FIFO

Chapter 8
Cost Retail
Purchases $67,800 $99,500
Net markups 6,500
Net markdowns -3,000
$67,800 $103,000
67,800/103,000 = .66 (rounded)
(for purchases)
0.66 Cost Retail
Goods available for sale 84,800 126,500
Less: Sales 98,000
Ending inventory at FIFO $18,810
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

Purchases 67,800 99,500
Net markups 6,500
$ 84,800 $ 129,500
84,800/129,500 = .66 (rounded)
0.66
Net markdowns -3,000
Less: Sales 98,000
Ending inventory at retail $ 28,500
Ending inventory at lower of cost
or market $ 18,810
POINTS: 1
118. Laura’s Homemade cannot decide which inventory method to use to determine its ending inventory. The accounting
Chapter 8
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 cost of inventory under the following cost flow assumptions.
1) LIFO
2) Average Cost
ANSWER: 1) LIFO
Cost Retail
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
Chapter 8

84,800/126,500 = .67
0.67
Less: Sales 98,000
Ending inventory at average cost $ 19,095
POINTS: 1
119. The Smith Company uses the retail inventory method to estimate inventory for interim financial statements. The following inve
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.
ANSWER:
a. FIFO inventory = $15,300, determined as follows:
Cost
Purchases $38,500
Freight-in 500
Purchase returns (1,800)
Net markups
Net markdowns
$37,200
Cost-to-retail ratio: $37,200/$62,000 = 0.60

Goods available for sale $49,700
Less: Sales
Ending inventory at retail
Ending inventory at FIFO cost
Chapter 8
(0.60 ´ $25,500) $15,300
b. LIFO inventory = $18,800, determined as follows:

Cost
Beginning inventory $12,500
Cost-to-retail ratio (for beginning inventory):

$12,500/$15,000 = 0.8333
Purchases $38,500
Freight-in 500
Purchase returns (1,800)
Net markups
Net markdowns
$37,200
Cost-to-retail ratio (for purchases):

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

Less: Sales
Ending inventory at retail
Ending inventory at LIFO cost:
$15,000 ´ 0.8333 = $12,500 (Beginning inventory layer, at original co
$10,500 ´ 0.60 = 6,300
$18,800
POINTS: 1
120. Given the following information for Miller, Inc.:
Cost Retail
Markdown cancellations $950
Markup cancellations 3,500
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
Chapter 8
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.
ANSWER: a FIFO inventory = $7,395, determined as follows:
Cost Retail
Purchases $35,400 $46,787
Purchase returns (1,030) (1,520)
Purchase discounts (756)
Freight-in 4,000
Net markups 11,000
$37,614 $54,617
Cost-to-retail ratio:
$37,614/$54,617 = 0.69 (rounded)

Goods available for sale $44,774 $68,437
Employee discounts (1,020)
Ending inventory at FIFO cost (0.69 ´ $ 7,395
$10,717)
b. Lower of average cost or market inventory:

Cost $44,774/($68,437 + $1,650) = 0.64 (rounded)
ratio:
0.64 ´ $10,717 = $6,859
POINTS: 1

Chapter 8
121. Guinea, Inc. adopted the dollar-value LIFO retail inventory method on January 1, 2016, when the price index was
100. The following information was taken from company records on December 31, 2016, when the price index was
110.
Cost Retail
Sales $190,000
Additional markups 18,000
Markup cancellations 6,000
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, 2016, inventory. (Round off calculations to the nearest dollar.)
ANSWER: Cost of inventory = $20,560, determined as follows:
Cost percentages:
Beginning inventory: $14,400/$20,000 = 0.72

($158,000 − $4,000)/($199,000 − $5,000 + $18,000 −
Purchases:
$6,000 − $8,000 + $2,000) = 0.77
$20,000 + $199,000 − $5,000 − $190,000 + $18,000 −

Ending inventory at retail:
$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
POINTS: 1

Chapter 8
122. Dahlia adopted the dollar-value LIFO retail inventory method on January 1, 2016. The following information for 2016
was taken from the company's records:
Cost Retail
Sales $173,350
Net markups 2,000
Inventory, January 1, 2016 $ 24,300 30,000
Purchases 147,740 180,000
Net markdowns 4,000
The price index on January 1, 2016, was 100. On December 31, 2016, it was 105.
Required:
Compute the inventory value for December 31, 2016.

ANSWER:
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
POINTS: 1

Chapter 8
123. Donahue adopted the dollar-value LIFO retail inventory method on January 1, 2016. The following information for
2016 was taken from the company's records:
Cost Retail
Sales $189,000
Net markups 6,000
Inventory, January 1, 2016 $ 21,000 30,000
Purchases 147,000 200,000
The price index on January 1, 2016, was 100. On December 31, 2016, it was 110. Round cost/retail percentages to
the nearest whole percent if necessary.
Required:
Compute the inventory value for December 31, 2016.

ANSWER: 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
POINTS: 1
124. A list of errors is shown below:
Year-End
Cost of Retained Working
Errors Goods Sold Earnings Capital
Ending inventory is overstated ________ ________ ________

Chapter 8
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.
ANSWER:
Year-End
Cost of Retained Working
Goods Sold Earnings Capital
Ending inventory is U O O
overstated
Beginning inventory is O N* N
overstated
Ending inventory is O U U
understated
Beginning inventory is U N* N
understated
Purchases is overstated O U U
(recorded twice)
Purchases is understated U O O
(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.
POINTS: 1

Chapter 8
125. 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.
ANSWER: 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
POINTS: 1

Chapter 8
126. 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.
ANSWER: Effect on
Cost of Goods Sold Accounts Payable
a. − 0
b. − −
c. 0 −
POINTS: 1

Chapter 8
127. Walker Towel & Linen Shop uses the lower of cost or NRV method and has a periodic inventory system. Additional
information follows:
Inventory
Date Cost Market
January 1, 2019 $4,600 $4,000
December 31, 2019 6,000 5,000
December 31, 2020 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, 2020?
b. If the allowance method is in use, what would be the debit to Income Summary on
December 31, 2019?
ANSWER: a. $8,200
b. $4,600
POINTS: 1
128. The Slayton Company uses a periodic inventory system and values its inventory at lower of cost or NRV. Its
accounting records indicate the following information relating to inventory:
Inventory
Date Cost Market
January 1, 2019 $ 75,000 $ 75,000
December 31, 2019 110,000 80,000
December 31, 2020 140,000 128,000
Prepare the required journal entries at December 31, 2019, and December 31, 2020, to record the inventory at lower
of cost or market using the following methods:
a. Direct method
b. Allowance method
ANSWER:
a. Direct Method:
12/31/19:
Inventory 75,000
Inventory 80,000
Chapter 8
12/31/20:
Inventory 80,000
Inventory 128,000
b. Allowance Method:
12/31/19:
Inventory 75,000
Inventory 110,000
Loss Due to Write-Down of Inventory 30,000

NRV
12/31/20:
Allowance to Reduce Inventory to NRV 30,000
Inventory 110,000
Inventory 140,000
Loss Due to Write-Down of Inventory 12,000

NRV
POINTS: 1
129. Information about the ending inventories of Charleston Chair Company, who applies the LIFO method, is shown
below:
Current Normal
Replacement Selling Cost of Profit
Year Cost Cost Price Completion Margin

Chapter 8
2016 $10,000 $11,500 $12,000 $1,000 $1,100

2017 15,000 13,000 14,000 1,500 1,250
2018 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 Charleston Chair Company maintains a periodic inventory system, prepare
journal entries for 2018 to record the reduction of the inventory to market value using:
(1) the direct method
(2) the allowance method
ANSWER: a. 2016: $10,000

Cost = $10,000
Market = $11,000 (upper constraint = $12,000 - $1,000 = $11,000)
(lower constraint = $11,000 - $1,100 = $9,900)
2017: $12,500
Cost = $15,000
2018: $18,900
Cost = $20,000
b. (1) Direct method:

Inventory 12,500
Inventory 18,900
(2) Allowance method:

Inventory 15,000
Inventory 20,000
Allowance to Reduce 1,400

Inventory to Market
Loss Recovery Due
to Market
Valuation ($2,500 - 1,400
$1,100)
POINTS: 1
LEARNING OBJECTIVES: ACCT.WHAL - 16.14.1 LO 14.1

Chapter 8
ACCT.WHAL. - 16.8.1 - LO 8.1

130. Describe the lower of cost or market rule.

ANSWER: 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.
POINTS: 1
NATIONAL STANDARDS: United States - BUSPROG: Communications
131. Replacement costs are measured based upon GAAP’s requirement of an upper and a lower constraint on the market
value when applying the LIFO or retail inventory methods. What are the upper and lower constraints?
ANSWER: 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.
POINTS: 1
132. Under special circumstances GAAP allows a company to report its inventory above cost. How must this exception
be justified?
ANSWER: * an inability to determine appropriate costs
* immediate marketability of the inventory at a quoted market price
* the interchangeability of the units of inventory
POINTS: 1

Chapter 8
133. In what situations would the gross profit method be used to estimate ending inventory?
ANSWER: * 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.
POINTS: 1
134. Define the following:

Markup
Additional Markup
Net Additional Markup
Markdown Cancellation
ANSWER: 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.
POINTS: 1
135. What are the four alternative valuations used in the application of the Retail Inventory Method?
ANSWER: FIFO
LIFO
Average Cost
Lower of Average Cost or Market
POINTS: 1

Chapter 8
136. What is dollar value LIFO retail method?

ANSWER: Companies can combine the retail LIFO with the dollar value LIFO in order to smooth
out fluctuations in prices.
POINTS: 1
DIFFICULTY: Easy
137. 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?
ANSWER: 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.
POINTS: 1
138. 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?
ANSWER: Net income would be over stated because cost of goods sold was under stated.
POINTS: 1

Chapter 8
139. Lower of cost or NRV rule can be applied to periodic inventory. What are the two methods? Which one requires an
entry to the loss due to write-down of inventory account?
ANSWER: Direct method
Allowance method
The Allowance method requires the use of the loss due to write-down of inventory
account.
POINTS: 1

Chapter 8
140. 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:
State the accounting convention that supports the lower of cost or market rule, and in this
a.
context, discuss the purpose of the rule.
b. Discuss the criticisms of the lower of cost or market rule in the valuation of inventories.
The accounting convention that supports the lower of cost or market rule is
conservatism. Conservatism can be described as "anticipate no profit and provide
for all possible losses." Within this context, it would be appropriate to record the
inventory at "market," which is defined as replacement cost (under the LIFO or
retail inventory method) or as net realizable value (under the FIFO, average cost,
a.
or specific identification method) 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
ANSWER: cash flows.
b. The criticisms of the lower of cost or market rule are as follows:
The rule is applied in only one direction. Inventory holding losses are
(1)
recognized, but inventory holding gains are ignored.
The revenue recognition principle is violated because the inventory holding

(2) loss is recognized before the earning process is complete and before an
exchange transaction has taken place.
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
(3)
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.
POINTS: 1

Chapter 8
141. Describe the differences in the application of lower of the cost or market consideration between U.S. GAAP and
IFRS.
ANSWER:
IFRS, like U.S. GAAP, require the use of the lower of cost or market rule to value
inventory and apply the LCM method the same way that U.S. GAAP does when a
company uses FIFO, average cost, or specific identification by simply comparing net
realizable value to historical cost.. Unlike U.S. GAAP when the LCM method is being
applied under the LIFO or retail inventory method, IFRS does not consider ceiling and
floor limits, nor is replacement cost considered as a possible market estimate to be
compared 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.
POINTS: 1
142. Under what circumstances does GAAP allow inventory to be valued at market prices greater than cost, thereby
allowing companies to recognize profits before items are sold? Briefly explain the justification for this standard.
ANSWER:
GAAP allows a company to report its inventory above cost under the following
circumstances:
an inability to determine appropriate costs

immediate marketability of the inventory at a quoted market price
the interchangeability of the units of inventory
These conditions generally only apply to commodities, like precious metals, agricultural
commodities, oil and gas, and mining commodities. For example, precious metals having
a determinable market value with no major cost of marketing may be reported above
cost. When goods are reported above cost, this fact should be fully disclosed. When it
is highly certain that the inventory can be sold at the market price, income is earned by
production (or through inventory holding gains) rather than by sale.
POINTS: 1

Chapter 8
143. 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
ANSWER: 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 disadvantages 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.
POINTS: 1

Chapter 8
144. The retail inventory method is used extensively in the retail industry.
Required:
Discuss the assumptions and benefits of the retail inventory method.

ANSWER: 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.
POINTS: 1
LOCAL STANDARDS: United States - OH - Default City - AICPA: BB-Industry

Chapter 8
145. Why would a company elect to use dollar-value LIFO retail method for valuing inventory?
ANSWER:
Companies typically choose LIFO (versus FIFO or average cost methods) because, in
a period of rising prices, LIFO results in lower taxable income and therefore lower
income tax liabilities. Companies that have few inventory items may elect to use
traditional LIFO. However, record keeping requirements are costly if the company has
a large number of inventory items. Furthermore, if the types of inventory items are
constantly changing, adding new items and eliminating old items, the tax benefits of
LIFO reverse themselves after old items are removed from inventory which erodes
older layers of LIFO-based inventories.
The companies that maintain a large number of products and expect significant
changes in their product mix in future, frequently use dollar-value LIFO technique.
Older LIFO layers of inventory, representing past tax savings, are based on price-level
indices. These layers are maintained as long as the overall quantity levels of inventory
are maintained regardless of the quantities of individual inventory items
POINTS: 1

Chapter 8
146. 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 2016.
Required:
Explain the effects of the error on the income statements and balance sheets for 2016 and 2017.
ANSWER:
Overstating ending inventory in 2016 will understate cost of goods sold and overstate
both gross profit and income on the 2016 income statement. On the 2016 balance
sheet, both inventory and retained earnings will be overstated.
On the 2017 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 2017 balance sheet, both inventory and retained earnings will be correct. The
errors will counterbalance themselves by the end of 2017.
POINTS: 1

Chapter 8
147. The following information for five products (A-E) was taken from the inventory records of the Walker Company
who use the FIFO method:
Product A B C D E
# of Units 175 200 250 200 300
Unit cost $5.50 $10.00 $5.10 $5.10 $5.00
Replacement cost per unit $6.00 $9.00 $4.60 $4.50 $4.50
Net realizable value (NRV) per unit $5.20 $12.50 $7.00 $7.00 $7.00
NRV–Normal profit per unit $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
the inventory as a whole
b.
ANSWER: a. ($5.20 × 175) + ($10.00 × 200) + ($5.10 × 250) +

($5.10 × 200) + ($5.00 × 300) = $5,220
*Market value under FIFO is identified as NRV*
b. Cost = $962.50 + $2,000 + $1,275 + $1,020 + $1,500 = $6,757.50

Market = $910 + $2,500 + $1,750 + $1,400 + $2,100 = $8,660.00
Inventory at lower of cost or market: $6,757.50
POINTS: 1
LEARNING OBJECTIVES: ACCT.WHAL - 16.14.1 LO 14.1
NATIONAL STANDARDS: United States - BUSPORG - Analytic
KEYWORDS: Bloom’s: Analyzing

Chapter 8
148. Given the following information for Gator Company who uses the FIFO method:
Net NRV Minus

Item 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.
ANSWER: a. 1. $17.70 4. $ 3.12

2. $ 8.28 5. $12.00
3. $64.80 6. $45.60
b. Net
Realizable
Item Quantity Cost Value
1 1 $ 17.70 $24.60
2 1 10.80 8.28
3 1 72.00 64.80
4 1 4.80 3.12
5 1 12.00 12.30
6 1 48.00 45.60
Total $165.30 $ 158.70
Inventory at lower of cost or market: $158.70
POINTS: 1
LEARNING OBJECTIVES: ACCT.WHAL. - 16.8.1 - LO 8.1

Chapter 8
149. Given the following information for the Lawrence Company who uses the FIFO method:
NRV Minus Net

Normal Realizable Replacement
Item 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.
ANSWER: a. $3.40 d. $ 6.00

b. $32.40 e. $22.80
c. $ 1.56 f. $12.30
POINTS: 1
LEARNING OBJECTIVES: ACCT.WHAL. - 16.8.1 - LO 8.1

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Intermediate Accounting Reporting and

Analysis 3rd Edition Wahlen Test Bank

Intermediate Accounting Reporting and Analysis 3rd

Intermediate Accounting Reporting and Analysis 1st

Intermediate Accounting Reporting and Analysis 2nd

Intermediate Accounting Reporting and Analysis 2nd

Intermediate Accounting Reporting And Analysis 2017

Financial Reporting Financial Statement Analysis and

Financial Reporting Financial Statement Analysis and

Financial Reporting Financial Statement Analysis and

Copyright Cengage Learning. Powered by Cognero. Page 1

Copyright Cengage Learning. Powered by Cognero. Page 2

Copyright Cengage Learning. Powered by Cognero. Page 3

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Allowance to Reduce Inventory to NRV x,xxx

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Loss Due to Write-Down of Inventory x,xxx

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Estimated transportation costs for delivery $3.90

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Transportation costs $ 4.00

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26. Given the following information for the Raquel Company:

Date Cost Market

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27. Given the following information for the Tea Company:

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Item Per Unit

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Transportation costs $ 5.00

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39. Generally, valuing inventory above cost

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January 1, 2016, inventory balance $12,500

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44. Consider the following:

Code: A = Gross profit to net sales ratio

Which equation is correct?

45. Relevance of the gross profit margin depends upon

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Sales (1/1/16 through 6/3/16) $260,000

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48. Given the following information for Bonnie Bunny Company:

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Inventory (1/1/16) $ 330,000

50. The gross profit method is not used to

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Sales (1/1/16 through 7/3/16) $240,000

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Inventory (1/1/16) $ 130,000

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FIFO Average Cost LIFO

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62. Barbara Co. presents the following information:

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