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Exam 17: Merchandise Inventory

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Question 1

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The modifying convention of conservatism requires that inventory be presented on the balance sheet at

A) cost.
B) market value.
C) either cost or market value, whichever is lower.
D) average cost during the period.

E) B) and D)
F) A) and B)

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Question 2

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What is inventory shrink? How may inventory shrink come about?

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Shrink is the difference between the recorded amount of inventory in the financial records and the amount determined in a physical inventory determined during a count. Shrink may be due to theft, loss, or improper record keeping.

Question 3

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The merchandise available for sale cost a company $90,000 and was marked to sell at a retail price of $125,000. Sales during the period totaled $80,000. If the retail method is used, the estimated cost of the ending inventory is

Many retail stores take a periodic inventory at retail values, using the sales price marked on the merchandise.

The fundamental assumption of the gross profit method of estimating inventory is that the rate of gross profit on sales is about the same from period to period.

For internal control, unit figures used to compute the inventory should be verified through spot checks.

The following information concerns several of the inventory items at DC's. $\begin{array} { | c | c | c | c | } \hline \text { Description } & \text { Quantity } & \text { Unit Cost } & \text { Market Value } \\\hline \text { Department A: } & & & \\\hline \text { Model DC 225 } & 40 & \$ 16.90 & \$ 17.50 \\\hline \text { Model DC 364 } & 65 & 28.75 & 25.00 \\\hline \text { Model DC 513 } & 50 & 28.00 & 26.50 \\\hline \text { Department B: } & & & \\\hline \text { Model AR 137 } & 13 & 59.00 & 60.00 \\\hline \text { Model AR 226 } & 25 & 97.00 & 94.75 \\\hline \text { Model AR 196 } & 14 & 125.00 & 122.50 \\\hline\end{array}$ Determine the amount of inventory to be reported on the financial statements using the lower of cost or market method of valuation under each of the following options. 1. Lower of cost or market for each item separately 2. Lower of total cost or total market 3. Lower of total cost or total market by department

Duncan Industries' inventory of coats (Model XL) during 2013 is given below. $\begin{array} { | l | c | c | } \hline & \text { \# Units } & \text { Unit Cost } \\\hline \text { Beginning Inventory, January 1, 2013 } & 42 & 75 \\\hline \text { Purchases: } & & \\\hline \text { January 18 } & 20 & 78 \\\hline \text { January 31 } & 25 & 80 \\\hline \text { February 20 } & 30 & 75 \\\hline \text { March 1 } & 10 & 70 \\\hline \text { Ending Inventory, December 31, 2013 } & 4 & \\\hline\end{array}$ What is the cost of the ending inventory and the cost of goods sold? 1. Assume Duncan Industries utilizes the FIFO method 2. Assume Duncan Industries utilizes the LIFO method 3. Assume Duncan Industries utilizes the average cost method

The difference between the cost and the initial retail price of merchandise is

The November 1^st inventory of the Ray Adams Company had a cost of $29,750. Its retail value was $48,000. During the month of November, purchases in the amount of $41,734 (including freight in of $234) were made and priced at retail for $79,650. Sales for the month of November amounted to $88,000. What is the November cost of goods sold and the ending inventory at cost and at retail?

The _________________________ account is the one account that appears on both the balance sheet and the income statement.

The ____________________ method of estimating ending inventory involves estimating the cost of goods sold by applying a company's cost/sales ratio to its sales for the current period.

When the replacement cost of an item is below its original purchase cost, it is necessary to value the inventory at market price in order to reflect the lower current value in the firm's financial records.

Which of the following is NOT a way to apply the lower of cost or market rule?

The most conservative method of applying the lower of cost or market rule is to use the lower of total cost or total market by groups.

Explain the following terms-markon, markup, and markdown.

Alyse Designer Handbags had the following inventory figures for its Nicole Model during 2013 as shown below. $\begin{array} { | l | c | c | } \hline & \text { \# Units } & \text { Unit Cost } \\\hline \text { Beginning Inventory, January 1, 2013 } & 36 & 15 \\\hline \text { Purchases: } & & \\\hline \text { January 18 } & 20 & 16 \\\hline \text { March 3 } & 25 & 16 \\\hline \text { June 30 } & 30 & 14 \\\hline \text { October 18 } & 36 & 15 \\\hline \text { Ending Inventory, December 31, 2013 } & 15 & \\\hline\end{array}$ What is the cost of the ending inventory and the cost of goods sold? 1. Assume the company utilizes the FIFO method 2. Assume the company utilizes the LIFO method 3. Assume the company utilizes the average cost method

Following the consistency principle, once a firm adopts a method of inventory valuation, it should use that method consistently from one period to the next.

Gross profit ratio is determined by dividing Net Sales by Gross Profit.

The steps and proper order for estimating EI cost using the gross profit method are as follows: