The gross profit method can be used in all of the following situations except:

1. When applying the lower-of-cost-or-market rule, market should not be less than:
   
   
   
   

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   • How is the gross profit method used as it relates to inventory valuation?
   • When reporting inventory using the lower of cost or market method market should not be less than?
   • What measures reflects profitability from normal operations?
   • When applying lower of cost or market under the LIFO or retail inventory method market value should not be less than?

   D) net realizable value less a normal profit margin

2. The following information pertains to one item of inventory of the Simon Company:

   Per Unit
   Cost $180
   Replacement cost 150
   Selling price 195
   Disposal costs 5
   Normal profit margin30

   Applying the lower-of-cost-or-market rule, this item should be valued at:
   
   
   
   

   B) $160

   * Market = ($195 - $5) - $30 = $160

3. The gross profit method can be used in all of the following situations except:
   
   
   
   

   B) In preparation of annual financial statements

4. The records of California Marine Products, Inc., revealed the following information related to inventory destroyed in an earthquake:

   Inventory, beginning of period $300,000
   Purchases to date of earthquake 160,000
   Net sales to date of earthquake 450,000
   Gross profit ratio 30%

   The estimated amount of inventory destroyed by the earthquake is:
   
   
   
   

   B) $145,000

   * $300,000 (beginning balance) + $160,000 (purchases) - $315,000 (estimated cost of sales: $450,000 x 0.70)

5. The difference in the calculation of the cost-to-retail percentage applying the conventional retail method and the average cost method is that the average cost method:
   
   
   
   

   C) includes markdowns

   * The conventional retail method includes net markups, but excludes net markdowns. The average cost method includes both net markups and net markdowns.

6. The difference in the calculation of the cost-to-retail percentage applying the LIFO method and the average cost method is that the average cost method:
   
   
   
   

   B) includes beginning inventory

   * In the LIFO method, the cost-to-retail percentage is only compute on the current year's purchases

7. The Toso Company uses the retail inventory method. The following information is available for the year ended December 31, 2009:

   Cost Retail
   Inventory 1/1/09 $390,000 $650,000
   Net purchases for the year 1,402,000 1,835,000
   Net markups 75,000
   Net markdowns 45,000
   Net sales 1,845,000

   Applying the conventional retail inventory method, Toso's inventory at December 31, 2009, is estimated at:
   
   
   
   

   B) $469,000

   Ending inventory at retail: $670,000 [$650,000 (beginning inventory) + $1,835,000 (net purchases) + $75,000 (net markups) - $45,000 (net markdowns) - $1,845,000 (net sales].

   Cost ratio: 70% [$390,000 (beginning inventory) + $1,402,000 (net purchases)] / [$650,000 (beginning inventory) + $1,835,000 (net purchases) + $75,000 (net markups)]. Ending inventory at cost: $70,000 x 70%

8. The Toso company uses the retail inventory method. The following information is available for the year ended December 31, 2009:

   Cost Retail
   Inventory 1/1/09 $ 390,000 $ 650,000
   Net purchases for the year 1,402,000 1,835,000
   Net markups 75,000
   Net markdowns 45,000
   Net sales 1,845,000

   Applying the average cost retail inventory method, Toso's inventory at December 31, 2009, is estimated at:
   
   
   
   

   D) $477,392

   Ending inventory at retail: $670,000 [$650,000 (beginning inventory) + $1,835,000 (net purchases) + $75,000 (net markups) - $45,000 (net markdowns) - $1,845,000 (net sales)].

   Cost ratio: 71.25% [$390,000 (beginning inventory) + $1,402,000 (net purchases)] / [$650,000 (beginning inventory + $1,835,000 (net purchases) + $75,000 (net markups) - $45,000 9net markdowns)]. Ending inventory at cost: $670,000 x 71.25%

9. The Toso company uses the retail inventory method. The following information is available for the year ended December 31, 2009:
   Cost Retail
   Inventory 1/1/09 $ 390,000 $ 650,000
   Net purchases for the year 1,402,000 1,835,000
   Net markups 75,000
   Net markdowns 45,000
   Net sales 1,845,000

   Applying the LIFO retail inventory method, Toso's inventory at December 31, 2009, is estimated at:
   
   
   
   

   B) $405,035

   * Ending inventory at retail: $670,000 [$650,000 (beginning inventory) + $1,835,000 (net purchases) + $75,000 (net markups) - $45,000 (net markdowns) - $1,845,000 (net sales)].

   The current year's layer: $20,000 ($670,000 - $650,000).

   Cost ratio: 75.17% [$1,402,000 (net purchases at cost)] / [$1,835,000 (net purchases at retail) + $75,000 (net markups) - $45,000 (net markdowns)].

   Ending inventory at cost: $390,000 (beginning inventory at cost) + $15,035 ($20,000 x 75.17%)

10. The Toso company uses the retail inventory method. The following information is available for the year ended December 31, 2009:
    Cost Retail
    Inventory 1/1/09 $ 390,000 $ 650,000
    Net purchases for the year 1,402,000 1,835,000
    Net markups 75,000
    Net markdowns 45,000
    Net sales 1,845,000

    Assume that 1/1/09 Toso adopted the dollar-value LIFO retail inventory method and that the retail price index at the end of 2009 is 1.02. Toso's inventory at December 31, 2009, is estimated at:

    B) 395,159

    * Ending inventory at retail: $670,000 [$650,000 (beginning inventory) + $1,835,000 (net purchases) + $75,000 (net markups) - $45,000 (net markdowns) - $1,845,000 (net sales)].

    Ending inventory at retail 1/1/09 retail prices: $656,863 ($670,000 /1.02).

    The current year's layer at 1/1/09 retail prices: $6,863 ($656,863 - $650,000).

    Cost ratio: 75,17% [$1,402,000 (net purchases at cost)] / [$1,835,000 (net purchases at retail) + $75,000 (net markups) - $45,000 (net markdowns)].

    Ending inventory at cost: $390,000 (beginning inventory at cost) + $5,262 ($6,863 x 1.02 x 75.17%).

11. in 2009, the Robinson company switched its inventory method from FIFO to average cost. Inventories at the end of 2008 were reported in the balance sheet at $22 million. if the average cost method has been used, 2008 ending inventory would have been $20 million. The company's tax rate is 40%. The adjustment to 2009 beginning retained earnings would be:
    
    
    
    

    A) a $1.2 million decrease in income

    * Cost of goods sold would have been higher by $2 million, reducing pretax by $2 million. of that, taxes would have been reduced by $0.8 million, leaving a $1.2 million decrease in income.

12. In 2009, Robinson's ending inventory is $23 million using average cost, and would have been $26 million if the company had not switched from the FIFO method. The effect of the change in method on 2009 net income is a:
    
    
    
    

    A) $600,000 decrease

    * The average cost inventory increased by $3 million ($23 million - $20 million.) FIFO inventory would have increase by $4 million ($26 million - $22 million). Thus, cost of sales under average cost is $1 million greater than under FIFO. This reduces income before taxes by $1 million, and net income by $600,000

13. The Jackson Company incorrectly omitted $100,000 of merchandise from its 2009 ending inventory. In addition, a merchandise purchase of $40,000 was incorrectly recorded as a $4,000 debit to the purchases account. As a result of these errors, 2009 before-tax income is:
    
    
    
    

    C) understated by $64,000

    * By itself, the $100,000 omitted inventory would cause a cost-of-sals to be overstated (and income understated) $100,000. By itself, the misrecorded purchase would cause cost-of-sales to be understated (and income overstated) by $36,000. The net effect is to understate income by $64,000

14. To determine if an increase in the dollar value of inventory is due to increased quantities, using dollar-value LIFO retail:
    
    
    
    

    D) Deflate the ending inventory amount to beginning of year prices and compare to the beginning inventory amount

15. Data related to the inventories of Hargrove Medical Supply is presented below:

    Surgical Eq. Surigical Sup. Rehab Eq. Rehab Sup
    Selling price $360 $220$240$65
    Cost 270 190 150 62
    Replacement cost 340 180 135 58
    Disposal cost 30 15 25 10
    Normal gross profit ratio 30%20%30% 20%

    In applying the LCM rule, the inventory of surgical equipment would be valued at:

    D) $330

16. Data related to the inventories of Hargrove Medical Supply is presented below:

    Surgical Eq. Surigical Sup. Rehab Eq. Rehab Sup
    Selling price $360 $220$240$65
    Cost 270 190 150 62
    Replacement cost 340 180 135 58
    Disposal cost 30 15 25 10
    Normal gross profit ratio 30%20%30% 20%

    In applying the LCM rule, the inventory of surgical supplies would be valued at:
    
    
    
    

    C) $180

17. Data related to the inventories of Hargrove Medical Supply is presented below:

    Surgical Eq. Surigical Sup. Rehab Eq. Rehab Sup
    Selling price $360 $220$240$65
    Cost 270 190 150 62
    Replacement cost 340 180 135 58
    Disposal cost 30 15 25 10
    Normal gross profit ratio 30% 20% 30% 20%

    In applying the LCM rule, the inventory of Rehab equipment would be valued at:
    
    
    
    

    D) $143

18. Data related to the inventories of Hargrove Medical Supply is presented below:

    Surgical Eq. Surigical Sup. Rehab Eq. Rehab Sup
    Selling price $360 $220$240$65
    Cost 270 190 150 62
    Replacement cost 340 180 135 58
    Disposal cost 30 15 25 10
    Normal gross profit ratio 30% 20% 30% 20%

    In applying the LCM rule, the inventory of rehab supplies would be valued at:
    
    
    
    

    A) $55

19. Clarabell Inc. uses the conventional retail method to estimate ending inventory. Cost data for the most recent quarter is shows below:

    Cost Retail
    Beginning inventory $112,000 $191,000
    Net purchases 402,000 703,000
    Net markups 43,000
    Net markdowns 21,000
    Net sales 685,000

    The conventional cost-to-retail percentage is:
    
    
    
    

    C) 54.9%

20. Clarabell Inc. uses the conventional retail method to estimate ending inventory. Cost data for the most re
    cent quarter is shows below:

    Cost Retail
    Beginning inventory $112,000 $191,000
    Net purchases 402,000 703,000
    Net markups 43,000
    Net markdowns 21,000
    Net sales 685,000

    To the nearest thousand, estimated ending inventory using the conventional retail method is:
    
    
    
    

    B) $127,000

21. Data below for the year ended December 31, 2009 relates to Real Value Hardware. Real Value started January 1, 2009 and uses the LIFO retail method to estimate ending inventory:

    Cost Retail
    Beginning inventory $66,000 $104,000
    Net purchases 287,100 459,600
    Net markups 21,000
    Net markdowns 40,000
    Net sales 425,000

    Current period cost-to-retail percentage is:
    
    
    
    

    D) 65.2%

22. Data below for the year ended December 31, 2009 relates to Real Value Hardware. Real Value started January 1, 2009 and uses the LIFO retail method to estimate ending inventory:
    Cost Retail
    Beginning inventory $66,000 $104,000
    Net purchases 287,100 459,600
    Net markups 21,000
    Net markdowns 40,000
    Net sales 425,000

    Estimated ending inventory at retail is:
    
    
    
    

    A) 119,600

23. Data below for the year ended December 31, 2009 relates to Real Value Hardware. Real Value started January 1, 2009 and uses the LIFO retail method to estimate ending inventory:

    Cost Retail
    Beginning inventory $66,000 $104,000
    Net purchases 287,100 459,600
    Net markups 21,000
    Net markdowns 40,000
    Net sales 425,000

    To the nearest thousand, estimated ending inventory at cost is:

    A) $76,000

How is the gross profit method used as it relates to inventory valuation?

When reporting inventory using the lower of cost or market method market should not be less than?

What measures reflects profitability from normal operations?

When applying lower of cost or market under the LIFO or retail inventory method market value should not be less than?