Posted: April 11th, 2016

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?

1. Which application of the lower of cost or market rule will generally result in the lowest valuation for the ending inventory?
to each item of the inventory
to each major category of inventory
to the total inventory
all of these applications result in the same valuation for inventory

2. Waring, Inc. uses the lower of cost or market rule in valuing its inventory. One unit has a ceiling constraint of $42.50. The following is other information concerning this unit:

The selling price of this unit must be
$44.70
$45.70
$47.90
$53.40

3. Which one of the following statements is true with regard to the lower of cost or market rule?
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.
The lower of cost or market rule must be applied on an individual item basis for financial accounting purposes.
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.
The lower of cost or market rule is primarily an application of the going concern assumption.

4. Which one of the following statements regarding the gross profit method is true?
The gross profit method is a complicated method to use in practice.
The gross profit method results in a more accurate inventory valuation than the retail inventory method.
The gross profit method is an acceptable method to estimate the cost of inventory destroyed by a casualty.
The gross profit method is often used to calculate the year end inventory for financial accounting purposes.

5. At the beginning of 2010, the Nancy Company had an inventory valued at $34,375 at cost ($50,000 at retail). During the year, Nancy purchased inventory for $50,000 ($70,000 at retail), and made markdowns of $7,500. Nancy s sales in 2010 were $62,500. What is Nancy s estimated ending inventory at FIFO cost using the retail inventory method?
$37,500
$40,000
$39,000
$34,375

6. 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?

Include Include Exclude
Include Exclude Exclude
Exclude Exclude Exclude
Exclude Include Exclude

7. If the net markdowns are excluded from the calculation of the cost to retail ratio in the retail inventory method, the ending inventory s valuation is lower because of which of the following effects on the cost to retail ratio?
The denominator of the ratio will be lower, which results in a higher cost to retail ratio.
The denominator of the ratio will be higher, which results in a lower cost to retail ratio.
The numerator of the ratio will be higher, which results in a higher cost to retail ratio.
The numerator of the ratio will be lower, which results in a lower cost to retail ratio.

8. 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?
FIFO
LIFO
average cost
lower of average cost or market

9. 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?
net markdowns
purchases
beginning inventory
freight in charges

10. If purchases are recorded correctly but ending physical inventory is understated, which one of the following situations occurs for the current year?
Working capital is understated and net income is overstated.
Working capital and net income are understated.
Working capital is overstated and net income is understated.
Working capital and net income are overstated.