INVENTORIES

Problem 16-50 Multiple choice (PAS 2)

Inventories are defined by all of the following, except
a. Held for sale in the ordinary course of business.
b. In the process of production for such sale
c. In the form of materials or supplies to be consumed in the production process or the rendering of
services
d. Used in the production or supply of goods and services for administrative purposes

2. The cost of inventory is the sum of

a. Costs of purchase and costs of conversion.
b. Direct costs, indirect costs and other costs.
c. Costs of purchase, costs of conversion and other costs incurred in bringing the inventory to the
present location and condition.
d. Costs of conversion and other costs incurred in bringing the inventory to the present location and
condition.

3. The cost of purchase of inventory does not include

a. Purchase price
b. Import duties and irrecoverable taxes
c. Freight and handling costs
d. Trade discounts, rebates and other similar items

4. The costs of conversion of inventories include all, except

a. Costs directly related to the units of production, such as direct labor
b. Systematic allocation of fixed production overhead
c. Systematic allocation of variable production overhead
d. Systematic allocation of administrative overhead

5. Fixed production overheads include all, except

a. Indirect materials and indirect labor
b. Depreciation of factory building
c. Maintenance of factory equipment
d. Cost of factory management and administration

6. The allocation of fixed factory overhead to the cost of conversion is based on

a Normal capacity of the production facilities
b. Actual use of the production facilities
c. Either the normal capacity or actual use of the production facilities
d. Relative sales value

7. How should unallocated fixed overhead costs be treated?

a. Allocated to finished goods and cost of goods sold.
b. Allocated to raw materials, goods in process and finished goods.
c. Recognized as an expense in the period incurred.
d. Allocated to goods in process, finished goods and cost of goods sold.

8. Variable production overheads are allocated to each unit of production on the basis of
a. Normal capacity of the production facilities
b. Actual use of the production facilities
c. Either the normal capacity or the actual use of production facilities, whichever is appropriate
d. Neither the normal capacity nor the actual use of production facilities

9. The inventories of a service provider may simply be described as

a Work in progress
b. Unbilled services
c. Billed services
d. Services inventory

10. The costs of inventory of a service provider include which of the following?
a. Labor and other costs of personnel directly engaged in providing the service.
b. Compensation of supervisor directly engaged in providing the service.
c. Attributable overhead incurred in providing the service.
d. All of these are included.
Problem 16-51 Multiple choice (IFRS)
1. Which of the following should be taken into account when determining the cost of inventory?
a. Storage cost of part-finished goods
b. Abnormal freight in
c. Recoverable purchase tax
d. Interest on inventory loan

2. Which of the following should not be taken into account when determining the cost of inventory?
a. Storage cost of part-finished goods
b. Trade discount
Recoverable purchase tax
d. Import duty on shipping of inventory inward

3. Which of the following costs should be included in inventory valuation?

a. Administrative cost
b. Abnormal material usage
c. Storage cost relating to finished goods
d. Fixed production overhead

4. Which of the following would not be reported as inventory?

a. Land acquired for resale by a real estate firm
b. Shares and bonds held for resale by a brokerage firm
c. Partially completed goods
d. Machinery acquired by a manufacturing entity for use in the production process

5. Which of the following costs of conversion cannot be included in cost of inventory?

a. Cost of direct labor
b. Factory rent and utilities
c. Salaries of sales staff
d. Factory overhead based on normal capacity

6. The cost of inventories does not include

a. Salaries of factory staff
b. Storage cost necessary in the production process before a further production stage
c Abnormal amount of wasted material
d. Irrecoverable purchase tax

7. Costs incurred in bringing the inventories to their present location and condition include
a. Cost of designing products for specific customers
b. Abnormal amount of wasted material, labor and production cost
c. Storage cost not necessary in the production process before a further production stage
d. Distribution cost

8. Inventories encompass all of the following, except

a. Merchandise purchased by a retailer
b Land and other property not held for sale
c. Finished goods produced
d. Materials and supplies awaiting use in the production process

9. A property developer must classify properties that it holds for sale in the ordinary course of
business as
a. Inventory
b. Property, plant and equipment
c. Financial asset
d. Investment property.

10. Consumable stores or supplies to be consumed in the production process are reported as
a. Inventories
b. Property, plant and equipment
c. Investment property
d. Intangible assets

Problem 16-52 Multiple choice (AICPA Adapted)

1. The use of a purchase discount lost account implies that the cost of a purchased inventory is the
a. Invoice price
b. List price
c. Invoice price less the purchase discount taken
d. Invoice price less the purchase discount allowable whether taken or not taken

2. The use of a purchase discount account implies that the cost of a purchased inventory is the
a. Invoice price
b. List price
C. Invoice price less the purchase discount taken
d. Invoice price less the purchase discount allowable whether taken or not taken

3. Theoretically, cash discounts permitted on purchased raw materials should be

a. Added to other income, whether taken or not
b. Added to other income, only if taken
c. Deducted from inventory, whether taken or not
d. Deducted from inventory, only if taken

4. When using the periodic system, which of the following generally would not be separately
accounted for in the computation of cost of goods sold?
a Trade discounts applicable to purchases
b. Cash discounts taken during the period
c. Purchase returns and allowances during the period
d. Cost of transportation in for merchandise purchased during the period

5. Which is not an acceptable basis in measuring inventory?

a. Historical cost
b. Net realizable value
c. Prime cost
d. Fair value less cost of disposal

6. The valuation of inventory on a prime cost basis

a. Would achieve the same results as direct costing
b. Would exclude all overhead from inventory cost
c. Is always achieved when standard costing is adopted
d. Is always achieved when the FIFO is adopted

7. What is considered normal capacity of production facilities

a. The average production over a five-year period
b. Actual production
c. Actual production plus loss of capacity
d. A range that may vary based on business and industries specific factors

8. What is the treatment for abnormal freight in?

a. Charge to expense for the period
b. Charge to finished goods inventory
c. Charge to raw materials inventory
d. Allocate to work in process inventory

9. An entity paid the in-transit insurance premium for consignment goods shipped to a consignee. In addition, the entity
advanced part of the commission that will be due when the consignee sells the goods. What amount should be
included as part of inventory cost?
a. Insurance premium
b. Advanced commission
c. Both insurance premium and advanced commission
d. Neither insurance premium nor advanced commission

10. A consignee paid the freight cost for goods shipped from a consignor. The freight cost is to be deducted from the
consignee's payment to the consignor when the consigned goods are sold. Until the consignee sells the goods, the
freight cost should be included in the consignee's
a. Cost of goods sold
b. Freight out
c. Distribution cost
d. Accounts receivable

Problem 16-53 Multiple choice (IAA)

What is the method of accounting for inventory in which the cost of goods sold is recorded each
time a sale is made?
a. Professional inventory system
b. Periodic inventory system
c. Perpetual inventory system
d. Planned inventory system

2. Which of the following is a characteristic of a perpetual inventory system?

a. Inventory purchases are debited to a purchases account.
b. Inventory records are not kept for every item.
e. Cost of goods sold is recorded with each sale.
d. Cost of goods sold is determined as the amount of purchases less the change in inventory.

3. Which of the following is incorrect about the perpetual inventory method?

a. Purchases are recorded as debit to the inventory account.
b. The entry to record a sale includes a debit to cost of goods sold and a credit to inventory.
c. After a physical inventory count, inventory is credited for any missing inventory.
d. Purchase returns are recorded by debiting accounts payable and crediting purchase returns and
allowances.

4. An entry debiting inventory and crediting cost of goods sold would be made when
a. Merchandise is sold and the periodic inventory method is used.
b. Merchandise is sold and the perpetual inventory method is used.
c. Merchandise is returned and the perpetual inventory method is used.
d. Merchandise is returned and the periodic inventory method is used.

Problem 16-54 Multiple choice (IAA)

1. What is consigned inventory?
a. Goods that are shipped and title transfers to the receiver.
b. Goods that are sold but payment is not required until the goods are sold.
c. Goods that are shipped but title remains with the shipper.
d. Goods that have been segregated for shipment to a customer.

2. Goods on consignment are included in the inventory of

a: The consignor but not the consignee
b. Both the consignor and the consignee
c. The consignee but not the consignor
d. Neither the consignor nor the consignee

3. Freight and other handling charges incurred in the transfer of goods from the consignor to
consignee are
a. Expense on the part of the consignor
b. Expense on the part of the consignee
c. Inventoriable by the consignor
d. Inventoriable by the consignee

4. Valuation of inventory requires the determination of all, except

a. The costs to be included in inventory.
b. The physical goods to be included in inventory.
e. The cost of goods held on consignment.
d. The cost flow assumption.

5. How is a significant amount of consignment inventory reported?

a Reported separately in the consignor's statement of financial position.
b. Combined with other inventory of the consignor.
c. Reported separately by the consignee.
d. Combined with other inventory of the consignee.

Problem 16-55 Multiple choice (IAA)

Which of the following accounts is not reported in inventory?
a. Raw materials
b. Equipment
c. Finished goods
d. Supplies
2. Why is inventory included in the computation of net income?
a. To determine cost of goods sold
b. To determine sales revenue
c., To determine merchandise returns
d. Inventory is not included in the computation of net income

3. When inventory is misstated, the presentation lacks

a. Relevance
b. Faithful representation
c. Comparability
d. All of the choices are correct

4. Which of the following costs should not be included as part of the cost of inventory?
a. Abnormal freight
b. Import duties
c. Conversion costs
d. All of these are included in inventory

5. An entity that purchased inventory for resale to customers

should charge what account for the purchase?
a. Finished goods inventory
b. Work in process inventory
c. Merchandise inventory
d. All of the choices are correct

6. Costs which are inventoriable include all of the following, except

a. Costs that are directly connected with the bringing of goods to the place of business of the
buyer.
b. Costs that are directly connected with the converting of goods to a salable condition.
c. Buying costs of a purchasing department.
d. Selling costs of a sales department.

7. Where should goods in transit recently purchased FOB destination be included in the statement
of financial position?
a. Accounts payable
b. Inventory
c. Equipment
d. Not in the statement of financial position

8. Which of the following should be included in inventory?

a. Goods in transit which were purchased FOB destination.
b. Goods received from another entity for sale on consignment.
c. Goods sold to a customer which are being held for the customer to call for at the customer
convenience.
d. None of these should be included.

9. In a periodic inventory system, the beginning inventory is

a. Net purchases minus cost of goods sold
b. Net purchases minus ending inventory
c. Total goods available for sale minus net purchases
d. Total goods available for sale minus cost of goods sold

10. Which of the following should not be included in the cost of goods in process inventory?
a. Cost of electricity to operate factory equipment
b. Maintenance cost of factory equipment
c. Depreciation on equipment in the sales manager's office
d. Depreciation on factory equipment
Problem 16-56 Multiple choice (IAA)
Which term represents the deduction from the invoice price of purchased goods granted by
suppliers for early payment?
a. Sales discount
b. Purchase discount
c. Trade discount
d. Purchase return and allowance

2. A discount given to a customer for purchasing a large volume of merchandise is typically

referred to as
a. Trade discount
b. Quantity discount
c. Size discount
d. Cash discount

3. Which method may be used to record cash discounts received for paying suppliers promptly?
a. Net method
b. Gross method
c. Average method
d. Net method and gross method

4. When a purchase is made, the purchase is recorded as a credit to accounts payable

gross method
a. As if the discount is to be taken, if using the gross method
b. Without regard for the discount, if using the net method
c. As if the discount is to be taken, if using the net method
d. As if the discount is to be taken, using either the gross or net method

5. When recording accounts payable, a purchase discount is recorded

a. If using the net method
b. If using the gross method, but only if the payment is made during the discount period
c. If using the net method, provided the payment is made during the discount period
d. If using the gross method, but the purchase discount is reduced by any purchase discount lost

6. When determining the cost of an inventory, which of the

following should not be included?
a. Interest on loan obtained to purchase the inventory
b. Commission paid when purchased
c. Labor cost of the inventory when manufactured
d. Depreciation of plant equipment used in manufacturing

7. Which of the following inventories carried by a manufacturer is similar to the merchandise inventory of a
retailer?
a. Raw materials
b. Goods in process
c. Finished goods
d. Supplies

8. Which of the following should be included in inventory?

a. Goods in transit purchased FOB shipping point
b. Goods in transit purchased FOB destination
c. Goods received from another entity on consignment
d. Goods in transit to a customer sold FOB shipping point

9. Which of the following describes the flow of product costs through the inventory accounts of a
manufacturer?
a. Raw materials, goods in process, factory overhead, finished goods
b. Raw materials, goods in process, finished goods
c. Raw materials, direct labor, overhead, finished goods
d. Raw materials, direct labor, factory overhead

10. Entities must allocate the cost of all goods available for sale between
a. The cost of goods on hand at the beginning and the cost of goods acquired during the period.
b. The cost of goods on hand at the end of the period and the cost of goods acquired during the period.
c. The income statement and the statement of financial position.
d. All of the choices are correct.

INVENTORY COST FLOW

Problem 17-29 Multiple choice (AICPA Adapted)
1. Which of the following inventory method measures most closely the current cost of inventory?
a. FIFO
b. Specific identification
c. Weighted average
d. LIFO

2. Which inventory cost flow assumption would consistently result in the highest income in a period
of sustained inflation?
a FIFO
b. LIFO
c. Weighted average
d. Specific identification

3. In a period of falling prices, the use of which inventory cost flow method would typically result in
the highest cost of goods sold?
a. FIFO
b. LIFO
c. Weighted average
d. Specific identification

4. In a period of rising prices, the inventory cost allocation method that tends to result in the lowest
reported net income is
a. LIFO
b. FIFO
c. Moving average
d. Weighted average

5. Which inventory cost flow assumption provides the best measure of earnings, where "best"
means most appropriate for predicting future earnings, when prices have been declining?
a. FIFO
b. Specific identification
c. LIFO
d. Average cost

6. Which method of inventory pricing best approximates specific identification of the actual flow of
costs and units?
a. LIFO
b. FIFO
c. Moving average
d. Weighted average

7. Cost of goods sold is the same under a periodic system as under a perpetual system when an
entity uses
a FIFO
b. LIFO
c. Weighted average
d. Specific identification

8. During periods of rising prices, when the FIFO inventory cost flow method is used, a perpetual
inventory system would
a. Not be permitted.
b. Result in a higher ending inventory than a periodic inventory system.
c. Result in the same ending inventory as a periodic inventory system.
d. Result in a lower ending inventory than a periodic inventory system.

9. The inventory cost was lower using FIFO than LIFO. If there is no beginning inventory, what
direction did the cost of purchases move during the period?
a. Up
b. Down
c. Steady
d. Cannot be determined

10. Assuming no beginning inventory, what can be said about the trend of inventory prices if cost of
goods sold using the FIFO method exceeds cost of goods sold using the average cost method?
a. Prices decreased
b. Prices remained unchanged
c. Prices increased
d. Price trend cannot be determined from the information

Problem 17-30 Multiple choice (IAA)

1. IFRS prohibits which of the following cost flow assumptions?
a LIFO
b. Specific identification
c. Weighted average
d. Any of these cost flow assumptions is allowed

2. What is the inventory pricing procedure in which the oldest costs rarely have an effect on the
ending inventory?
a. FIFO
b. LIFO
c. Specific identification
d. Weighted average

3. In a period of declining prices, the inventory method which tends to give the highest amount of
cost of goods sold is
a. Specific identification
b. Average cost
c. FIFO
d. LIFO

4. In a period of falling prices, which inventory method generally provides the lowest amount of
ending inventory?
a. Weighted average
b. FIFO
c. Moving average
d. Specific identification

5. In a period of falling prices, which inventory method generally provides the lowest amount of net
income?
a. Weighted average
b. Moving average
c. FIFO
d. Specific identification

6. The costing of inventory must be deferred until the end of reporting period under which of the
following method of inventory valuation?
a. Moving average
b. Weighted average
c. LIFO perpetual
d. FIFO perpetual

7. The cost of inventories that are not ordinarily interchangeable and goods or services produced
and segregated for specific projects shall be measured using
a. FIFO
b. Average method
c. LIFO
d. Specific identification

8. Which is the reason why the specific identification method may be considered ideal for assigning
cost to inventory and cost of goods sold?
a. The potential for manipulation of net income is reduced.
b. There is no arbitrary allocation of cost.
c. The cost flow matches the physical flow.
d. It is applicable to all types of inventory.

9. Which of the following is likely to be a circumstance where the specific identification method can
be used?
a. Unit price is low.
b. Inventory turnover is low.
c. Inventory quantities are large.
d. All of the choices are likely circumstances.

10. Which of the following cost flow assumptions is used for inventory when an entity builds
townhouses?
a. FIFO
b. Specific identification
c. Weighted average
d. Any of these cost flow assumptions

LOWER OF COST AND NET REALIZABLE VALUE

Problem 18-19 Multiple choice (IFRS)
1. How should sales staff commission be dealt with when valuing inventory at LCNRV?
a. Added to cost
b. Ignored
e. Deducted in arriving at net realizable value
d. Deducted from cost

2. How should trade discounts be dealt with when valuing inventory at LCNRV?
a. Added to cost
b. Ignored
c. Deducted in arriving at net realizable value
d. Deducted in arriving at cost

3. How should prompt payment discount be dealt with when valuing inventory at LCNRV?
a. Added to cost
b. Ignored
c. Deducted in arriving at net realizable value
d. Deducted from cost

4. How should import duties be dealt with when valuing inventory at LCNRV?
a. Added to cost
b. Ignored
c. Deducted in arriving at net realizable value
d. Deducted from cost

5. Inventory should be measured at

a. Lower of cost and fair value
b. Lower of cost and net realizable value
c. Lower of cost and net selling price
d. All of these are used in measuring inventory

Problem 18-20 Multiple choice (IAA)

1. Net realizable value is
a. Current replacement cost
b. Estimated selling price
c. Estimated selling price less estimated cost to complete
d. Estimated selling price less estimated cost to complete and estimated cost of disposal

2. Inventories are usually written down to net realizable value

a. Item by item
b. By classification
c. By total
d. By segment

3. Which of the following is not an acceptable method of applying the LCNRV?

a. Inventory location
b. Group inventory
c. Individual item
d. Total inventory

4. Which statement is incorrect regarding LCNRV?

a. Net realizable value is the selling price less estimated cost to complete and estimated cost of disposal.
b. In most situations, entities measure inventory on a total inventory basis.
c. One of two methods may be used to record the income effect of valuing inventory at net realizable value.
d. Entities use an allowance account to reduce inventory to net realizable value.
5. Which of the following statements is true regarding inventory writedown and reversal of writedown?
a. Reversal of inventory write down is prohibited.
b. Separate reporting of reversal of inventory write down is required.
c. Entities are required to record write down in a separate loss account.
d. All of the choices are correct.

6. LCNRV of inventory
a Is always either the net realizable value or cost.
b. Should always be equal to net realizable value.
c. May sometimes be less than net realizable value.
d. Should always be equal to estimated selling price less cost to complete.

7. Lower of cost and net realizable value

a. Gives the lowest valuation if applied to the total inventory.
b. Gives the lowest valuation if applied to major group of inventory.
c. Gives the lowest valuation if applied to individual item of inventory.
d. Must be applied to major group.

8. Lower of cost and net realizable value as it applies to inventory is best described as the
a. Reporting of a loss when there is a decrease in the future utility below the original cost.
b. Method of determining cost of goods sold.
c. Assumption to determine inventory flow.
d. Change in inventory value to net realizable value.

9. Which method may be used to record a loss due to a price decline in the value of inventory?
a. Loss method
b. Sales method
c. Cost of goods sold method
d. Loss method and cost of goods sold method

10. When the cost of goods sold method is used to record inventory at net realizable value
a. There is a direct reduction in the selling price.
b. A loss is recorded directly in the inventory account by debiting loss.
c. Only the portion of the loss attributable to inventory sold is recorded.
d. The net realizable value for ending inventory is substituted for cost and the loss is buried in cost of
goods sold.

Problem 18-21 Multiple choice (IAA)

1. The credit balance that arises when a loss on a purchase commitment is recognized should be
a. Presented as a current liability
b. Subtracted from ending inventory
c. Presented as component of other comprehensive income
d. Presented in the income statement

2. If a material amount of inventory has been ordered through a formal purchase contract at the end of
reporting period for future delivery at firm prices
a. This fact must be disclosed.
b. Disclosure is required only if prices have declined since the date of the order.
c. Disclosure is required only if prices have since risen substantially.
d. An appropriation of retained earnings is necessary.

3. When a portion of inventory has been pledged as security for a loan

a. The value of the inventory pledged should be deducted from the debt.
b. An equal amount of retained earnings should be appropriated.
c. The fact should be disclosed but the amount of current assets should not be affected.
d. The cost of the pledged inventory should be transferred from current asset to noncurrent asset.

4. An example of an inventory accounting policy that should be disclosed is

a. Effect of inventory profit caused by inflation.
b. Classification of inventory into raw materials, goods in process and finished goods.
c. Identification of major suppliers.
d. Method used for inventory costing.

Problem 18-22 Multiple choice (IAA)

1. Commodities of broker-traders are measured at
a. Fair value
b. Fair value less cost of disposal
c. Cost
d. Current replacement cost

2. Commodity broker-traders
a. Produce commodities such as rice, corn or precious metals.
b. Hold inventory primarily to sell in the near term and generate a profit from price fluctuation.
c. Measure inventories at the lower of cost and net realizable value.
d. All of the choices are correct regarding broker-traders.

3. Net realizable value is the general rule for valuing which inventory?
a. Commodities held by broker-traders
b. Computer components held for sale
c. Inventories priced on an item by item basis
d. All of these inventories are measured at net realizable value

4. Net realizable value is used to measure which inventory?

a. Agricultural inventory
b. Minerals
c. Commodities held by broker-traders
d. All of these are measured at net realizable value

5. Which of the following financial attributes would not be used to measure inventory?
a. Historical cost
b. Current replacement cost
c. Net realizable value
d. Present value of future cash flows

GROSS PROFIT METHOD

Problem 20-33 Multiple choice (IAA)

1. Which will not require an estimate of inventory?
a. Inventory destroyed by typhoon
b. Proof of the reasonable accuracy of the physical inventory
c. Interim financial statements are prepared
d. Determination of the ending inventory to be reported in the statement of financial position at year-end

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

a. To verify the accuracy of the perpetual inventory record.
b. To verify the accuracy of the physical inventory.
c. To estimate cost of goods sold.
d. To provide an inventory value under FIFO.

3. Which of the following statements is not valid about the gross profit method?
a. It may be used by auditors.
b. It is an acceptable accounting procedure.
c. It may be used to estimate inventory for interim statements.
d. It may be used to estimate inventory for annual statements.

4. The gross margin method of estimating ending inventory may be used for all of the following, except
a. Internal as well as external interim reports
b. Internal as well as external year-end reports
c. Estimate of inventory destroyed by fire or other casualty
d. Rough test of the validity of an inventory cost determined under either periodic or perpetual system.

5. The use of the gross profit method assumes

a. The amount of gross profit is the same as in prior years.
b. Sales and cost of goods sold have not changed.
c. Inventory values have not increased.
d. The relationship between selling price and cost of goods sold is similar to prior years.

6. Which of the following is not a basic assumption of the gross profit method?
a. The beginning inventory plus purchases equal total goods to be accounted for.
b. Goods not sold must be hand.
c. The sales reduced to cost basis when deducted from the sum of beginning inventory and purchases
would result to inventory on hand.
d. The amount of purchases and the amount of sales remain relatively unchanged from the previous period.

7. The gross profit method of estimating inventory would not be useful when
a. A periodic system is in use and inventories are required for interim statements.
b. Inventories have been destroyed or lost by fire, theft or other casualty.
c. There is a significant change in the mix of products being sold.
d. The relationship between gross profit and sales remains stable over time.

8. The gross profit method is not valid when

a. There is substantial increase in the quantity of inventory during the year.
b. There is substantial increase in the cost of inventory during the year.
c. The gross margin percentage changes significantly during the year.
d. All ending inventory is destroyed by fire before it can be counted.

9. The gross profit method is invalid when

a. A portion of inventory is destroyed.
b. There is a substantial increase in inventory during the year.
c. There is no beginning inventory because it is the first year of operation.
d. The gross profit percentage applicable to the goods in ending inventory is different from the percentage
applicable to goods sold during the period.

RETAIL INVENTORY METHOD

Problem 21-19 Multiple choice (AICPA Adapted)

1. A major advantage of the retail inventory method is that it
a. Permits entities which use it to avoid taking an annual physical inventory.
b. Gives a more accurate amount of inventory than other methods.
c. Hides costs from customers and employees.
d. Provides a method for inventory control and facilitates determination of the periodic inventory.

2. When the conventional retail inventory method is used, markdowns are ignored in the computation of the
cost to retail ratio because
a. There may be no markdowns in a given year.
b. This tends to give a better approximation of the lower of cost or net realizable value.
c. Markups are also ignored.
d. This tends to result in the showing of a normal profit margin in a period when no markdown goods have
been sold.

3. To produce an inventory valuation which approximates the lower of cost and net realizable value using
the retail inventory method, the computation of the ratio of cost to retail should
a. Include markups but not markdowns
b. Include markups and markdowns
c. Ignore both markups and markdowns
d. Include markdowns but not markups

4. The retail inventory method would include which of the following in the calculation of the goods available
for sale
at both cost and retail?
a. Freight in
b. Purchase returns
c. Markups
d. Markdowns

5. If the conservative retail inventory method is used, which of the following calculations would include or
exclude net markdowns?
Cost ratio Ending inventory at retail
a. Include Include
b. Include Exclude
c. Exclude Include
d. Exclude Exclude

6. With regard to the retail inventory method, which of the following statements is the most accurate?
a. Generally, accountants ignore net markups and net markdowns in computing the cost-price percentage.
b. Generally, accountants exclude both net markups and net markdowns in computing cost-price
percentage.
c. This method results in a lower ending inventory cost if net markups are included but net markdowns are
excluded in computing the cost-price percentage.
d. It is not adaptable to FIFO costing.

7. The conventional retail method produces an ending inventory that approximates

a. Lower of average cost and net realizable value
b. Lower of FIFO cost and net realizable value
c. Net realizable value
d. Lower of cost and net realizable value
8. Which one of the following would cause a decrease in the cost ratio as used in the retail inventory
method?
a. Higher retail prices
b. Lower net markups
c. More employee discounts granted
d. Higher freight in charges

9. The retail method is based on the assumption that

a. Final inventory and the total of goods available for sale contain the same proportion of high cost and low
cost ratio goods.
b. Ratio of gross margin to sales is approximately the same each period.
C. Ratio of cost to retail changes at a constant rate.
d. Proportions of markup and markdowns to selling price are the same.

10. Which of the following is not a reason the retail inventory method is used widely?
a. As a control measure in determining inventory shortage
b. For insurance information
c. To permit the computation of net income without a physical count of inventory
d. To defer income tax liability

Problem 21-20 Multiple choice (IAA)

1. Which of the following is not required when using the retail inventory method?
a. All inventory items must be categorized according to the retail markup percentage
b. Total cost and retail price of goods purchased
c. Total cost and retail price of goods available for sale
d. Total sales for the period

2. What condition is not necessary when using the retail inventory method?
a. Total cost of goods sold for the period
b. Total cost and retail price of goods purchased
c. Total cost and retail price of goods available for sale
d. Total sales for the period

3. An inventory method which is designed to approximate inventory valuation at the lower of cost and net
realizable value is
a. Average retail method
b. FIFO retail
c. Conventional retail method
d. LIFO retail

4. What is the effect of freight in on the cost-retail ratio when using the conservative retail method?
a. Increases the cost-retail ratio
b. No effect on the cost-retail ratio
c. Depends on the amount of the net markup
d. Decreases the cost-retail ratio

5. What is the effect of net markup on the cost-retail ratio when using the conservative retail method?
a. Increases the cost-retail ratio
b. No effect on the cost-retail ratio
c. Depends on the amount of the net markdown
d. Decreases the cost-retail ratio