Which of the following statements about the retail inventory method is correct?

QuestionAnswer The method of recording inventory that debits cost of goods sold for the write-down of the inventory to market is the: Cost of goods sold method. The primary basis of accounting for inventories is cost. A departure from the cost basis of pricing the inventory is required where there is evidence that when the goods are sold in the ordinary course of business their future utility will be less than their cost. In applying Lower-of-Cost-or-Market, the designated market value is the middle value of replacement cost, net realizable value and net realizable value less a normal profit margin historical cost is abandoned when future utility (revenue-producing ability of the asset drops below its original cost. Market Value = Replacement Cost Value goods at cost or cost to replace which ever is lower Loss should be recorded when loss occurs (not in period of sale). Why use Replacement Cost (RC) for Market? Decline in the RC usually = decline in selling price Why use Replacement Cost (RC) for Market? RC allows a consistent rate of Gross Profit If reduction in RC fails to indicated reduction in utlity then 2 additional valuations limitations are used 2 Additional valuations of limitations are Ceiling - Net realizable value & Floor Net realizable value less a normal profit margin. Ceiling Net realizable value Top possible value. Prevents overstatement of the value of obsolete damaged or shopworn inventories Floor lowest value Deters understatement of inventory and overstatement of the loss in the current period. Cost to retail Ratio Total goods available for sale at cost divided by the total goods available at retail. Dollar-value LIFO retail method Method of estimating the cost of ending inventory by calculating the dollar increase in retail inventory layers with price indexes. Gross profit method A method of estimating the ending inventory LIFO retail method A method of estimating the cost of ending inventory which excludes the beginning inventory in the cost to retail ratio Lower (floor) limit In applying the lower-of- cost of market method the market cannot be valued less than net realizable value less a normal profit margin. Lower of Cost or market (LCM) A basis whereby inventory is stated at the lower of cost or market (current replacement cost). Markdown A decrease below the original retail price. Markup Cancellation A decrease in the selling price of an item that had been previously marked up above the original retail price. A markup cancellation will never reduce the selling price below the original retail price. Net Realizable Value The estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal Original Retail price The price at which the item was originally marked for sale. Purchase commitments Agreements to buy inventory weeks, months, years in advance. Retail inventory method A method used to estimate the cost of the ending inventory by applying a cost to retail ratio to the ending inventory at retail. Upper (ceiling) limit In applying the lower-of-cost-or market method, the market cannot be valued more than net realizable value. Net Realizable Value Selling price - less disposal & Completion cost Net RV - Profit Replacement cost (designated Market) Use of allowance - Multiple periods Leave allowance account on books & merely adjust balance at the Next year-end to agree with the discrepancy between cost & Lower of Cost or market at balance sheet date. Computation of Gross Profit Percentage -- at retail Markup/Retail = % at retail Computation of Gross profit Percentage -- on Cost Markup/cost = % on cost Gross profit on selling price = Percentage markup on cost/100% + Percentage of markup on cost Percentage markup on cost = Gross profit on selling price/100% - Gross profit on Selling Price The direct method of recording inventory at market under the lower of cost or market rule establishes a separate contra asset account and a loss account to record the write-off. False The direct method of recording inventory at market under the lower of cost or market rule establishes a separate contra asset account and a loss account to record the write-off. True In applying the lower of cost or market rule, the floor is defined as: net realizable value less a normal profit margin. In the lower of cost or market rule, net realizable value is referred to as the: Ceiling When the direct method is used adjust cost to “market”, what account is debited? Cost of goods sold Inventory may be recorded at net realizable value if There is a controlled market with a quoted price. Inventory may be recorded at net realizable value if The inventory consist of precious metals or agricultural products Inventory may be recorded at net realizable value if There are no significant costs of disposal he LIFO retail method assumes that markups and markdowns apply to both beginning inventory and goods purchased during the period. False Correct! The LIFO retail method assumes that markups and markdowns apply only to the goods purchased during the period. True The relative sales value method is used throughout the: Petroleum Industry If a material amount of inventory has been ordered through a formal purchase contract at the balance sheet date for future delivery at firm prices, The fact must be disclosed The gross profit method is not acceptable for annual financial reports. However, it can be used for interim periods. True Which of the following is included in the calculation of the cost-to-retail ratio under the conventional retail inventory method? Markups & Markup Cancellations Which one of the following is deducted in computing the cost-to-retail ratio? Abnormal Shortages The conventional retail inventory method includes both net markups and net markdowns to calculate the cost-to-retail ratio. False Does not include net markdowns Which of the following is not permitted under IFRS? LIFO cost flow assumption IFRS permits the use of specific identification where appropriate but does not allow use of the LIFO cost flow assumption. Companies may value inventories at net realizable value if cost is too difficult to determine. True When is the relative sales value method used? When purchasing a group of varying units like basket purchases Medi Corporation, contracted in 2013 to purchase 2,000 lbs of a spice mix at $5.15 per pound, delivery to be made in May of 2014. By December 31, 2013, the price per pound of the spice mixture had risen to $5.65 per pound. In 2013, Medi should recognize No gain or loss The gross profit method of estimating ending inventory is not acceptable for: Annual financial statements The inventory turnover ratio is computed by dividing: COGS by average inventory The LIFO retail method assumes that markups and markdowns apply only to the goods purchased during the period. True Which of the following statements is true regarding IFRS and inventories? With respect to inventories IFRS defines” market” as net realizable value. The percentage markup on cost can be computed by dividing gross profit by 100% Minus gross profit

Which of the following is true regarding the retail inventory method?

What is the retail inventory method?

Is the retail inventory method LIFO or FIFO?

Which of the following is a major advantage of the retail inventory method?