Inventory Estimation - Simulation

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

• Verify the accuracy of the perpetual inventory records.

• Verity the accuracy of the physical inventory.

• To estimate cost of goods sold.

• To provide an inventory value of LIFO inventories.

Which of the following is not a basic assumption of the gross profit method?

• The beginning inventory plus the purchases equal total goods to be accounted for.

• Goods not sold must be on hand.

• If the sales, reduced to the cost basis, are deducted from the sum of the opening inventory plus purchases, the result is the amount of inventory on hand.

• The total amount of purchases and the total amount of sales remain relatively unchanged from the comparable previous period.

The gross profit method of inventory valuation is invalid when

• a portion of the inventory is destroyed.

• there is a substantial increase in inventory during the year.

• there is no beginning inventory because it is the first year of operation.

• none of these.

Which statement is not true about the gross profit method of inventory valuation?

• It may be used to estimate inventories for interim statements.

• It may be used to estimate inventories for annual statements.

• It may be used by auditors.

• None of these.

A major advantage of the retail inventory method is that it

• provides reliable results in cases where the distribution of items in the inventory is different from that of items sold during the period.

• hides costs from competitors and customers.

• gives a more accurate statement of inventory costs than other methods.

• provides a method for inventory control and facilitates determination of the periodic inventory for certain types of companies.

An inventory method which is designed to approximate inventory valuation at the lower of cost or net realizable value is

• last-in, first-out.

• first-in, first-out.

• conventional retail method.

• specific identification.

The retail inventory method is based on the assumption that the

• final inventory and the total of goods available for sale contain the same proportion of high-cost and low-cost ratio goods.

• ratio of gross margin to sales is approximately the same each period.

• ratio of cost to retail changes at a constant rate.

• proportions of markups and markdowns to selling price are the same.

Which statement is true about the retail inventory method?

• It may not be used to estimate inventories for interim statements.

• It may not be used to estimate inventories for annual statements.

• It may not be used by auditors.

• None of these.

When the conventional retail inventory method is used, markdowns are commonly ignored in the computation of the cost to retail ratio because

• there may be no markdowns in a given year.

• this tends to give a better approximation of the lower of cost or net realizable value.

• markups are also ignored.

• this tends to result in the showing of a normal profit margin in a period when no markdown goods have been sold.

To produce an inventory valuation which approximates the lower-of-cost-or-net realizable value using the conventional retail inventory method, the computation of the ratio of cost to retail should

• include markups but not markdowns.

• include markups and markdowns

• ignore both markups and markdowns.

• include markdowns but not markups.