Kaplan University AC 300 Unit 3 Quiz – 100% Correct Answers

 1.

Question :

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?

Student Answer:

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.

 2.

Question :

The gross profit method is most commonly used to

Student Answer:

replace the year-end physical inventory

check the cost generated by a perpetual inventory system

determine the cost of inventory destroyed by fire

develop a sales budget

 3.

Question :

Which application of the lower of cost or market rule will generally result in the highest valuation for the ending inventory?

Student Answer:

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

 4.

Question :

Which one of the following statements is true with regard to the lower of cost or market rule?

Student Answer:

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.

 5.

Question :

The Martha Company normally sells its inventory at a 20% profit margin on sales. In 2010, the net realizable value of inventory purchased for $50,000 declined to $44,000. There are no costs to complete and dispose of this inventory. What is the floor constraint on the valuation of this inventory using the lower of cost or market rule?

Student Answer:

$35,200

$40,000

$44,000

$50,000

 6.

Question :

The major criticism of the lower of cost or market rule for valuation of inventory is that

Student Answer:

holding losses are recognized, but holding gains are not

holding gains are recognized, but holding losses are not

the total difference between selling price and cost is usually recognized in the period of the sale

the conservatism principle is violated because of the use of the floor constraint

 7.

Question :

If purchases are recorded correctly but ending physical inventory is understated, which one of the following situations occurs for the current year?

Student Answer:

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.

 8.

Question :

Which one of the following statements regarding the gross profit method is not true?

Student Answer:

The gross profit method is a complicated method to use in practice.

The gross profit method is often used to estimate the year-end inventory for comparison to actual on-hand inventory.

The gross profit method is an acceptable method to estimate the cost of inventory destroyed by a casualty.

The gross profit method results in a less accurate inventory valuation than the retail inventory method.

 9.

Question :

The Jenny Company uses a periodic inventory accounting system and values its inventory by using the lower of cost or market rule. The allowance method is used in applying the lower of cost or market rule. The company adjusts and closes its books annually on December 31. Below are the cost and market values of the company's year-end inventories for a three-year period:



Which of the following journal entries would be correct as of December 31, 2011, to apply the lower of cost or market rule to the valuation of inventory?

Student Answer:

Dr. Inventory 46,000
Cr. Income Summary 46,000

Dr. Loss Due to Market Valuation 10,000
Cr. Allowance to Reduce Inventory to Market 10,000

Dr. Cost of Goods Sold 10,000
Cr. Inventory 10,000

Dr. Cost of Goods Sold 10,000
Cr. Allowance to Reduce Inventory to Market 10,000

 10.

Question :

When comparing the lower of cost to market

Student Answer:

the appropriate market value is determined before comparing it to the cost

the purpose of the ceiling is to ensure that the write-down is sufficient to cover all expected gains

the purpose of the floor is to prevent an excessive gain from being recognized in the future

the process is consistent with the principle of conservatism because the goal is to limit excessive swings in gross margin