Inventory Estimation

Question 1

Procedures for approximating the value of inventory:

Answer 1

Gross Profit Method
Retail Inventory Method

Question 2

Based on the assumption that the rate of gross profit remains approximately the same from period to period and therefore the ratio of cost of goods sold to net sales is relatively constant from period to period.

Answer 2

Gross Profit Method

Question 3

The COGS is computed in Gross Profit Method as follows:

Answer 3

-Net sales multiplied by cost ratio
(if gross profit rate is based on sales)

-Net sales divided by sales ration
(if gross profit is based on cost)

Question 4

In Gross Profit Method, sales allowance and sales discount are…

Answer 4

IGNORED
(not deducted from sales)

Question 5

This method is often used in the retail industry for measuring inventory or a large number of rapidly changing items with similar margin for which it is impracticable to use other costing method.

Answer 5

Retail Inventory Method

Question 6

Accounting treatment:

• Purchase discounts

Answer 6

Deducted from purchases at cost.

Question 7

Accounting treatment:

• Purchase returns

Answer 7

Deducted from purchases at cost and at reail

Question 8

Accounting treatment:

• Purchase allowances

Answer 8

Deducted from purchases at cost.

Question 9

Accounting treatment:

• Sales discount

Answer 9

Ignored

Question 10

Accounting treatment:

• Sales allowances

Answer 10

Ignored

Question 11

Accounting treatment:

• Sales return

Answer 11

Deducted from sales.

Question 12

Accounting treatment:

• Sales return AND allowances

Answer 12

Deducted from sales.

Question 13

Accounting treatment:

• Freight-in

Answer 13

Added to purchases at cost.

Question 14

Accounting treatment:

• Employee discount

Answer 14

Added to Sales.

Question 15

Accounting treatment:

• Normal losses

Answer 15

Deducted from goods available for sale at retail

Question 16

Accounting treatment:

• Abnormal losses

Answer 16

Deducted from goods available for sale at cost and at retail.

Question 17

Accounting treatment:

• Departmental transfer-in

Answer 17

Added to purchases at cost and at retail.

Question 18

Accounting treatment:

• Departmental transfer-out

Answer 18

Deducted from purchases at cost and at retail.

Question 19

Approaches in the use of Retail Method:

Answer 19

• Conservative/Conventional/LCNRV
• Average Cost Approach
• FIFO Approach

Question 20

This approach is also known as the lower of the average cost or market.

Answer 20

Conservative Approach.

Question 21

The conservatie approach _________ net markup
and _________ net markdown in determining the cost ratio in order to arrive at a conservative cost.

Answer 21

includes; excludes

Question 22

This includes both net markdown and net markdown in determining cost ratio.

Answer 22

Average cost

Question 23

This is based on the assumption that markup and markdown apply to goods purchase during the year and not to beginning inventory.

Answer 23

FIFo Approach