Multiple Choice

1. LCNRV of inventory is always

a. either the net realizable value or cost.
b. equal to net realizable value.
c. the greater of net realizable value or cost.
d. equal to net realizable value less costs to complete.

Ans: A - LCNRV of inventory is always either the net realizable value or its cost., LO: 1, Bloom: K, Difficulty: Easy,
Min: 1, AICPA FC: Measurement, AICPA BC: None, AICPA PC: None, IMA: Reporting

2. Lower-of-cost-or-net realizable value as it applies to inventory is best described as

a. the reporting of a loss when there is a decrease in the future utility below the original
cost.
b. a method of determining cost of goods sold.
c. the reporting of a gain or loss when there is a decrease in the future utility below the
original cost .
d. a change in inventory value to net realizable value.

Ans: A - Lower-of-cost-or-net realizable value as it applies to inventory is reporting of a loss when there is a
decrease in the future utility below the original cost., LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AICPA FC:
Measurement, AICPA BC: None, AICPA PC: None, IMA: Reporting

3. The replacement cost of a FIFO cost inventory item is $75. Net realizable value is $82.50.
The cost of the item is $76.50. The inventory item would be valued at
a. $0.
b. $75.
c. $76.50.
d. $82.50.

Ans: C - Lower-of-Cost-or-NRV is used. Cost is lower than NRV ($76.50 < $82.50), so the inventory is valued at
the lower of the two amounts, $76.50., LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AICPA FC: Measurement,
AICPA BC: None, AICPA PC: None, IMA: Reporting

4. The replacement cost of an inventory item is ₤90. Net realizable value is ₤87.50. The cost of
the item is ₤93. The inventory would be valued at
a. ₤91.50.
b. ₤90.
c. ₤93.
d. ₤87.50.

Ans: D - Net realizable value ($87.50), because it is less than cost., LO: 1, Bloom: AP, Difficulty: Medium, Min: 2,
AICPA FC: Measurement, AICPA BC: None, AICPA PC: None, IMA: Reporting
5. Max Company has chosen to use an allowance account. When the cost of goods sold method
is used with a perpetual inventory system to adjust cost to “market”, what account is used
to record the income effect of valuing inventory at NRV?
a. Inventory
b. Cost of Goods Sold
c. Loss Due to Decline of Inventory to NRV
d. Allowance to Reduce Inventory to NRV

Ans: D - When the cost of goods sold method is used, Cost of Goods Sold is debited and the Allowance to Reduce
Inventory to NRV account is credited., LO: 1, Bloom: AP, Difficulty: Medium, Min: 1, AICPA FC: Reporting, AICPA
BC: None, AICPA PC: None, IMA: Reporting

6. Under International Financial Reporting Standards (IFRS), net realizable value is the
general rule for valuing which of the following types of inventory?
a. Commodities held by broker-traders
b. Computer components held for sale to manufacturers
c. Inventories priced on an item by-item basis, but not those priced on a total-inventory
basis
d. All of the choices are held at NRV under IFRS

Ans: A - Net realizable value is the general rule for inventory of commodities held by broker-traders., LO: 2,
Bloom: AP, Difficulty: Medium, Min: 2, AICPA FC: Measurement, AICPA BC: None, AICPA PC: None, IMA:
Reporting

7. Agricultural produce is
a. harvested from biological assets.
b. valued at the time of harvest at its cost to produce.
c. valued at each reporting period at its fair value less costs to sell.
d. All of the choices are correct regarding agricultural produce.

Ans: A - Agricultural produce is harvested from biological assets., LO: 1, Bloom: C, Difficulty: Easy, Min: 2, AICPA
FC: Reporting, AICPA BC: None, AICPA PC: None, IMA: Reporting

8. Colicchio Corporation acquired two inventory items at a lump-sum cost of €60,000. The
acquisition included 3,000 units of knife X001, and 3,000 units of knife X002. X001 normally
sells for €20 per unit, and X002 for €10 per unit. If Colicchio sells 1,000 units of X002, what
amount of gross profit should it recognize? Round percentages to 3 decimal places.
a. €1,000
b. €3,333
c. €6,667
d. €10,000

Ans: B - The sales value of X001 is (3,000 × €20 each) $60,000 and the X002 units are (3,000 × €10 each)
€30,000 totaling €90,000. The cost allocated to X002 based on relative sales values is (€30,000 ÷ €90,000)
33.333% of the €60,000 or €20,000. The cost per unit of X002 is (€20,000 ÷ 3,000) €6.667 making 1,000 units
worth €6,667. Revenues of €10,000 less cost of €6,667 results in a gross profit of €3,333., LO: 2, Bloom: AP,
Difficulty: Medium, Min: 2, AICPA FC: Reporting, AICPA BC: None, AICPA PC: None, IMA: Reporting

9. High Country Corporation acquired two inventory items at a lump-sum cost of $80,000. The
acquisition included 6,000 units of product A, and 14,000 units of product B. Product A

2
 normally sells for $12 per unit, and product B for $4 per unit. If High Country sells 2,000
units of A, what amount of gross profit should it recognize?
a. $750
b. $2,250
c. $9,000
d. $4,750

Ans: C - The sales value of A is (6,000 units × $12 each) $72,000 and the B is (14,000 units × $4 each) $56,000
totaling $128,000. The cost allocated to A based on relative sales values is ($72,000 ÷ $128,000) 56.25% of the
$80,000 or $45,000. The cost per unit of A is ($45,000 ÷ 6,000) $7.50 resulting in a cost for 2,000 units of
$15,000. Revenues of $24,000 less $15,000 results in a gross profit of $9,000., LO: 2, Bloom: AP, Difficulty:
Medium, Min: 2, AICPA FC: Reporting, AICPA BC: None, AICPA PC: None, IMA: Reporting

10. An estimated loss on purchase commitments is reported

a. as a valuation account.
b. as an item similar to discontinued operations.
c. under Other Expenses and Losses.
d. as a deduction from purchases.

Ans: C - An estimated loss on purchase commitments is reported under Other Expenses and Losses., LO: 2,
Bloom: C, Difficulty: Easy, Min: 2, AICPA FC: Reporting, AICPA BC: None, AICPA PC: None, IMA: Reporting

11. The percentage markup on cost can be computed by dividing gross profit by 100%
a. plus gross profit.
b. minus gross profit.
c. plus markup on cost.
d. minus markup on cost.

Ans: B - Dividing gross profit by 100% minus gross profit yields the percentage markup on cost., LO: 3, Bloom:
AP, Difficulty: Medium, Min: 1, AICPA FC: Reporting, AICPA BC: None, AICPA PC: None, IMA: Reporting

12. The gross profit method of inventory valuation is invalid when

a. a portion of the 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. None of these are correct.

Ans: D - The gross profit method can be used in all of these cases., LO: 3, Bloom: C, Difficulty: Easy, Min: 2, AICPA
FC: Reporting, AICPA BC: None, AICPA PC: None, IMA: Reporting

13. Viewpoint Company’s October 31 inventory was destroyed by fire. The company’s
beginning inventory was ¥500,000, and purchases for January through October were
¥1,200,000. Sales for the same period were ¥1,800,000. The company’s normal gross
profit percentage is 30% of sales. Using the gross profit method, the October 31
inventory is estimated to be
a. ¥40,000.
b. ¥540,000.
c. ¥300,000.
d. ¥440,000.

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 Ans: D - ($500,000 + $1,200,000) – [$1,800,000 – ($1,800,000 × .30)] = $440,000., LO: 3, Bloom: AP, Difficulty:
Medium, Min: 2, AICPA FC: Reporting, AICPA BC: None, AICPA PC: None, IMA: Reporting

14. Which of the following is included in the calculation of the cost-to-retail ratio under the
conventional retail inventory method?
a. Markdowns only
b. Markdowns and markdown cancellations
c. Markups only
d. Markups and markup cancellations

Ans: D - The conventional retail inventory method does not include markdowns or markdown cancellations in
the calculation of the cost-to-retail ratio., LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AICPA FC: Reporting, AICPA BC:
None, AICPA PC: None, IMA: Reporting

15. Which statement is true about the retail inventory method?

a. It may not be used to estimate inventories for interim statements.
b. It may not be used to estimate inventories for annual statements.
c. It may not be used by auditors.
d. None of these are correct.

Ans: D - None of these statements is correct., LO: 4, Bloom: C, Difficulty: Easy, Min: 2, AICPA FC: Reporting, AICPA
BC: None, AICPA PC: None, IMA: Reporting

4
16. Which one of the following is deducted in computing the cost-to-retail ratio using the cost
retail inventory method?
a. Abnormal shortages
b. Sales returns
c. Normal shortages
d. Employee discounts

Ans: A - Abnormal shortages are the only option deducted in computing the cost-to-retail ratio using the cost
retail inventory method., LO: 4, Bloom: AP, Difficulty: Medium, Min: 1, AICPA FC: Measurement, AICPA BC: None,
AICPA PC: None, IMA: Reporting

17. Under the conventional retail inventory method, the cost-to-retail ratio includes the retail
price of goods available and
a. markups only.
b. markups and markdowns.
c. net markups only.
d. ₨net markdowns only.

Ans: C - The cost-to-retail ratio includes net markups under the conventional retail method., LO: 4, Bloom: AP,
Difficulty: Medium, Min: 1, AICPA FC: Measurement, AICPA BC: None, AICPA PC: None, IMA: Reporting

18. The following data concerning the conventional retail inventory method are taken from the
financial records of Quarry Company.
Cost Retail
Beginning Inventory A$ 98,000 A$140,000
Purchases 448,000 640,000
Freight-in 12,000 0
Net markups 0 40,000
Net markdowns 0 28,000
Sales 0 672,000

If the amounts given are verified and a count of the ending inventory reveals that
merchandise actually on hand amounts to A$108,000 at retail, the business has
a. realized a gain.
b. sustained a loss.
c. no gain or loss as there is close coincidence of the inventories.
d. none of these answer choices are correct.

Ans: B - Ending inventory at retail is $120,000 ($140,000 + $640,000 + $40,000 − $28,000 − $672,000),
according to the financial records. Inventory on hand, at retail, is only $108,000. Therefore, it is a loss., LO: 4,
Bloom: AN, Difficulty: Medium, Min: 3, AICPA FC: Reporting, AICPA BC: None, AICPA PC: None, IMA: Reporting

19. Lagasse Corporation’s computation of cost of goods sold is

Beginning inventory kr160,000

Add: Cost of goods purchased 605,000
Cost of goods available for sale 765,000
Ending inventory 180,000
Cost of goods sold kr585,000

How long does it take Lagasse to sell its inventory value, on average?

5
 a. 53.0 days
b. 100.0 days
c. 106.1 days
d. 112.3 days

Ans: C - 365 days ÷ {$585,000 ÷ [($160,000 + $180,000) ÷ 2]} = 106.1 days., LO: 5, Bloom: AP, Difficulty:
Medium, Min: 2, AICPA FC: Reporting, AICPA BC: None, AICPA PC: None, IMA: Reporting

20. The inventory turnover ratio is computed by dividing the cost of goods sold by
a. beginning inventory.
b. ending inventory.
c. average inventory.
d. number of days in the year.

Ans: C - The inventory turnover ratio is computed by dividing the cost of goods sold by average inventory., LO: 5,
Bloom: K, Difficulty: Easy, Min: 1, AICPA FC: Reporting, AICPA BC: None, AICPA PC: None, IMA: Reporting

6
Exercises

1. The inventory of Martinez SE on December 31, 2022, consists of the following items.

Cost per
Part Quantity Unit Net Realizable Value
A419 5,000 €12.00 €21.00
A435 4,250 9.00 7.00
A545 10,100 8.00 12.00
A615 7,500 11.00 8.00
A721 11,000 10.00 11.00
A885 14,000 16.00 20.00
A999a 9,200 7.00 1.00

aPart No. A999 is obsolete and has a realizable value of €1 each as scrap.

Instructions
1. Determine the inventory as of December 31, 2022, by the LCNRV method, applying this
method to each item.
2. Determine the inventory by the LCNRV method, applying the method to the total of the
inventory.

Solution
Per Unit Lower-of-
Part No. Quantity Cost NRV Total Cost Total NRV Cost-or-NRV
A419 5,000 €12.00 €21.00 € 60,000 €105,000 € 60,000
A435 4,250 9.00 7.00 38,250 29,750 29,750
A545 10,100 8.00 12.00 80,800 121,200 80,800
A615 7,500 11.00 8.00 82,500 60,000 60,000
A721 11,000 10.00 11.00 110,000 121,000 110,000
A885 14,000 16.00 20.00 224,000 280,000 224,000
A999 9,200 7.00 1.00 64,400 9,200 9,200
Totals €659,950 €726,150 € 573,750

(a) €573,750
(b) €659,950

LO: 1, Bloom: AP, Difficulty: Medium, Min: 8-10, AICPA FC: Measurement, AICPA BC: None, AICPA PC: None, IMA:
Reporting

2. Plant Company began operations in 2021 and determined its ending inventory at cost and
at lower-of-cost-or-NRV at December 31, 2021, 2022, and 2023. This information is
presented below.
Cost Lower-of-Cost-or-NRV
December 31, 2021 $ 87,000 $ 71,000
December 31, 2022 100,000 98,000
December 31, 2023 97,000 97,000

Instructions

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 (a) Prepare the journal entries required at December 31, 2021, 2022, and 2023, assuming
that the cost-of-goods-sold method is used with an allowance account.
(b) Prepare journal entries required at December 31, 2021, 2022, and 2023, assuming that
the loss method is used with an allowance account.
(c) Which of the two methods above provides the higher net income in each year?

Solution
(a) 12/31/21 Cost of Goods Sold 16,000
Allowance to Reduce Inventory to NRV 16,000

12/31/22 Allowance to Reduce Inventory to NRV 14,000

Cost of Goods Sold 14,000

12/31/23 Allowance to Reduce Inventory to NRV 2,000

Cost of Goods Sold 2,000

(b) 12/31/21 Loss Due to Decline of Inventory to NRV 16,000

Allowance to Reduce Inventory to NRV 16,000

12/31/22 Allowance to Reduce Inventory to NRV 14,000

Recovery of Inventory Loss 14,000

12/31/23 Allowance to Reduce Inventory to NRV 2,000 2,000

Recovery of Inventory Loss

Calculation of Allowance Adjustments

*Cost of inventory at 12/31/21 $87,000
Lower of cost or NRV at 12/31/21 (71,000)
Allowance amount needed to reduce inventory
to NRV at 12/31/21 (x) $ 16,000

Cost of inventory at 12/31/22 $100,000

Lower of cost or NRV at 12/31/22 (98,000)
Allowance amount needed to reduce inventory
to NRV at 12/31/22 (y) $ 2,000

Recovery of previously recognized loss

= (x) – (y) = $16,000 – $12,000 = $14,000

Cost of inventory at 12/31/23 $97,000

Lower of cost or NRV at 12/31/23 (97,000)
Allowance amount needed to reduce inventory
to NRV at 12/31/23 (z) $ -0-

Recovery of previously recognized loss

= (y) – (z) = $2,000 – $0 = $2,000

(c) Both methods of recording lower-of-cost-or-NRV adjustments have the same effect on net income.
The only difference is the income statement account used to record the allowance adjustment.

8
 LO: 1, Bloom: AP, Difficulty: Medium, Min: 10-12, AICPA FC: Measurement, AICPA BC: None, AICPA PC: None,
IMA: Reporting

3. At December 31, 2022, Henson, Ltd., a manufacturer, has outstanding noncancelable

purchase commitments for 75,000 pounds of raw material to be used in its manufacturing
process. The purchase commitments require Henson, Ltd. to pay £12.00 per pound for the
raw material. The company prices its raw material inventory at cost or NRV, whichever is
lower.

Instructions
(a) Assuming that the market price as of December 31, 2022 is £10.50, how would this
matter be treated in the accounts and statements? Explain.
(b) Assuming that the market price as of December 31, 2022 is £12.95, instead of £10.50,
how would you treat this situation in the accounts and statements?
(c) Provide the entry in January 2023, when the 75,000-pound shipment is received,
assuming that the situation given in (a) above existed at December 31, 2022, and that
the market price in January 2023 was £10.50 per pound. Also assume that Henson
uses a perpetual inventory system. Give an explanation of your treatment.

Solution
(a) The drop in the market price of the commitment should be charged to operations in
the current year if it is material in amount. The following entry would be made:

Unrealized Holding Gain or Loss—Income 112,500

Purchase Commitment Liability [75,000 × (£12.00 – £10.50)] 112,500

The entry is made because a loss in utility has occurred during the period in which the
market decline took place. The account credited in the above entry should be included
among the current liabilities on the balance sheet, with an appropriate footnote
indicating the nature and extent of the commitment.

(b) If the commitment is material in amount, there should be a footnote in the balance
sheet stating the nature and extent of the commitment. The footnote may also disclose
the market price of the materials. The excess of market price over contracted price is a
gain contingency which cannot be recognized in the accounts until it is realized.

(c) Assuming the £112,500 market decline entry was made on December 31, 2022, as
indicated in (a), the entry when the materials are received in January 2023 would be:

Raw Materials Inventory 787,500

Purchase Commitment Liability 112,500
Accounts Payable 900,000

This eliminates the £112,500 liability set up at December 31, 2022 and records the
contractual liability for the purchase. This permits Henson to record the raw materials
inventory in 2023 at its market price of £787,500. The additional £112,500 of the cost
was charged to operations in 2022.

9
 LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AICPA FC: Measurement, AICPA BC: None, AICPA PC: None, IMA:
Reporting

4. Uematsu Music Company sells three principal types of musical instruments, with varying
percentages of gross profit on cost.

Harps Violins Cellos

Gross profit percentage 30% 35% 40%

On May 9, 2022, a fire destroyed Uematsu’s office and the warehouse in which it stored the
instruments. To file a report of loss for insurance purposes, the company must know the
amount of the inventories immediately preceding the fire. Unfortunately, Uematsu Music
Company did not maintain any perpetual inventory records. A general ledger was kept and
computer records related to the ledger were backed up to the cloud nightly. You were able
to ascertain the following from the general ledger (yen in thousands).

Harps Violins Cellos

Inventory Jan. 1, 2022 ¥200,000 ¥120,000 ¥150,000
Purchases to May 9, 2022 150,000 50,000 75,000
Sales Revenue to May 9, 2022 292,500 148,500 238,000

Instructions
Submit your estimate of the inventory amounts immediately preceding the fire.

Solution
Harps Violins Cellos
Inventory 1/1/22 (cost) ¥ 200,000 ¥120,000 ¥150,000
Purchases to 5/9/22 (cost) 150,000 50,000 75,000
Cost of goods available 350,000 170,000 225,000
Deduct cost of goods sold* 225,000 110,000 170,000
Inventory 5/9/22 (cost) ¥ 125,000 ¥ 60,000 ¥ 55,000

Total inventory at 5/9/22 = ¥125,000 + ¥60,000 + ¥55,000 = ¥240,000

Computation for cost of goods sold:*
¥292,500
Harps: = ¥225,000
1.30

¥148,500
Violins: = ¥110,000
1.35

¥238,000
Cellos: = ¥170,000
1.40

LO: 3, Bloom: AP, Difficulty: Medium, Min: 10-12, AICPA FC: Measurement, AICPA BC: None, AICPA PC: None,
IMA: Reporting

10
5. Presented below is information related to Robinson, Inc.
Cost Retail
Beginning inventory $ 425,000 $ 750,000
Purchases 1,900,000 3,350,000
Freight on purchases 81,000
Markups 175.000
Markup cancellations 140,000
Abnormal shortage 15,000 26,000
Markdowns 88,000
Markdown cancellations 12,000
Employee discounts 5,200
Sales revenue 3,575,000
Sales returns 100,000
Normal shortage 17,500
Purchase returns 22,000 41,000

Instructions
Compute ending inventory by the conventional retail inventory method. Round percentages
to three decimal places (for example, round 0.4158 to 41.6%)

Solution
Cost Retail
Beginning inventory $ 425,000 $ 750,000
Purchases 1,900,000 3,350,000
Freight on purchases 81,000
Purchase returns (22,000) (41,000)
Totals 2,384,000 4,059,000
Add: Net markups and abnormal shortage:
Markups $175,000
Markup cancellations (140,000) 35,000
Deduct Abnormal shortage (15,000) (26,000)
Totals $2,369,000 4,068,000

Deduct: Net markdowns, employee discounts,

normal shortages, and net sales revenue
Markdowns 88,000
Markdowns cancellations (12,000) 76,000
Employee discounts 5,200
Normal shortages 17,500
Sales revenue 3,575,000
Sales returns (100,000) 3,475,000
Ending inventory at retail $ 494,300

$2,369,000
Cost-to-retail ratio = = 58.2%
$4,068,000

Ending inventory at cost = 58.2% × $494,300 = $287,683

LO: 4, Bloom: AP, Difficulty: Medium, Min: 15, AICPA FC: Measurement, AICPA BC: None, AICPA PC: None, IMA:
Reporting

11