Under this method, the ending inventory is The gross profit method of estimating

computed as goods available for sale minus inventory is not valid when
cost of goods sold
a. There is substantial increase in the
-Gross Profit Method
quantity of inventory during the year.
The gross margin method of estimating b. There is substantial increase in the cost
ending inventory may be used for all of the of inventory during the year.
following, accept: c. The gross margin percentage changes
significantly during the year.
a. Internal as well as external interim reports d. All ending inventory is destroyed by fire
b. Internal as well as external year-end before it can be counted.
reports
The gross profit method is invalid when
c. Estimate of inventory destroyed by fire or
other casualty
a. A portion of inventory is destroyed
d. Rough test of the validity of an inventory
b. There is a substantial decrease in
cost determined under either periodic or
inventory
perpetual system
c. There is no beginning inventory
The gross profit method assumes that d. The gross profit percentage applicable to
the goods in ending inventory is different
a. The amount of gross profit is the same as from the percentage applicable to goods
in prior years. sold during the period.
b. Sales and cost of goods sold have not
Which statement is not valid about the gross
changed from previous years.
profit method?
c. Inventory values have not increased from
a. It may be used by auditors
previous years.
b. It is an acceptable accounting procedure
d. The relationship between selling price
c. It may be used to estimate inventory for
and cost of goods sold is similar to prior
interim statements.
years.
d. It may be used to estimate inventory for
The gross profit method of estimating annual statements.
inventory would not be useful when
Which is not a basic assumption of the
gross profit method?
a. A periodic system is in use and
inventories are required for interim
a. The beginning inventory plus net
statements.
purchases equals total goods to be
b. Inventories have been destroyed or lost
accounted for.
by fire, theft or other casualty, and the
b. Goods not sold must be on hand.
specific data required for inventory valuation
c. The sales reduced to cost basis when
are not available.
deducted from the sum of beginning
c. There is a significant change in the mix of
inventory and net Purchases would result to
products being sold.
inventory on hand.
d. The relationship between gross profit and
d. The amount of purchases and the
sales remains stable over time.
amount of sales remain relatively
unchanged from the previous period.
How is the gross profit method used in The retail inventory method would include
relation to inventory valuation? which of the following in the calculation of
the goods available for sale at both cost and
a. To verify the accuracy of the perpetual retail?
inventory record
b. To verify the accuracy of the physical a. Freight in
inventory b. Purchase returns
c. To estimate the cost of goods sold c. Markups
d. To provide a FIFO inventory value d. Markdowns
An advantage of the retail method is that it With regard to the retail inventory method,
which is the most accurate statement?
a. Permits entities to avoid taking an annual
physical inventory a. Generally, accountants ignore net
b. Gives more accurate measurement of markups and net markdowns in computing
inventory the cost ratio.
c. Hides costs from customers and b. Generally, accountants exclude net
employees. markups and include net markdowns in
d. Provides a method for inventory control computing cost ratio.
and facilitates determination of the periodic c. The retail method results in a lower
inventory. ending inventory if net markups are included
but net markdowns are excluded in
To produce an inventory valuation which
computing the cost ratio.
approximates the lower of cost and NRV
d. It is not adaptable to FIFO costing.
using the retail inventory method, the
computation of the ratio of cost to retail The conventional retail method produces an
should ending inventory that approximates

a. Include markups but not markdowns a. Lower of average cost and net realizable
b. Include markups and markdowns value
c. Ignore both markups and markdowns b. Lower of FIFO cost and net realizable
d. Include markdowns but not markups value
c. Lower of LIFO cost and net realizable
When the conventional retail inventory
value
method is used, markdowns are commonly
d. Lower of cost and net realizable value
ignored in the computation of the cost to
retail ratio because The retail method is based on the
assumption that
a. there may be no markdowns in a given
year. a. Final inventory and the total goods
b. this tends to give a better approximation available for sale contain the same
of the lower of average cost and net proportion of high cost and low cost ratio
realizable value. goods.
c. markups are also ignored. b. Gross margin is the same each period.
d. this tends to result in the showing of a c. Ratio of cost to retail changes at a
normal profit margin in a period when no constant rate.
markdown goods have been sold. d. Proportions of markup and markdown to
selling price are the same.
If the conservative retail inventory method is What is the effect of freight in on the cost-
used, which of the following calculations retail ratio when using the conservative
would include or exclude net markdowns? retail method?

Cost Ratio Ending Inventory at retail a. Increases the cost-retail ratio

a. Include Include b. No effect on the cost-retail ratio
b. Include Exclude c. Depends on the amount of the net
c. Exclude Include markup
d. Exclude Exclude d. Decreases the cost-retail ratio
An inventory method which is designed to What is the effect of net markup on the cost-
approximate inventory valuation at the lower retail ratio when using the conservative
of average cost and net realizable value is retail method?

a. Average retail method a. Increases the cost-retail ratio

b. FIFO retail b. No effect on the cost-retail ratio
c. Conventional retail method c. Depends on the amount of the net
d. LIFO retail markup
d. Decreases the cost-retail ratio
Which of the following is not a reason why
the retail inventory method is used widely? Which of the following would cause a
decrease in the cost ratio used in the retail
a. As a control measure in determining inventory method?
inventory shortage
b. For insurance information a. Higher retail prices
c. To permit the computation of net income b. Lower net markups
without a physical count of inventory c. More employee discounts
d. To defer income tax liability d. Higher freight in charges
Which of the following is not required when
using the retail inventory method?

a. All inventory items must be categorized

according to the retail markup percentage
b. Total cost and retail price of goods
purchased
c. Total cost and retail price of the goods
available for sale
d. Total sales for the period
What condition is not necessary when using
the retail inventory method?

a. Total cost of goods sold for the period

b. Total cost and retail price of goods
purchased
c. Total cost and retail price of goods
available for sale
d. Total sales for the period