INTERMEDIATE ACCOUNTING 2 QUIZ #1: RETAIL INVENTORY METHOD

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

a. Verify the accuracy of the perpetual inventory records.
b. Verity the accuracy of the physical inventory.
c. To estimate cost of goods sold.
d. To provide an inventory value of LIFO inventories

2. Which of the following is not a basic assumption of the gross profit method?
a. The beginning inventory plus the purchases equal total goods to be accounted for.
b. Goods not sold must be on hand.
c. 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.
d. The total amount of purchases and the total amount of sales remain relatively
unchanged from the comparable previous period.

3. 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.

4. Which statement is not true about the gross profit method of inventory valuation?
a. It may be used to estimate inventories for interim statements.
b. It may be used to estimate inventories for annual statements.
c. It may be used by auditors.
d. None of these.

5. A major advantage of the retail inventory method is that it

a. provides reliable results in cases where the distribution of items in the inventory is
different from that of items sold during the period.
b. hides costs from competitors and customers.
c. gives a more accurate statement of inventory costs than other methods.
d. provides a method for inventory control and facilitates determination of the periodic
inventory for certain types of companies.

6. An inventory method which is designed to approximate inventory valuation at the lower

of cost or net realizable value is
a. last-in, first-out.
b. first-in, first-out.
c. conventional retail method.
d. specific identification.

7. The retail inventory method is based on the assumption that the

a. final inventory and the total of goods available for sale contain the same proportion of
high-cost and low-cost ratio goods.
b. ratio of gross margin to sales is approximately the same each period.
c. ratio of cost to retail changes at a constant rate.
d. proportions of markups and markdowns to selling price are the same.
[Date]

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INTERMEDIATE ACCOUNTING 2 QUIZ #1: RETAIL INVENTORY METHOD

8. What is the effect of net markups on the cost-retail ratio when using the conventional
retail method?
a. Increases the cost-retail ratio.
b. No effect on the cost-retail ratio.
c. Depends on the amount of the net markdowns.
d. Decreases the cost-retail ratio.

9. What is the effect of freight-in on the cost-retail ratio when using the conventional retail
method?
a. Increases the cost-retail ratio.
b. No effect on the cost-retail ratio.
c. Depends on the amount of the net markups.
d. Decreases the cost-retail ratio.

10. What condition is not necessary in order to use the retail method to provide inventory
results?
a. Retailer keeps a record of the total costs of products sold for the period.
b. Retailer keeps a record of the total costs and retail value of goods purchased.
c. Retailer keeps a record of the total costs and retail value of goods available for sale.
d. Retailer keeps a record of sales for the period.

11. The following information is available for October for Barton Company.
Beginning inventory P 50,000
Net purchases 150,000
Net sales 300,000
Percentage markup on cost 66.67%
A fire destroyed Barton’s October 31 inventory, leaving undamaged inventory with a cost
of P3,000. Using the gross profit method, the estimated ending inventory destroyed by
fire is
a. P17,000.
b. P77,000.
c. P80,000.
d. P100,000.

[Date]

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INTERMEDIATE ACCOUNTING 2 QUIZ #1: RETAIL INVENTORY METHOD

12. The following information is available for October for Norton Company.
Beginning inventory P100,000
Net purchases 300,000
Net sales 600,000
Percentage markup on cost 66.67%
A fire destroyed Norton’s October 31 inventory, leaving undamaged inventory with a cost
of P6,000. Using the gross profit method, the estimated ending inventory destroyed by
fire is
a. P34,000.
b. P154,000.
c. P160,000.
d. P200,000.

Use the following information for questions 13 and 14.

Miles Company, a wholesaler, budgeted the following sales for the indicated months:
June July August
Sales on account P1,800,000 P1,840,000 P1,900,000
Cash sales 180,000 200,000 260,000
Total sales P1,980,000 P2,040,000 P2,160,000

All merchandise is marked up to sell at its invoice cost plus 20%. Merchandise inventories at the
beginning of each month are at 30% of that month's projected cost of goods sold.

13. The cost of goods sold for the month of June is anticipated to be
a. P1,440,000.
b. P1,500,000.
c. P1,520,000.
d. P1,650,000.

14. Merchandise purchases for July are anticipated to be

a. P1,632,000.
b. P2,076,000.
c. P1,700,000.
d. P1,730,000.

15. Reyes Company had a gross profit of P360,000, total purchases of P420,000, and an
ending inventory of P240,000 in its first year of operations as a retailer. Reyes’s sales in
its first year must have been
a. P540,000.
b. P660,000.
c. P180,000.
d. P600,000.

16. A markup of 40% on cost is equivalent to what markup on selling price?

a. 29%
b. 40%
c. 60%
[Date]

d. 71%

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INTERMEDIATE ACCOUNTING 2 QUIZ #1: RETAIL INVENTORY METHOD

17. Kesler, Inc. estimates the cost of its physical inventory at March 31 for use in an interim
financial statement. The rate of markup on cost is 25%. The following account balances
are available:
Inventory, March 1 P220,000
Purchases 172,000
Purchase returns 8,000
Sales during March 300,000
The estimate of the cost of inventory at March 31 would be
a. P84,000.
b. P144,000.
c. P159,000.
d. P112,000.

18. On January 1, 2010, the merchandise inventory of Glaus, Inc. was P800,000. During
2010 Glaus purchased P1,600,000 of merchandise and recorded sales of P2,000,000.
The gross profit rate on these sales was 25%. What is the merchandise inventory of
Glaus at December 31, 2010?
a. P400,000.
b. P500,000.
c. P900,000.
d. P1,500,000.

19. For 2010, cost of goods available for sale for Tate Corporation was P900,000. The gross
profit rate was 20%. Sales for the year were P800,000. What was the amount of the
ending inventory?
a. P0.
b. P260,000.
c. P180,000.
d. P160,000.

20. On April 15 of the current year, a fire destroyed the entire uninsured inventory of a retail
store. The following data are available:
Sales, January 1 through April 15 P300,000
Inventory, January 1 50,000
Purchases, January 1 through April 15 250,000
Markup on cost 25%
The amount of the inventory loss is estimated to be
a. P60,000.
b. P30,000.
c. P75,000.
d. P50,000.

21. The sales price for a product provides a gross profit of 25% of sales price. What is the
gross profit as a percentage of cost?
a. 25%.
b. 20%.
c. 33%.
[Date]

d. Not enough information is provided to determine.

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INTERMEDIATE ACCOUNTING 2 QUIZ #1: RETAIL INVENTORY METHOD

22. Gamma Ray Corp. has annual sales totaling P650,000 and an average gross profit of
20% of cost. What is the dollar amount of the gross profit?
a. P130,000.
b. P97,500.
c. P108,333.
d. P162,500.

23. On August 31, a hurricane destroyed a retail location of Vinny's Clothier including the
entire inventory on hand at the location. The inventory on hand as of June 30 totaled
P320,000. From June 30 until the time of the hurricane, the company made purchases of
P85,000 and had sales of P250,000. Assuming the rate of gross profit to selling price is
40%, what is the approximate value of the inventory that was destroyed?
a. P320,000.
b. P181,500.
c. P205,000.
d. P255,000.

24. On October 31, a fire destroyed PH Inc.'s entire retail inventory. The inventory on hand
as of January 1 totaled P680,000. From January 1 through the time of the fire, the
company made purchases of P165,000 and had sales of P360,000. Assuming the rate
of gross profit to selling price is 40%, what is the approximate value of the inventory that
was destroyed?
a. P680,000.
b. P673,000.
c. P485,000.
d. P629,000.

25. On March 15, a fire destroyed Interlock Company's entire retail inventory. The inventory
on hand as of January 1 totaled P1,650,000. From January 1 through the time of the fire,
the company made purchases of P683,000, incurred freight-in of P78,000, and had
sales of P1,210,000. Assuming the rate of gross profit to selling price is 30%, what is the
approximate value of the inventory that was destroyed?
a. P2,048,000.
b. P1,486,000.
c. P1,564,000.
d. P2,411,000.

26. Dicer uses the conventional retail method to determine its ending inventory at cost.
Assume the beginning inventory at cost (retail) were P130,000 (P198,000), purchases
during the current year at cost (retail) were P685,000 (P1,100,000), freight-in on these
purchases totaled P43,000, sales during the current year totaled P1,050,000, and net
markups (markdowns) were P24,000 (P36,000). What is the ending inventory value at
cost?
a. P153,164.
b. P156,165.
c. P157,412.
d. P236,000.
[Date]

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INTERMEDIATE ACCOUNTING 2 QUIZ #1: RETAIL INVENTORY METHOD

27. Boxer Inc. uses the conventional retail method to determine its ending inventory at cost.
Assume the beginning inventory at cost (retail) were P65,500 (P99,000), purchases
during the current year at cost (retail) were P568,000 (P865,600), freight-in on these
purchases totaled P26,500, sales during the current year totaled P811,000, and net
markups were P69,000. What is the ending inventory value at cost?
a. P222,600.
b. P174,366.
c. P142,241.
d. P152,308.

28. Barker Pet supply uses the conventional retail method to determine its ending inventory
at cost. Assume the beginning inventory at cost (retail) were P265,600 (P326,900),
purchases during the current year at cost (retail) were P1,068,600 (P1,386,100), freight-
in on these purchases totaled P63,900, sales during the current year totaled P1,302,000,
and net markups (markdowns) were P2,000 (P96,300). What is the ending inventory
value at cost?
a. P316,700.
b. P258,111.
c. P411,000.
d. P246,667.

29. Crane Sales Company uses the retail inventory method to value its merchandise
inventory. The following information is available for the current year:
Cost Retail
Beginning inventory P 30,000 P 50,000
Purchases 145,000 200,000
Freight-in 2,500 —
Net markups — 8,500
Net markdowns — 10,000
Employee discounts — 1,000
Sales — 205,000
If the ending inventory is to be valued at the lower-of-cost-or-net realizable value, what is
the cost to retail ratio?
a. P177,500 ÷ P250,000
b. P177,500 ÷ P258,500
c. P175,000 ÷ P260,000
d. P177,500 ÷ P248,500

Use the following information for questions 30 through 32.

The following data concerning the retail inventory method are taken from the financial records of
Welch Company.
Cost Retail
Beginning inventory P 49,000 P 70,000
Purchases 224,000 320,000
Freight-in 6,000 —
Net markups — 20,000
Net markdowns — 14,000
[Date]

Sales — 336,000

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INTERMEDIATE ACCOUNTING 2 QUIZ #1: RETAIL INVENTORY METHOD

30. The ending inventory at retail should be

a. P74,000.
b. P60,000.
c. P64,000.
d. P42,000.

31. If the ending inventory is to be valued at approximately the lower of cost or market, the
calculation of the cost to retail ratio should be based on goods available for sale at (1)
cost and (2) retail, respectively of
a. P279,000 and P410,000.
b. P279,000 and P396,000.
c. P279,000 and P390,000.
d. P273,000 and P390,000.

32. If the foregoing figures are verified and a count of the ending inventory reveals that
merchandise actually on hand amounts to P54,000 at retail, the business has
a. realized a windfall gain.
b. sustained a loss.
c. no gain or loss as there is close coincidence of the inventories.
d. none of these.

33. Drake Corporation had the following amounts, all at retail:

Beginning inventory P 3,600 Purchases P120,000
Purchase returns 6,000 Net markups 18,000
Abnormal shortage 4,000 Net markdowns 2,800
Sales 72,000 Sales returns 1,800
Employee discounts 1,600 Normal shortage 2,600
What is Drake’s ending inventory at retail?
a. P54,400.
b. P56,000.
c. P57,600.
d. P58,400

34. Goren Corporation had the following amounts, all at retail:

Beginning inventory P 3,600 Purchases P100,000
Purchase returns 6,000 Net markups 18,000
Abnormal shortage 4,000 Net markdowns 2,800
Sales 72,000 Sales returns 1,800
Employee discounts 1,600 Normal shortage 2,600
What is Goren’s ending inventory at retail?
a. P34,400.
b. P36,000.
c. P37,600.
d. P38,400
[Date]

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INTERMEDIATE ACCOUNTING 2 QUIZ #1: RETAIL INVENTORY METHOD

Use the following information for questions 35 through 37.

Plank Co. uses the retail inventory method. The following information is available for the current
year.
Cost Retail
Beginning inventory P 78,000 P122,000
Purchases 295,000 415,000
Freight-in 5,000 —
Employee discounts — 2,000
Net markups — 15,000
Net Markdowns — 20,000
Sales — 390,000

35. If the ending inventory is to be valued at approximately lower-of-average-cost-or-net

realizable value, the calculation of the cost ratio should be based on cost and retail of
a. P300,000 and P430,000.
b. P300,000 and P428,000.
c. P373,000 and P550,000.
d. P378,000 and P552,000.

36. The ending inventory at retail should be

a. P160,000.
b. P150,000.
c. P144,000.
d. P140,000.

37. The approximate cost of the ending inventory by the conventional retail method is
a. P95,900.
b. P94,920.
c. P98,000.
d. P102,480.

38. Keen Company's accounting records indicated the following information:

Inventory, 1/1/10 P 600,000
Purchases during 2010 3,000,000
Sales during 2010 3,800,000
A physical inventory taken on December 31, 2010, resulted in an ending inventory of
P700,000. Keen's gross profit on sales has remained constant at 25% in recent years.
Keen suspects some inventory may have been taken by a new employee. At December
31, 2010, what is the estimated cost of missing inventory?
a. P50,000.
b. P150,000.
c. P200,000.
d. P250,000.

39. Henke Co. uses the retail inventory method to estimate its inventory for interim
statement purposes. Data relating to the computation of the inventory at July 31, 2010,
are as follows:
[Date]

Cost Retail
Inventory, 2/1/10 P 200,000 P 250,000

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INTERMEDIATE ACCOUNTING 2 QUIZ #1: RETAIL INVENTORY METHOD

Purchases 1,000,000 1,575,000

Markups, net 175,000
Sales 1,750,000
Estimated normal shoplifting losses 20,000
Markdowns, net 110,000
Under the lower-of-cost-or-net realizable value method, Henke's estimated inventory at
July 31, 2010 is
a. P72,000.
b. P84,000.
c. P96,000.
d. P120,000.

40. At December 31, 2010, the following information was available from Kohl Co.'s
accounting records:
Cost Retail
Inventory, 1/1/10 P147,000 P 203,000
Purchases 833,000 1,155,000
Additional markups 42,000
Available for sale P980,000 P1,400,000
Sales for the year totaled P1,050,000. Markdowns amounted to P10,000. Under the
lower-of-cost-or-net realizable value method, Kohl's inventory at December 31, 2010
was
a. P294,000.
b. P245,000.
c. P252,000.
d. P238,000.

[Date]

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INTERMEDIATE ACCOUNTING 2 QUIZ #1: RETAIL INVENTORY METHOD

142. At December 31, 2010, the following information was available from Kohl Co.'s
accounting records:
Cost Retail
Inventory, 1/1/10 P147,000 P 203,000
Purchases 833,000 1,155,000
Additional markups 42,000
Available for sale P980,000 P1,400,000
Sales for the year totaled P1,050,000. Markdowns amounted to P10,000. Under the
lower-of-cost-or-net realizable value method, Kohl's inventory at December 31, 2010
was
a. P294,000.
b. P245,000.
c. P252,000.
d. P238,000.

[Date]

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