The following questions are adapted from a variety of sources including questions developed by the AICPA Board of Examiners and those used in the Kaplan CPA Review Course to study inventory while preparing for the CPA examination. Determine the response that best completes the statements or questions.

1. Kahn Co., in applying the lower of cost or market method, reports its inventory at replacement cost. Which of the following is correct?

2. Moss Co. has determined its year-end inventory on a FIFO basis to be $400,000. Information pertaining to that inventory is as follows:
Estimated selling price ...........$408,000
Estimated cost of disposal ........ 20,000
Normal profit margin .......... 60,000
Current replacement cost .......... 360,000
What should be the carrying value of Moss’s inventory?
a. $328,000
b. $360,000
c. $388,000
d. $400,000
3. On May 2, a fire destroyed the entire merchandise inventory on hand of Sanchez Wholesale Corporation.
The following information is available:
Sales, January 1 through May 2..........$360,000
Inventory, January 1 ............... 80,000
Merchandise purchases, January 1 through
May 2 (including $40,000 of goods in transit on
May 2, shipped f.o.b. shipping point) ...... 330,000
Markup percentage on cost .......... 20%
What is the estimated inventory on May 2 immediately prior to the fire?
a. $ 70,000
b. $ 82,000
c. $110,000
d. $122,000
4. Hutch, Inc., uses the conventional retail inventory method to account for inventory. The following information relates to current year’s operations:

What amount should be reported as cost of sales for the year?
a. $480,000
b. $487,500
c. $500,000
d. $525,000
5. Bren Co.’s beginning inventory on January 1 was understated by $26,000, and its ending inventory on December 31 was overstated by $52,000. As a result, Bren’s cost of goods sold for the year was
a. Understated by $26,000.
b. Overstated by $78,000.
c. Understated by $78,000.
d. Overstated by $26,000.
Beginning in 2011, International Financial Reporting Standards are tested on the CPA exam along with U.S. GAAP. The following questions deal with the application of IFRS.
6. A company determined the following values for its inventory at the end of its fiscal year:
Historical cost ..................$100,000
Replacement cost .................. 70,000
Net realizable value ................. 90,000
Net realizable value less a normal profit margin ...... 85,000
Fair value ..................... 95,000
Under IFRS, what amount should the company report as inventory in its balance sheet?
a. $70,000
b. $85,000
c. $90,000
d. $95,000
7. If circumstances indicate that an inventory write-down is no longer appropriate:
a. The write-down can be reversed under U.S. GAAP.
b. The write-down can be reversed under IFRS.
c. The write-down can be reversed under both U.S. GAAP and IFRS.
d. The write-down can’t be reversed under either U.S. GAAP orIFRS.

Transcribed Image Text:

Cost is greater than replacement cost NRV, less a normal profit margin, is greater than replacement cost b. C. d. res No Yes No Yes No No Yes Average Cost Retail Beginning inventory and purchases Net markups Net markdowns Sales $600,000 $920,000 40,000 60,000 780,000