61. The reasoning behind the retail inventory method is that if an accurate estimate of the cost-to-retail ratio is made, it can be multiplied by the ending inventory at retail to estimate ending inventory at cost.
62. The reliability of the gross profit method depends on a good estimate of the gross profit ratio.
63. In the retail inventory method of inventory valuation, the retail amount of inventory refers to the dollar amount measured by looking at the selling prices of inventory items.
64. To avoid the time-consuming process of taking an inventory each year, the majority of companies use the gross profit method to estimate ending inventory.
65. Using the retail inventory method, if the cost to retail ratio is 60% and ending inventory at retail is $45,000, then estimated ending inventory at cost is $27,000.
Multiple Choice Questions
66. Damaged and obsolete goods:
A. Are never included in inventory.
B. Are included in inventory at their full cost.
C. Are included in inventory at their net realizable value.
D. Should be disposed of immediately.
E. Are assigned a value of zero.
67. Merchandise inventory includes:
A. All goods owned by a company and held for sale.
B. All goods in transit.
C. All goods on consignment.
D. Only damaged goods.
E. Only items that are on the shelf.
68. Goods in transit are included in a purchaser's inventory:
A. At any time during transit.
B. When the purchaser is responsible for paying freight charges.
C. When the supplier is responsible for freight charges.
D. If the goods are shipped FOB destination.
E. After the halfway point between the buyer and seller.
69. Goods on consignment:
A. Are goods shipped by the owner to the consignee who sells the goods for the owner.
B. Are reported in the consignee's books as inventory.
C. Are goods shipped to the consignor who sells the goods for the owner.
D. Are not reported in the consignor's inventory since they do not have possession of the inventory.
E. Are always paid for by the consignee when they take possession of the goods.
70. Given the following items and costs as of the balance sheet date, determine the value of Faltron Company's merchandise inventory.
- $1,000 goods sold by Faltron to another company. The goods are in transit and shipping terms are FOB destination.
- $2,000 goods sold by another company to Faltron. The goods are in transit and shipping terms are FOB destination.
- $3,000 owned by Faltron but in the possession of another company, the consignee.
- Damaged goods owned by Faltronthatoriginally cost $4,000 but now have a $500 net realizable value.
A. $10,000
B. $6,500
C. $5,500
D. $5,000
E. $4,500