Higher freight in charges would cause a decrease in the cost ratio in the retail inventory method.
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INVENTORY ESTIMATION 1.Inventory estimates will be required for the following, except a.As proof of reasonable accuracy of the physical inventory b.When inventory is destroyed by typhoon or lahar flow c.When interim financial statements are prepared d.In the determination of the ending inventory to be shown on the balance sheet at year end 2.Noel Corp. has annual sales totaling P650,000 and an average gross profit of 20% of cost. What is the peso amount of the gross profit? a.130,000 b.162,500 c.108,333 d.97,500 SOLUTION: P650,000 - (P650,000 ÷ 1.20) = P108,333 3.The following information is available for October for Joseph Company Beginning inventoryP 50,000 Net purchases150,000 Net sales300,000 Percentage markup on cost66.67% A fire destroyed Joseph’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 SOLUTION: (P50,000 + P150,000) – (P300,000 ÷ 5/3) – P3,000 = P17,000 4.April Company uses the retail inventory method to value its merchandise inventory. The following information is available for the current year: CostRetail Beginning inventoryP 30,000P 50,000 Purchases145,000200,000 Freight-in2,500- Net markups-8,500 FINANCIAL ACCOUNTINGTHEORY & PRACTICEINVENTORIES – COST ESTIMATION & BIOLOGICAL ASSETSQUIZZERFINANCIAL ACCOUNTINGEssay Questions: Inventory – Cost Estimation Page 4 INVENTORY VALUATIONEssay Questions Inventory Estimation Methods
However, year-end statements require physical count, not a mere estimate of inventory value. Gross profit method 2. Explain the gross profit method of estimating the cost of ending inventory. Under the gross profit method, the ending inventory is computed as "goods available for sale minus cost of sales". The cost of sales is determined through the use of the gross profit rate and this is the reason the gross profit method is called as such. This method is based on the major assumption that the rate of gross profit remains approximately the same from period to period and therefore the ratio of cost of goods sold to net sales is relatively constant from period to period. Retail inventory method 3. Explain the retail method of estimating the cost of ending inventory. The retail inventory method came to its name because the selling price or retail price is tagged to each item and therefore the ending inventory is stated at selling price. The ending inventory is computed as follows: Goods available for sale at selling price minus net sales equals ending inventory at selling Inventory – Cost EstimationEssay Questions: Inventory – Cost Estimation Page 5 price which is multiplied by the cost ratio to get the inventory at cost. The cost ratio under the retail method is computed by dividing the goods available for sale at cost by the goods available for sale at selling price.
PAS 2, paragraph 22, provides that the percentage used under the retail method shall take into consideration inventory that has been marked down to below its original selling price. An average percentage for each retail department is often used. This means that the average cost approach shall be applied in conjunction with the retail inventory method. Of course, PAS 2 requires either the FIFO or average method as a cost formula.
Biological AssetsEssay Questions: Biological Assets Page 7 Harvest is the detachment of produce from a biological asset or the cessation of a biological asset's life processes.
The following table provides examples of biological assets, agricultural produce and products that are the result of processing after harvest. Biological asset Agricultural Product produce after harvest
Again, the measurement of biological assets and agricultural produce is covered by PAS 41 and the measurement of products after harvest is covered by PAS 2 on inventories.
Agricultural activity or simply "agriculture" is the management by an entity of the biological transformation and harvest of biological assets for sale or for conversion into agricultural produce or into additional biological assets. Biological transformation comprises the processes of growth, degeneration, production and procreation that cause qualitative or quantitative changes in a biological asset.
Agricultural activity covers a diverse range of activities such as the following:
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The common features of agricultural activity are as follows: a. Capability to change b. Management of change c. Measurement of change Capability to change Living animals and plants are capable of biological transformation. Management of change The agricultural activity must be "managed" to facilitate biological transformation by enhancing or at least stabilizing conditions necessary for the process to take place. Such management distinguishes agricultural activity from other activities. For example, harvesting from "unmanaged" sources, such as ocean fishing and deforestation, is not agricultural activity. Measurement of change The change in quality or quantity brought about by biological transformation or harvest is measured and monitored as a routine management function.
FINANCIAL ACCOUNTINGEssay Questions: Biological Assets Page 10 The prevailing view is that the fair value of agricultural produce at the point of harvest can always be measured reliably. The fair value measurement of agricultural produce stops at the time of harvest. After that date, PAS 2 on inventory shall apply. In other words, the harvested product becomes an inventory and shall be measured subsequently at the lower of cost and net realizable value. The harvested product is recorded by debiting inventory and crediting gain from change in fair value.
A gain may arise on initial recognition of a biological asset, for example, when a calf is born. A gain or loss arising from initial recognition of agricultural produce at fair value less cost of disposal shall also be included in profit or loss. Biological AssetsEssay Questions: Biological Assets Page 11 A gain or loss may arise on initial recognition of agricultural produce as a result of harvesting. An entity shall disclose the aggregate gain or loss arising on the initial recognition of biological asset and agricultural produce and from the change in fair value less cost of disposal of biological asset.
The principles espoused in PAS 41 for biological assets and agricultural produce do not apply to agricultural land. The requirements of PAS 16 which are applicable to property, plant and equipment apply equally to agricultural land for purposes of measurement.
Biological assets are often physically attached to land, for example, trees in a plantation forest. There may be no separate market for biological assets that are attached to the land but an active market may exist for the combined assets, that is, for the biological assets and land as a package. An entity may use information regarding the combined assets to determine the fair value of the biological assets. For example, the fair value of the land may be deducted from the fair value of the combined assets to arrive at the fair value of the trees in the plantation forest.
Inventory – Cost EstimationMCQ – Theories: Inventory – Cost Estimation Page 13 MCQ – Theory: Inventories – Cost Estimation Gross profit method
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Retail inventory method 12. The retail method is based on the assumption that A. Ratio of cost to retail changes at a constant rate. B. Ratio of gross margin to sales is approximately the same each period. C. Proportions of markup and markdown to selling price are the same. FINANCIAL ACCOUNTINGMCQ – Theories: Inventory – Cost Estimation Page 16 Conventional retail inventory method 19. An inventory method which is designed to approximate inventory valuation at the lower of cost and net realizable value is A. Average retail method C. FIFO retail B. Conventional retail method D. LIFO retail FA © 2014
Sensitivity analysis 24. Which of the following would cause a decrease in the cost ratio used in the retail inventory method? A. Higher freight in charges C. Lower net markups B. Higher retail prices D. More employee discounts FA © 2014 Biological AssetsMCQ – Theories: Biological Assets Page 17
Comprehensive 27. With regard to the retail inventory method, which of the following is the most accurate statement? A. It is not adaptable to FIFO costing. B. Generally, accountants ignore net markups and net markdowns in computing the cost price percentage. C. Generally, accountants exclude net markups and include net markdowns in computing cost price percentage. D. This method results in a lower ending inventory cost if net markups are included but net markdowns are excluded in computing the cost price percentage. FA © 2014 MCQ – Theory: Biological Assets Scope 28. Where there is a long aging or maturation process after harvest, the accounting for such products shall be dealt with by A. PAS 41, Agriculture C. PAS 40, Investment property FA © 2014 B. PAS 2, Inventories D. PAS 16, Property, plant and equipment
Biological AssetsMCQ – Theories: Biological Assets Page 19
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Income from biological asset 45. An entity had a plantation forest that is likely to be harvested and sold in 30 years. The income shall be accounted for in which of the following? A. No income shall reported annually until first harvest and sale in 30 years. B. The eventual sale proceeds shall be estimated and matched to the profit and loss account over the 30-year period. C. Income shall be measured annually and reported using a fair value approach that recognizes and measures biological growth. D. The plantation forest shall be valued every 5 years and the increase in value shall be recognized as component of other comprehensive income. FA © 2014
Agricultural produce 48. It is the harvested product of the entity's biological assets. A. Agricultural produce C. Harvest B. Agriculture D. Product TOA © 2013 49. Agricultural produce is A. The harvested product from biological asset. B. Valued at the time of harvest at the cost of production. C. All of the choices are correct regarding agricultural produce. D. Valued at each reporting period at fair value less cost of disposal. FA © 2014 What is the effect of the freightWhat is the effect of freight-in on the cost-to-retail ratio when using the conventional retail method? Depends on the amount of the net markups. Decreases the cost-to-retail ratio.
Is freightThe correct option is c.
Under the retail inventory method, the charges pertaining to freight-in would be added to the cost rather than retail. Under retail, the net purchases are mentioned, excluding the listing of the items for the computation of net purchases.
What is the retail method of inventory costing?The retail inventory method is an accounting method used to estimate the value of a store's merchandise. The retail method provides the ending inventory balance for a store by measuring the cost of inventory relative to the price of the merchandise.
Which inventory method approximates inventory valuation at the lower of cost or market?Retail merchants can use the retail inventory method to price inventories at approximate cost or approximate lower of cost or market (LCM) instead of valuing inventory at actual cost or LCM.
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