中级财务会计Chap04Inventories Additional Issues答案.docVIP

Chapter 9 Inventories: Additional Issues Question 9-5 The gross profit method estimates cost of goods sold, which is then subtracted from cost of goods available for sale to obtain an estimate of ending inventory. The estimate of cost of goods sold is found by multiplying sales by the historical ratio of cost to selling prices. The cost percentage is the reciprocal of the gross profit ratio. Question 9-6 The key to obtaining accurate estimates when using the gross profit method is the reliability of the cost percentage. If the cost percentage is too low, cost of goods sold will be understated and ending inventory overstated. Cost percentages usually are based on relationships of past years, which aren’t necessarily representative of the current relationship. Failure to consider theft or spoilage also could cause an overstatement of ending inventory. Answers to Questions (continued) Question 9-7 The retail inventory method first determines the amount of ending inventory at retail by subtracting sales for the period from goods available for sale at retail. Ending inventory at retail is then converted to cost by multiplying it by the cost-to-retail percentage. Question 9-8 The main difference between the gross profit method and the retail inventory method is in the determination of the cost percentage used to convert sales at selling prices to sales at cost. The retail inventory method uses a cost percentage, called the cost-to-retail percentage, which is based on a current relationship between cost and selling price. The gross profit method relies on past data to reflect the current cost percentage. Question 9-9 Initial markup — Original amount of markup from cost to selling price. Additional markup — Increase in selling price subsequent to initial markup. Markup cancellation — Elimination of an additional markup. Markdown — Reduction in selling price below the original selling price. Markdown cancellation — Elimination of a markdown. Question 9-1