ACG 3131 Chapter 9 Questions and
Correct Answers
Avg days to sell inv ✅A measure that represents the average number of days' sales for
which inventory is on hand. A variant of the inventory turnover, it is computed by
dividing the inventory turnover by the number of days in the year (365 or sometimes for
simplicity, 360).
Conv retail inv method ✅A method of valuing ending inventory that uses only a cost
ratio using markups but not markdowns, thereby approximating the lower-of-average-
cost-or-market.
Cogs method ✅A method of valuing inventory in which cost of goods sold is debited
for the write-down of inventory to market. As a result, the company does not report a
loss in the income statement because the cost of goods sold already includes the
amount of loss.
Cost to retail ratio ✅The total goods available for sale at cost divided by the total
goods available for sale at retail price.
Designated market value ✅The amount that a company compares to cost, when using
the lower-of-cost-or-market (LCM) rule. The designated market value is the middle
value of three amounts: replacement cost, net realizable value, and net realizable value
less a normal profit margin.
Gross profit method ✅Method of determining inventory amount, often used when it is
impossible or impractical to take a physical inventory.
In this method, companies compute the gross profit percentage on selling price, multiply
that percentage times net sales to determine gross profit, subtract gross profit from net
sales to find cost of goods sold, and subtract cost of goods sold from total goods
available for sale to determine ending inventory. Also called the gross margin method.
Gross profit percentage ✅Measure used in the gross profit method; it represents the
rate (percentage) of profit a company expects from some convenient measure, usually
sales. This rate is determined by company policy and prior-period experience
Hedging ✅The purchaser in the purchase commitment simultaneously enters into a
contract in which it agrees to sell in the future the same quantity of the same (or similar)
goods at a fixed price. The company holds a buy position in a purchase commitment
and a sell position in a futures contract in the same commodity.
Correct Answers
Avg days to sell inv ✅A measure that represents the average number of days' sales for
which inventory is on hand. A variant of the inventory turnover, it is computed by
dividing the inventory turnover by the number of days in the year (365 or sometimes for
simplicity, 360).
Conv retail inv method ✅A method of valuing ending inventory that uses only a cost
ratio using markups but not markdowns, thereby approximating the lower-of-average-
cost-or-market.
Cogs method ✅A method of valuing inventory in which cost of goods sold is debited
for the write-down of inventory to market. As a result, the company does not report a
loss in the income statement because the cost of goods sold already includes the
amount of loss.
Cost to retail ratio ✅The total goods available for sale at cost divided by the total
goods available for sale at retail price.
Designated market value ✅The amount that a company compares to cost, when using
the lower-of-cost-or-market (LCM) rule. The designated market value is the middle
value of three amounts: replacement cost, net realizable value, and net realizable value
less a normal profit margin.
Gross profit method ✅Method of determining inventory amount, often used when it is
impossible or impractical to take a physical inventory.
In this method, companies compute the gross profit percentage on selling price, multiply
that percentage times net sales to determine gross profit, subtract gross profit from net
sales to find cost of goods sold, and subtract cost of goods sold from total goods
available for sale to determine ending inventory. Also called the gross margin method.
Gross profit percentage ✅Measure used in the gross profit method; it represents the
rate (percentage) of profit a company expects from some convenient measure, usually
sales. This rate is determined by company policy and prior-period experience
Hedging ✅The purchaser in the purchase commitment simultaneously enters into a
contract in which it agrees to sell in the future the same quantity of the same (or similar)
goods at a fixed price. The company holds a buy position in a purchase commitment
and a sell position in a futures contract in the same commodity.
