BALIUAG UNIVERSITY

CPA REVIEW 2014-15

THEORY OF ACCOUNTS

JACF
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INVENTORIES, INVENTORIES VALUATIONS

1. This Standard applies to all inventories, except:
a. Work in progress arising under construction contracts, including directly related service contracts;
b. Financial instruments
c. Biological assets related to agricultural activity and agricultural produce at the point of harvest
d. Cost of raw materials used for production
2. Inventories are assets that include those that are
a. Held for sale in the ordinary course of business
b. In the process of production for such sale
c. List of financial instrument
d. In the form of materials or supplies to be consumed in the production process or in the rendering of services
3. It is the estimated selling price in the ordinary course of business less the estimated costs of completion and the
estimated costs necessary to make the sale.
a. Fair value
b. Net realizable value
c. Present value
d. Future value
4. It is the amount for which an asset could be exchanged, or liability settled, between knowledgeable, willing parties
in an arms length transaction.
a. Fair value
b. Net realize able value
c. Present value
d. Future value
5. Inventories shall be measured at the lower of
a. Lower of cost and net realizable value
b. Lower of cost and fair value
c. Lower of cost and future value
d. Lower of cost and present value
6. Cost of inventories shall comprise all costs of
a. Purchase
b. Costs of conversion
c. Other costs incurred in bringing the inventories to their present location and condition
d. All the above
7. The following are added to the cost of inventories except:
a. Purchase price
b. Import duties and other taxes
c. Transport, handling and other costs directly attributable to the acquisition of finished goods, materials and
services

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Page 1 of 7 It is not enough that we do our best; sometimes we must do what is required. Winston Churchill

BALIUAG UNIVERSITY
CPA REVIEW 2014-15
THEORY OF ACCOUNTS

JACF
__________________________________________________________________________________________________
8. The following are excluded from the cost of inventory except:
a. Abnormal amounts of wasted materials, labor or other production costs
b. Storage costs, unless those costs are necessary in the production process before a further production stage
c. Administrative overheads that contribute to bringing inventories to their present location and condition
d. Selling costs
9. An entity may purchase inventories on deferred settlement terms. When the arrangement effectively contains a
financing element, that element, for example a difference between the purchase price for normal credit terms and
the amount paid, the difference is recognized as
a. Addition to inventory
b. Interest expense over the period of the financing
c. Disregarded in the computation of inventory
d. Either a or b
10. The inventory of a service provider are measured at the costs of their production. These costs consists primarily of
the following except:
a. Labor and other costs of personnel directly engaged in providing the service
b. Amount paid to supervisory personnel
c. Labor and other costs relating to sales and general administrative personnel
d. Amount paid for attributable overheads
11. Inventories comprising agricultural produce that an entity has harvested from its biological assets are measured on
initial recognition at their
a. Fair value less estimated point of sale costs at the point of harvest
b. At cost less estimated point of sale costs at the point of harvest
c. At current cost less estimated point of sale costs at the point of harvest
d. At depreciable cost less estimated point of sale costs at the point of harvest
12. A techniques for the measurement of the cost of inventories that to take into account normal levels of materials and
supplies, labor, efficiency and capacity utilization. They are regularly reviewed and, if necessary, revised in the light
of current conditions.
a. Gross profit method
b. Standard cost method
c. First-in, first-out method
d. Last-in, first-out method
13. A cost formula that takes into account the cost of inventories of items that are not ordinarily interchangeable and
goods or services produced and segregated for specific projects is called
a. First-in, first-out method
b. Weighted average method
c. Last-in, first-out method
d. Specific identification method
14. A cost formula that is longer acceptable as an inventory costing method is called
a. First-in, first-out method
b. Weighted average method
c. Last-in ,first-out method
d. Specific identification method
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Page 2 of 7 It is not enough that we do our best; sometimes we must do what is required. Winston Churchill

BALIUAG UNIVERSITY
CPA REVIEW 2014-15
THEORY OF ACCOUNTS

JACF
__________________________________________________________________________________________________
15. When inventories are sold, the carrying amount of those inventories shall be recognized as an
a. Expense in the period in which the related revenue is recognized
b. Capitalized as part of the asset
c. Maybe expense or asset based on judgment call
d. Not taxable
16. The following are recognized as expense for inventory purposes except:
a. Any write-down of inventories to net realizable value
b. All losses of inventories in the period the write-down or loss occurs
c. Amount of any reversal of any write-down of inventories
d. None among the choices
17. Which of the following conversion costs are not part of the cost of inventory?
a. Direct labor costs
b. Factory supervision costs
c. Other factory overhead
d. Salary of sales staff
18. Which of the following statements about inventories is false?
a. All goods to which the entity has title shall be included in inventory, regardless of location.
b. Ownership determines the inclusion or exclusion of inventory in the financial statements.
c. As long as the entity holds possession of the inventory the ownership remains with it.
d. Inventories are assets which are held for sale in the ordinary course of business.
19. Which of the following terms in connection with purchase of inventory makes the seller retain ownership of the
goods in transit and shall legally be responsible for freight charges and other expenses up to the point of
destination?
a. FOB destination
b. FOB shipping point
c. Freight collect
d. Freight prepaid
20. It means that the freight charge on the goods shipped is not yet paid and the common carrier shall collect the same
from the buyer, thus freight charges are actually paid by the buyer.
a. FOB destination
b. FOB shipping point
c. Freight collect
d. Freight prepaid
21. Which of the following statements relating to maritime shipping is not true?
a. A seller who ships free alongside must bear all expenses and risk involved in delivering the goods up to the
dock next to or alongside the vessel on which the goods are to be shipped.
b. The seller bears the cost of loading and shipment and thus, title passes to the buyer when the carrier takes
possession of the goods.
c. Under cost, insurance and freight, the buyer agrees to pay in a lump sum the cost of the goods, insurance
cost and freight charge.
d. Under CIF, the seller must pay for the cost of loading, and thus the title and risk of loss shall pass to the
buyer upon delivery of the goods to the carrier.

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Page 3 of 7 It is not enough that we do our best; sometimes we must do what is required. Winston Churchill

BALIUAG UNIVERSITY
CPA REVIEW 2014-15
THEORY OF ACCOUNTS

JACF
__________________________________________________________________________________________________
22. The following statement/s is / are true.
a. In consignment, the consignor who is the owner transfers physical possession of certain goods to a
consignee who as agent sells the goods on the consignees behalf.
b. Goods on consignment shall be included in the consignees inventory and excluded from the consignors
inventory.
c. Freight and other handling charges are part of the cost of inventory of consigned goods.
d. All statements are true.
23. The following statements are true, except.
a. Inventories shall be presented as one line item in the statement of financial position but the details of the
inventories shall be disclosed in the notes to financial statements.
b. Inventories are either acquired for production, sales or consumption and acquisitions that normally
approximate the entitys need for the current operating cycle and thus presented as current assets.
c. Notes to financial statements shall disclose the composition of inventories of a manufacturing entity.
d. Notes to financial statements shall disclose the beginning inventories, current purchases and ending
inventories of a merchandising entity.
24. In a periodic or physical inventory system which is generally used when the individual inventory items have small
peso investment and are relatively fast-moving.
a. Physical counting of goods on hand at the end of the accounting period is being done to determine actual
quantities.
b. Cost of goods sold is computed only at the beginning and the end of the period.
c. Retailers such as convenience stores, groceries store, hardware and auto parts stores normally use physical
inventory system in accordance with PAS 2.
d. Actual quantities are multiplied by the estimated costs to get the inventory balance.
25. Perpetual inventory system needs:
a. Increases and decreases in inventories to be reflected in the bin cards and stock cards, and the balances
represent the inventory at hand.
b. Cost of goods sold to be computed at the time of every sales period.
c. To be adopted when the inventory items treated individually have small peso investment and relativelymoving.
d. Physical count of units on hand to be done at least twice a year or in a more frequent interval to confirm the
balances appearing on the bin cards.
26. Trade discounts are:
a. Reductions in the invoice price allowed when payment is made within the discount period.
b. Meant to encourage prompt payment and to encourage trading or promote sales.
c. Reductions in list price or catalog price in order to get the invoice price or actual amount charged to the
buyer.
d. Recorded as deduction from gross sales.
27. Which of the following statements is true about methods of recording purchases:
a. Gross method records discounts in the purchase discount account at the time of sales.
b. Net method deducts discounts from purchases when measuring cost of goods sold.
c. In gross method the cost of purchases is measured net of allowable cash discount at the time of sales.
d. In net method cost of purchases are measured net of cash discounts allowable whether taken or not.
28. Which does not comprise the cost of inventory?
a. Cost of purchases
b. Other costs incurred in bringing the inventory to its present location and condition.
c. Cost of conversion
d. Cost of holding

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Page 4 of 7 It is not enough that we do our best; sometimes we must do what is required. Winston Churchill

BALIUAG UNIVERSITY
CPA REVIEW 2014-15
THEORY OF ACCOUNTS

JACF
__________________________________________________________________________________________________
29. The following statements are true about cost of purchases, except
a. Cost of purchase of inventory includes purchase price, import duties, and irrevocable taxes, freight out,
handling and other cost directly attributable to the acquisition of finished goods, materials and services.
b. Foreign exchange differences which arise directly from the recent acquisition of inventories are not included
as part of cost of purchase.
c. When inventories are purchased with deferred settlement terms, the difference between the purchase price
for normal credit terms and the amount paid is recognized as interest expense over the period of financing.
d. Rebates are deducted in determining the cost of purchase in perpetual inventory system.
30. The following statements are not true, except
a. The cost of conversion includes direct materials, direct labor and systematic allocation of fixed and variable
production overhead that is incurred in converting materials into finished goods
b. The allocation of fixed production overhead to the cost of conversion is based on the budgeted capacity of
the production facilities.
c. The amount of fixed overhead allocated to each unit of production is increased as consequence of low
production or idle capacity.
d. Unallocated overhead is recognized as expense in the period in which it is incurred.
31. All but one of the following costs are included in the cost of inventory.
a. Storage costs related to goods in process.
b. Abnormal wastages
c. Administrative overheads
d. Distribution costs
32. Cost of inventory of a service provider includes:
a. Labor costs of personnel directly engaged in providing the services to companys personnel.
b. Labor costs of supervisory personnel directly engaged in providing services to its clients.
c. Other costs relating to sales and general administrative personnel.
d. Other costs relating to personnel directly engaged in providing services to companys personnel.
33. Inventories shall be measured at:
a. Lower of cost and selling price minus cost to sell.
b. Selling price less cost to sell
c. Current replacement cost not exceeding NRV or less tan NRV minus normal profit margin.
d. Current replacement cost
34. The cost of inventories that are not ordinarily interchangeable and inventories that are segregated for specific
projects shall be determined using.
a. FIFO perpetual method.
b. Average method
c. Specific identification method
d. Moving average method
35. Which of the following is false?
a. FIFO method expresses inventory in terms of recent prices while cost of goods sold is representative of
earlier prices and favors the statement of financial position.
b. Periodic weighted inventory method expresses inventory in terms of beginning inventory plus total cost of
purchases during the period divided by the total units purchased plus those in the beginning inventory to get
the weighted average unit cost.
c. Perpetual weighted average method expresses inventory by computing new weighted average unit cost
after every purchase and purchase return.
d. Specific identification method is inappropriate for inventories that are segregated for specific project and
inventories that are not ordinarily interchangeable.

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Page 5 of 7 It is not enough that we do our best; sometimes we must do what is required. Winston Churchill

BALIUAG UNIVERSITY
CPA REVIEW 2014-15
THEORY OF ACCOUNTS

JACF
__________________________________________________________________________________________________
36. Net realizable value equals
a. Estimated selling price less estimated
b. Estimated selling price less estimated cost to complete and dispose
c. Current replacement cost not exceeding NRV or less tan NRV minus normal profit margin.
d. Current replacement cost
37. Inventories are usually written down to LCNRV on an item by item or individual basis and thus:
I.
If cost is lower than the net realizable value, the inventory is stated at cost and the increase in value is
recognized
II.
If the net realizable is lower than cost, the inventory is measured at net realizable value and the decrease in
value is not recognized as expense.
a. Statement 1 is true
b. Statement 2 is true
c. Both statements are true
d. Both statements are false
38. Analyze the following statements.
STATEMENT 1: The cost of goods sold method records inventory at lower of cost or net realizable value and any
loss written down is not accounted for separately but buried in the cost of goods sold.
STATEMENT 2: The loss method records inventory at cost and any loss on inventory writedown is accounted for
separately and included in the computation of cost of goods sold.
STATEMENT 3: The gain on reversal of inventory writedown is recorded only to the extent of the allowance balance
and included is the computation of cost of goods sold.
a. Statements 1, 2, and 3 are true.
b. Statements 1 and 2 are true.
c. Statements 1, 2, and 3 are false.
d. Statements 1 and 3 are false.
39. Inventories of agricultural, forest and mineral products are measured at net realizable value at the following stage of
production, except
a. When agricultural products are harvested.
b. When mineral ore have been extracted.
c. When sales is assured under a forward contract or a government guarantee.
d. When homogenous market exists and there is a intelligible risk of failure to sell.
40. Which is correct?
a. Broke-traders commodities are measured at the price that would be received to sell the asset or paid to
transfer a liability in an orderly transaction between participants at the measurement date.
b. Standard costs method may be used for convenience if result s approximate cost and on the basis of actual
level of materials and supplies, labor efficiency and capacity utilization.
c. When different commodities are purchased at a lump sum, the single cost is apportioned among the
commodities based on their respective sales price which is based on the philosophy that costs is appropriate
selling price.
d. A decline in the purchase price after a non-cancelable purchase commitment is recorded as a loss in the
period of price commitment, with a debit to loss on purchase commitment and credit to liability while gain is
recognized to the extent of more than the loss previously recorded .
41. Financial statements shall disclose the following with respect to inventories, except
a. The accounting policy adopted in measuring inventories, including the cost.
b. The total carrying amount of inventories and carrying amount in classifications appropriate to the entity.
c. The amount of inventories recognized as an expense during the period.
d. The circumstances or events that led to reversal of a writedown.

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Page 6 of 7 It is not enough that we do our best; sometimes we must do what is required. Winston Churchill

BALIUAG UNIVERSITY
CPA REVIEW 2014-15
THEORY OF ACCOUNTS

JACF
__________________________________________________________________________________________________
42. Which is not a reason for making an estimate of inventory?
a. Determination of inventory loss due to fire and other catastrophe or theft.
b. Proof of the reasonable accuracy of a physical count.
c. Preparation of interim statements
d. Preparation of year-end statements
43. Analyze the following statements.
STATEMENT 1: Computing the ending inventory as the difference between goods available for sale less cost of sales,
whereby cost of sales is determined through the use of the gross profit rate, is based on the major assumption that
the rate of income remains approximately the same from period to period.
STATEMENT 2: Computing the ending inventory as the difference between goods available for sales at selling price
and gross sales multiplied by the cost ratio is called retail inventory method.
a. Statement 1 is correct
b. Statement 2 is wrong
c. Both statements are correct
d. Both statements are false
44. All are applications of retail inventory method, except
a. Cost ratio is determined by including markups and excluding markdowns in computing the goods available
for sale at retail.
b. The markups and markdowns are both included in the computation of the cost ratio.
c. A cost ratio is computed for the current year thus the current purchases are considered together with
markups and markdowns and the beginning inventory is included in the computation.
d. None of the above
45. PAS 2 provides that the percentage used under retail method shall take into consideration inventory that has been
marked down to below its original selling price and requires the use of either FIFO or average method as cost
formula, thus, if a product costing P20 originally sells for P25.00, rose to P30.00 and ended up at P21 has a net:
a. Net markdown of P4.00.
b. Net markdown cancelation of P5.00
c. Net markup cancelation of P9.00
d. Net markup of P1.

END

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Page 7 of 7 It is not enough that we do our best; sometimes we must do what is required. Winston Churchill