07a Inventories Cost Flow Valuation

FINANCIAL ACCOUNTING
THEORY & PRACTICE

INVENTORIES
(Cost Flow & Valuation)
QUIZZER
Inventory – Cost Flow & Valuation
INVENTORIES
Essay Questions
Basic Concepts
1. Define "inventories".
PAS 2, paragraph 6, defines inventories as "assets which are held for sale in the ordinary
course of business, in the process of production for such sale or in the form of materials or
supplies to be consumed in the production process or in the rendering of services".
2. What are the two classes of inventories?
Inventories are broadly classified into two, namely inventories of a trading entity and
inventories of manufacturing entity.
A trading entity is one that buys and sells goods in the same form purchased.
The term "merchandise inventory" is generally applied to goods held by a trading entity.
A manufacturing entity is one that buys goods which are altered or converted into another
form before they are made available for sale.
The terms "finished goods", "goods in process," "raw materials", and "factory or
manufacturing supplies" refer to inventories of a manufacturing entity.
3. What is the general rule as to "what goods shall be included in inventory"?
The general rule is that "all goods to which the entity has title shall be included in inventory,
regardless of location."
In other words, it is ownership that determines inventory inclusion or inventory exclusion.
As long as the entity is the owner of the goods to be inventoried, the goods shall be included
in inventory.
4. Explain the following terms in connection with purchase of inventory.

1. FOB destination
2. FOB shipping point
3. Freight collect
4. Freight prepaid
Essay Questions Page 1

FOB destination - means that the ownership of the goods purchased is vested in the buyer
upon receipt thereof.
Accordingly, the seller is still the owner of the goods in transit and shall legally be responsible
for freight charges and other expenses up to the point of destination.
FOB shipping point - means that the ownership of the goods purchased is vested in the buyer
upon the shipment thereof.
Accordingly, the buyer is already, the owner of the goods in transit and shall legally be
responsible for freight charges and other expenses from the point of shipment to the point of
destination.
Freight collect - means that the freight charge on the goods shipped is not yet paid. The
common carrier shall collect the same from the buyer. Thus, under this, the freight charge is
actually paid by the buyer-
Freight prepaid - means that the freight charge on the goods shipped is already paid by the
seller.
The terms "FOB destination" and "FOB shipping point" determine ownership of the goods in
transit and the party who is supposed to pay the freight charge and other expenses from the
point of shipment to the point of destination.
The terms "freight collect" and "freight prepaid" determine the party who actually paid the
freight charge but not the party who is supposed to legally pay the freight charge.
5. Explain fully FAS, CIF and Ex-ship in relation to maritime shipping.
FAS or free alongside - A seller who ships FAS 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.
The buyer bears the cost of loading and shipment and thus, title passes to the buyer when
the carrier takes possession of the goods.
CIF or cost, insurance and freight - Under this shipping contract, the buyer agrees to pay in
a lump sum the cost of the goods, insurance cost and freight charge.

The shipping contract may be modified as CF which means that the buyer agrees to pay in a
lump sum the cost of the goods and freight charge only.
In either case, the seller must pay for the cost of loading. Thus, title and risk of loss shall pass
to the buyer upon delivery of the goods to the carrier.
Ex-ship - A seller who delivers the goods ex-ship bears all expenses and risk of loss until the
goods are unloaded at which time title and risk of loss shall pass to the buyer.
6. Who is the owner of "consigned goods"?
A consignment is a method of marketing goods in which the owner known as the consignor
transfers physical possession of certain goods to an agent known as the consignee who sells
the goods on the owner's behalf.
Goods on consignment shall be included in the consignor's inventory and excluded from the
consignee's inventory.
Freight and other handling charges are part of the cost of the inventory of consigned goods.
7. Explain the classification and presentation of inventories in the statement of financial position.
Since inventories are acquired for production, sale or consumption and acquisitions normally
approximate the entity's need for the current operating cycle, these are generally classified
as current assets.
The 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.
For example, the note shall disclose the composition of the inventories of a manufacturing
entity as finished goods, goods in process, raw materials and manufacturing supplies.
8. Explain the two systems of accounting for inventories.
1. Periodic or physical system
The periodic system calls for the physical counting of goods on hand at the end of the
accounting period to determine quantities.
The quantities are then multiplied by the recorded unit costs to get the inventory value.

This approach gives actual or physical inventory.
Thus, under this approach, the cost of goods sold is computed only at the end of the
period by deducting the physical inventory from the total cost of goods available for sale.
The periodic inventory procedure is generally used when the individual inventory items
have small peso investment, such as groceries, hardware and auto parts.
2. Perpetual system
The perpetual system requires the keeping of stock cards that summarize inventory
inflow and outflow.
Inventory increases and decreases are reflected in the stock cards and the resulting
balance represents the inventory. This approach gives book or perpetual inventory.
Under this approach, the cost of goods sold is computed at the time of every sale.
The perpetual inventory procedure is commonly used when the inventory items treated
individually have large peso investment such as jewelry and cars.
When the perpetual system is used, a physical count of the units on hand should at least
be made once a year or at frequent intervals to confirm the balances appearing on the
stock cards.
9. Distinguish cash discounts and trade discounts.
1. Cash discounts are reductions in the invoice price allowed  only when payment is made
within the discount period.
Cash discounts are called purchase discount on the part of the buyer and sales discount
on the part of seller.
Trade discounts are reductions in the list price or catalog price in order to get the invoice
price or the amount actually charged to the buyer.
2. Cash discounts are recorded but trade discounts are not  recorded.
3. The' purpose of cash discounts is to encourage prompt  payment. The purpose of trade
discounts is to encourage  trading or promote sales.

10. What are the two methods of recording purchases?
1. Gross method
As the title suggests, the purchases are recorded at the gross amount of the invoice.
Cash discounts taken are recorded in a purchases discount account at the time of
payment.
The purchases discount is deducted from purchases when measuring cost of goods sold.
2. Net method
The purchases are recorded at net amount, meaning, the cost of purchases is measured
net of cash discounts allowable whether taken or not taken.
11. What is "cost" of an inventory?
The cost of an inventory comprises:

a. Cost of purchase
b. Cost of conversion
c. Other cost incurred in bringing the inventory to its  present location and condition
12. Explain the "cost of purchase" of an inventory.
The cost of purchase of inventory comprises the purchase price, import duties and
irrecoverable taxes, freight, handling and other costs directly attributable to the acquisition of
finished goods, materials and services.
Trade discounts, rebates and other similar items are deducted in determining the cost of
purchase.
The cost of purchase shall not include foreign exchange differences which arise directly from
the recent acquisition of inventories.
Moreover, 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.

13. Explain the "cost of conversion" of an inventory.
The cost of conversion of inventory includes cost directly related to the units of production
such as direct labor.
The cost of conversion also includes a systematic allocation of fixed and variable production
overhead that is incurred in converting materials into finished goods.
The allocation of fixed production overhead to the cost of conversion is based on the normal
capacity of the production facilities.
The amount of fixed overhead allocated to each unit of production is not increased as
consequence of low production or idle plant.
Unallocated overhead is recognized as expense in the period in which it is incurred.
Variable production overhead is allocated to each unit of production on the basis of the actual
use of the production facilities.
14. What is the treatment of the following costs in connection with inventory?
a. Abnormal amounts of wasted materials, labor and other  production costs

b. Storage costs
c. Administrative overheads that do not contribute to  bringing inventories to their present
location and  condition
d. Distribution costs
Such costs are excluded from the cost of inventory and recognized as expenses in the period
in which they are incurred.
The reason is that these costs are not necessary in bringing the inventory to the present
location and condition.
However, storage costs related to goods.in process or part-finished goods are inventoriable.
15. Explain the cost of inventory of a service provider.

The cost of inventory of a service provider consists primarily of the labor and other costs of
personnel directly engaged in providing the service, including supervisory personnel and
attributable overhead.

The inventory of a service provider may simply be described as work in progress.
Labor and other costs relating to sales and general administrative personnel are not included
but are recognized as expenses in the period in which they are incurred.
Measurement
16. Explain fully the measurement of inventory in the statement of financial position.
PAS 2 provides the following clear-cut principles concerning measurement of inventory:
a. Paragraph 9 provides that inventories shall be measured  at the lower of cost and net
realizable value or now known  as LCNRV.
b. Paragraph 25 provides that the cost of inventories shall be  determined by using either
the FIFO method or weighted  average method. PAS 2 prohibits the use of LIFO costing.
c. Paragraph 23 provides that the cost of inventories that are  not ordinarily interchangeable
and inventories that are  segregated for specific projects shall be determined by using
 specific identification method.
17. Explain the "first in, first out" (FIFO) method of inventory valuation.
The FIFO method assumes that "the goods first purchased are first sold" and consequently
the goods remaining in the inventory at the end of the period are those most recently
purchased or produced.
In other words, the FIFO is in accordance with the ordinary merchandising procedure that the
goods are sold in the order they are purchased. The rule is "first come, first sold".
The inventory is thus expressed in terms of recent or new prices while the cost of goods sold
is representative of earlier or old prices.
This method favors the statement of financial position in that the inventory is stated at current
replacement cost.
The objection to the method is that there is improper matching of cost against revenue
because the goods sold are stated at earlier or older prices resulting in understatement of
cost of sales.

18. Explain the weighted average method of inventory valuation.
The periodic weighted average method means that cost of the beginning inventory plus the
total cost of purchases during the period is divided by the total units purchased plus those in
the beginning inventory to get a weighted average unit cost.
Such weighted average unit cost is then multiplied by the units on hand to derive the inventory
value.
The average unit cost is computed by dividing the total cost of goods available for sale by the
total number of units available for sale.
When used in conjunction with the perpetual system, the weighted average method is
popularly known as the moving average method.
PAS 2, paragraph 27, provides that the weighted average may be calculated on a periodic
basis or as each additional shipment is received depending upon the circumstances of the
entity.
Under moving average method, a new weighted average unit costjnust be computed after
every purchase and purchase return.
Thus, the total cost of goods available after every purchase and purchase return is divided
by the total units available for sale at this time to get a new weighted average unit cost.
Such new weighted average unit cost is then multiplied by the units on hand to get the
inventory cost.
This method requires the keeping of inventory stock cards in order to monitor the "moving"
unit cost after every purchase.
19. Explain the "last in, first out" or LIFO method of inventory valuation.
THE LIFO method assumes that "the goods last purchased are first sold" and consequently
the goods remaining in the inventory at the end of the period are those first purchased or
produced.
The inventory is thus expressed in terms of earlier or old prices and the cost of goods sold is
representative of recent or new prices.

The LIFO favors the income statement because there id proper matching of current cost
against revenue, the cost of goods sold being expressed in terms of current or recent cost.
The objection to the LIFO is that the inventory is stated at earlier or older prices and therefore
there may be a significant lag between inventory valuation and current replacement cost.
Moreover, the use of LIFO permits income manipulation, such as by making year-end
purchases designed to preserve existing inventory layers. At times these purchases may not
even be in the best economic interest of the entity.
20. Explain the "specific identification" method of inventory valuation?
Specific identification means that specific costs are attributed to identified items of inventory.
The cost of the inventory is determined by simply multiplying the units on hand by their actual
unit cost.
This requires records which will clearly determine the actual costs of goods on hand.
PAS 2, paragraph 23, provides that this method is appropriate for inventories that are
segregated for a specific project and inventories that are not ordinarily interchangeable.
The specific identification method may be used in either periodic or perpetual inventory
system.
The major argument for this method is that the flow of the inventory cost corresponds with
the actual physical flow of goods.
With specific identification, there is an actual determination of cost of units sold and on hand.
The major argument against this method is that it is very costly to implement even with high-
speed electronic computers.
21. What is "net realizable value"?
Net realizable value or NRV is the' estimated selling price in the ordinary course of business
less the estimated cost of completion and the estimated cost of disposal.

The cost of inventories may not be recoverable if those inventories are damaged, if they have
become wholly or partially obsolete, or if their selling prices have declined:
The cost of inventories may also not be recoverable if the estimated cost of completion or the
estimated cost of disposal has increased.
The practice of writing inventories down below cost to the net reahzable value is consistent
with the view that assets should not be carried in excess of amounts expected to be realized
from their sale or use.
22. Explain the measurement of inventories at the "lower of cost and net realizable value".
Inventories are usually written down to net realizable value on an item by item or individual
basis.
It is not appropriate to write down inventories based on a classification of inventory, for

example, finished goods or all inventories in a particular industry or geographical segment.
If the cost is lower than net realizable value, the inventory is stated at cost and the increase
in value is not recognized.
If the net realizable value is lower than cost, the inventory is measured at net realizable value
and the decrease in value is recognized as expense.
23. Explain the direct and allowance method of accounting for inventory writedown to net
realizable value.
Direct method
The inventory is recorded at the lower of cost or net reahzable value. This method is also
known as "cost of goods sold" method because any loss on inventory writedown is not
accounted for separately but "buried" in the cost of goods sold.
Allowance method
The inventory is recorded at cost and any loss on inventory writedown is accounted for
separately. This method is also known as "loss method" because a loss account, "loss on
inventory writedown" is debited and a valuation account "allowance for inventory writedown"
is credited for the inventory writedown.
The loss on inventory writedown is included in the computation of cost of goods sold.

In subsequent years, this allowance account is adjusted upward or downward depending on

the difference between the cost and net realizable value of the inventory at year-end.
If the required allowance increases, an additional loss is recognized.
If the required allowance decreases, a gain on reversal of inventory writedown is recorded.

However, the gain is limited only to the extent of the allowance balance.
The gain on reversal of inventory writedown is also included in the computation of cost of
goods sold as a deduction.
Preferably, the allowance method is used in order that the effects of writedown and reversal
of writedown can be clearly identified.
As a matter of fact, PAS 2, paragraph 36, requires disclosure of the amount of any inventory
writedown and the amount of any reversal of inventory writedown.
Agricultural, Mineral & Forest Products

24. Explain the measurement of agricultural, mineral and forest products.
PAS 2, paragraph 4, provides that inventories of agricultural, forest and mineral products are
measured at net realizable value at certain stages of production.
This occurs when agricultural crops have been harvested or mineral ores have been
extracted and a sale is assured under a forward contract or a government guarantee, or when
a homogenous market exists and there is a negligible risk of failure to sell.
Commodities of Broker-Traders
25. Explain the measurement of commodities of broker-traders.
PAS 2, paragraph 3, provides that commodities of broker-traders are measured at fair value
less cost of disposal.
PFRS 13, paragraph 9, defines fair value as "the price that would be received to sell the asset
or paid to transfer a liability in an orderly transaction between market participants at the
measurement date".
Broker-traders are those who buy and sell commodities for others or on their own account.
The inventories of broker-traders are principally acquired with the purpose of selling them in
the near future and generating a profit from fluctuations in price or broker-traders' margin.

Standard Costs
26. Explain the measurement of inventory at "standard costs".
Standard costs are "predetermined product costs established on the basis of normal levels
of materials and supplies, labor, efficiency and capacity utilization".
A standard cost is predetermined and, once determined, is applied to all inventory

movements - inventories, goods available for sale, purchases and goods sold or placed in
production.
PAS 2, paragraph 21, states that the standard cost method may be used for convenience if
the results approximate cost.
However, the standards set should be realistically attainable and are reviewed and revised
regularly in the fight of current conditions.
Relative Sales Price Method

27. What is the meaning of the "relative sales price" method of inventory measurement?
When different commodities are purchased at a lump sum, the single cost is apportioned
among the commodities based on then respective sales price.
The relative sales price method is based on the philosophy that cost is proportionate to selling
price.
Purchase Commitments
28. What are purchase commitments? How are purchase commitments accounted for?
Purchase commitments are obligations of an entity to acquire certain goods sometime in the
future at a fixed price and fixed quantity.
Actually, a purchase order has already been made for future delivery of goods fixed in price
and fixed in quantity.
Where the purchase commitments are significant or unusual, disclosure is required in the
accompanying notes to financial statements.
Any losses which are expected to arise from firm and noncancelable purchase commitments
shall be recognized.

If there is a decline in purchase price after a noncancelable purchase commitment has been
made, a loss is recorded in the period of the price decline.
Note that a purchase commitment must be noncancelable in order that a loss on purchase
commitment can be recognized.
Thus, if at the end of the reporting period, the purchase price falls below the agreed price the
difference is accounted for as a debit to loss on purchase commitment and a credit to an
estimated liability.
Actually, the recognition of a loss on purchase commitment is an adaptation of the

measurement at the lower of cost and net realizable value.
Accordingly, if the market price rises by the time the entity makes the purchase, a gain on
purchase commitment would be recorded.
However, the amount of gain to be recognized is limited to the loss on purchase commitment
previously recorded.
Disclosures
29. What are necessary disclosures with respect to inventories?
With respect to inventories, the financial statements shall disclose the following:
a. The accounting policy adopted in measuring inventories, including the cost formula used.
b. The total carrying amount of inventories and the carrying amount in classifications
appropriate to the entity. Common classifications of inventories are merchandise
inventory, raw materials, goods in process, finished goods and production supplies.
c. The carrying amount of inventories carried at fair value less cost to sell.
d. The amount of inventories recognized as an expense during the period.
e. The amount of any writedown of inventories recognized as an expense during the period.
f. The amount of reversal of writedown that is recognized as income.
g. The circumstances or events that led to reversal of a writedown of inventories.
h. The carrying amount of inventories pledged as security for liabilities.

Multiple Choice - Theory

Basic concepts
1. Inventories are defined as
A. Assets used in the production or supply of goods and services for administrative
purposes.
B. Assets held for sale, in the process of production, or in the form of materials or supplies
to be consumed in the production process.
C. Assets held for sale in the ordinary course of business, in the process of production for
such sale, or in the form of materials or supplies to be consumed in the production
process or in the rendering of services.
D. Tangible assets held for sale in the ordinary course of business, in the process of
production, or in the form of materials or supplies to be consumed in the production
process or in the rendering of services. FA © 2014
2. Inventories are assets defined by all of the following, except

A. In the process of production for such sale
B. Held for sale in the ordinary course of business.
C. Used in the production or supply of goods and services for administrative purposes.
D. In the form of materials or supplies to be consumed in the production process or the
rendering of services FA © 2014
3. An entity that purchased inventory for resale to customers should charge what account for
the purchase?
A. Finished goods inventory C. Work in process inventory
B. Merchandise inventory D. All of the choices are correct FA © 2014
4. Which of the following inventories carried by a manufacturer is similar to the merchandise

inventory of a retailer?
A. Finished goods C. Supplies
B. Raw materials D. Work in process FA © 2014
5. Which of the following should be included in inventory at the end of reporting period?
A. Goods received from another entity on consignment
B. Goods in transit which were purchased FOB destination
C. Goods in transit which were purchased FOB shipping point FA © 2014
D. Goods in transit to a customer which were sold to the customer FOB shipping point
MCQ - Theory Page 14

6. Inventories include all of the following assets, except

A. In the process of production for sale.
B. Held for sale in the ordinary course of business.
C. Held for use in the production or supply of goods or  services.
D. In the form of materials or supplies to be consumed  in the production process or in the
rendering of  services. TOA © 2013
7. Inventories encompass all of the following, except

A. Finished goods produced
B. Merchandise purchased by a retailer
C. Land and other property not held for sale
D. Materials and supplies awaiting use in the production  process FA © 2014
8. Which of the following accounts is not reported in inventory?

A. Equipment C. Raw materials
B. Finished goods D. Supplies FA © 2014
9. Which of the following should not be reported as inventory?

A. Land acquired for resale by a real estate firm
B. Shares and bonds held for resale by a brokerage firm
C. Partially completed goods held by a manufacturing entity
D. Machinery acquired by a manufacturing entity for use in the production process FA ©
2014
10. Which of the following should be included in inventory?

A. Goods received from another entity for sale on consignment.
B. Goods in transit which were purchased FOB destination.
C. Goods sold to a customer which are being held for the customer to call for at the
customer convenience.
D. None of these should be included. FA © 2014
Product costs & period costs

11. The cost of inventory is the sum of
A. Direct cost, indirect cost and other cost.
B. Cost of purchase and cost of conversion.
C. Cost of conversion and other cost incurred in bringing   the inventory to the
present location and condition.
D. Cost of purchase, cost of conversion and other cost  incurred in bringing the inventory to
the present  location and condition. FA © 2014

12. The cost of purchase of inventory does not include

A. Purchase price
B. Import duties and irrecoverable taxes
C. Trade discounts, rebates and other similar items
D. Freight, handling and other cost directly attributable  to the acquisition of goods FA ©
2014
13. Costs that are incurred in bringing the inventories to their present location and condition are
capitalized as cost of inventories and these include
A. Distribution cost
B. Cost of designing products for specific customers
C. Abnormal amount of wasted material, labor and  production cost FA © 2014
D. Storage cost not necessary in the production process  before a further production stage
14. Variable production overheads are allocated to each unit of production on the basis of
A. Actual use of the production facilities
B. Normal capacity of the production facilities
C. Neither the normal capacity nor the actual use of  production facilities FA © 2014
D. Either the normal capacity or the actual use of  production facilities, whichever is
appropriate
15. Which of the following costs should be included in inventory valuation?

A. Administrative costs C. Fixed production overhead FA © 2014
B. Abnormal material usage D. Storage costs relating to finished goods
16. Fixed production overheads include all of the following, except

A. Depreciation of factory building
B. Maintenance of factory equipment
C. Indirect materials and indirect labor
D. Cost of factory management and administration FA © 2014
17. The allocation of fixed factory overhead to the cost of conversion is based on
A. Relative sales value method
B. Actual use of the production facilities
C. Normal capacity of the production facilities FA © 2014
D. Either the normal capacity or actual use of the  production facilities, whichever is
appropriate

18. What is considered normal capacity of production facilities?

A. Actual production
B. The average production over a five-year period
C. Actual production plus loss of capacity for planned  maintenance
D. A range that may vary based on business and  industry-specific factors TOA © 2013
19. How should unallocated fixed overhead costs be treated?

A. Recognized as an expense in the period incurred.
B. Allocated to finished goods and cost of goods sold.
C. Allocated to raw materials, goods in process and  finished goods.
D. Allocated to goods in process, finished goods and cost  of goods sold. FA © 2014
20. Which of the following should be taken into account when determining the cost of inventory?
A. Abnormal freight in C. Recoverable purchase tax FA © 2014
B. Interest on inventory loan D. Storage cost of part-finished goods
21. The inventories of a service provider may simply be described as

A. Billed services C. Unbilled services
B. Services inventory D. Work in progress FA © 2014
22. The costs of inventory of a service provider include which of the following?
I. Labor and other cost of personnel directly engaged in providing the service.
II. Compensation of supervisor directly engaged in  providing the service.
III. Attributable overhead incurred in providing the  service.
A. I only C. I and III only
B. I and II only D. I, II and III TOA © 2013
23. The costs of inventory of a service provider include which of the following?
A. Attributable overhead incurred in providing the service.
B. Compensation of supervisor directly engaged in providing the service.
C. Labor and other costs of personnel directly engaged in providing the service.
D. All of these are included. FA © 2014
24. Costs which are inventoriable include all of the following, except
A. Selling costs of a sales department.
B. Buying costs of a purchasing department.
C. Costs that are directly connected with the converting of goods to a salable condition.
D. Costs that are directly connected with the bringing of goods to the place of business of
the buyer. FA © 2014

25. The costs of conversion of inventory include all of the following, except
A. Systematic allocation of administrative overhead
B. Systematic allocation of fixed production overhead
C. Systematic allocation of variable production overhead
D. Costs directly related to the units of production, such  as direct labor FA © 2014
26. Which of the following costs of conversion cannot be included in cost of inventory?
A. Cost of direct labor
B. Factory rent and utilities
C. Factory overhead based on normal capacity
D. Salaries of sales staff (sales department shares the  building with factory) FA © 2014
27. Which of the following should not be taken into account when determining the cost of
inventories?
A. Trade discounts
B. Recoverable purchase taxes
C. Storage costs of part-finished goods
D. Import duties on shipping of inventory inward TOA © 2013
28. The cost of inventories does not include

A. Salaries of factory staff.
B. Irrecoverable purchase taxes.
C. Abnormal amounts of wasted materials and  distribution costs. FA © 2014
D. Storage costs necessary in the production process  before a further production stage.
29. Which of the following costs should not be included as part of the cost of inventory?
A. Abnormal freight C. Import duties FA © 2014
B. Conversion costs D. All of these are included in inventory
30. When determining the unit cost of an inventory, which of the following should not be included?
A. Commission paid when inventory is purchased
B. Labor cost of the inventory when manufactured
C. Interest on loan obtained to purchase the inventory
D. Depreciation of plant equipment used in manufacturing FA © 2014
31. Which of the following statements in relation to measurement of inventory is true?

I. Cost of factory management shall be included in the cost of inventory.
II. Maintenance expenses for an item of equipment used  in the manufacturing process
shall be included in the  cost of inventory.

A. I only C. Both I and II

B. II only D. Neither I nor II TOA © 2013
32. Theoretically, how should warehousing cost and interest on inventory loan affect the cost of
inventory, respectively?
A. Increase and Increase C. No effect and Increase
B. Increase and No effect D. No effect and No effect TOA © 2013
33. An exception to the general rule that costs should be charged to expense in the period
incurred is
A. Sales commission and salary costs incurred in  connection with the sale of inventory.
B. General and administrative fixed costs incurred in  connection with the purchase of
inventory.
C. Interest costs for financing of inventories that are  routinely manufactured in large
quantities on a  repetitive basis.
D. Factory overhead costs incurred on a product manufactured but not sold during the
current accounting period. FA © 2014
Freight Terms
34. Goods shipped FOB shipping point on the last day of the year should ordinarily be included
in
A. The buyer's inventory balance
B. The seller's inventory balance
C. Neither the buyer's nor seller's inventory balance
D. Both the buyer's and the seller's inventory balance TOA © 2013
35. Goods shipped FOB destination that are in transit at the end of the year should be included
in the inventory of
A. Bank C. Common carrier
B. Buyer D. Seller TOA © 2013
36. Which of the following should be included in inventory at the end of reporting period?
A. Goods received from another entity on consignment
B. Goods in transit which were purchased FOB destination
C. Goods in transit which were purchased FOB shipping  point TOA © 2013
D. Goods in transit to a customer which were sold to the  customer FOB shipping point

Trade discount, purchase discount, freight-in, purchase returns & allowances

37. A discount given to a customer for purchasing a large volume of merchandise is typically
referred to as
A. Cash discount C. Size discount
B. Quantity discount D. Trade discount FA © 2014
38. Which of the following terms represents the deduction from the invoice price of purchased
goods granted by suppliers for early payment?
A. Purchase discount C. Sales discount
B. Purchase return and allowance D. Trade discount FA © 2014
39. What is the treatment for abnormal freight in?

A. Charge to expense for the period.
B. Charge to raw materials inventory.
C. Charge to finished goods inventory.
D. Allocate to raw materials, work in process and finished  goods. TOA © 2013
40. Which of the following generally would not be separately accounted for in the computation of
cost of goods sold?
A. Cash discounts taken during the period
B. Trade discounts applicable to purchases
C. Cost of transportation for merchandise purchased
D. Purchase returns and allowances during the period TOA © 2013
Gross method & net method

41. Which method may be used to record cash discounts received for paying suppliers promptly?
A. Average method C. Net method FA © 2014
B. Gross method D. Net method and gross method
42. Theoretically, cash discounts permitted on purchased raw materials should be

A. Added to other income, only if taken
B. Deducted from inventory, only if taken
C. Added to other income, whether taken or not
D. Deducted from inventory, whether taken or not FA © 2014
43. The use of purchase discount account implies that the recorded cost of a purchased inventory
item is
A. Invoice price
B. Invoice price plus any purchase discount lost

C. Invoice price less the purchase discount taken

D. Invoice price less the purchase discount allowable  whether taken or not FA © 2014
44. The use of a discount lost account implies that cost of a purchased inventory item is
A. List price
B. Invoice price
C. Invoice price less the purchase discount taken
D. Invoice price less the purchase discount allowable  whether or not taken FA © 2014
Periodic & perpetual inventory system

45. In a periodic system, the beginning inventory is
A. Net purchases minus ending inventory
B. Net purchases minus cost of goods sold
C. Total goods available for sale minus net purchases
D. Total goods available for sale minus cost of goods sold FA © 2014
46. When using the periodic system, which of the following generally would not be separately
accounted for in the computation of cost of goods sold?
A. Cash discounts taken during the period
B. Trade discounts applicable to purchases
C. Purchase returns and allowances during the period
D. Cost of transportation in for merchandise purchased during the period FA © 2014
47. What is the method of accounting for inventory in which the cost of goods sold is recorded
each time a sale is made?
A. Periodic inventory system C. Planned inventory system TOA © 2013
B. Perpetual inventory system D. Professional inventory system
48. Which of the following is a characteristic of a perpetual inventory system?

A. Inventory records are not kept for every item.
B. Cost of goods sold is recorded with each sale.
C. Inventory purchases are debited to a purchases account. FA © 2014
D. Cost of goods sold is determined as the amount of  purchases less the change in
inventory.
49. Which of the following is not true of the perpetual inventory method?
A. Purchases are recorded as debit to the inventory account.
B. After a physical inventory count, inventory is credited  for any missing inventory.
C. The entry to record a sale includes a debit to cost of  goods sold and a credit to inventory.

D. Purchase returns are recorded by debiting accounts  payable and crediting purchase
returns and allowances. FA © 2014
50. An entry debiting inventory and crediting cost of goods sold would be made when
A. Merchandise is sold and the periodic inventory method is used.
B. Merchandise is sold and the perpetual inventory  method is used.
C. Merchandise is returned and the periodic inventory  method is used.
D. Merchandise is returned and the perpetual inventory  method is used. FA © 2014
Consigned inventory
51. What is consigned inventory?
A. Goods that are shipped but title remains with the shipper.
B. Goods that are shipped and title transfers to the receiver.
C. Goods that have been segregated for shipment to a customer.
D. Goods that are sold but payment is not required until the goods are sold. FA © 2014
52. Goods on consignment are included in the inventory of

A. The consignor but not the consignee
B. The consignee but not the consignor
C. Both the consignor and the consignee
D. Neither the consignor nor the consignee FA © 2014
53. Freight and other handling charges incurred in the transfer of goods from the consignor to
consignee are FA © 2014
A. Inventoriable by the consignee C. Expense on the part of the consignee
B. Inventoriable by the consignor D. Expense on the part of the consignor
54. How is a significant amount of consignment inventory reported?

A. Reported separately by the consignee.
B. Combined with other inventory of the consignor.
C. Combined with other inventory of the consignee.
D. Reported separately in the consignor's statement of financial position. FA © 2014
Types of Inventories
55. Which of the following describes the flow of product costs  through the inventory accounts of
a manufacturer?
A. Raw materials, direct labor, factory overhead
B. Raw materials, goods in process, finished goods
C. Raw materials, direct labor, factory overhead, finished  goods
D. Raw materials, goods in process, factory overhead, finished goods TOA © 2013

56. Which of the following would not be included in the cost of work in process inventory?
A. Depreciation on factory equipment
B. Maintenance cost of factory equipment
C. Cost of electricity to operate factory equipment
D. Depreciation on equipment in the sales manager's office TOA © 2013
57. Which of the following inventories carried by a manufacturer is similar to the merchandise
inventory of a retailer?
A. Finished goods C. Supplies
B. Raw materials D. Work in process TOA © 2013
Cost Flow Assumption

58. The cost of inventory shall be measured using
A. Average method C. LIFO . TOA © 2013
B. FIFO D. Either FIFO or average method
59. This cost formula assumes that the items of the inventory that were purchased or produced
first are sold first and consequently the items remaining in inventory at the end of the period
are those most recently purchased or produced.
A. FIFO C. Moving average
B. LIFO D. Weighted average TOA © 2013
60. Which of the following inventory method reports most closely the current cost of inventory?
A. FIFO C. Specific identification
61. Which of the following is the reason why the specific identification method may be considered
ideal for assigning cost to inventory and cost of goods sold?
A. There is no arbitrary allocation of cost.
B. It is applicable to all types of inventory.
C. The cost flow matches the physical flow.
D. The potential for manipulation of net income is reduced. TOA © 2013
62. The costing of inventory must be deferred until the end of reporting period under which of the
following method of inventory valuation9
A. FIFO perpetual C. Moving average
B. LIFO perpetual D. Weighted average TOA © 2013

63. The weighted average method may be calculated

I. On a periodic basis.
II. As each shipment is received depending upon the  circumstances of the entity.
A. I only C. Either I or II
B. II only D. Neither I nor II TOA © 2013
Sensitivity analysis
64. In a period of falling prices, the use of which inventory cost flow method would typically result
in the highest cost of goods sold?
65. Which inventory cost flow assumption provides the best measure of earnings, where "best"
means most appropriate for predicting future earnings, when prices have been declining?
A. Average cost C. LIFO
B. FIFO D. Specific identification TOA © 2013
66. Which inventory cost flow assumption would consistently result in the highest income in a
period of sustained inflation?
67. In a period of rising prices, the inventory cost allocation method that tends to result in the
lowest reported net income is
A. FIFO C. Moving average
68. During periods of rising prices, when the FIFO inventory cost flow method is used, a perpetual
inventory system would
A. Not be permitted.
B. Result in the same ending inventory as a periodic  inventory system.
C. Result in a lower ending inventory than a periodic  inventory system.
D. Result in a higher ending inventory than a periodic  inventory system. TOA © 2013
69. The inventory cost was lower using FIFO than LIFO. If there is no beginning inventory, what
direction did the cost of purchases move during the period?
A. Cannot be determined C. Steady
B. Down D. Up TOA © 2013

Measurement & Valuation

70. Why is inventory included in the computation of net income?
A. To determine sales revenue
B. To determine cost of goods sold
C. To determine merchandise returns
D. Inventory is not included in the computation of net income FA © 2014
71. Valuation of inventory requires the determination of all, except

A. The cost flow assumption.
B. The costs to be included in inventory.
C. The cost of goods held on consignment.
D. The physical goods to be included in inventory. FA © 2014
Fair value less cost of disposal

72. Commodity broker-traders
A. Measure inventories at LCNRV.
B. All of the choices are correct regarding broker-traders.
C. Produce commodities such as rice, corn or precious metals. FA © 2014
D. Hold inventory primarily to sell in the near term and generate a profit from price
fluctuation.
73. Commodities of broker-traders are measured at

A. Cost C. Fair value less cost of disposal
B. Fair value D. Net realizable value FA © 2014
Net realizable value

74. Situation in which net realizable value is used to measure inventory includes
A. Agricultural inventory C. Minerals FA © 2014
B. Commodities held by broker-traders D. All of these are measured at NRV
75. Net realizable value is the general rule for valuing which inventory?
A. Commodities held by broker-traders
B. Inventories priced on an item by item basis
C. Computer components held for sale to manufacturers
D. All of these are measured at NRV FA © 2014
76. When agricultural crops have been harvested or mineral ores have been extracted and a sale
is assured under a forward contract or government guarantee, such inventories are measured
at

A. Cost C. Relative sales price

B. Net realizable value D. Standard cost FA © 2014
77. Net realizable value is

A. Estimated selling price
B. Current replacement cost
C. Estimated selling price less estimated cost to complete FA © 2014
D. Estimated selling price less estimated cost to complete  and estimated cost of disposal
Lower of cost and net realizable value

78. Inventories shall be measured at
A. Cost C. Lower of cost and net realizable value
B. Higher of cost and net realizable value D. Net realizable value FA © 2014
79. Reporting inventory at the lower of cost and net realizable value is a departure from
A. Conservatism C. Full disclosure
B. Consistency D. Historical cost FA © 2014
80. Lower of cost and net realizable value as it applies to inventory is best described as the
A. Assumption to determine inventory flow.
B. Method of determining cost of goods sold.
C. Change in inventory value to net realizable value. FA © 2014
D. Reporting of a loss when there is a decrease in the  future utility below the original cost.
81. Inventories are usually written down to net realizable value

A. By classification C. By total
B. By segment D. Item by item FA © 2014
82. Which of the following is not an acceptable method of  applying the LCNRV?
A. Individual item C. Inventory location
B. Inventory group D. Total of the inventory FA © 2014
83. Lower of cost and net realizable value

A. Must be applied to major group.
B. Gives the lowest valuation if applied to the total inventory.
C. Gives the lowest valuation if applied to major group  of inventory.
D. Gives the lowest valuation if applied to individual  item of inventory. FA © 2014

84. LCNRV of inventory

A. Should always be equal to net realizable value.
B. Is always either the net realizable value or cost.
C. May sometimes be less than net realizable value.
D. Should always be equal to estimated selling price less  cost to complete. FA © 2014
85. When inventory declines in value below original cost, what is the maximum amount of the
inventory value?
A. Sales price
B. Historical cost
C. Net realizable value
D. Sales price reduced by estimated cost of disposal FA © 2014
86. How should import duties be dealt with when valuing inventory at LCNRV?
A. Ignored
B. Added to cost
C. Deducted from cost
D. Deducted in arriving at net realizable value FA © 2014
87. How should trade discounts be dealt with when valuing inventories at the lower of cost and
net realizable value?
A. Added to cost C. Deducted in arriving at NRV
B. Deducted from cost D. Ignored FA © 2014
88. How should prompt payment discount be dealt with when valuing inventories at the lower of
cost and net realizable value?
89. How should sales staff commission be dealt with when valuing inventories at the lower of
cost and net realizable  value?
90. The amount of any writedown Of inventory to net realizable value and all losses of inventory
shall be
A. Deferred until the related inventory is sold.
B. Recognized as other expense in the period the  writedown or loss occurs.
C. Recognized as operating expense in the period the  writedown or loss occurs.
D. Recognized as component of cost of goods sold in the  period the writedown or loss
occurs. FA © 2014

91. Which method may be used to record a loss due to a price decline in the value of inventory?
A. Loss method
B. Sales method
C. Cost of goods sold method
D. Loss method and cost of goods sold method FA © 2014
92. When the cost of goods sold method is used to record inventory at net realizable value
A. There is a direct reduction in the selling price.
B. A loss is recorded directly in the inventory account by debiting loss.
C. Only the portion of the loss attributable to inventory sold is recorded.
D. The net realizable value for ending inventory is substituted for cost and the loss is buried
in cost of goods sold. FA © 2014
93. Which of the following statements is true regarding inventory writedown and reversal of
writedown?
A. Reversal of inventory writedown is prohibited.
B. Separate reporting of reversal of inventory writedown  is required.
C. Entities are required to record writedown in a  separate loss account.
D. All of the choices are correct. FA © 2014
94. Which of the following statements is incorrect regarding  LCNRV?

A. In most situations, entities price inventory on a total  inventory basis.
B. Entities use an allowance account to reduce inventory  to net realizable value.
C. Net realizable value is the selling price less estimated  cost to complete and estimated
cost of disposal.
D. One of two methods may be used to record the income  effect of valuing inventory at net
realizable value. FA © 2014
Not an acceptable basis

95. Which of the following financial attributes would not be used to measure inventory?
A. Current replacement cost C. Net realizable value FA © 2014
B. Historical cost D. Present value of future cash flows
96. Which is not an acceptable basis in measuring inventory?
A. Fair value less cost of disposal C. Net realizable value
B. Historical cost D. Prime cost FA © 2014
97. Which of the following is not an acceptable basis for valuation of inventory?
A. Current replacement cost C. Historical cost
B. Current selling price less cost of disposal D. Prime cost FA © 2014

98. The valuation of inventory on a prime cost basis

A. Is always achieved when the FIFO is adopted
B. Would achieve the same results as direct costing
C. Is always achieved when standard costing is adopted
D. Would exclude all overhead from reported inventory cost FA © 2014
Cost of goods available for sale & cost of goods sold

99. Entities must allocate the cost of all goods available for sale between
A. The income statement and the statement of financial  position.
B. The cost of goods on hand at the end and the cost of  goods acquired or produced during
the period.
C. The cost goods on hand at the beginning and the cost of  goods acquired or produced
during the period.
D. All of the choices are correct. FA © 2014
100. Cost of goods sold is equal to

A. The cost of inventory at the beginning of a period plus  net sales minus the cost of
inventory at the end of a  period.
B. The cost of inventory at the beginning of a period minus  net purchases plus the cost of
inventory at the end of a  period.
C. The cost of inventory at the beginning of a period plus  net purchases minus the cost of
inventory at the end of  a period.
D. The cost of inventory at the end of a period plus net  purchases minus the cost of
inventory at the beginning  of a period. TOA © 2013
101. If an entity ended a period with a larger inventory that it had at the beginning of the period,
which of the following statements is true?
A. Net income was greater than gross profit
B. The cost of goods sold v/as greater than net purchases
C. The cost of goods sold was smaller than net purchases
D. The cost of goods available for sale was smaller than cost of goods sold TOA © 2013
Accounting error
102. When the current year's ending inventory is overstated
A. The next year's income is overstated.
B. The current year's net income is overstated.
C. The current year's total assets are understated.
D. The current year's cost of goods sold is overstated. TOA © 2013

103. An overstatement of ending inventory in the current period would result in income of the next
period being
A. Overstated C. Correctly stated TOA © 2013
B. Understated D. Either overstated or understated
104. If an entity incorrectly includes goods held on consignment in the ending inventory, the effect
on the next period's cost of goods sold and net income respectively is TOA © 2013
A. Overstatement and overstatement C. Understatement and overstatement
B. Overstatement and understatement D. Understatement and understatement
105. Goods in transit at year-end purchased FOB shipping point were appropriately recorded in
the purchases account but were incorrectly excluded from the ending inventory. What effect
will this omission have on assets, liabilities and retained earnings at year-end? TOA © 2013
A. No effect, no effect, overstated C. Understated, no effect, overstated
B. No effect, no effect, understated D. Understated, no effect, understated
Journal entries
106. An entry debiting inventory and crediting cost of goods sold would be made when
A. Merchandise is sold and the periodic inventory method is used.
B. Merchandise is sold and the perpetual inventory method is used.
C. Merchandise is returned and the periodic inventory method is used.
D. Merchandise is returned and the perpetual inventory method is used. FA © 2014
Presentation & disclosure

107. A property developer must classify properties that it holds for sale in the ordinary course of
business as
A. Financial asset C. Investment property FA © 2014
B. Inventory D. Property, plant and equipment
108. Consumable stores or supplies to be consumed in the production process are reported as
A. Intangible assets C. Investment property FA © 2014
B. Inventories D. Property, plant and equipment
109. Where should goods in transit recently purchased FOB destination be included in the
statement of financial position?
A. Inventory
B. Equipment
C. Accounts payable
D. Not in the statement of financial position FA © 2014

110. When inventory is misstated, the presentation lacks

A. Comparability C. Relevance FA © 2014
B. Faithful representation D. All of the choices are correct
111. The credit balance that arises when a loss on a purchase commitment is recognized shall be
A. Presented as a current liability
B. Subtracted from ending inventory
C. Presented in the income statement
D. Presented as an appropriation of retained earnings FA © 2014
112. If a material amount of inventory has been ordered through a formal purchase contract at the
end of reporting period for future delivery at firm prices
A. This fact must be disclosed.
B. An appropriation of retained earnings is necessary.
C. Disclosure is required only if prices have since risen substantially. FA © 2014
D. Disclosure is required only if prices have declined since the date of the order.
113. An example of an inventory accounting policy that should be disclosed is

A. Identification of major suppliers.
B. Method used for inventory costing.
C. Effect of inventory profit caused by inflation. FA © 2014
D. Classification of inventory into raw materials, work in process and finished goods.
114. When a portion of inventory has been pledged as security for a loan
A. An equal amount of retained earnings should be  appropriated.
B. The value of the inventory pledged should be deducted  from the debt.
C. The fact should be disclosed but the amount of current  assets should not be affected.
D. The cost of the pledged inventory should be transferred  from current asset to noncurrent
asset FA © 2014
115. Which is not a mandated disclosure in relation to inventory?
A. The carrying amount of each item of inventories
B. The amount of inventories recognized as expense  during the period. FA © 2014
C. The carrying amount of inventories carried at fair  value less cost of disposal
D. Accounting policy adopted in measuring inventories,  including the cost formula used
116. Which is not a required disclosure in relation to inventory?

A. The amount of any reversal of writedown of inventories
B. The amount of any writedown of inventories recognized as expense FA © 2014
C. The circumstances or events that led to the reversal  of a writedown of inventories
D. The fair value less cost of disposal of inventories  pledged as security for liabilities

MCQ - Problems
Statement of Cost of Goods Sold
Ending inventory
1. Fairy Company provided the following information:
2013 2014
Sales 7,500,000 4,500,000
Beginning inventory 1,260,000
Purchases 6,450,000 3,180,000
Freight in 350,000 220,000
Purchase discounts 90,000 45,000
Purchase returns 120,000 40,000
Purchase allowances 20,000 15,000
Ending inventory 2,355,000 ?
What is the inventory on December 31, 2014?
A. 2,025,000 C. 2,505,000
B. 2,370,000 D. 3,285,000 FA © 2014
Cost of goods available for sale

2. Tonette Company provided the following information for the current year:
Net sales 3,600,000
Freight in 90,000
Purchase discounts 50,000
Ending inventory 240,000
The gross margin is 40% of sales. What is the cost of goods available for sale? "
A. 1,680,000 C. 2,400,000
B. 1,920,000 D. 2,440,000 FA © 2014
Gross profit rate

3. Illusive Company provided the following data for the current year:
Sales 6,200,000
Sales return 200,000
Inventory, January 1 1,000,000
Purchases 5,500,000
Freight in 250,000
Purchase return 100,000
Purchase allowance 30,000
Purchase discount 20,000
Inventory, December 31 2,100,000
MCQ - Problems Page 32

What is the gross profit rate on cost for the current year?
A. 25 percent C. 75 percent
B. 33 1/3 percent D. 66 2/3 percent FA © 2014
Reconstruction of Accounts
Accounts receivable
4. Steven Company began operations in 2014. For the year ended
December 31,2014, the entity provided the following information:
Total merchandise purchases for the year 7,000,000
Merchandise inventory on December 31 1,400,000
Collection from customers 4,000,000
All merchandise was marked to sell at 40% above cost. All sales are on a credit basis and all
receivables are collectible. What is the balance of accounts receivable on December
31,2014?
A. 1,000,000 C. 5,000,000
B. 3,840,000 D. 5,800,000 FA © 2014
5. Greenhorn Company provided the following information for the current year:
Accounts receivable, January 1 800,000
Accounts receivable collected 2,600,000
Cash sales 500,000
Purchases 2,000,000
Gross profit on sales 900,000
What is the balance of accounts receivable on December 31?
A. 700,000 C. 1,300,000
B. 1,200,000 D. 1,700,000 FA © 2014
Inventory
6. Hectic Company provided the following data for the current year:
Accounts receivable, January 1 1,100,000
Accounts receivable, December 31 1,300,000
Turnover of accounts receivable 5 to 1
Purchases 4,500,000
Gross profit rate ' 40%
Hint: Net sales = Average accounts receivable x turnover

What is the estimated inventory on December 31?

A. 300,000 C. 3,900,000
B. 2,700,000 D. 6,000,000 FA © 2014
7. Quench Company provided the following information:

Cash sales 640,000
Cash collected on accounts receivable 4,400,000
Accounts receivable, January 1 1,100,000
Accounts receivable, December 31 950,000
Bad debts written off 60,000
Purchases 3,500,000
Inventory, December 31 840,000
Gross profit on sales 30%
What is the inventory on January 1?
A. 640,000 C. 1,350,000
B. 805,000 D. 1,485,000 FA © 2014
Gross Margin
8. Vigor Company provided the following information for the current year:
Accounts receivable, January 1 900,000
Accounts receivable, December 31 1,000,000
Accounts receivable turnover 8 to 1
Inventory, January 1 . 1,100,000
Inventory turnover 4 to 1
Hint: Cost of sales = Average inventory x turnover
What is the gross margin for the current year?
A. 3,000,000 C. 4,600,000
B. 3,400,000 D. 7,600.000 FA © 2014
Purchases
9. Brilliant Company purchased motorcycles from various countries for export to other countries.
The entity has incurred the following costs during the current year:
Cost of purchases based on vendors' invoices 5,000,000
Trade discounts on purchases already deducted from vendors' invoices 500,000
Import duties 400,000
Freight and insurance on purchases 1,000,000
Other handling costs relating to imports 100,000
Salaries of accounting department 600,000

Brokerage commission paid to agents for arranging imports 200,000

Sales commission paid to sales agents 300,000
After-sales warranty costs 250,000
What is the total cost of the purchases?
A. 5,700,000 C. 6,500,000
B. 6,100,000 D. 6,700,000 FA © 2014
Accounts payable
10. Wine Company recorded purchases at net amount. On December 10, the entity purchased
merchandise on account, P4,000,000, terms 2/10, n/30. The entity returned P300,000 of the
December 10 purchase and received credit on account. The account had not been paid on
December 31. At what amount should the account payable be adjusted on December 31?
A. 0 C. 80,000
B. 74,000 D. 86,000 P1 © 2014
11. Kindness Company regularly buys sweaters and is allowed a trade discount of 20%
and 10%. The entity made a purchase on March 20 and received an invoice with a
list price of P900,000, a freight charge of P50,000, and payment terms of net 30 days.
The entity should record the purchase at what amount?
A. 630,000 C. 680,000
B. 648,000 D. 698,000 FA © 2014
12. Quest Company reported accounts payable on December 31, 2014 at P2,000,000
before considering the following transactions:
 Goods shipped to Quest Company, FOB shipping point on December 20, 2014, from a
vendor were lost in transit. The invoice price was P100,000. On January 5, 2015, Quest
Company filed at P100,000 claim against the common carrier.
 On December 27, 2014, a vendor authorized Quest Company to return, for full credit,
goods shipped and billed at P50,000 on December 2, 2014. The returned goods were
shipped by Quest Company on December 27, 2014. A P50,000 credit memo was
received and recorded by Quest Company on January 6, 2015.
On December 31, 2014, what amount should be reported as accounts payable?
A. 2,050,000 C. 2,250,000
B. 2,150,000 D. 2,300,000 FA © 2014

13. Black Company reported accounts payable on December 31,2014 at P4,500,000 before any
necessary year-end adjustments relating to the following transactions:
• On December 27,2014, Black wrote and recorded checks to creditors totaling
P2,000,000 causing an overdraft of P500,000 in Black's bank account on December 31,
2014. The checks were mailed on January 10,2015.
• On December 28, 2014, Black purchased and received goods for P750,000, terms 2/10,
n/30. Black records purchases and accounts payable at net amount. The invoice was
recorded and paid January 3,2015.
• Goods shipped F.O.B. destination on December 20,2014 from a vendor to Black were
received January 2,2015. The invoice cost was P325,000.
A. 7,235,000 C. 7,553,500
B. 7,250,000 D. 7,575,000 P1 © 2014
14. Kew Company reported accounts payable on December 31,2014 at P2,200,000 before
considering the following data:
• Goods shipped to Kew F.O.B. shipping point on December 22, 2014, were lost in transit.
The invoice cost of P40,000 was not recorded by Kew. On January 7,2015, Kew filed a
P40,000 claim against the common carrier.
• On December 27, 2014, a vendor authorized Kew to return, for full credit, goods shipped
and billed at P70,000 on December 3,2014. The returned goods were shipped by Kew
on December 28,2014. A P70,000 credit memo was received and recorded by Kew on
January 5, 2015.
• On December 31,2014, Kew has a P500,000 debit balance in accounts payable to Ross,
a supplier, resulting from a P500,000 advance payment for goods to be manufactured.
What amount should be reported as accounts payable on December 31,2014?
A. 2,170,000 C. 2,680,000
B. 2,670,000 D. 2,730,000 P1 © 2014
15. Bakun Company began operations late in 2013. For the first quarter ended March 31,2014,
the entity provided the following information:
Total merchandise purchased through March 15, 2014 recorded at net 4,900,000
Merchandise inventory on December 31, 2013, at selling price 1,500,000
All merchandise was acquired on credit and no payments have been made on accounts
payable since the inception of the entity. All merchandise is marked to sell at 50% above
invoice cost before time discounts of 2/10, n/30. No sales were made in 2014. What amount
of cash is required to eliminate the current balance in accounts payable?
A. 5,750,000 C. 6,000,000
B. 5,900,000 D. 6,400,000 P1 © 2014

16. Black Company reported accounts payable on December 31, 2014 at P900.000
before any necessary year-end adjustments relating to the following transactions:
 On December 27, 2014, Black Company wrote and recorded checks to creditors totaling
P400,000 causing an overdraft of P100,000 in Black Company's bank account on
December 31, 2014. The checks were mailed out on January 10, 2015.
 On December 28, 2014, Black Company purchased and received goods for P150,000
terms 2 /10, n /30. Black Company records purchases and accounts payable at net
amount. The invoice was recorded and paid January 3, 2015.
 Goods shipped FOB shipping point, 5/10, n/30 on December 20, 2014 from a vendor to
Black Company were received January 2, 2015. The invoice cost was P200,000.
A. 1,447,000 C. 1,637,000
B. 1,450,000 D. 1,650,000 FA © 2014
Payment for purchases

17. On June 1,2014, Pitt Company sold merchandise with a list price of P5,000,000 to Burr on
account. Pitt allowed trade discounts of 30% and 20%. Credit terms were 2/10, n/30 and the
sale was made FOB shipping point. Pitt prepaid P200,000 of delivery costs for Burr as an
accommodation. On June 11, 2014, what amount was received by Pitt from Burr as
remittance in full?
A. 2,744,000 C. 2,944,000
B. 2,940,000 D. 3,140,000 P1 © 2014
18. Cognac Company used the perpetual inventory and gross method of recording purchases.
On December 1, the entity purchased P1,500,000 of inventory, terms 2/10, n/30. On
December 5, the entity returned goods that cost P150,000. On December 11, the entity paid
the supplier. On December 11, what account should be credited? FA © 2014
A. Inventory for P27,000 C. Purchase discount for P27,000
B. Inventory for P30,000 D. Purchase discount for P30,000
Net method vs. gross method

19. Rabb Company records purchases at gross amount but wishes to change to recording
purchases net of purchase discounts. Discount available on purchases for the current year
totaled P100,000. Of this amount, P10,000 is still available in the accounts payable balance.
The balances in the accounts as of and for the year ended December 31, before conversion
are:

Purchases 5,000,000
Purchase discounts taken 40,000
Accounts payable 1,500,000
What is the balance of accounts payable on December 31 after the conversion?
A. 1,410,000 C. 1,460,000
B. 1,440,000 D. 1,490,000 P1 © 2014
20. Duke Company specializes in the sale of IBM compatibles and software packages and had
the following transactions:
Purchases of IBM compatibles 1,700,000
Purchases of commercial software packages 1,200,000
Returns and allowances 50,000
Purchase discounts taken 17,000
Terms on all purchases were 2/10, n/30. All returns and allowances took place within 5 days
of purchase and prior to any payment. What was the amount of discount lost?
A. 17,000 C. 41,000
B. 40,000 D. 57,000 FA © 2014
21. On August 1 of the current year, Stella Company recorded purchases of inventory of
P800,000 and P 1,000,000 under credit terms of 2/15, net 30. The payment due on the
P800,000 purchase was remitted on August 16. The payment due on the P1,000,000
purchase was remitted on August 31. Under the net method and the gross method, these
purchases should be included at what respective amounts in the determination of cost of
goods available for sale?
FA © 2014 A. B. C. D.
Net method 1,784,000 1,764,000 1,764,000 1,800,000
Gross method 1,764,000 1,800,000 1,784,000 1,764,000
Questions 22 & 23 are based on the following information. FA © 2014

Wine Company recorded purchases at net amount. On December 10, the entity purchased
merchandise on account, P4,000,000, terms 2/10, n/30. The entity returned P300,000 of the
December 10 purchase and received credit on account. The account had not been paid on
December 31.
22. What amount should be recorded as purchase return?

A. 270,000 C. 300,000
B. 294,000 D. 306,000

23. By how much should the account payable be adjusted on December 31?
A. 0 C. 80,000
B. 74,000 D. 86,000
Inventoriable cost
24. Dean Sportswear regularly buys sweaters from Mill Company and is allowed trade discounts
of 20% and 10% from the list price. Dean made a purchase during the year, and received an
invoice with a list price of P600,000, a freight charge of P15,000 and payment terms of 2/10,
n/30. What is the cost of the purchase?
A. 432,000 C. 438,360
B. 435,000 D. 447,000 P1 © 2014
25. On December 26, 2014, Branigan Company purchased goods costing PI,000,000. The terms
were FOB shipping point. The goods were received on December 28,2014. Costs incurred
by the entity in connection with the purchase and delivery of the goods were normal freight
charge P30,000, handling cost P20,000, insurance on shipment P5,000 and abnormal freight
charge for express shipping P12,000. What is the total cost of the inventory?
A. 1,030,000 C. 1,055,000
B. 1,050,000 D. 1,067,000 FA © 2014
26. Eagle Company incurred the following costs in relation to a certain product:
Direct materials and labor 180,000
Variable production overhead 25,000
Factory administrative costs 15,000
Fixed production costs 20,000
What is the correct measurement of the product?
A. 195,000 C. 225,000
B. 205,000 D. 240,000 FA © 2014
27. Parrot Company provided the following inventory data:

Materials 300,000
Production labor cost 330,000
Production overhead 120,000
General administration cost 100,000
Marketing cost 50,000
What is the value of the completed inventory?
A. 630,000 C. 850,000
B. 750,000 D. 900,000 FA © 2014

28. On December 28, 2014, Kerr Company purchased goods costing P500,000. The terms were
FOB destination. The costs incurred in connection with the sale and delivery of the goods
were:
Packaging for shipment 10,000
Shipping 15,000
Special handling charges 25,000
These goods were received on December 31,2014. On December 31, 2014, what total cost
should be included in inventory?
A. 500,000 C. 535,000
B. 520,000 D. 545,000 FA © 2014
29. Stone Company had the following transactions during December 2014:
Inventory shipped on consignment to Beta Company 1,800,000
Freight paid by Stone 90,000
Inventory received on consignment from Alpha Company 1,200,000
Freight paid by Alpha 50,000
No sales of consigned goods were made in December 2014. What amount should be
included in inventory on December 31,2014?
A. 1,200,000 C. 1,800,000
B. 1,250,000 D. 1,890,000 P1 © 2014
30. Fenn Company provided the following information for the current year:
Merchandise purchased for resale 4,000,000
Freight in 100,000
Freight out 50,000
Purchase returns 20,000
Interest on inventory loan 200,000
What is the inventoriable cost of the purchase?
A. 4,030,000 C. 4,130,000
B. 4,080,000 D. 4,280,000 FA © 2014
31. Brilliant Company has incurred the following costs during the current year:
Cost of purchases based on vendors' invoices 5,000,000
Trade discounts on purchases already deducted from vendors' invoices 500,000
Freight and insurance on purchases 1,000,000
Other handling costs relating to imports 100,000
Salaries of accounting department 600,000
Brokerage commission paid to agents for arranging imports 200,000

Sales commission paid to sales agents 300,000

After-sales warranty costs 250,000
What is the total cost of purchases?
A. 5,700,000 C 6,500,000
B. 6,100,000 D. 6,700,000 FA © 2014
Inventories
32. Tequila Company had at year-end P200,000 office supplies, P1,350,000 raw materials,
P2,950,000 goods in process, P3,600,000 finished goods and P300,000 prepaid insurance.
What total amount should be reported as inventories in the statement of financial position at
year-end?
A. 3,600,000 C. 7,900,000
B. 3,800,000 D. 8,100,000 FA © 2014
33. Corolla Company incurred the following costs:
Materials 700,000
Storage costs of finished goods 180,000
Delivery to customers 40,000
Irrecoverable purchase taxes 60,000
At what amount should the inventory be measured?
A. 760,000 C. 940,000
B. 880,000 D. 980,000 FA © 2014
34. Aman Company provided the following data:

Items counted in the bodega 4,000,000
Items included in the count specifically segregated per sale contract 100,000
Items in receiving department, returned by customer, in good condition 50,000
Items ordered and in the receiving department 400,000
Items ordered, invoice received but goods not
received. Freight is on account of seller. 300,000
Items shipped today, invoice mailed, FOB shipping point 250,000
Items shipped today, invoice mailed, FOB destination 150,000
Items currently being used for window display 200,000
Items on counter for sale 800,000
Items in receiving department, refused because of damage 180,000
Items included in count, damaged and unsalable 50,000
Items in the shipping department 250,000
What is the correct amount of inventory?
A. 5,150,000 C. 5,800,000
B. 5,700,000 D. 6,000,000 P1 © 2014

35. Lunar Company included the following items under inventory:

Materials 1,400,000
Advance for materials ordered 200,000
Goods in process 650,000
Unexpired insurance on inventory 60,000
Advertising catalogs and shipping cartons 150,000
Finished goods in factory 2,000,000
Finished goods in entity-owned retail store, including 50% profit on cost 750,000
Finished goods in hands of consignees including 40% profit on sales 400,000
Finished goods in transit to customers, shipped FOB destination at cost 250,000
Finished goods out on approval, at cost 100,000
Unsalable finished goods, at cost 50,000
Office supplies 40,000
Materials in transit, shipped FOB shipping point,
excluding freight of P30,000 330,000
Goods held on consignment, at sales price, cost P150,000 200,000
A. 5,375,000 C. 5,500,000
B. 5,250,000 D. 5,540,000 P1 © 2014
36. Ram Company provided the following information at the end of current year.
Finished goods in storeroom, at cost, including overhead
of P400,000 or 20%. 2,000,000
Finished goods in transit, including freight charge of
P20,000, FOB shipping point 250,000
Finished goods held by salesmen, at selling price, cost, P100,000 140,000
Goods in process, at cost of materials and direct labor 720,000
Materials 1,000,000
Materials in transit, FOB destination 50,000
Defective materials returned to suppliers 100,000
Shipping supplies 20,000
Gasoline and oil for testing finished goods 110,000
Machine lubricants 60,000
A. 4,000,000 C. 4,170,000
B. 4,090,000 D. 4,270,000 P1 © 2014

Adjusted inventory balance

37. Brandy Company took a physical inventory at the end of the year and determined that
P2,600,000 of goods were on hand. In addition, the entity determined that P200,000 of goods
purchased in transit shipped FOB shipping point were actually received two days after the
physical count and that the entity had P300,000 of goods out on consignment. What amount
should be reported as inventory at year-end?
A. 2,600,000 C. 2,900,000
B. 2,800,000 D. 3,100,000 FA © 2014
38. Scotch Company took a physical inventory at the end of the year and determined that
purchased were in transit shipped FOB destination. The goods were actually received three
days after the inventory count. The entity sold P100,000 worth of inventory FOB destination.
Such inventory is in transit at year-end. What amount should be reported as inventory at year-
end?
A. 1,900,000 C. 2,140,000
B. 2,000,000 D. 2,240,000 FA © 2014
39. The audit of Joust Company revealed a physical inventory on December 31, 2014 with a cost
of P4,000,000. The following items were excluded from the count:
* A special machine, fabricated to order for a customer costing P400,000, was finished
and specifically segregated on December 31, 2014. The customer was billed on that
date and the machine excluded from inventory although it was shipped on January 4,
2015.
• Merchandise costing P50,000 shipped by a vendor FOB seller on December 28, 2014
and received b3? Joust Company on January 10, 2015.
What is the correct inventory on December 31, 2014?
A. 4,000,000 C. 4,400,000
B. 4,050,000 D. 4,450,000 FA © 2014
40. Honor Company reported inventory on December 31, 2014 at P1,500,000 based on a
physical count of goods priced at cost, and before any necessary year-end adjustment
relating to the following:
 Included in the physical count were goods billed to a customer FOB shipping point on
December 31, 2014. These goods had a cost of P30,000 and were picked up by the
carrier on January 10,2015.
 Goods shipped FOB destination on December 28, 2014 from a vendor to Honor
Company were received on January 4, 2015. The invoice cost was P50,000.

What amount should be reported as inventory on December 31, 2014?

A. 1,470,000 C. 1,500,000
B. 1,480,000 D. 1,550,000 FA © 2014
41. Empty Company reported inventory on December 31, 2014 at P2,500,000 based on physical
count priced at cost and before any necessary adjustment for the following:
 Merchandise costing P100,000, shipped FOB shipping point from a vendor on December
30, 2014 was received and recorded on January 5, 2015.
 Goods in the shipping area were excluded from inventory although shipment was not
made until January 4, 2015. The goods billed to the customer FOB shipping point on
December 30, 2014, had a cost of P400,000.
What amount should be reported as inventory on December 31,2014?
A. 2,500,000 C. 2,900,000
B. 2,600,000 D. 3,000,000 FA © 2014
42. Brandy Company took a physical inventory at the end of the year and determined that
purchased in transit shipped FOB shipping point were actually received two days after the
inventory count and that the entity had P300,000 of goods out on consignment. What amount
should be reported as inventory at the end of the year?
A. 2,600,000 C. 2,900,000
B. 2,800,000 D. 3,100,000 FA © 2014
43. Hero Company reported inventory on December 31, 2014 at P6,000,000 based on a physical
count of goods priced at cost and before any necessary year-end adjustments relating to the
following:
• Included in the physical count were goods billed to a customer FOB shipping point on
December 30,2014. These goods had a cost of PI 25,000 and were picked up by the
carrier on January 7, 2015.
• Goods shipped FOB shipping point on December 28, 2014, from a vendor to Hero were
received on January 4,2015. The invoice cost was P300,000.
What amount should be reported as inventory on December 31, 2014?
A. 5,875,000 C. 6,175,000
B. 6,000,000 D. 6,300,000 P1 © 2014
44. The physical count conducted in the warehouse of Lenient Company on December 31, 2014
revealed total cost of P3,600,000. However, the following items were excluded from the
count:

 Goods sold to a customer, which are being held for the customer to call for at the
customer's convenience with a cost of P200,000.
 A packing case containing a product costing P80,000 was standing in the shipping room
when the physical inventory was taken. It was not included in the inventory because it
was marked "hold for shipping instructions". Goods in process costing P300,000 held by
an outside processor for further processing.
A. 3,880,000 C. 4,100,000
B. 3,980,000 D. 4,180,000 FA © 2014
45. Reverend Company conducted a physical count on December 31, 2014 which revealed
merchandise with a total cost of P5,000,000. However, further investigation revealed that
the following items were excluded from the count.
* Goods sold to a customer, which are being held for the customer to call at the customer's
convenience with a cost of P200,000.
* A packing case containing a product costing P500,000 was standing in the shipping room
was marked "hold for shipping instructions". The investigation revealed that the
customer's order was dated December 28,2014, but that the case was shipped and the
customer billed on January 4, 2015.
* A special machine costing P250,000, fabricated to order for a customer, was finished
and specifically segregated at the back part of the shipping room on December 31,2014.
The customer was billed on that date and the machine was excluded from inventory
although it was shipped on January 2, 2015.
What is the correct amount of inventory that should be reported on December 31,2014?
A. 5,500,000 C. 5,750,000
B. 5,700,000 D. 5,950,000 P1 © 2014
46. Fair Company reported inventory on hand on December 31,2014 valued at a cost of
P950,000. The following items were not included in this inventory amount:
Item: Purchased goods in transit, shipped FOB destination, invoice price P30,000 which
includes freight charge of P1,500.
Item 2: Goods held on consignment by Fair Company at a sales price of P28,000, including
sales commission of 20% of the sales price.
Item 3: Goods sold to Grace Company, under terms FOB destination, invoiced for P18,500
which includes P1,000 freight charge to deliver the goods. Goods are in transit.
The entity's selling price is 140%o of cost.
Item 4: Purchased goods in transit, terms FOB shipping point, invoice price P50,000,

freight cost, P2,500.

Item 5: Goods out on consignment to Manila Company, sales price P35,000, shipping cost
of P2,000.
What is the adjusted cost of the inventory on December 31,2014?
A. 1,040,000 C. 1,043,000
B. 1,042,000 D. 1,073,500 P1 © 2014
47. Baritone Company counted and reported the ending inventory on December 31, 2014 at
P2,000,000. None of the following items were included when the total amount of the ending
inventory was computed:
• P150,000 in goods located in the entity's warehouse that are on consignment from
another entity.
• P200,000 in goods that were sold by the entity and shipped on December 30 and were
in transit on December 31,2014. The goods were received by the customer on January
2,2015. Terms were FOB destination.
• P300,000 in goods that were purchased by the entity and shipped on December 30 and
were in transit on December 31, 2014. The goods were received by the entity on January
2,2015. Terms were FOB shipping point.
• P400,000 in goods that were sold by the entity and shipped on December 30 and were
in transit on December 31,2014. The goods were received by the customer on January
2, 2015. Terms were FOB shipping point.
What is the correct amount of inventory on December 31,2014?
A. 2,350,000 C. 2,750,000
B. 2,500,000 D. 2,900,000 FA © 2014
48. Sterling Company reported the 2014 year-end inventory at P7,600,000 before the following
adjustments:
* Goods valued at PI,000,000 are on consignment with a customer. These goods are not
included in the year-end inventory.
* Goods costing P250,000 were received from a vendor on January 5,2015. The related
invoice was received and recorded on January 12, 2015. The goods were shipped on
December 31, 2014, terms FOB shipping point.
* Goods costing P850,000 were shipped on December 31,2014, and were delivered to the
customer on January 2,2015. The terms of the invoice were FOB shipping point. The
goods were included in ending inventory for 2014 even though the sale was recorded in
2014.
* A P350,000 shipment of goods to a customer on December 31, 2014, FOB destination,
was not included in the year-end inventory. The goods cost P260,000 and were delivered
to the customer on January 8,2015. The sale was properly recorded in2015.

* An invoice for goods costing P350,000 was received and recorded as a purchase on
December 31, 2014. The related goods, shipped FOB destination, were received on
January 2, 2015, and thus were not included in the physical inventory. * Goods valued
at P650,000 are on consignment from a vendor. These goods are not included in the
year-end inventory.
* A P1,050,000 shipment of goods to a customer on December 30, 2014, terms FOB
destination, was recorded as a sale in 2014. The goods, costing P840,000 and delivered
to the customer on January 6,2015, were not included in 2014 ending inventory.
What is the correct inventory on December 31,2014?
A. 8,100,000 C. 9,450,000
B. 9,100,000 D. 9,950,000 P1 © 2014
49. Joy Company conducted a physical count on December 31,2014 which revealed inventory
with a cost of P4,410,000. The audit identified that the following items were excluded from
this amount:
* Merchandise of P610,000 is held by Joy on consignment.
* Merchandise costing P380,000 was shipped by Joy FOB destination to a customer on
December 31,2014. The customer was expected to receive the goods on Janaury
5,2015.
* Merchandise costing P460,000 was shipped by Joy FOB shipping point to a customer
on December 29, 2014. The customer was expected to receive the goods on January 5,
2015.
* Merchandise costing P830,000 shipped by a vendor FOB destination on December 31,
2014 was received by Joy on January 5,2015.
* Merchandise costing P510,000 purchased FOB shipping point was shipped by the
supplier on December 31, 2014 and received by Joy on January 5,2015.
What is the correct amount of inventory on December 31,2014?
A. 3,800,000 C. 4,920,000
B. 4,690,000 D. 5,300,000 FA © 2014
50. Mia Company submitted an inventory list on December 31,2014 which showed a total of
P5,000,000.
• Excluded from the inventory was merchandise costing P80,000 because it was
transferred to the delivery department for packaging on December 28,2014 and for
shipping on January 2,2015. • The bill of lading and other import documents on a
merchandise were delivered by the bank and the trust receipt accepted by the entity on
December 26,2014. Taxes and duties have been paid on this shipment but the broker
did not deliver the merchandise until January 7, 2015. Cost of the shipment totaled
P800.000. This shipment was not included in the inventory on December 31,2014.

• A review of the entity's purchase orders showed a commitment to buy P100,000 worth
of merchandise from Myrose Company. This was not included in the inventory because
the goods were received on January 3, 2015. Supplier's invoice for P300,000 worth of
merchandise dated December 28,2014 was received through the mail on December 30,
2014 although the goods arrived only on January 4? 2015. Shipment terms are FOB
shipping point. This item was included in the December 31,2014 inventory by the entity.
• Goods valued at P20,000 were received from Darlyn Company on December 28,2014
for approval by Mia. The inventory team included this merchandise in the list but did not
place any value on it. On January 4,2015, the entity informed the supplier by long
distance telephone of the acceptance of the goods and the supplier's invoice was
received on January 7,2015.
• On December 27, 2014, an order for P25,000 worth of merchandise was placed. This
was included in the year-end inventory although it was received only on January 5,2015.
The seller shipped the goods FOB destination.
A. 5,055,000 C. 5,830,000
B. 5,555,000 D. 5,855,000 P1 © 2014
51. Leila Company conducted a physical count on December 31,2014 which revealed total cost
of P3,600,000. However, the following items were excluded from the count:
• Goods sold to a customer which are being held for the customer to call for at the
customer's convenience with a cost of P200,000.
• A packing case containing a product costing P80,000 was standing in the shipping room
was marked "hold for shipping instructions".
• Goods in process costing P300,000 held by an outside processor for further processing.
• Goods costing P50,000 shipped by a vendor FOB seller on December 28,2014 and
received by Leila Company on January 10, 2015.
A. 3,980,000 C. 4,180,000
B. 4,030,000 D. 4,230,000 P1 © 2014
Inventory adjustments
52. An analysis of the ending inventory of Lilac Company on December 31,2014 disclosed the
inclusion of the following items:
Merchandise in transit purchased on terms:
FOB shipping point 165,000

FOB destination 100,000

Merchandise out on consignment at sales price (including

markup of 30% on cost) 195,000
Merchandise sent to customer for approval (cost of goods, P30,000) 40,000
Merchandise held on consignment 35,000
What is the reduction of the inventory on December 31,2014?
A. 190,000 C. 222,000
B. 203,500 D. 355,000 P1 © 2014
Cost of goods sold

53. Brooke Company used a perpetual inventory system. At the end of 2013, the inventory
account was P360,000 and P30,000 of those goods included in ending inventory were
purchased FOB shipping point and did not arrive until 2014. Purchases in 2014 were
P3,000,000. The perpetual inventory records showed an ending inventory of P420,000 for
2014. A physical count at the end of 2014 showed an inventory of P3 80,000. Inventory
shortages are included in cost of goods sold. What amount should be reported as cost of
goods sold for 2014?
A. 2,940,000 C. 3,000,000
B. 2,980,000 D. 3,010,000 FA © 2014
54. Clem Company provided the following for the current year:
Central warehouse Held by consignees
Beginning inventory 1,100,000 120,000
Purchases 4,800,000 600,000
Freight in 100,000
Transportation to consignees 50,000
Freight out 300,000 80,000
Ending inventory 1,450,000 200,000
What is the cost of goods sold for the current year?
A. 4,550,000 C. 5,070,000
B. 4,850,000 D. 5,120,000 FA © 2014
Consignment sales revenue

55. On October 1, 2014, Grimm Company consigned 40 freezers to Holden Company costing
P14,000 each for sale at P20,000 each and paid PI 6,000 in transportation costs. On
December 30, 2014, Holden Company reported the sale of 10 freezers and remitted
P170,000. The remittance was net of the agreed 15% commission. What amount should be
recorded as consignment sales revenue for 2014?

A. 154,000 C. 196,000
B. 170,000 D. 200,000 P1 © 2014
Payable for consigned goods

56. On December 1,2014, Alt Department Store received 505 sweaters on consignment from
Todd. Todd's cost for the sweaters was P800 each, and they were priced to sell at PI,000.
Alt's commission on consigned goods is 10%>. On December 31, 2014, 5 sweaters
remained. In the December 31,2014 statement of financial position, what amount should be
reported as payable for consigned goods?
A. 404,000 C. 454,000
B. 450,000 D. 490,000 P1 © 2014
FIFO method
57. Marsh Company had 150,000 units of product A on hand at January 1, costing P21 each.
Purchases of product A during the month of January were as follows:
Units Unit cost
January 10 200,000 22
18 250,000 23
28 100,000 24
A physical count on January 31 shows 250,000 units of product A on hand.
What is the cost of the inventory on January 31 under the FIFO method?
A. 5,250,000 C. 5,550,000
B. 5,350,000 D. 5,850,000 P1 © 2014
58. Mildred Company is a wholesaler of office supplies. The FIFO periodic inventory is used. The
activity for inventory of calculators during August is as follows:
Units Cost
August 1 Inventory 20,000 36.00
7 Purchase 30,000 37.20
12 Sale 36,000
21 Purchase 48,000 38.00
22 Sale 38,000
29 Purchase 16,000 38.60
What is the ending inventory on August 31 ?

A. 1,500,800 C. 1,522,880
B. 1,501,600 D. 1,529,600 P1 © 2014

59. Jayson Company used the perpetual system. The following information has been extracted
from the records about one product:
Units Unit cost Total cost
Jan. 1 Beginning balance 8,000 70.00 560,000
6 Purchase 3,000 70.50 211,500
Feb. 5 Sale 10,000
Mar. 5 Purchase 11,000 73.50 808,500
Mar. 8 Purchase return 800 73.50 58,800
Apr. 10 Sale 7,000
Apr. 30 Sale return 300
If the FIFO cost flow method is used, what is the cost of the inventory on April 30?
A. 315,000 C. 330,750
B. 329,360 D. 433,876 P1 © 2014
60. Hilltop Company sells a new product. During a move to a new location, the inventory records
for the product were misplaced. The entity has been able to gather some information from
the purchases and sales records. The July purchases are as follows:
Quantity Unit cost Total cost
July 5 10,000 65 650,000
9 12,000 63 756,000
12 15,000 60 900,000
25 14,000 62 868,000
51,000 3,174,000
On July 31,15,000 units were on hand. The sales for July amount to P6,000,000, or 60,000
units at P100 per unit. The entity has always used a periodic FIFO inventory costing system.
Gross profit on sales for July was P2,400,000. What is the cost of inventory on July 1 ?
A. 426,000 C. 2,400,000
B. 1,354,000 D. 2,826,000 P1 © 2014
61. Rona Company used the perpetual inventory system. The inventory transactions for August
of the current year were as follows:
Aug. 1 Beginning 20,000 4.00 80,000
7 Purchase 10,000 4.20 42,000
10 Purchase 20,000 4.30 86,000
12 Sale 15,000 ? ?
16 Purchase 20,000 4.60 92,000
20 Sale 40,000 ? ?
28 Sale return 3,000 ? ?

The sale return relates to the August 20 sale. If the FIFO cost flow method is used, the sale
return would be costed back into inventory at what unit cost?
A. 4.00 C. 4.30
B. 4.20 D. 4.60 P1 © 2014
62. On April 1,2014, Toronto Company had 6,000 units of merchandise on hand that cost P120
per unit. During the month, the entity had the following transactions with regard to the
merchandise:
April 5 Purchased on account 15,000 units at P140 per unit
8 Returned 1,000 units from the April 5 purchase.
29 Sold on account 16,000 units at P200 per unit.
The entity used a perpetual inventory system and a FIFO cost flow. What is the cost of goods
sold for April?
A. 2,080,000 C. 2,144,000
B. 2,120,000 D. 2,200,000 P1 © 2014
63. Lagoon Company accumulated the following data for the current year.
Raw materials - beginning inventory 90,000 units @ P7.00
Purchases 75,000 units @ P8.00
120,000 units @ P8.50
The entity transferred 195,000 units of raw materials to work in process during the year.
Work in process - beginning inventory 50,000 units @ P 14.00
Direct labor 3,100,000
Manufacturing overhead 2,950,000
Work in process - ending inventory 48,000 units @ P15.00
The entity used the FIFO method for valuing inventory. What is the cost of goods
manufactured for the current year?
A. 7,515,000 C. 8,235,000
B. 7,535,000 D. 8,280,000 P1 © 2014
FIFO & LIFO

64. ABC Company provided the following net income and inventory:
2014 2015
Net income using LIFO 2,750,000 3,000,000
Year-end inventory - FIFO 1,400,000 2,000,000
Year-end inventory - LIFO 900,000 1,600,000
What is the net income for 2015 using the FIFO cost flow?
A. 2,600,000 C. 3,100,000
B. 2,900,000 D. 3,500,000 P1 © 2014

Weighted-average method
65. Lane Company provided the following inventory card during February:
Purchase Units Balance
Price Units Used Units
Jan. 10 100 20,000 20,000
31 10,000 10,000
Feb. 8 110 30,000 40,000
9 Returns from factory (Jan. 10 lot) (1,000) 41,000
28 11,000 30,000
Using the weighted average method, what is the cost of inventory on February 28?
A. 3,120,000 C. 3,180,000
B. 3,150,000 D. 3,300,000 P1 © 2014
66. Stephanie Company is a wholesaler of photography equipment. The entity used the periodic
average cost method to account for inventory. The activity for the inventory of cameras during
July is shown below:
Units Unit cost
July 1 Inventory 20,000 36.00
7 Purchase 30,000 37.00
12 Sale 36,000
21 Purchase 50,000 37.88
22 Sale 38,000
29 Purchase 16,000 38.11
What is the ending inventory on July 31 ?
A. 1,534,000 C. 1,587,360
B. 1,569,120 D. 1,594,640 P1 © 2014
Moving-average method
67. Frey Company recorded the following data pertaining to raw material Y during January of the
current year.
Units .
Date Received Cost Issued On hand
1/1 Inventory 200 8,000
1/8 Issue 4,000 4,000
1/20 Purchase 12,000 240 16,000
What is the moving average unit cost of the inventory on January 31?
A. 220 C. 230
B. 224 D. 240 P1 © 2014

68. Celine Company provided the following data relating to an inventory item.
Jan. 1 Beginning balance 5,000 200 1,000,000
10 Purchase 5,000 250 1,250,000
15 Sale 7,000
16 Sale return 1,000
30 Purchase 16,000 150 2,400,000
31 Purchase return 2,000 150 300,000
Under the perpetual system, what is the moving average unit cost on January 31?
A. 165 C. 181
B. 167 D. 225 P1 © 2014
69. Anders Company used the moving average method to determine the cost of the inventory.
During January of the current year, the entity recorded the following information pertaining to
its inventory:
Balance on January 1 40,000 50 2,000,000
Sold on January 17 35,000
Purchased on January 28 20,000 80 1,600,000
What amount of inventory should be reported on January 31 ?
A. 1,500,000 C. 1,850,000
B. 1,625,000 D. 2,000,000 P1 © 2014
Comprehensive
Questions 1 & 2 are based on the following information. P1 © 2014
During January of the current year, Metro Company which maintains a perpetual inventory system,
recorded the following information pertaining to its inventory:
Units Unit cost Total cost Units on hand
Balance on 1/1 10,000 100 1,000,000 10,000
Purchased on 1/7 6,000 300 1,800,000 16,000
Sold on 1/20 9,000 7,000
Purchased 1/25 4,000 500 2,000,000 11,000
70. Under the moving average method, what amount should Metro report as inventory on
January 31 ?
A. 2,640,000 C. 3,300,000
B. 3,225,000 D. 3,900,000

71. Under the FIFO method, what amount should Metro report as inventory on January 31 ?
A. 1,300,000 C. 3,900,000
B. 2,700,000 D. 4,100,000
Questions 1 thru 3 are based on the following information. P1 © 2014

Yakal Company reported that a flood recently destroyed many of the financial records. The entity
used an average cost inventory valuation system. The entity made a physical count at the end of
each month in order to determine monthly ending inventory value. By examining various
documents, the following data are gathered:
Ending inventory at July 31 60,000 units
Total cost of units available for sale in July 1,452,100
Cost of goods sold during July 1,164,100
Cost of beginning inventory, July 1 4.00 per unit
Gross profit on sales for July 935,900
July 5 55,000 5.10 280,500
11 53,000 5.00 265,000
15 45,000 5.50 247,500
16 47,000 5.30 249,100
Total purchases 200,000 1,042,100
72. What is the number of units on July 1 ?

A. 60,000 C. 102,500
B. 76,500 D. 140,000
73. How many units were sold during the month of July?
A. 140,000 C. 260,000
B. 242,500 D. 302,500
74. What is the cost of the inventory on July 31 ?

A. 240,000 C. 312,600
B. 288,000 D. 410,000
Relative Sales Value Method

75. Casa Company purchased a tract of land for P12,000,000. The entity incurred additional cost
of P3,000,000 during the remainder of the year in preparing the land for sale. The tract was
subdivided into residential lots as follows:

Lot class Number of lots Sales price per lot

A 100 240,000
B 100 160,000
C 200 100,000
Using the relative sales value method, what amount of cost should be allocated to Class A
lots?
A. 3,000,000 C. 6,000,000
B. 3,750,000 D. 7,200,000 FA © 2014
76. Solid Company purchased a plot of ground for P18,000,000. The entity also paid an
independent appraiser for the land the amount of P500,000. The land was developed as
residential lots at a total cost of P41,500,000. The lots were classified as follows:
Number of lots Sales price per lot
Highland 20 1,000,000
Midland 40 750,000
Lowland 100 500,000
What total cost should be allocated to Highland lots?
A. 8,300,000 C. 11,900,000
B. 8,400,000 D. 12,000,000 P1 © 2014
77. Elixir Company bought a 10-hectare land in Novaliches to be improved, subdivided into lots
and eventually sold. Purchase price of the land was P5,800,000. Taxes and documentation
expenses on the transfer of the property amounted to P80,000. The lots were classified as
follows:
Lot class Number of lots Selling price per lot Total clearing cost
A 10 100,000 None
B 20 80,000 100,000
C 40 70,000 300,000
D 50 60,000 800,000
What amount should be allocated as total cost of Class B lots under the relative sales price
method?
A. 1,176,000 C. 1,276,000
B. 1,220,000 D. 1,700,000 P1 © 2014
78. Apitong Company manufactures bath towels. The production comprises 60% of "Class A"
which sells for P500 per dozen and 40% of "Class B" which sells for P250 a dozen. During
the current year, 60,000 dozens were produced at an average cost of P360 a dozen. The
inventory at the end of the current year was as follows:

2,200 dozens "Class A" @ P360 792,000

3,000 dozens "Class B" @ P360 1,080,000
Total inventory 1,872,000
Using the relative sales value method which management considers as a more equitable
basis of cost distribution, what is the measurement of the inventory?
A. 1,170,000 C. 1,872,000
B. 1,665,000 D. 2,340,000 P1 © 2014

Julius Company, a conglomerate, has three subsidiaries, Aye, Bee and Cee. Aye Company is in
commodity business. Inventory on January 1, 2014 totaled P240,000. Aye Company used the
weighted average method.
Quantities on hand were 8,000 and 10,000 on January 1 and December 31,2014 respectively. Aye
Company made purchases of 25,000 units in 2014 at a total cost of P816,000.
Bee Company buys and sells land. On January 1,2014, a tract of land was bought for P 10,000,000.
Costs of leveling the land amounted to P2,500,000. The lots were subdivided as follows:
25 Class A to sell for P400,000 each'
30 Class B to sell for P300,000 each
10 Class C to sell for P100,000 each
On December 31,2014, the unsold lots consisted of 15 Class A, 6 Class B and 3 Class C.
Cee Company sells beds. The perpetual inventory was stated at P1,960,000 on December 31,
2014. At the close of the year, a new approach for compiling inventory was used and apparently
a satisfactory cutoff was not made.
Some events that occurred are as follows:

* Beds shipped FOB shipping point to a customer on January 5, 2015 costing P200,000 were
included in inventory on December 31, 2014.
* Beds costing P900,000 received December 30, 2014 were recorded on January 2, 2015.
* Beds received costing P190,000 were recorded twice.
* Beds shipped FOB shipping point to a customer on December 28, 2014 per date shipping
invoice which cost P700,000 were not recorded as delivered until January 2015.
* Beds on hand which cost P23 0,000 were not recorded.
79. What is the ending inventory of Aye Company?
A. 300,000 C. 320,000
B. 313,200 D. 326,400

80. What is the ending inventory of Bee Company?

A. 3,900,000 C. 4,875,000
B. 4,050,000 D. 5,062,500
81. What is the ending inventory of Cee Company?

A. 2,200,000 C. 2,900,000
B. 2,390,000 D. 3,090,000
Lower of cost or NRV

82. Based on a physical inventory taken on December 31,2014, Chewy Company determined
the chocolate inventory on a FIFO basis at P5,200,000 with a replacement cost of
P4,000,000. The entity estimated that, after further processing costs of P2,400,000, the
chocolate could be sold as finished candy bars for P8,000,000. The normal profit margin is
10% of sales. Using the measurement at the lower of cost and net realizable value, what
amount should be reported as chocolate inventory on December 31,2014?
A. 4,000,000 C. 5,200,000
B. 4,800,000 D. 5,600,000 P1 © 2014
83. Winter Company provided the following inventory data at year-end:

Cost NRV
Skis 2,200,000 2,500,000
Boots 1,700,000 1,500,000
Ski equipment 700,000 800,000
Ski apparel 400,000 500,000
What amount should be reported as inventory at year-end?
A. 4,800,000 C. 5,200,000
B 5,000,000 D. 5,300,000 P1 © 2014
84. Chicago Company has two products in the inventory.

Product X Product Y
Selling price 2,000,000 3,000,000
Materials and conversion costs 1,500,000 1,800,000
General administration costs 300,000 800,000
Estimated selling costs 600,000 700,000
At the year-end, the manufacture of items of inventory has been completed but no selling
costs have yet been incurred. What is the measurement of Product X and Y,
respectively?
A. 1,400,000 and 1,800,000 C. 1,500,000 and 1,800,000
B. 1,400,000 and 2,300,000 D. 1,500,000 and 2,300,000 P1 © 2014

85. Greece Company provided the following data for the current year:
Inventory - January 1:
Cost 3,000,000
Net realizable value 2,800,000
Net purchases 8,000,000
Inventory - December 31:
Cost 4,000,000
What amount should be reported as cost of goods sold?
A. 7,000,000 C. 7,200,000
B. 7,100,000 D. 7,300,000 P1 © 2014
86. Gracia Company used the lower of cost or net realizable value method to value inventory.
Data regarding the items in work in process inventory are presented below:
Markers Pens Highlight
ers
Historical cost 240,000 188,000 300,000
Selling price 360,000 250,000 360,000
Estimated cost to complete 48,000 50,000 68,000
Replacement cost 208,000 168,000 318,000
Normal profit margin as a percentage of selling price 25% 25% 10%
What is the measurement of the work in process inventory?
A. 676,000 C. 720,000
B. 694,000 D. 728,000 P1 © 2014
87. On December 31,2014, Julie Company reported ending inventory at P3,000,000, and the
allowance for inventory writedown before any adjustment at P150,000. Relevant information
on December 31,2014 follows:
Product 1 Product 2 Product 2 Product 3
Historical cost 800,000 1,000,000 700,000 500,000
Replacement cost 900,000 1,200,000 1,000,000 600,000
Sales price 1,200,000 1,300,000 1,250,000 1,000,000
Net realizable value 550,000 1,100,000 950,000 350,000
Normal profit 250,000 150,000 300,000 300,000
What amount of loss on inventory writedown should be included in cost of goods sold?
A. 100,000 C. 250,000
B. 200,000 D. 400,000 P1 © 2014

88. Uptown Company used the perpetual method to record inventory transactions for 2014.
Inventory 1,900,000
Sales 6,500,000
Sales return 150,000
Cost of goods sold 4,600,000
Inventory losses 120,000
On December 24,2014, the entity recorded a P150,000 credit sale of goods costing
P100,000. These goods were sold on FOB destination terms and were in transit on December
31,2014. The goods were included in the physical count. The inventory on December 31,2014
determined by physical count had a cost of P2,000,000 and a net realizable value of
P1,700,000. Any inventory writedown is not yet recorded. What amount should be reported
as cost of goods sold for 2014?
A. 4,500,000 C. 4,920,000
B. 4,720,000 D. 5,020,000 P1 © 2014
89. Altis Company reported the following information for the current year:
Sales (100,000 units at P150) 15,000,000
Sales discount 1,000,000
Purchases 9,300,000
Purchase discount 400,000
The inventory purchases during the year were as follows:
Beginning inventory, January 1 20,000 60 1,200,000
Purchases, quarter ended March 31 30,000 65 1,950,000
Purchases, quarter ended June 30 40,000 70 2,800,000
Purchases, quarter ended Sept. 30 50,000 75 3,750,000
Purchases, quarter ended Dec. 31 10,000 80 800,000
150,000 10,500,000
The accounting policy is to report inventory in the financial statements at the lower of cost
and net realizable value. Cost is determined under the first-in, first-out method. The entity
has determined that, on December 31,2014, the replacement cost of inventory was P70 per
unit and the net realizable value was P72 per unit. The normal profit margin is P10 per unit.
What amount should be reported as cost of goods sold for the current year?
A. 6,300,000 C. 6,700,000
B. 6,500,000 D. 6,900,000 P1 © 2014
90. In 2014, North Company experienced a decline in the value of inventory resulting in a
writedown from P3,600,000 to P3,000,000. The entity used the allowance method to record
the necessary adjustment. In 2015, market conditions have improved dramatically. On

December 31,2015, the inventory had a cost of P5,000,000 and net realizable value of
P4,600,000. What is included in the adjusting entry on December 31, 2015?
A. Debit allowance for inventory writedown P200,000
B. Credit allowance for inventory writedown P400,000
C. Debit gain on reversal of inventory writedown P200,000
D. Credit gain on reversal of inventory writedown P400,000 P1 © 2014

White Company carried four items in inventory. The following per-unit data relate to these items at
the end of first year of operations:
Units Cost Sale price Selling cost Normal profit

Category 1:
A 25,000 105 130 15 20
B 20,000 85 90 10 10
Category 2:
C 40,000 50 45 5 5
D 30,000 65 75 15 10
91. What is the measurement of inventory under LCNRV applied to individual item?
A. 7,625,000 C. 7,875,000
B. 7,725,000 D. 8,275,000
92. What is the measurement of inventory under LCNRV applied to inventory category?
A. 7,625,000 C. 7,875,000
B. 7,725,000 D. 8,275,000
93. What is the measurement of inventory under LCNRV applied to inventory as a whole?
A. 7,625,000 C. 7,875,000
B. 7,725,000 D. 8,275,000
Purchase commitment
94. On December 31, 2014, Dos Company has outstanding purchase commitments for 50,000
gallons at P20 per gallon of raw material. It is determined that the market price of the raw
material has declined to P17 per gallon on December 31,2014 and it is expected to decline
further to P15 in the first quarter of 2015. What is the loss on purchase commitment that
should be recognized in 2014?
A. 0 C. 250,000
B 150,000 D. 850,000 P1 © 2014

95. On October 1, 2014, Gorgeous Company entered into a 6-month, P5,200,000 purchase
commitment for a supply of a special product. On December 31,2014, the market value of
this material had fallen to P5,000,000.On March 31, 2015, the market value of the purchase
commitment is P4,900,000. What is the loss on purchase commitment to be recognized on
March 31,2015?
A. 0 C. 200,000
B. 100,000 D. 300,000 P1 © 2014
96. On November 15, 2014, Diamond Company entered into a commitment to purchase 10,000
ounces of gold on February 15,2015 at a price of P310 per ounce. On December 31, 2014,
the market price of gold is P270 per ounce. On February 15,2015, the price of gold is P300
per ounce. What is the gain on purchase commitment to be recognized on February 15,2015?
A. 0 C. 300,000
B. 100,000 D. 400,000 P1 © 2014
97. On November 15, 2014, Damascus Company entered into a commitment to purchase
100,000 barrels of aviation fuel for P55 per barrel on March 31, 2015. The entity entered into
this purchase commitment to protect itself against the volatility in the aviation fuel market. By
December 31,2014 the purchase price of aviation fuel had fallen to P40 per barrel. However,
by March 31, 2015, when the entity took delivery of the 100,000 barrels the price of aviation
fuel had risen to P60 per barrel. What amount should be recognized as gain on purchase
commitment for 2015?
A. 0 C. 1,500,000
B. 500,000 D. 2,000,000 P1 © 2014
98. On January 1,2014, Card Company signed a three-year, noncancelable purchase contract,
which allows Card to purchase up to 5,000 units of a computer part annually from Hart
Company at P100 per unit and guarantees a minimum annual purchase of 1,000 units. During
2014, the part unexpectedly became obsolete. Card had 2,500 units of this inventory on
December 31,2014, and believed these parts can be sold as scrap for P20 per unit. What
amount of loss from the purchase commitment should be reported in the 2014 income
statement?
A. 160,000 C. 240,000
B. 200,000 D. 360,000 P1 © 2014

ANSWER KEY – Theory

1.C 26.D 51.A 76.B 101.C
2.C 27.B 52.A 77.D 102.B
3.B 28.C 53.B 78.C 103.B
4.A 29.A 54.D 79.D 104.B
5.C 30.C 55.B 80.D 105.D
6.C 31.C 56.D 81.D 106.D
7.C 32.B 57.A 82.C 107.B
8.A 33.D 58.D 83.D 108.B
9.D 34.A 59.A 84.B 109.D
10.D 35.D 60.A 85.C 110.B
11.D 36.C 61.C 86.B 111.A
12.C 37.D 62.D 87.B 112.A
13.B 38.A 63.C 88.D 113.B
14.A 39.A 64.A 89.C 114.C
15.C 40.B 65.C 90.D 115.A
16.C 41.D 66.A 91.D 116.D
17.C 42.D 67.B 92.D
18.D 43.A 68.B 93.B
19.A 44.D 69.B 94.A
20.D 45.C 70.B 95.D
21.D 46.B 71.C 96.D
22.D 47.B 72.D 97.D
23.D 48.B 73.C 98.D
24.A 49.D 74.D 99.A
25.A 50.D 75.A 100.C
Answer Key Page 63

ANSWER KEY – PROBLEMS

1.B 26.D 51.B 76.D
2.C 27.B 52.A 77.B
3.B 28.A 53.B 78.B
4.B 29.D 54.D 79.C
5.A 30.B 55.D 80.D
6.B 31.D 56.B 81.A
7.B 32.C 57.D 82.C
8.A 33.A 58.D 83.A
9.D 34.B 59.C 84.A
10.B 35.C 60.B 85.B
11.D 36.C 61.D 86.C
12.A 37.D 62.B 87.C
13.A 38.B 63.A 88.C
14.B 39.B 64.B 89.B
15.C 40.C 65.C 90.A
16.C 41.D 66.B 91.A
17.C 42.D 67.C 92.B
18.A 43.D 68.B 93.C
19.D 44.B 69.C 94.B
20.B 45.A 70.B 95.B
21.C 46.B 71.C 96.C
22.B 47.B 72.C 97.C
23.B 48.B 73.B 98.A
24.D 49.D 74.B
25.C 50.D 75.C
Answer Key Page 64

ANSWER EXPLANATION
1. Answer is (B).
Beginning inventory - 2015 2,355,000
Purchases 3,180,000
Freight in 220,000
Purchase discounts ( 45,000)
Purchase returns (40,000)
Purchase allowances (15,000)
Goods available for sale 5,655,000
Cost of sales- 2015 (4,500,000 x 73%) 3,285,000
Ending inventory - 2015 2,370,000
Sales 100%
Cost of sales 73%
Gross profit rate 27%
2. Answer is (C).
Cost of goods sold (60% x 3,600,000) 2,160,000
Ending inventory 240,000
Cost of goods available for sale 2,400,000
3. Answer is (B).
Sales 6,200,000
Less: Sales returns 200,000
Net sales 6,000,000
Cost of sales:
Inventory – January 1,000,000
Purchases 5,500,000
Freight-in 250,000
Total 5,750,000
Less: Purchase returns, allow. & discounts 150,000 5,600,000
Less: Inventory – December 31 2,100,000 4,500,000
Gross income 1,500,000
Gross profit rate (1,500,000 / 4,500,000) 33 1/3%
Answer Explanations & Solutions Page 65

4. Answer is (B).
Purchases 7,000,000
Inventory-December 31 (1,400,000)
Markup on cost (40% x 5,600,000) 2,240,000
Sales (140% x 5,600,000) 7,840,000
Collections from customers (4,000,000)
Accounts receivable - December 31 3,840,000
5. Answer is (A).
Inventory – January 1 1,200,000
Purchases 2,000,000
Less: Inventory – December 31 1,100,000
Gross profit 900,000
Total sales 3,000,000
Less: Cash sales 500,000
Sales on account 2,500,000
Accounts receivable – January 1 800,000
Total 3,300,000
Less: Collections 2,600,000
Accounts receivable – December 31 700,000
6. Answer is (B).
Net sales (1,200,000 x 5) 6,000,000
Inventory 1,800,000
Purchases 4,500,000
Less: Cost of sales (6,000,000 x 60%) 3,600,000
Inventory – December 31 2,700,000
7. Answer is (B).
Credit sales 950,000 + 60,000 + 4,400,000 – 1,100,000 4,310,000
Cash sales 640,000
Total sales 4,950,000
Gross profit 30% (1,485,000)
Cost of sales 3,465,000
Beginning inventory 840,000 + 3,465,000 – 3,500,000 805,000

8. Answer is (A).
Sales (950,000 x 8) 7,600,000
Cost of sales (1,150,000 x 4) 4,600,000
Gross margin 3,000,000
9. Answer is (D).
Cost of purchases 5,000,000
Freight and insurance 1,000,000
Other handling costs 100,000
Brokerage commission 200,000
Total cost of purchases 6,700,000
10. Answer is (B).

Gross invoice 4,000,000
Purchase return ( 300,000)
Balance 3,700,000
Purchase discount lost (2% x 3,700,000) 74,000
11. Answer is (D).

Invoice price (900,000 x .80 x .90) 648,000
12. Answer is (A).

Accounts payable per book 2,000,000
Goods lost in transit, FOB shipping point 100,000
Purchase return (50,000)
Adjusted balance 2,050,000
13. Answer is (A).

Undelivered entity checks 2,000,000
Goods purchased and received on Dec. 28, 2014 750,000
Purchase discount (2% x 750,000) (15,000) 735,000
Total accounts payable 7,235,000
The undelivered checks should be adjusted as follows:
Cash 2,000,000

14. Answer is (B).

Goods shipped FOB shipping point
on December 22, 2014 and lost in transit 40,000
Advance payment erroneously debited to accounts payable 500,000
Adjusted accounts payable 2,670,000
Kew Company shall suffer the loss of the goods in transit because the goods are shipped
FOB shipping point. Appropriately, Kew Company must file a claim against the common
carrier.
15. Answer is (C).

Purchases through March 15, 2014 (4,900,000 / 98%) 5,000,000
Inventory-12/31/2013, at cost (1,500,000/ 150%) 1,000,000
Total gross amount to be paid 6,000,000
16. Answer is (C).

Accounts payable per book 900,000
Undelivered checks 400,000
Unrecorded purchases on Dec. 28 (150,000 x 98%) 147,000
Purchase on December 20 (200,000 x 95%) 190,000
Adjusted accounts payable 1,637,000
17. Answer is (C).

List price 5,000,000
Trade discounts: 30% x 5,000,000 (1,500,000)
3,500,000
20% x 3,500,000 ( 700,000)
Invoice price 2,800,000
Cash discount (2% x 2,800,000) ( 56,000)
Net amount 2,744,000
Add: Reimbursement of delivery cost 200,000
Total remittance from Burr 2,944,000
18. Answer is (A).

Cash 1,323,000
Inventory 27,000

19. Answer is (D).

Accounts payable at gross 1,500,000
Discounts available in the accounts payable balance (10,000)
Accounts payable at net 1,490,000
20. Answer is (B).

Purchases of IBM compatibles 1,700,000
Purchases of commercial software packages 1,200,000
Returns and allowances (50,000)
Discounts available on purchases (2% x 2,850,000) 57,000
Purchase discounts taken (17,000)
Discount lost 40,000
21. Answer is (C).

Net method
Purchases (800,000 + 1,000,000) 1,800,000
Purchase discount taken (2% x 800,000) (16,000)
Purchase discount not taken (2% x 1,000,000) (20,000)
Net amount 1,764,000
Under the net method, the purchase discount is deducted from purchases regardless of
whether taken or not taken.
Gross method
Purchases 1,800,000
Purchase discount taken (16,000)
Under the gross method, the purchases are recorded at gross and only the purchase discount
taken is deducted from purchases in determining cost of goods available for sale.
22. Answer is (B).

Purchase return, gross 300,000
Purchase discount 300,000 x 2% (6,000)
Net purchases 294,000
23. Answer is (B).

Purchase discount (4,000,000 – 300,000) x 2% 74,000

24. Answer is (D).

List price 600,000
Trade discount (20% x 600,000) (120,000)
Balance 480,000
Trade discount (10% x 480,000) ( 48,000)
Invoice price 432,000
Freight charge 15,000
Total cost of purchase 447,000
Purchases are normally recorded at gross. Thus, the cash discount is ignored.
25. Answer is (C). All costs incurred except abnormal freight
26. Answer is (D). All costs are inventoriable.
27. Answer is (B).

Materials 300,000
Production labor cost 330,000
Production overhead 120,000
Value of completed inventory 750,000
28. Answer is (A). When the shipping terms are FOB destination, the seller is
responsible for costs incurred in transporting the goods to the buyer.
29. Answer is (D).

Inventory shipped on consignment to Beta 1,800,000
Freight paid by Stone 90,000
Total cost of consigned inventory 1,890,000
30. Answer is (B).

Merchandise purchased 4,000,000
Freight in 100,000
Inventoriable cost 4,080,000
31. Answer is (D).

Cost of purchases 5,000,000

Freight and insurance 1,000,000

Other handling costs 100,000
Brokerage commission 200,000
Total cost of purchases 6,700,000
32. Answer is (C).

Raw materials 1,350,000
Goods in process 2,950,000
Finished goods 3,600,000
Total 7,900,000
33. Answer is (A).

Materials 700,000
Irrecoverable purchase taxes 60,000
Total cost of inventory 760,000
34. Answer is (B).

Items counted in the bodega 4,000,000
Items included in count specifically segregated ( 100,000)
Items returned by customer 50,000
Items ordered and in receiving department 400,000
Items shipped today, FOB destination 150,000
Items for display 200,000
Items on counter for sale 800,000
Damaged and unsalable items included in count ( 50,000)
Items in the shipping department 250,000
5,700,000
35. Answer is (C).

Materials 1,400,000
Finished goods in factory 2,000,000
Finished goods in entity-owned retail store (750,000/150%) 500,000
Finished goods in the hands of consignees (400,000 x 60%) 240,000
Finished goods in transit 250,000
Finished goods out on approval 100,000
Materials in transit (330,000 + 30,000) 360,000
Correct inventory 5,500,000

36. Answer is (C).

Finished goods 2,000,000
Finished goods held by salesmen 100,000
Goods in process (720,000/80%) 900,000
Materials 1,000,000
Factory supplies (110,000 + 60,000) 170,000
37. Answer is (D).

Goods on hand 2,600,000
Goods purchased in transit 200,000
Goods out on consignment 300,000
38. Answer is (B).

Goods sold in transit 100,000
39. Answer is (B).

Physical inventory 4,000,000
Merchandise shipped FOB seller 50,000
40. Answer is (C). Physical count = 1,500,000
41. Answer is (D).

Physical count 2,500,000
Merchandise shipped FOB shipping point on Dec. 30. 2014 from a vendor 100,000
Goods shipped FOB shipping point to a customer on January 4, 2015 400,000
42. Answer is (D).

Goods purchased in transit 200,000
Goods out on consignment 300,000

43. Answer is (D).

Goods shipped FOB shipping point on December 30, 2014
to Hero and received January 4, 2015 300,000
Inventory, December 31,2014 6,300,000
The goods costing P125,000 are properly included in the December 31,2014 physical count
because the goods are shipped FOB shipping point only on January 7,2015 (picked up by
common carrier).
44. Answer is (B).

Inventory marked “hold for shipping instruction” 80,000
45. Answer is (A).

Inventory marked "hold for shipping instructions" 500,000
Correct amount of inventory 5,500,000
46. Answer is (B).

Inventory per book 950,000
Item 3 (18,500-1,000/140%) 12,500
Item 4 (50,000 + 2,500) 52,500
Item 5 (35,000 /140% = 25,000 + 2,000) 27,000
Adjusted inventory 1,042,000
47. Answer is (B).

Reported inventory 2,000,000
Goods sold in transit, FOB destination 200,000
Goods purchased in transit, FOB shipping point 300,000
Correct amount of inventory 2,500,000
48. Answer is (B).

Inventory before adjustment 7,600,000
Goods out on consignment 1,000,000
Goods purchased, FOB shipping point 250,000
Goods sold, FOB shipping point ( 850,000)

Goods sold, FOB destination 260,000

Goods sold, FOB destination 840,000
49. Answer is (D).

Goods sold in transit, FOB destination 380,000
Goods purchased in transit, FOB shipping point 510,000
Adjusted inventory 5,300,000
50. Answer is (D).

Inventory per book 5,000,000
Inventory transferred to delivery department 80,000
Shipment covered by bill of lading 800,000
Goods in transit, purchased FOB destination ( 25,000)
51. Answer is (B).

Inventory per physical count 3,600,000
Inventory marked "hold for shipping instructions" 80,000
Goods in process inventory 300,000
Goods shipped FOB seller or FOB shipping point 50,000
52. Answer is (A).

Merchandise in transit purchased FOB destination 100,000
Markup on goods out on consignment (195,000-150,000) 45,000
Markup on merchandise for approval 10,000
Merchandise held on consignment 35,000
Total reduction 190,000
53. Answer is (B).

Inventory - December 31,2013 360,000
Purchases-2014 3,000,000
Inventory - December 31,2014 ( 380,000)

54. Answer is (D).

Beginning inventory 1,220,000
Purchases 5,400,000
Freightin (100,000+ 50,000) 150,000
Ending inventory (1,650,000)
55. Answer is (D). Freezers sold (10 x P20,000) = 200,000
56. Answer is (D). Payable for consigned goods (500,000 - 50,000) 450,000
57. Answer is (D).

January 18 150,000 23 3,450,000
28 100,000 24 2,400,000
Total FIFO cost 250,000 5,850,000
58. Answer is (D).

Beginning inventory 20,000
Purchases (30,000 + 48,000 + 16,000) 94,000
Total units available 114,000
Sales (36,000+ 38,000) ( 74,000)
Ending inventory in units 40,000
From August 21 purchase (24,000 x 38.00) 912,000
From August 29 purchase (16,000 x 38.60) 617,600
Total cost of inventory, August 31 1,529,600
59. Answer is (C).

From March 5 purchase (4,500 units x 73.50) 330,750
Whether periodic or perpetual system, the FIFO inventory is the same.
60. Answer is (B).

Sales 6,000,000
Gross profit (2,400,000)
Inventory - July 31 (see below) 928,000
Cost of goods available for sale 4,528,000
Purchases for July (3,174,000)

Inventory - July 1 1,354,000
Quantity Unit cost Total cost

July 12 1,000 60 60,000
25 14,000 62 868,000
FIFO inventory - 7/31 15,000 928,000
61. Answer is (D). Under the perpetual FIFO cost flow, the sale return is costed back
into inventory at the latest unit purchase cost of P4.60.
62. Answer is (B).

Units sold Unit cost Total cost
April 1 6,000 120 720,000
5 10,000 140 1,400,000
Total goods sold 16,000 2,120,000
63. Answer is (A).

Beginning raw materials (90,000 x 7) 630,000
Purchases (75,000 x 8 + 120,000 x 8.50) 1,620,000
Raw materials available for use 2,250,000
Ending raw materials (90,000 x 8.50) (765,000)
Raw materials used 1,485,000
Direct labor 3,100,000
Manufacturing overhead 2,950,000
Total manufacturing cost 7,535,000
Beginning work in process (50,000 x 14) 700,000
Total work in process 8,235,000
Ending work in process (48,000 x 15) ( 720,000)
Cost of goods manufactured 7,515,000
Beginning raw materials of 90,000 units plus purchases of 75,000 and 120,000 minus
195,000 units transferred equals 90,000 ending raw materials.
64. Answer is (B).

2014 2015
Net income - LIFO 2,750,000 3,000,000
Understatement inventory2014'( 1,400,000- 900,000) 500,000 ( 500,000)
2015 (2,000,000-1,600,000) - 400,000
Net income - FIFO 3,250,000 2,900,000

65. Answer is (C).

January 10 20,000 100 2,000,000
February 8 30,000 110 3,300,000
50,000 5,300,000
Weighted average unit cost (5,300,000/50,000) 106
Cost of inventory (30,000 x 106) 3,180,000
66. Answer is (B).

July 1 Inventory 20,000 36.00 720,000
7 Purchase 30,000 37.00 1,110,000
21 Purchase 50,000 37.88 1,894,000
29 Purchase 16,000 38.11 609,760
Total goods available
(4,333,760/116,000) 116,000 37.36 4,333,760
Sales (36,000+ 38,000) ( 74,000)
Ending inventory 42,000 37.36 1,569,120
67. Answer is (C).

January 1 8,000 200 1,600,000
8 (4,000) 200 (800,000)
4,000 200 800,000
20 12,000 240 2,880,000
(3,680,000/16,000 = 230) 16,000 230 3,680,000
68. Answer is (B).

Jan. 1 Beginning balance 5,000 200 1,000,000
10 Purchase 5,000 250 1,250,000
Balance 10,000 225 2,250,000
15 Sale (7,000) 225 (1,575,000)
Balance 3,000 225 675,000
16 Sale return 1,000 225 225,000
Balance 4,000 225 900,000
30 Purchase 16,000 150 2,400,000
Balance 20,000 165 3,300,000
31 Purchase return (2,000) 150 ( 300,000)
Balance 18,000 167 3,000,000

Observe that the moving average unit cost changes every time there is a new purchase or a
purchase return. The moving average unit cost is not affected by a sale or a sale return.
69. Answer is (C).

January 1 40,000 50 2,000,000
January 17 (35,000) 50 (1,750,000)
Balance 5,000 50 250,000
January 28 20,000 80 1,600,000
Balance 25,000 74 1,850,000
70. Answer is (C).

January 1 10,000 100 1,000,000
January 7 6,000 300 1,800,000
Balance (2,800,000/16,000) 16,000 175 2,800,000
January 20 sale ( 9,000) 175 (1,575,000)
Balance 7,000 175 1,225,000
January 25 4,000 500 2,000,000
Balance (3,225,000/11,000) 11,000 293 3,225,000
71. Answer is (C).

January 1 1,000 100 100,000
January 7 6,000 300 1,800,000
January 25 4,000 500 2,000,000
Total FIFO cost 11,000 3,900,000
Note again that the FIFO cost will be the same whether periodic system or perpetual
system.
72. Answer is (B).

Cost of units available for sale for July 1,452,100
Purchases for July (1,042,100)
Cost of inventory - July 1 410,000
Number of units - July 1 (410,000/P4) 102,500

73. Answer is (B).

July 1 inventory 102,500
Purchases for July 200,000
Total units available for sale for July 302,500
July 31 inventory (60,000)
Units sold during the month of July 242,500
74. Answer is (B).

Average unit cost (1,452,100/ 302,500) 4.80
Inventory - July 31 (60,000 x 4.80) 288,000
Another approach
Cost of units available for sale for July 1,452,100
Cost of goods sold for July (1,164,100)
Inventory - July 31 288,000
75. Answer is (C).

Sales price Fraction Allocated cost
A (100 x 240,000) 24,000,000 24/60 6,000,000
B (100 x 160,000) 16,000,000 16/60 4,000,000
C (200 x 100,000) 20,000,000 20/60 5,000,000
60,000,000 15,000,000
Incidentally, the cost of each class A lot is P6,000,000 divided by 100 lots or P60,000.
76. Answer is (D).

Sales price Fraction Total cost
Highland ( 20 x 1,000,000) 20,000,000 20/100 12,000,000
Midland (40 x 750,000) 30,000,000 30/100 18,000,000
Lowland (100 x 500,000) 50,000,000 50/100 30,000,000
100,000,000 60,000,000
77. Answer is (B).

Sales price Fraction Allocated cost
A (10x100,000) 1,000,000 10/84 700,000
B (20x80,000) 1,600,000 16/84 1,120,000
C (40x70,000) 2,800,000 28/84 1,960,000
D (50x60,000) 3,000,000 30/84 2,100,000
8,400,000 5,880,000

Allocated cost of Class B 1,120,000

Clearing cost of Class B 100,000
Total cost 1,220,000
78. Answer is (A).

Units Sales price Total
Class A (60% x 60,000) 36,000 500 18,000,000
Class B (40% x 60,000) 24,000 250 6,000,000
60,000 24,000,000
Total average cost (60,000 x 360) 21,600,000
Allocated cost:
Class A (18/24 x 21,600,000) 16,200,000
Class B ( 6/24 x 21,600,000) 5,400,000
Total average cost 21,600,000
Unit cost:
Class A (16,200,000/36,000) 450
Class B ( 5,400,000/24,000) 225
Inventory cost:
Class A (2,200x450) 990,000
Class B (3,000 x 225) 675,000
79. Answer is (C).

Units Cost
January 1 8,000 240,000
Purchases 25,000 816,000
Goods available for sale 33,000 1,056,000
Inventory - December 31 (1,056,000 / 33,000 = 32 x 10,000) 320,000
80. Answer is (D).

Sales price Fraction Cost
Class A (25x400,000) 10,000,000 10/20 6,250,000
Class B (30 x 300,000) 9,000,000 9/20 5,625,000
Class C (10x100,000) 1,000,000 1/20 625,000
20,000,000 12,500,000
Cost per lot Unsold Cost

Class A (6,250,000/25) 250,000 15 3,750,000
Class B (5,625,000/30) 187,500 6 1,125,000

Class C ( 625,000/10) 62,500 3 187,500

81. Answer is (A).

Inventory per book 1,960,000
Beds received December 30, 2014 recorded January 2, 2015 900,000
Beds received recorded twice ( 190,000)
Beds shipped FOB shipping point on
December 30, 2014 recorded January 2015 ( 700,000)
Beds on hand unrecorded 230,000
82. Answer is (C).

Estimated sales price 8,000,000
Cost to complete - processing cost (2,400,000)
FIFO cost 5,200,000

Nee realizable value 5,600,000
LCNRV 5,200,000
The FIFO cost of P5,200,000 is the inventory valuation because it is lower than the net
realizable value.
83. Answer is (A).

Cost NRV LCNRV
Skis 2,200,000 2,500,000 2,200,000
Boots 1,700,000 1,500,000 1,500,000
Ski equipment 700,000 800,000 700,000
Ski apparel 400,000 500,000 400,000
5,000,000 5,300,000 4,800,000
Inventories shall be measured at the lower of cost and net realizable value applied by
individual item.
84. Answer is (A).

Inventories shall be measured at the lower of cost and net realizable value applied by
individual item. Net realizable value is the estimated selling price less the estimated cost to
complete and the estimated cost of disposal.

Product X Product Y
Materials and conversion costs 1,500,000 1,800,000
Selling price 2,000,000 3,000,000
Selling costs ( 600,000) ( 700,000)
Net realizable value 1,400,000 2,300,000
Measurement at lower amount 1,400,000 1,800,000
85. Answer is (B).

Inventory - January 1, at cost 3,000,000
Inventory - December 31, at cost (4,000,000)
Cost of goods sold before inventory writedown 7,000,000
Loss on inventory writedown 100,000
Cost of goods sold after inventory writedown 7,100,000
Required allowance - December 31 (4,000,000 - 3,700,000) 300,000
Allowance for inventory writedown - January 1 (3,000,000-2,800,000) 200,000
The amount of any inventory writedown to net realizable value and all losses on inventory
shall be included in cost of goods sold. The amount of any reversal of inventory writedown
shall be deducted from cost of goods sold.
86. Answer is (C).

Historical cost NRV Value
Markers 240,000 312,000 240,000
Pens 188,000 200,000 188,000
Highlighters 300,000 292,000 292,000
720,000
The measurement at the lower of cost or net realizable value shall be applied on an individual
basis or item by item.
87. Answer is (C).

Cost NRV LCNRV
Product 1 800,000 550,000 550,000
Product 2 1,000,000 1,100,000 1,000,000
Product 3 700,000 950,000 700,000
Product 4 500,000 350,000 350,000
2,600,000
Note that under LCNRV, replacement cost and normal profit are not taken into consideration.


LCNRV 2,600,000
Required allowance for inventory writedown 400,000
Allowance before adjustment (150,000)
Increase in allowance 250,000
Loss inventory writedown 250,000
Allowance for inventory writedown 250,000
88. Answer is (C).

Physical inventory 2,000,000
Inventory writedown 300,000
Cost of goods sold per book 4,600,000

Cost of goods incorrectly recorded as sold (100,000)
Inventory losses 120,000
Adjusted cost of goods sold 4,920,000
89. Answer is (B).

September 30 (40,000 x 75) 3,000,000
December 31(10,000 x 80) 800,000
FIFO cost 3,800,000
Net realizable value (50,000 x 72) 3,600,000
Inventory writedown 200,000
Inventory - January 1 at cost 1,200,000
Purchases 9,300,000
Purchase discount ( 400,000)
Inventory - December 31 at cost ( 3,800,000)
Cost of goods sold before inventory writedown 6,300,000
Cost of goods sold after inventory Writedown 6,500,000
90. Answer is (A).

2014 Loss on inventory writedown 600,000
Allowance for inventory writedown 600,000

2015 Allowance for inventory writedown 200,000

Gain on reversal of inventory writedown (600,000-400,000) 200,000
91. Answer is (C).

(a) (b) (c)
Units Unit cost NRV
Category 1:
A 25,000 105 115
B 20,000 85 80
Category 2:
C 40,000 50 40
D 30,000 65 60
(a x b) (a x c)
Total cost NRV LCNRV
Category 1:
A 2,625,000 2,875,000 2,625,000
B 1,700,000 1,600,000 1,600,000
Subtotal 4,325,000 4,475,000
Category 2:
C 2,000,000 1,600,000 1,600,000
D 1,950,000 1,800,000 1,800,000
Subtotal 3,950,000 3,400,000 .
Grand total 8,275,000 7,875,000 7,625,000
LCNRV - by individual item 7,625,000
92. Answer is (B). LCNRV - by category

Total cost NRV Lower
Category 1 4,325,000 4,475,000 4,325,000
Category 2 3,950,000 3,400,000 3,400,000
7,725,000
93. Answer is (B).

Total NRV 7,875,000
LCNRV - by total 7,875,000
94. Answer is (B). Loss on purchase commitment (50,000 x 3) 150,000

95. Answer is (B).

Market value - December 31, 2014 5,000,000
Market value - March 31, 2015 4,900,000
Additional loss on purchase commitment in 2015 100,000
96. Answer is (C).

Estimated liability for purchase commitment on 12/31/2014(10,000 x
40) 400,000
Entry on February 15, 2015
Purchases (10,000x300) 3,000,000
Estimated liability for purchase commitment 400,000
Accounts payable (10,000 x 310) 3,100,000
Gain on purchase commitment 300,000
97. Answer is (C).

Estimated liability for purchase commitment on 12/31/2014
(100,000x15) 1,500,
000
To record the actual purchase on March 31,2015:
Purchases (100,000x55) 5,500,000
Estimated liability for purchase commitment 1,500,000
Gain on purchase commitment 1,500,000
The gain to be recognized is limited to the loss on purchase commitment previously recorded.
98. Answer is (A).

Remaining contract -1,000 units each year
2015 (1,000 x P100) 100,000
2016 (1,000 x P100) 100,000
Total 200,000
Estimated realizable value (2,000 x P20) 40,000
Loss on purchase commitment 160,000
A loss on inventory write-down should also be recognized on December 31,2014 in the
amount of P200,000 (2,500" units x P80).

07a Inventories Cost Flow Valuation

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FINANCIAL ACCOUNTING

THEORY & PRACTICE

2. What are the two classes of inventories?

3. What is the general rule as to "what goods shall be included in inventory"?

In other words, it is ownership that determines inventory inclusion or inventory exclusion.

4. Explain the following terms in connection with purchase of inventory.

Essay Questions Page 1

5. Explain fully FAS, CIF and Ex-ship in relation to maritime shipping.

Essay Questions Page 2

6. Who is the owner of "consigned goods"?

8. Explain the two systems of accounting for inventories.

1. Periodic or physical system

Essay Questions Page 3

This approach gives actual or physical inventory.

9. Distinguish cash discounts and trade discounts.

Essay Questions Page 4

10. What are the two methods of recording purchases?

11. What is "cost" of an inventory?

The cost of an inventory comprises:

12. Explain the "cost of purchase" of an inventory.

Essay Questions Page 5

13. Explain the "cost of conversion" of an inventory.

Unallocated overhead is recognized as expense in the period in which it is incurred.

a. Abnormal amounts of wasted materials, labor and other production costs

15. Explain the cost of inventory of a service provider.

Essay Questions Page 6

The inventory of a service provider may simply be described as work in progress.

PAS 2 provides the following clear-cut principles concerning measurement of inventory:

Essay Questions Page 7

18. Explain the weighted average method of inventory valuation.

Essay Questions Page 8

20. Explain the "specific identification" method of inventory valuation?

21. What is "net realizable value"?

Essay Questions Page 9

It is not appropriate to write down inventories based on a classification of inventory, for

Essay Questions Page 10

In subsequent years, this allowance account is adjusted upward or downward depending on

If the required allowance increases, an additional loss is recognized.

If the required allowance decreases, a gain on reversal of inventory writedown is recorded.

Agricultural, Mineral & Forest Products

Essay Questions Page 11

A standard cost is predetermined and, once determined, is applied to all inventory

Relative Sales Price Method

Essay Questions Page 12

Actually, the recognition of a loss on purchase commitment is an adaptation of the

Essay Questions Page 13

Multiple Choice - Theory

2. Inventories are assets defined by all of the following, except

4. Which of the following inventories carried by a manufacturer is similar to the merchandise

MCQ - Theory Page 14

6. Inventories include all of the following assets, except

7. Inventories encompass all of the following, except

8. Which of the following accounts is not reported in inventory?

9. Which of the following should not be reported as inventory?

10. Which of the following should be included in inventory?

Product costs & period costs

MCQ - Theory Page 15

12. The cost of purchase of inventory does not include

15. Which of the following costs should be included in inventory valuation?

16. Fixed production overheads include all of the following, except

MCQ - Theory Page 16

18. What is considered normal capacity of production facilities?

19. How should unallocated fixed overhead costs be treated?

a. Abnormal amounts of wasted materials, labor and other  production costs

94. Which of the following statements is incorrect regarding  LCNRV?