NOTES RECEIVABLE

CHAPTER 23
QUESTION 23-1
Define notes receivable.
ANSWER 23-1
Notes receivable are claims supported by formal promises to pay usually in the form of notes.
A negotiate promissory note is an unconditional promise in writing made by one person to
another, signed by the maker, engaging to pay on demand or at a fixed determinable future
time a sum certain in money to order or to bearer.
Simply stated, a promise note is a written contract in which one person, known as the maker,
promises to pay another person, known as the pays, a definite sum of money.
The note may be payable on demand or at a definite future date.
Standing alone, the term “notes receivable” represents only claims arising from sale of
merchandise or service in the ordinary course of business.
Thus, notes receivable from officers, employees, shareholders and affiliates shall be
designated separately.
QUESTION 23-2
Explain the treatment of dishonored notes.
ANSWER 23-2
When a promissory note mature and is not paid, it is said to be dishonored.
Theoretically, dishonored notes shall be removed from the notes receivable account and
transferred to accounts receivable.
The amount debited to accounts receivable should include the face amount, interest and other
charges.
Such approach is Defended on the ground that the overdue note has lost part of its status as a
negotiable instrument and really represents only an ordinary claim against the maker.
QUESTION 23-3
Explain the initial measurement of short-term notes receivable.
ANSWER 23-3
Conceptually, notes receivable shall be measured initially at present value.
The present value is the sum of all future cash inflows discounted using the prevailing
market rate of interest or effective interest rate.
However, short-term notes receivable shall be measured at face amount.
Cash flows relating to short-term notes receivable are not discounted because the amount
of the discount is usually not material.
QUESTION 23-4
Explain the initial measurement of long-term notes receivable.
ANSWER 23-4
The initial measurement of long-term notes depends on whether the notes are interest-
bearing or noninterest-bearing.
Interest bearing long-term notes are measured at face amount which is actually the present
value upon issuance.
Noninterest-bearing long-term notes are measured at present value.
Actually, the term “noninterest-bearing” is a misnomer because all notes implicitly contain
interest.
It is simply a case of the “interest being included in the face amount” rather than being
stated as a separate rate.
QUESTION 23-5
Explain the subsequent measurement of notes receivable

ANSWER 23-5
Subsequent to initial recognition, long-term note receivable shall be measured at amortized
cost using the effective interest method.
For long-term noninterest-bearing notes receivable, the amortized cost is the present value
plus amortization of the discount.
Simply computed, the amortized cost of notes receivable is equal to the face amount minus
the unamortized unearned interest income.
QUESTION 25-6
1. On October 1 of the current year, an entity received a one-year note receivable
bearing interest at the market rate. The face amount of the note receivable and the
entire amount of the interest are due on September 30 of next year. The interest
receivable on December 31 of the current year would consist of an amount
representing
a. Three months of accrued interest income
b. Nine months of accrued interest income
c. Twelve months of accrued interest income
d. The excess on October 1 of the present value of the note receivable over its face amount.
2. On July 1 of the current year, an entity obtained a two-year 8% note receivable for
services rendered. At that time, the market rate of interest was 10%. The face amount
of the note and the entire amount of interest are due on the date of maturity. Interest
receivable on December 31 of the current year is
a. 5% of the face amount of the note
b. 4% of the face amount of the note
c. 5% of the present value of the note
d. 4% of the present value of the note
3. An entity uses the installment method to recognize revenue from installment
sales. Customers pay the installment notes in 24 equal monthly amounts which
include 12% interest. What is the installment notes receivable balance six months
after the sale?
a. 75% of the original sales price
b. Less than 75% of the original sales price.
c. The present value of the remaining monthly payments discounted at 12%.
d. Less than the present value of the remaining monthly payments discounted at 12%.

4. What is imputed interest?

a. Interest based on the stated interest rate
b. Interest based on the implicit interest rate
c. Interest based on the average interest rate
d. Interest based on the bank prime interest rate
5. Accounting for the interest in a noninterest bearing note receivable is an example
of what aspect of accounting theory?
a. Matching
b. Verifiability
c. Substance over form
d. Form over substance

6. On July 1 of the current year, an entity received a one-year note receivable

bearing interest at the market rate. The face amount of the note receivable and the
entire amount of the interest are due in one-year. The interest receivable account
would show a balance on
a. July 1 but not December 31
b. December 31 but not July 1
c. July 1 and December 31
d. Neither July 1 nor December 31
7. On July 1 of the current year, entity received a one-year note receivable bearing
interest at the market rate. The face amount of the note receivable and the entire
amount of the interest are due in one-year. When the note receivable was recorded on
July 1, which of the following was debited?
a. Interest receivable
b. Unearned discount on note receivable
c. Interest receivable and unearned discount on note receivable
d. Neither interest receivable nor unearned discount on note receivable

8. On august 15, an entity sold goods for which it received a note bearing the market
rate of interest on that date. The four-month note was dated July 15. note principal,
together with all interest, is due November 15. when the note was recorded on august
15, which of the following accounts increased?
a. Unearned discount
b. Interest receivable
c. Prepaid interest
d. Interest expense
9. On July 1of the current year, an entity received a one-year note receivable bearing
interest at the market rate. The face amount of the note receivable and the entire amount
of the interest are due on June 30 of next year. On December 31 of the current year, the
entity should report in the statement of financial position
a. A deferred credit for interest applicable to next year
b. No interest receivable
c. interest receivable for the entire amount of the interest due on June 30 of next year
d. Interest receivable for the interest accruing in the current year.
10. An entity received a seven-year zero interest-bearing note on February 1, 2019 in
exchange for property sold. There was no established exchange price for the property
and the note has no ready market. The prevailing rate of interest for a note of this type
was 7% on February 1, 2019, 6% on December 31, 2019, 8% on February 1, 2020, and 9%
on December 31, 2020. what interest rate should be used to calculate the interest revenue
from the transaction for the years ended December 31, 2019 and 2020, respectively?
a. 0% and 0%
b. 7% and 7%
c. 7% and 9%
d. 6% and 9%
ANSWER 23-6

1. A
2. B
3. C
4. B
5. C
6. B
The accrued interest receivable on December 21 is for the period July 1to December of the
current year.
ANSWER 23-6
7. D
On July 1, when the note was received, there is no accrued interest received as yet. Also,
there is no unearned discount because the note receivable is interest bearing.
8. B
Since the note was dated July 15 and it was received on August 15, there is an accrued
interest receivable for July 15 to August 15.
9. D
There is an accrued interest receivable from July 1 to December 31 of the current year.
10. B
The interest revenue should be computed based on the prevailing rate of interest on the
date of issue, February 1, 2019
INVENTORIES
CHAPTER 25
QUESTION 25-1
Define Inventories

ANSWER 25-1
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.

QUESTION 25-2
What is the general rule as to what goods shall be included in inventory?

ANSWER 25-2
The general 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.
QUESTION 25-3
Explain FOB destination FOB Shipping point in connection with purchase of inventory.
ANSWER 25-3
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.
The terms “FOB Destination” and “FOB shipping point” determine ownership of the goods in
transit and party who is supposed to pay the freight charge and other expenses from the
point of shipment to the point of destination.
QUESTION 25-4
Explain freight collection and freight prepaid.
ANSWER 25-4
Freight collect means that the freight charge on the goods shipped is not yet paid.
the common carrier shall be 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 actually paid by the
seller.
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.

QUESTION 25-5
Explain fully FAS, CIF, and Ex-ship in relation to maritime shipping.
ANSWER 25-5
FAS or free alongside
A seller who ships FAS must bear all expenses and risk involved in delivering the goods up to
dock next to or alongside the vessel on which the goods are to be shipped.
The shipping contract, the buyer agrees to pay in a lump sum of the cost of the goods,
insurance and freight charge.
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 of cost of the goods,
insurance 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.
QUESTION 25-6
Explain the two systems of accounting for inventories.

ANSWER 25-6
1. Periodic or physical system
The periodic system calls for the physical counting of goods on hands 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 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.

QUESTION 25-7
Distinguish cash discounts and trade discounts.
3. 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.

QUESTION 25-8
Explain the two methods of recording purchases.
4. Gross method
As the title suggests, the purchases are recorded at the gross amount of the invoice.
Cash discounts taken care recorded in a purchases discount account at the time of
payment.
The purchase 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.
QUESTION 25-9
What is cost of an inventory?
ANSWER 25-9
The cost of an inventory comprises:
a. Cost of purchase
b. Cost of conversion
c. Other cost incurred in bringing the inventory to the present location and condition

QUESTION 25-10
Explain the cost of purchase of an inventory comprises:
ANSWER 25-10
d. Purchase price
e. Import duty and irrecoverable tax
f. Freight and other handling cost
g. Other cost directly attribute to the acquisition of the inventory
Trade discounts, rebates and other similar items are deducted the cost of purchase.
QUESTION 25-11
Explain the cost of conversion of an inventory.
ANSWER 25-11
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.

QUESTION 25-12
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
ANSWER 25-12
Such costs are excluded from the cost of inventory and recognized as expenses in the
period when 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.

QUESTION 25-13
Explain the cost of inventory of a service provider.
ANSWER 25-13
a. Labor and other cost of personnel directly engaged in providing the service
b. Compensation of supervision directly engaged in providing the service
c. Attribute overhead incurred in providing the service
QUESTION 25-14 Multiple choice (PAS 2)
1. The cost of purchase of inventory does not include
a. Purchase price
b. Import duties and irrecoverable taxes
c. Freight, handling and other directly attributable cost
d. Trade discounts, rebates and other similar items
2. The cost of conversion include all, except
a. Direct labor
b. Systematic allocation of fixed production overhead
c. Systematic allocation of variable production overhead
d. Systematic allocation of administrative overhead
3. The allocation of fixed factory overhead is based on
a. Normal capacity of the production facilities
b. Actual use of the production facilities
c. Either the normal capacity or actual use
d. Relative sales value method
4. How should unallocated fixed overhead be treated?
a. Allocated to finished goods and cost goods sold.
b. Allocated to raw materials, goods in process and finished goods.
c. Recognized as an expense in the period incurred.
d. Allocated to cost of goods sold.
5. Variable production overhead is allocated to each unit of production on the basis
of
a. Normal capacity of the production facilities
b. Actual use of the production facilities
c. Either the normal capacity or the actual use
d. Nether the normal capacity nor the actual use
ANSWER 25-14

1. d
2. d
3. a
4. c
5. b
QUESTION 25-15 Multiple choice (IFRS)
1. Which of the following should not be taken into account when determining the cost of
inventory?
a. Storage costs of part-finished goods
b. Trade discounts
c. Recoverable purchase taxes
d. Import duties on shipping of inventory inward
2. The cost of inventory does not include
a. Salaries of factory staff.
b. Storage cost necessary in the production process before a further production stage.
c. Abnormal amount of wasted materials.
d. Irrecoverable purchase taxes.
3. Which of the following costs of conversion cannot be included in the cost of inventory?
a. Cost of direct labor
b. Factory rent and utilities
c. Salaries of sales staff
d. Factory overhead based on normal capacity
4. Which of the should be taken into account when determining the cost of inventory?
a. Storage cost of part-finished goods
b. Abnormal freight in
c. Recoverable purchase tax
d. Interest on inventory loan
5. Costs incurred in bringing the inventory to the present location and condition include
a. Cost of designing product for specific customers
b. Abnormal amount of wasted material
c. Storage cost not necessary in the production process before a further production stage
d. Distribution cost
6. Inventories encompass all of the following, except
a. Merchandise purchased by a retailer
b. Land and other property not held for sale
c. Finished goods produced
d. Materials and supplies for use in production
7. A property developer must classify properties for sale in the ordinary course of
business as
a. Inventory
b. Property, plant and equipment
c. Financial asset
d. Investment property
8. Factory supplies to be consumed in the production process are reported as
a. Inventory
b. Property, plant and equipment
c. Investment property
d. Intangible asset
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
10. When determining the cost of an inventory, which of the following should not be
included?
a. Interest on loan obtained to purchase the inventory
b. Commission paid when inventory is purchased
c. Labor cost of the inventory when manufactured
d. Depreciation of plant equipment used in manufacturing
ANSWER 25-15

1. c
2. c
3. c
4. a
5. a
6. b
7. a
8. a
9. d
10. a
QUESTION 25-16 Multiple choice (AICPA Adapted)
1. Theoretically, cash discounts permitted should be
a. Added to other income, whether taken or not
b. Added to other income, only if taken
c. Deducted from inventory, whether taken or not
d. Deducted from inventory, only if taken
2. Which of the following generally would not be separately accounted for in the computation
of cost of cost of goods sold?
a. Trade discounts applicable to purchase
b. Cash discounts taken
c. Purchase returns and allowances
d. Cost of transportation for merchandise purchased
3. The use of purchase discount implies that the recorded cost os a purchased inventory 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
4. The use of a discount loss count implies that cost of a purchased inventory is
a. Invoice price
b. List price
c. Invoice price less the purchase discount taken
d. Invoice price less the purchase discount allowable whether taken or not
5. The valuation of inventory on a prime cost basis
a. Would achieve the same results as direct costing
b. Would exclude all overhead from inventory cost
c. Is always achieved when standard costing is adopted
d. Is always achieved when the FIFO is adopted
ANSWER 25-16

1. C
2. A
3. A
4. D
5. B
QUESTION 25-17 Multiple choice (IAA)
1. Which term represents the deduction from the invoice price of purchased goods granted
for early payment?
a. Sales discount
b. Purchase discount
c. Trade discount
d. Purchase return and allowance
2. A discount given to a customer for purchasing a large volume of merchandise is typically
referred to as
a. Trade discount
b. Quantity discount
c. Size discount
d. Cash discount
3. The purchase is recorded as a credit to accounts payable
a. As if the discount is to be taken, if using the gross method
b. Without regard for the discount is to be taken, if using the net method
c. As if the discount is to be taken, if the net method
d. As if the discount is to be taken, using either the gross or net method
4. When recording accounts payable, a purchase discount is recorded
a. If using the net method
b. If using the gross method, but only if the payment is made during the discount period
c. If using the net method, providing the payment is made during the discount period
d. If using the gross method, but the purchase discount is reduced by any purchase
discount lost
5. Using the gross method, purchase discount lost is
a. Included in purchases
b. Added to accounts payable
c. Included in interest expense
d. Deducted from interest income
ANSWER 25-17

1. b
2. a
3. c
4. b
5. a
QUESTION 25-18 Multiple choice (IAA)
1. Why is inventory included in the computation of the net income?
a. To determine cost of goods sold
b. To determine sales revenue
c. To determine merchandise returns
d. Inventory is not included in the computation of net income
2. Which of the following is a characteristic of a perpetual inventory system?
a. Inventory purchases are debited to a purchases account.
b. Inventory records are not kept for every item.
c. Cost of goods sold is recorded with each sale.
d. Cost of goods sold is determined as the amount of purchases less the change in inventory
3. Which of the following is incorrect about the perpetual inventory method?
a. Purchases are recorded as debit to the inventory account.
b. The entry to record a sale includes a debit to cost of goods sold and a credit to inventory.
c. After a physical inventory count, inventory is credited for any missing inventory.
d. Purchase returns are recorded by debiting accounts payable and crediting purchase
returns and allowances.
4. 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 perpetual inventory method is used.
d. Merchandise is returned and the periodic inventory method is used.
5. Which is not acceptable for valuation of inventory?
a. Historical cost
b. Current replacement cost
c. Prime cost
d. Estimated selling price less cost of disposal
6. in a periodic system, the beginning inventory is
a. Net purchases minus cost of goods sold
b. Net purchases minus ending inventory
c. Total goods available for sale minus net purchases
d. Total goods available for sale minus cost of goods sold
7. Entities must allocate the cost of all goods available for sale between
a. The cost of goods on hand at the beginning and the cost of goods purchased during the
period.
b. The cost of goods on hand at the end and the cost of goods purchased during the
period.
c. The income statement and the statement of financial position.
d. All of choices are correct
8. An exception to the general rule that costs should be charged to expense in the
period incurred is
a. Factory overhead costs incurred on a product manufactured but not sold during the
current period.
b. Interest cost for financing of inventories that are routinely manufactured.
c. General and administrative fixed cost incurred in connection with the purchase of
inventory.
d. Sales commission and salary incurred in connection with the sale of inventory.
ANSWER 25-18

1. a
2. c
3. d
4. c
5. c
6. c
7. c
8. a
QUESTION 25-19 Multiple choice (IAA)
1. What is consigned inventory?
a. Goods that are shipped and title transfers to the consignee.
b. Goods that are sold but payment is not required until the goods are sold.
c. Goods that are shipped but title remains with the consignor.
d. Goods that have been segregated for shipment to a customer.
2. Goods on consignment are included in the inventory of
a. The consignor but not the consignee
b. Both the consignor and the consignee
c. The consignee but not the consignor
d. Neither the consignor nor the consignee
3. How is a significant amount of consignment inventory reported?
a. Reported separately by the consignor.
b. Combined with other inventory of the consignor.
c. Reported separately by the consignee.
d. Combined with other inventory of the consignee.
4. Freight and other handling charges incurred in the transfer of goods from the
consignor to consignee are
a. Expense on the part of the consignor
b. Expense on the part of the consignee
c. Inventoriable by the consignor
d. Inventoriable by the consignee
5. Measurement of inventory requires the determination of all of the following,
except
a. The costs to be included in inventory.
b. The physical goods to be included in inventory.
c. The cost of goods held on consignment.
d. The cost flow assumption.
ANSWER 25-19

1. c
2. a
3. a
4. c
5. c
QUESTION 25-20 Multiple choice (IAA)
1. Sales where the goods are delivered only when the buyer makes final payment are called
a. Bill and hold sales
b. Sales subject to installation or inspection
c. Consignment sales
d. Layaway sales
2. Sales in which the buyer is not yet ready to take delivery but does take title are known as
a. Barter sales
b. Bill and hold sales
c. Layaway sales
d. Sales with buyback
3. When activities involve production through natural growth or aging of biological assets,
revenue is recognized as the plant or living animals grows. This is known as what approach?
a. Completion of production basis
b. Fair value approach
c. Accretion approach
d. Cost recovery or zero profit approach
4. For which of the following products is it appropriate to recognize revenue at the
completion of production even though no sale has been made?
a. Automobile
b. Large appliance
c. Residential unit
d. Precious metal
ANSWER 25-20

1. d
2. b
3. c
4. d
INVENTORY COST FLOW
CHAPTER 26
QUESTION 26-1
What are the acceptable cash flows assumptions in measuring inventory?
ANSWER 26-1
The cash flow assumptions acceptable under IFRS are:
a. FIFO or first in, first out
b. Weighted average
c. Specific identification
IFRS prohibits LIFO or last in, first out.

QUESTION 26-2
Explain FIFO method of inventory valuation.
ANSWER 26-2
The FIFO method assumes that the “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.

QUESTION 26-3
Explain the periodic weighted average method of inventory valuation.
ANSWER 26-3
the periodic weighted average method means that cost of the beginning inventory plus 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 s computed by dividing the total cost of goods available for sale by the
number of units available for sale.

QUESTION 26-4
Explain the perpetual weighted average method.
ANSWER 26-4
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 shipment is received depending upon the circumstances of the entity.
Under moving average method, a new weighted average unit cost must 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.
QUESTION 26-5
Explain the specific identification method of inventory valuation?
ANSWER 26-5
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.
The 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.
QUESTION 26-6
What is the meaning of the relative sales price method of inventory measurement?
ANSWER 26-6
When different commodities are purchased at a lump, the single cost is apportioned among the
commodities based on their respective sales price.
The relative sales price method is based on the philosophy that cost is proportionate to selling price.

QUESTION 26-7
Explain the measurement of inventory at standard costs.
ANSWER 26-7
Standard costs are predetermined product costs established on he basis of normal levels of materials
and supplies, labor, efficiency and capacity utilization.
A t 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 light of current conditions.
QUESTION 26-8 Multiple choice (AICPA Adapted)
1. Which of the following inventory method reports most closely the current cost of inventory?
a. FIFO
b. Specific identification
c. Weighted average
d. LIFO
2. Which inventory cost flow assumption would consistently result in the highest income in a period of
sustained inflation?
a. FIFO
b. LIFO
c. Weighted average
d. Specific identification
3. In a period of falling prices, the use of which inventory cost flow method would typically result in the
highest cost of goods sold?
a. FIFO
b. LIFO
c. Weighted average
d. Specific identification
4. In a period of rising prices, the inventory cost allocation method that tends to result in the highest
reported net income is
a. LIFO
b. FIFO
c. Moving average
d. Weighted average
5. During periods of rising prices, when the FIFO method is used, a perpetual inventor system would.
a. Not be permitted.
b. Results in a higher ending inventory than a periodic inventory system.
c. Result in the same ending inventory as a periodic inventory system.
d. Result in a lower ending inventory than a periodic inventory system.
6. which method of inventory pricing best approximates specific identification of the actual flow of
costs and units?
a. LIFO
b. FIFO
c. Moving average
d. Weighted average
7. Cost of goods sold is the same under a periodic system and a perpetual system when an entity uses
a. LIFO
b. FIFO
c. Moving average
d. Specific identification
8. Which inventory cost flow assumption provides the best measure or earnings, where “best” means
most appropriate for predicting future earnings, when prices have been declining?
a. FIFO
b. Specific identification
c. LIFO
d. Average cost
9. Assuming no beginning inventory, what can be said about the trend of inventory prices if cost of
goods sold computed using the FIFO method exceeds cost of goods sold using the average cost
method?
a. Prices decreased
b. Prices remained unchanged
c. Prices increased
d. prices trend cannot be determined from the information
ANSWER 26-8

1. a
2. a
3. a
4. b
5. c
6. b
7. a
8. c
9. a
10. b
QUESTION 26-9 Multiple choice (IAA)
1. IFRS prohibits which of the following cost flow assumptions?
a. LIFO
b. Specific identification
c. Weighted average
d. Any of these cost flow assumptions is allowed
2. What is the inventory pricing procedure in which the oldest costs rarely have an effect on the
ending inventory?
a. FIFO
b. LIFO
c. Specific identification
d. Weighted average
3. In a period of falling prices which inventory method generally provides the lowest amount of
ending inventory?
a. Weighted average
b. FIFO
c. Moving average
d. Specific identification
4. In a period of falling prices which inventory method generally provides the lowest amount of net income?
a. Moving average
b. Weighted average
c. FIFO
d. Specific identification
5. Costing of inventory must be deferred until the end of reporting period under which of the following method
of inventory valuation?
a. Moving average
b. Weighted average
c. LIFO perpetual
d. FIFO perpetual
6. The cost of inventories that are not ordinarily interchangeable and goods or services produced and
segregated for specific projects shall be measured using
a. FIFO
b. Average method
c. LIFO
d. Specific identification
7. Which is the reason why the specific identification method may be considered ideal for assigning
cost to inventory and cost of goods sold?
a. The potential for manipulation of net income is reduced.
b. There is no arbitrary allocation of cost.
c. The cost flow matches the typical flow
d. It is applicable to all types of inventory.
8. IFRS requires the specific identification method in certain circumstances. Which of the following is
likely to be a circumstances where the specific identification method can be used?
a. Unit price is low.
b. Inventory turnover is low.
c. Inventory quantities are large.
d. All of choices are likely circumstances.
9. Which of the following cost flow assumptions is used for inventory when an entity builds
townhouses?
a. FIFO
b. Specific Identification
c. Weighted average
d. Any of these cost flow assumptions
ANSWER 26-9

1. a
2. a
3. a
4. c
5. b
6. d
7. c
8. b
9. b
LOWER OF COST AND NET REALIZABLE VALUE

CHAPTER 27
QUESTION 27-1
Explain fully the measurement of inventory in the statement of financial position.
ANSWER 27-1
PAS 2 provides the following clearcut 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 suing either the
FIFO method or weighted average method.
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.

QUESTION 27-2
What is net realizable value?
ANSWER 27-2
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 the inventories are damaged o have become
wholly or partially obsolete, or if the selling prices have declined.

QUESTION 27-3
Explain the measurement of inventory at the lower of cost and net realizable value.
ANSWER 27-3
Inventory is usually written down to net realizable value on an item by item or individual basis.
It is not appropriate to write down inventory based on a classification of inventory, for example,
finished goods or inventory 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.
QUESTION 27-4
What are the two methods of accounting for inventory writedown to net realizable value?
ANSWER 27-4
The two methods of accounting for inventory writedown to net realizable value are:
1. Direct method
2. Allowance method

QUESTION 27-5
Explain the direct method of accounting for inventory writedown to net realizable value.
ANSWER 27-5
The inventory is recorded at the lower of cost and net realizable value.
This method is also known as “cost of goods sold” method because any loss on inventory
writedown is not accounted foe separately but “buried” in the cost of goods sold.
QUESTION 27-6
Explain the allowance method of accounting for inventory writedown to net realizable value.
ANSWER 27-6
The inventory is recorded at cost and any loss on inventory writedown is accounted for
separately.
The allowance method is also known as “loss method”.
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 in 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.
However, PAS 2 does not state any preference in accounting for inventory writedown to net
realizable value.

QUESTION 27-7
Explain the measurement of agricultural, mineral and forest products.
ANSWER 27-7
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:
a. When there is a forward contract or government guarantee.
b. When a homogeneous market exists and there is a negligible risk of failure to sell.

QUESTION 27-8
Explain the measurement of commodities of broker-traders.
ANSWER 27-8
PAS 2, paragraph 3, provides that commodities of broker-traders are measured at fair value
less cost of disposal.
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.
QUESTION 27-9
What are purchase commitments?
ANSWER 27-9
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 that 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 cost and net realizable value.
Accordingly, is 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 as limited to the loss on purchase commitment
prevoisly recorded.
QUESTION 27-10 Multiple choice (PAS 2)
1. Inventories shall be measured at
a. Cost
b. Net realizable value
c. Lower of cost and net realizable value
d. Higher of cost and net realizable value
2. The cost of inventory shall be measured using
a. FIFO
b. Average method
c. LIFO
d. Either FIFO or average method
3. Net realizable value is
a. Current replacement cost
b. Estimated selling price
c. Expected selling price less expected cost to complete and expected cost of disposal
d. Estimated selling price less estimated cost to complete and estimated cost of disposal
4. Inventories are usually written down to net realizable value
a. Item by item
b. By classification
c. By total
d. By segment
5. The amount of any writedown of inventory to net realizable value and all losses of inventory
shall be
a. Recognized as operating expense
b. Recognized as other expense
c. Recognized as component of cost of goods sold.
d. Deferred until the related inventory is sold.
ANSWER 27-10

1. c
2. d
3. d
4. a
5. c
QUESTION 27-11 Multiple choice (IFRS)
1. How should trade discounts be dealt with when valuing inventories at the lower of cost andnet
realizable value?
a. Added to cost
b. Ignored
c. Deducted in arriving at NRV
d. Deducted in arriving at cost
2. How should prompt payment discount be dealt with when valuing inventories at LCNRV?
a. Added to cost
b. Ignored
c. Deducted in arriving at NRV
d. Deducted in arriving at cost
3. How should import duties be dealt with when valuing inventories at LCNRV?
a. Added to cost
b. Ignored
c. Deducted in arriving at NRV
d. Deducted in arriving at cost
ANSWER 27-11

1. d
2. b
3. c
4. a
QUESTION 27-12 Multiple choice (IAA)
1. Which statement is incorrect regarding LCNRV?
a. Net realizable value is the estimated selling price less estimated cost to complete and
estimated cost of disposal.
b. In most situations, entities measure inventory on an total inventory basis.
c. The direct method may be used to record the income effect of valuing inventory at net
realizable value.
d. An entity may use an allowance account to reduce inventory to net realizable value.
2. Which statement 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. An entity is required to record an inventory writedown in a separate loss account.
d. All of the choices are correct.
3. Lower of cost and net realizable value
a. Results in the lowest valuation if applied to the total inventory.
b. Results in the lowest valuation if applied to major group of inventory.
c. Results in the lowest valuation if applied to individual item of inventory.
d. Must be applied to major group.
4. LCNRV of inventory
a. Is always either the net realizable value or cost.
b. Must be equal to net realizable value.
c. May sometimes be less than net realizable value.
d. Must be equal to estimated selling price less cost to complete.
5. Lower of cost and net realizable value of inventory valuation is best described as the
a. Reporting of a loss when there is a decrease in the future utility below the original cost.
b. Method of determining cost of goods sold.
c. Assumption to determine inventory flow.
d. Change in inventory value to net realizable value.
6. What is the reason for the inventory measurement at lower of cost and net realizable value?
a. To report a loss when there is a decrease in the future utility below the original selling price.
b. To be conservative.
c. To report a loss when there is a decrease in the future utility below the original cost.
d. To permit future income to be recognized.
7. Which method may be used to record a loss on inventory writedown to NRV?
a. Loss method
b. Accrual method
c. Cost of goods sold method
d. Loss method and cost of goods sold method
8. When the cost of good sold method is used to record inventory at net realizable value?
e. There is a direct reduction in the estimated selling price that results in a loss.
f. A loss is recorded directly by crediting inventory.
g. Only the portion of the loss attributable to inventory sold during the period is recorded.
h. The net realizable value for ending inventory is substituted for cost and the loss is buried in
cost of goods sold.
ANSWER 27-12

1. b
2. b
3. c
4. a
5. a
6. c
7. d
8. d
QUESTION 27-13 Multiple choice (IAA)
1. The credit balance that arises when a loss on a purchase commitment is recognized should be
a. Presented as a current liability
b. Subtracted from ending inventory
c. Presented as an appropriation of retained earnings
d. Presented in the income statement
2. 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. Disclosure is required only if prices have declined since the date of the order.
c. Disclosure is required only if prices have since risen substantially.
d. An appropriation of retained earnings is necessary.
3. When a portion of inventory has been pledged as security for a loan
a. The value of the inventory pledged should be deducted from the debt.
b. An equal amount of retained earnings should be appropriated.
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.
4. An example of an inventory accounting policy that should be disclosed is
a. Effect of inventory profit caused by inflation.
b. Classification of inventory into raw materials, work in process and finished goods.
c. Identification of major suppliers.
d. Method used for inventory costing.
ANSWER 27-13

1. a
2. a
3. c
4. d
QUESTION 27-14 Multiple choice (IAA)
1. Commodities of broker-traders are measured at
a. Fair value
b. Fair value less cost of disposal
c. Cost
d. Net realization value
2. Commodity broker-traders
a. Produce commodities such as rice or corn.
b. Hold inventory primarily to sell in the near term and generate a profit from price fluctuation.
c. Measure inventory at LCNRV.
d. All of the choices are correct regarding broker-traders.
3. NRV is the general rule for measuring which inventory?
a. Commodity held by broker-traders
b. Computer component held for sale
c. Inventory priced on an item by item basis
d. All of these inventories are measured at NRV
4. Net realization value is used to measure which inventory?
a. Agricultural inventory
b. Minerals
c. Commodities held by broker-traders
d. All of these are measured at net realization value
5. Which financial attribute would not be used to measure inventory?
a. Historical cost
b. Current replacement cost
c. Net realizable value
d. Present value of future cash flows
ANSWER 27-14

1. b
2. b
3. a
4. d
5. d
GROSS PROFIT AND RETAIL METHOD

CHAPTER 28
QUESTION 28-1
What are the reasons for making an estimate of inventory?
ANSWER 28-1
1. Determination of inventory loss due to fire and other catastrophe of theft of merchandise.
2. Proof of the reasonable accuracy of a physical count. This is popularly known as the “gross
profit test”
3. However, year-end statement require physical count, not a mere estimate of inventory value.

QUESTION 28-2
Explain the gross profit method of estimating the cost of ending inventory.
ANSWER 28-2
Under the gross profit method, the ending inventory is computed as “goods available for sale
minus cost of goods sold”
The cost of goods sold is determined through the use of the gross profit rate and this is the
reason the gross profit method is called as such.
This method is based on the major assumption that the rate of gross profit remains
approximately the same from period to period and therefore the ratio of cost of goods sold to
net sales is relatively constant from period to period.

QUESTION 28-3
Explain the retail method of estimating the cost of ending inventory.
ANSWER 28-3
The retail inventory method came to its name because the selling price or retail price is
tagged to each item and therefore the ending inventory is stated at selling price.
The ending inventory is computed using the following formula:
Goods available for sale at selling price minus net sales equals ending inventory at selling
price multiplies by the cost ratio equals the ending inventory at cost.
The cost ratio under the retail method is computed by dividing the goods available for sale at
cost by the goods available for sale at selling price.
QUESTION 28-4
What information is required under the retail inventory method?
ANSWER 28-4
The use of the retail inventory method requires that records be kept which must show the
following data:
a. Beginning inventory valued at cost and at retail price
b. Purchases during the period at cost and at retail price
c. Total goods available for sale for the period at cost and at retail price
d. Total sales for the period
e. Adjustments to the original retail price such as additional markup, markup cancelation,
markdown and markdown cancelation.
f. Other adjustments, such as departmental transfer, breakage, shrinkage, theft, damaged
goods and employees discount
QUESTION 28-5
What are the applications of the retail inventory method?
ANSWER 28-5
1. Conservative approach
the cost ratio is determined by including markups and excluding markdowns in
computing the goods available for sale at retail.
this approach is also known as the conventional or lower of average cost and net
realizable value approach.
2. Average cost approach
the markups and markdowns are both included in the computation of the cost ratio.
3. FIFO approach
a cost ratio is computed for the current year. Thus, only the current purchase are
considered together with markups and markdowns.
the beginning inventory is excluded in the computation.
QUESTION 28-6
Which approach is followed in measuring inventory under the retail inventory method?
ANSWER 28-6
PAS 2, paragraph 22 provides that the percentage used under the retail method shall take
into consideration inventory that has been marked down to below the original selling price.
An average percentage for each retail department is often used.
This means that the average cost approach shall be applied in conjunction with the retail
inventory method.
Of course, PAS 2 requires either the FIFO or average method as a cost formula.
The standard prohibits the LIFO cost flow assumption.
QUESTION 28-7 Multiple choice (IAA)
1. The gross margin method of estimating ending inventory may be used for all of the following,
except
a. Internal as well as external interim reports
b. Internal as well as external year-end reports
c. Estimate of inventory destroyed by fire or other casualty
d. Rough test of the validity of an inventory cost determined under either periodic or perpetual system.
2. The gross profit method assumes that
a. The amount of gross profit is the same as in prior years.
b. Sales and cost of goods sold have not changed from previous years
c. Inventory values have not increased from previous years.
d. The relationship between selling price and cost of goods sold is similar to prior years.
3. The gross profit method of estimating inventory would not be useful when
a. A periodic system is in use and inventories are required for interim statements.
b. Inventories have been destroyed or lost by fire, theft or other casualty, and the specific data required
for inventory valuation are not available.
c. There is significant change in the mix of products being sold.
d. The relationship between gross profit and sales remains stable over time.
4. The gross profit method of estimating inventory is not valid when
a. There is substantial increase in the quantity of inventory during the year.
b. There is substantial increase in the cost of inventory during the year.
c. The gross margin percentage changes significantly during the year.
d. All ending inventory is destroyed by fire before it can be counted.
5. The gross profit method s invalid when
a. A portion of inventory is destroyed.
b. There is a substantial decrease in inventory.
c. There is no beginning inventory
d. The gross profit percentage applicable to the goods in ending inventory is different from
the percentage applicable to goods sold during the period.
6. Which statement is not valid about the gross profit method?
a. It may be used by auditors.
b. It is an acceptable accounting procedure.
c. It may be used to estimate inventory for interim statements.
d. It may be used to estimate inventory for annual statements.
7. Which is not a basic assumption of the gross profit method?
a. The beginning inventory plus net purchases equals total goods to be accounted for.
b. Goods not sold must be on hand.
c. The sales reduced to cost basis when deducted from the sum of beginning inventory
and net purchases would result to inventory on hand.
d. The amount of purchases and the amount of sales remain relatively unchanged from the
previous period.
8. How is the gross profit method used in relation to inventory valuation?
a. To verify the accuracy of the perpetual inventory record
b. To verify the accuracy of the physical inventory
c. Toe estimate the cost of goods sold
d. To provide a FIFO inventory value
ANSWER 28-7

1. b
2. d
3. c
4. c
5. d
6. d
7. d
8. a
QUESTION 28-8 Multiple choice (AICPA Adapted)
1. An advantage of the retail inventory method is that it.
a. Permits entities to avoid taking an annual physical inventory.
b. Gives a more accurate measurement of inventory
c. Hides costs from customers and employees.
d. Provides a method for inventory control and facilities determination of the periodic inventory.
2. To produce an inventory valuation which approximates the lower of cost and NRV
using the retail method, the computation of the ratio of cost to retail should
a. Include markups but not markdowns
b. Include markups and markdowns
c. Ignore both markups and markdowns
d. Include markdowns but not markups
3. When the conventional retail inventory method is used, markdowns are commonly
ignored in the computation of cost to retail ratio because
e. there may be no markdowns during the year.
f. This tends to give a better approximation of the lower of average cost and net realizable
value.
c. Markups are also ignored.
d. This tends to result in the showing of a normal profit margin in a period when no
markdown goods have been sold.
4. The retail inventory method would include which of the following in the
calculation of the goods available for sale at both cost and retail?
a. Freight in
b. Purchase returns
c. Markups
d. Markdowns
5. With regard to the retail inventory method, which is the most accurate statement?
a. Generally, accountants ignore net markups and net markdowns in computing the cost
ratio.
b. Generally, accountants exclude net markups and include net markdowns in computing
cost ratio.
c. The retail method results in a lower ending inventory if net markups are included but net
markdowns are excluded in computing the cost ratio.
d. It is not adaptable to FIFO costing.
6. The conventional retail method produces an ending inventory that approximates
a. Lower of average cost and net realizable value
b. Lower of FIFO cost and net realizable value
c. Lower of LIFO cost and net realizable value
d. Lower of cost and net realizable value
7. The retail method is based on the assumption that
a. Final inventory and the total goods available for sale contain the same proportion of high
cost and low cost ratio goods.
b. gross margin is the same each period.
c. Ratio of cost to retail changes at a constant rate.
d. Proportion of markup and markdown to selling price are the same.
8. If the conservative retail inventory method is used, which of the following
calculations would include or exclude net markdowns?
Cost ratio Ending inventory at retail
e. Include Include
f. Include Exclude
c. Exclude Include
d. Exclude Exclude
9. An inventory method which is designed to approximate inventory valuation at the lower of
average cost and net realizable value is
e. Average retail method
f. FIFO method
g. Conventional retail method
h. LIFO retail
10. Which of the following is not a reason why the retail inventory method is used widely?
a. As a control measure in determining inventory shortage
b. For insurance information
c. To permit the computation of net income without a physical count of inventory
d. To defer income tax liability
ANSWER 28-8

1. d
2. a
3. b
4. b
5. c
6. a
7. a
8. c
9. c
10. d
QUESTION 28-9 Multiple choice (IAA)
1. Which of the following is not required when using the retail inventory method?
a. All inventory items must be categorized according to the retail markup percentage
b. Total cost and retail price of goods purchased
c. Total cost and retail price of goods available for sale
d. Total sales for the period.
2. What condition is not necessary when using the retail inventory method?
a. Total cost of goods sold for the period
b. Total cost and retail price of goods purchased
c. Total cost and retail price of goods available for sale
d. Total sales for the period.
3. Which is the effect of freight in on the cost-retail ratio when using the conservative
retail method?
a. Increases the cost-retail ratio
b. No effect on the cost-retail ratio
c. Depends on the amount of the net markup
d. Decreases the cost-retail ratio
4. What is the effect of net markup on the cost-retail ratio when using the conservative method?
a. Increases the cost-retail ratio
b. No effect on the cost-retail ratio
c. Depends on the amount of the net markdown
d. Decreases the cost-retail ratio
5. Which of the following would cause a decrease in the cost ratio used in the retail inventory
method?
a. Higher retail prices
b. Lower net markups
c. More employee discounts
d. Higher freight in charges
ANSWER 28-9

1. a
2. a
3. a
4. d
5. a