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INVENTORIES - THEORY
Related standard: PAS 2
1. Which of the following items should be included in a company’s inventory at the balance sheet
date?
a. Goods in transit which were purchased FOB destination.
b. Goods received from another company for sale on consignment.
c. Goods sold to a customer which are being held for the customer to call for at the
customer’s convenience.
d. Goods in transit which were purchased FOB shipping point.
2. Which statement is incorrect with respect to inventories under PAS No. 2?
a. Inventories should be measured at the lower of cost and net realizable value.
b. The cost of inventories should comprise all costs of purchase, costs of conversion and
other costs incurred in bringing the inventories to their present location and condition.
c. The cost of inventories of a service provider consists primarily of labor and other costs of
personnel directly engaged in providing the service, including supervising personnel and
attributable overhead.
d. The costs of conversion of inventories include costs directly related to the units of
production such as direct labor, and a systematic allocation of variable production
overhead.
3. The inventories of a service provider may simply be described as
a. Work in progress c. Unbilled receivables
b. Billed receivables d. Deferred costs
4. The cost of purchase of inventory does not include
a. Purchase price
b. Import duties and taxes
c. Freight, handling and other cost directly attributable to acquisition
d. Trade discount, rebate and other similar item
5. The cost of inventories that are not ordinarily interchangeable and goods or services produced
and segregated for specific projects should be assigned by using
a. LIFO b. FIFO c. Average method d. Specific identification
6. Which costs may be capitalized as cost of inventories?
a. Normal shrinkage and scrap incurred for the manufacture of a product in ending inventory.
b. Storage costs
c. Selling costs
d. Foreign exchange differences which arises directly on the recent acquisition of inventories
invoiced in a foreign currency.
7. Net realizable value is
a. Current replacement cost
b. Estimated selling price
c. Estimated selling price less estimated cost to complete
d. Estimated selling price less estimated cost to complete and estimated cost to sell
8. The cost of inventories in applying the valuation at lower of cost or net realizable value should
be assigned by using
a. FIFO only c. Average method only
b. LIFO only d. Either FIFO or average method
9. Reporting inventory at the LCM is a departure from the accounting principle of
a. Historical cost b. Conservatism c. Consistency d. Full disclosure

10. Which statement is not valid in relation to the LCM rule for inventories?
I. Inventories are usually written down to net realizable value on an item by item basis.
II. It is 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.
a. I only b. II only c. Both I and II d. Neither I nor II
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11. The original cost of an inventory item is below both replacement cost and net realizable value.
The net realizable value less normal profit margin is below the original cost. Under LCM
method, the inventory item should be valued at
a. Replacement cost
b. Net realizable value
c. Net realizable value less normal profit margin
d. Original cost

12. 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. Net realizable value c. Standard cost
b. Cost d. Relative sales price

13. The cost of inventories may not be recoverable under all of the following conditions, except
a. The estimated costs of completion or the estimated costs to be incurred to make the sale
have increased.
b. The inventories have become wholly or partially obsolete.
c. The inventories are damaged
d. The selling prices of the inventories have increased.

14. Which of the following is not an acceptable basis for valuation of inventories in published
financial statements?
a. Historical cost
b. Standard cost
c. Prime cost
d. Current selling price less cost to complete and cost to sell

15. Theoretically, freight and warehousing costs incurred in the transfer of consigned goods from
the consignor to the consignee should be considered
a. An expense by the consignor c. Inventoriable by the consignor
b. An expense by the consignee d. Inventoriable by the consignee

16. Goods on consignment should be included in the inventory of

a. The consignor but not the consignee c. Both the consignor and the consignee
b. The consignee but not the consignor d. Neither the consignor nor the consignee

17. All of the following costs should be charged against revenue in the period, except
a. Manufacturing overhead costs for a product manufactured and sold in the same accounting
period.
b. Costs which will not benefit any future period.
c. Costs from idle manufacturing capacity resulting from an unexpected plant shutdown.
d. Costs of normal shrinkage and scrap incurred for the manufacture of a product in ending
inventory.

18. The use of a discounts lost account implies that the recorded cost of a purchased inventory
item is its
a. Invoice price
b. Invoice price plus the purchase discount lost
c. Invoice price less the purchase discount taken
d. Invoice price less the purchase discount allowable whatever taken or not

19. The use of purchase discounts account implies that the recorded cost of a purchased inventory
item is its
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
20. Theoretically, cash discounts permitted on purchased raw materials 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
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21. When a portion of inventories has been pledged as security on a loan

a. The value of the portion pledged should be subtracted 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 to noncurrent asset
22. If a material amount of inventory has been ordered through a formal purchase contract at
balance sheet date 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.
23. The credit balance that arises when a net loss in 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
24. When using a perpetual inventory system
I. No purchases account is used.
II. A cost of goods sold account is used.
III. Two entries are required to record a sale.
a. I and II only b. II only c. II and III only d. I, II and III
25. Which one of the following inventory costing method lends itself most to manipulation of
reported net income among periods.
a. LIFO perpetual b. FIFO perpetual c. LIFO periodic d. FIFO periodic
26. During periods of arising prices, when the FIFO inventory cost flow method is used, a perpetual
inventory system would
a. Not be permitted
b. Result in a higher ending inventory than a periodic system inventory system
c. Result in the same ending inventory as a periodic system
d. Result in a lower ending inventory than a periodic inventory system
27. Generally, which inventory costing method approximates most closely the current cost for each
of the following:
Cost of goods sold Ending inventory
a. LIFO FIFO
b. LIFO LIFO
c. FIFO FIFO
d. FIFO LIFO
28. To produce an inventory valuation which approximates the lower of average cost or market
using the conservative retail inventory method, the computation of the ratio of cost to retail
should
a. Include markups but not markdowns c. Include markups and markdowns
b. Ignore both markups and markdowns d. Include markdowns but not markups
29. 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.
30. The gross profit method of inventory valuation is invalid when
a. A portion of the inventory is destroyed.
b. There is substantial increase in inventory during the year.
c. There is no beginning inventory because it is the first year of operation.
d. The gross profit percentage applicable to goods in the ending inventory is different from the
percentage applicable to goods sold during the period.
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