TOPIC 7: INVENTORY  Cost of Inventories shall comprise the ff:
Cost of purchase, cost of conversion, other cost
 Inventories are 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/supplies to be consumed in the
production process or in the rendering of services
 As a rule, all goods to which the entity has title
shall be included in the inventory, regardless of
the location
 FOB Destination- seller is the owner if still in
transit
 FOB Shipping Point- buyer is the owner if already
in transit
 FAS or Free Alongside- buyer owns the moment
the carrier possesses it
 CIF- buyer
 Ex-ship – transfers to the buyer the moment the
goods are unloaded
 Consigned goods shall be included in the
consignors inventory and is to be excluded from
the consignees inventory
 Freight and other handling charges on goods out
on consignment are part of the cost of goods
consigned
 Periodic system calls for the physical counting of
goods on hand at the end of the accounting period
to determine quantities.
This approach gives actual/physical inventories.
-used in individual inventory items that have small
peso investment
 Perpetual system requires the maintenance of
records called stock cards that usually offer a
running summary of the inventory inflow and
outflow
-This gives book/perpetual inventories
 When physical count is less than the book count,
there is shortage. It is usually closed to COGS
because this is often the result of normal shrinkage
and breakage in inventory
 Abnormal and material shortage shall be
separately classified and presented as Other
expense
 Trade Discounts are not recorded. Invoice prices
are usually net of any trade discounts
incurred in bringing the inventories in its present
location and condition.
 Cost of purchase comprises: purchase price,
import duties, irrecoverable taxes, freight,
handling and other costs directly attributable to the
acquisition of finished goods, materials and
services
 Trade discounts, rebates are excluded
 The cost of purchase shall not include foreign
exchange differences from the recent acquisition
of inventories involving a foreign currency
 Storage costs for goods in process are capitalized
while for finished goods they are expensed
TOPIC 8: INVENTORY (VALUATION &
INCLUSION)
 PAS 2 paragraph 9 provides that inventories shall
be measured at the lower of cost and net realizable
value (LCNRV)
 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 a period of inflation or rising prices, FIFO
yields the highest net income
 In a period of deflation or decreasing prices,
FIFO yields the lowest Net Income
 Weighted Average Periodic
Total Cost of Goods Available for Sale divided
by the total units available for sale yields the
cost per unit
 Weighted Average-Perpetual-Moving Average
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.
 Purchase commitments are obligations of the
entity to acquire certain goods sometime in the
future at a fixed price and fixed quantity
 If there is a decline in the purchase price after a
purchase commitment has been made, a loss is
recorded in the period of the price decline
 A purchase commitment must be non-
cancelable
 The recognition of a loss on purchase
commitment is an adaptation of the
measurement of the LCNRV
 Accordingly, if the market price rises by the
time the entity makes the purchase, a gain is
recognized but is limited to the loss previously
recognized
 Inventories specifically segregated per sale
contract is excluded
 Goods sold to a customer which are being held
for the customer to call at his convenience are
excluded from the inventory
TOPIC 9: SALES REVENUE
 The goods sold FOB shipping point and lost in
transit are properly included in sales because
the customer will suffer the loss since the
ownership already has been transferred upon
still in transit
 As a conservative approach, sales revenue
should be reduced by the estimated probable
sales returns
 Revenue should be recognized at the point of
sale which is usually the point of delivery.
 Revenue is recognized at the point of
production for agricultural, mineral and forest
product when a sale is assured under a forward
contract
TOPIC 10: RELATIVE SALES PRICE
METHOD & LCNRV
 A method of apportioning the purchase price
among several properties acquired
 Clearing costs are added to the cost of lots
(specific to where it is incurred)
 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
 The amount of any inventory writedown to net
realizable value and all losses on inventory
shall be included in COGS
 The amount of any reversal of inventory
writedown shall be deducted from COGS
 In a purchase commitment, the amount of
purchases should be recorded at the lower
between the forward price and the market price
at the date of purchase
 The accounts payable must be recorded at the
forward price or agreed purchase price
TOPIC 11: GROSS PROFIT METHOD
 In the absence of any statement to the contrary,
the gross profit rate is based on sales
 The cost of any inventory destroyed not
covered by an insurance is to be reported as
loss from explosion
 The sales discounts are ignored for purposes of
estimating inventory under the gross profit
method
 Loss from explosion is presented as a separate
expense not part of the cost of goods sold
 Like sales discounts, sales allowances are
ignored in determining net sales under the
gross profit method
TOPIC 12: RETAIL INVENTORY
METHOD
 PAS 2 paragraph 22 provides that this method
is often used in the retail industry for
measuring inventory of large number of rapidly
changing items with similar margin for which it
is impracticable to use other costing method
 Basic Formula
GAFS at retail or selling price
Less: Net sales (Gross Sales less Sales Return)
= Ending Inventory at Retail Price
x Designated Cost Ratio
= Ending Inventory at Cost
 Employee Discounts- added back to sales
 Normal Shortage- deducted to GAFS at retail
 Abnormal Shortage- deducted from GAFS cost
& retail
 Approaches in the Use of Retail Method
1. Conventional/Conservative/LCNRV
-includes net mark-up and excludes net
markdown in determining the cost ratio
2. Average Approach
-includes both net mark-up and net mark-down
in determining the cost ratio
3. FIFO retail approach
-same as average but excludes beginning
inventory in the computation of the cost ratio
 Estimated shoplifting losses is deducted
together with sales
 Employee Discounts, normal shortage,
abnormal shortage are not included in the
computation of cost ratio
 In LIFO retail method, the computed ending
inventory per FIFO retail will be the basis for
the beginning inventory to be adjusted both
cost and retail, using the cost ratio
TOPIC 13: BIOLOGICAL ASSETS
 PAS 2
-Applies after the point of harvest, inventory
shall be recorded at the lower between cost and
NRV
-initial measurement of inventory at the point
of harvest shall be at fair value less cost of
disposal
 Gain from Changes in Fair Value consist of:
a. Physical Change
-Different Age, Same Date
b. Price Change
-Same Age, Different Date
 Gain from Agricultural Produce, used when an
inventory is harvested at the point of harvest
 Gain from change in fair value, used when an
offspring is born (physical change)
 PAS 41
-relates to agricultural activity, biological assets
-applied to agricultural produce at the point of
harvest
-does not deal with the processing of
agricultural produce after harvest
Hierarchy of FV measurement:
1. Level 1-quoted price, for identical assets,
active market
2. Level 2-quoted price for similar assets in an
active market; quoted prices for identical assets
in an inactive market
3. Level 3-unobservable inputs for the asset
-uses the best available information from the
entity’s own data
SIMULATED BOARD EXAM
1. Which statement is incorrect regarding
inventories?
a. Are recognized in the statement of financial
position if it is probable that the future economic
benefits will flow to the entity and the item has a
cost or value that can be measured reliably
b. Are measured at the LCNRV
c. Are presented as a separate line item in the
statement of financial position
d. Are presented in the statement of financial
position either as current or non-current
2. Which statement is incorrect regarding costs of
inventories?
a. 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.
b. Trade discounts, rebates and other similar items
are deducted in determining the cost of purchase
c. It may be appropriate to include non-production
overheads or the costs of designing products for
specific customers in the cost of inventories
d. Foreign exchange differences arising directly on
the recent acquisition of inventories invoiced in a
foreign currency are included in the cost of
inventories
3. Costs of purchase do not include
a. Purchase price
b. Import duties and other non-refundable taxes
c. Transport, handling and other costs directly
attributable to the acquisition of the finished goods,
materials and services
d. Fixed and variable manufacturing overheads
4. Cost of conversion do not include
a. Direct labor
b. Fixed Factory Overhead
c. Variable Factory Overhead
d. Direct Materials
5. The following may be included in the cost of
inventories, except:
a. Administrative Overheads
b. Storage costs
c. Wasted materials, labor and other production
costs
d. Selling Costs
6. Which statement is incorrect regarding cost
formulas?
a. The cost of inventories of items that are not
ordinarily interchangeable shall be assigned by
using specific identification of their individual costs
b. If specific identification is not required, the cost
of inventories shall be assigned by using FIFO,
LIFO, or weighted average cost formula
c. An entity shall use the same cost formula for all
inventories having a similar nature and use to the
entity
d. For inventories with a different nature or use,
different cost formulas may be justified
7. Which statement is incorrect regarding cost
formulas?
a. Specific Identification of cost means that specific
costs are attributed to identified inventory
b. The weighted average inventory costing method
is particularly suitable to inventory where
homogeneous products are mixed together.
c. The average cost formula may be calculated on a
periodic basis, or as each additional shipment is
received, depending upon circumstances of the
entity
d. The FIFO formula assumes that the items of
inventory that were purchased or produced last are
sold first and consequently the items remaining in
the inventory at the end of the period are those
earlier purchased or produced
8. 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
9. Which of the following is not affected by the
inventory valuation method used by an entity?
a. Cost of Goods Sold
b. Net Income of the entity
c. Amounts owed for income taxes
d. Amounts paid to acquire merchandise
10. Which is incorrect regarding writedown of
inventory to net-realizable value?
a. The practice of writing inventories down below
cost to net realizable value is consistent with the
view that assets should not be carried in excess of
the amounts expected to be realized from their sale
or use
b. Materials and other supplies held for use in the
production of inventories are not written down
below cost if the finished products in which they
will be incorporated are expected to be sold at or
above cost.
c. the best available measure of the net realizable
value of materials is the replacement cost
d. Inventories are usually written down on the basis
of a classification of inventory, for example,
finished good, or all the inventories in a particular
operating segment
11. PAS 2 (Inventories) applies to all inventories
except:
a. Work in process arising under construction
contracts, including directly related service
contracts
b. Financial instruments
c. Biological assets related to agricultural activity
and agricultural produce at the point of harvest
d. All of the above
12. PAS 2 does not apply to the measurement of
inventories held by
a. Producers of agricultural and forest products,
agricultural produce after harvest, and mineral
products , to the extent that they are measured at
NRV in accordance with well-established practices
in those industries
b. Commodity broker traders who measure their
inventories at fair value less costs to sell
c. Both a and b
d. Neither a nor b
13. When an inventory costing formula is changed,
the change is required to be applied:
a. Prospectively and the adjustment taken through
the current profit or loss
b. Retrospectively and the adjustment taken through
the opening balance of accumulated profits b. 947,000
c. Prospectively and the current period adjustment c. 856,200
recognized directly in equity d. 824,600
d. Retrospectively and the adjustment recognized as
17. The work-in process inventory of Burp Company
an extraordinary gain or loss
were completely destroyed by fire on June1, 2018.
14. A company decided to change its inventory You were able to establish physical inventory figures
valuation method from FIFO to LIFO in a period of as follows:
rising prices. What was the result of the change on January 1, 2018 June 1, 2018
ending inventory and net income in the year of Raw Materials 60,000 120,000
change? Work-in-process 200,000 ?
Ending Inventory Net Income Finished Goods 280,000 240,000
a. Increase Increase Sales from January 1 to May 31, were 546,750.
b. Increase Decrease Purchases of raw materials were 200,000 and freight
c. Decrease Decrease on purchases 30,000. Direct labor during the period
d. Decrease Increase
was 160,000. It was agreed with insurance adjusters
15. The use of gross profit method assumes that an average gross profit rate of 35% based on cost
a. the amount of gross profit is the same as in prior be used and that direct labor cost was 160% of
years factory overhead.
b. Sales and cost of goods sold have not changed The work in process inventory destroyed by fire is
from previous years a. 366,000
c. Inventory values have not increased from b. 314,612
previous years
c. 265,000
d. The relationship between gross profit and sales
remains stable over time d. 185,000

16. The Bayambang Corporation was organized on 18. Pugo uses the retail inventory method. The
January 1, 2017. On December 31, 2018, the following information is available for the current
corporation lost most of its inventory in a year:
warehouse fire just before the year-end count of
Cost Retail
inventory was to take place. Data from the records
Beginning Inventory 1.3M 2.6M
disclosed the following:
Purchases 18M 29.2M
2017 2018
Freight-In 400,000
Goods Available for 4, 069, 400 4,157,000
Purchase returns 600,000 1M
Sale
Purchase allowances 300,000
Sales 3,940, 000 4,180,000
Departmental Transfer In 400,000 600,000
Sales returns and 80,000 100,000
Net Markup 600,000
allowances
Net Markdown 2M
Gross profit rate 21% ?
Sales 24.7M
Sales returns 350,000
On January 1, 2018, the Corporation’s pricing policy Sales Discounts 200,000
was changed so that the gross profit rate would be Employee Discounts 600,000
three-percentage points higher than the one earned in Loss from Breakage 50,000
2017. Salvaged undamaged merchandise was marked The estimated cost of inventory at the end of the
to sell at 120, 000 while damaged merchandise was current year using the conventional method?
marked to sell at 80,000 had an estimated realizable a. 3,200,000
value of 18,000 b. 3,000,000
How much is the inventory loss due to fire? c. 3,250,000
a. 918,200 d. 3,360,000
19. The estimated cost of inventory at the end of the a. Ocean Fishing
current year using the average method? b. Deforestation
a. 3,200,000 c. Forestry
b. 3,000,000 d. All of the above
c. 3,250,000
d. 3,360,000 24. Which of the following is not a biological asset?
20. The estimated cost of inventory at the end of the a. Sheep
current year using the FIFO-Retail method? b. Trees in a timber plantation
a. 3,200,000 c. Dairy Cattle
b. 3,000,000 d. Felled trees
c. 3,250,000
d. 3,360,000 25. A herd of 10 2 year old animals was held at
January 1 of the current period. On July 1, one
21. The retail inventory method is characterized by animal aged 2.5 years was purchased for 108 and one
a. The recording of sales at cost animal was born. No animals were sold or disposed
b. The reporting of year-end inventory at retail in the of during the period. Per unit fair values less cost to
financial statements sell were as follows:
c. The recording of mark-ups at retail and markdowns 2-year old animal on January 1 100
at cost Newborn animal at July 1 70
d. The recording of purchases at cost 2.5 year old animal on July 1 108
Newborn animal on December 31 72
0.5-year old animal on December 31 80
22. On December 24, 2018, a fire destroyed totally 2 year old animal on December 31 105
the raw materials bodega of Bautista Manufacturing 2.5 year old animal on December 31 111
Co. There was no purchase of raw materials from the 3 year old animal on December 31 120
time of fire until December 31, 2018.
Inventories 1/1/2018 12/31/2018 The carrying amount of biological assets as of
Raw Materials 90,000 ? December 31
Factory Supplies 6,000 5,000 a. 1,292
Goods in Process 185,000 210,000 b. 1,400
Finished Goods 220,000 225,000
c. 1,338
The accounting records show the following data:
d. 1,320
Sales 1,200,000
Purchases of Raw Materials 400,000 26. The increase in fair value of biological assets in
Purchases of Factory Supplies 30,000 the current period due to price change is
Freight-in, raw materials 15,000 a. 55
Direct Labor 220,000 b. 222
Manufacturing Overhead 75% of Direct c. 53
Labor
d. 212
Gross profit rate 35% of sales
27. The increase in fair value of biological assets in
The cost of the raw materials destroyed by the fire the current period due to price change is
was a. 70
a. 140,000 b. 229
b. 75,000 c. 237
c. 80,000 d. 167
d. 176,000 28. PAS 41 applies to
23. Which of the following is an agricultural activity? a. Land related to agricultural activity
b. Intangible assets related to agricultural activity 32. Fenn Company provided the following
c. Bearer plants related to agricultural activity information for the current year:
d. Produce growing on bearer plants related to Merchandise purchased for resale 4M
agricultural activity Freight-in 100,000
Freight out 50,000
Purchase returns 20,000
29. Consumable biological assets include
Interest on Inventory loan 200,000
a. Grape vines What is the inventoriable cost of purchase?
b. Fruit trees a. 4,280,000
c. Trees from which firewood is harvested while the b. 4,030,000
tree remains c. 4,080,000
d. Trees being grown for lumber d. 4,130,000

30. Which of the following provides the least reliable

evidence of fair value?
a. Quoted prices in active markets for identical assets
that the entity can access at the measurement date Prepared By:
b. Quoted prices for identical or similar assets in King Christopher R. Laganao, CPA
markets that are not active
c. Inputs other than quoted prices that are observable
for the asset
d. Unobservable inputs for the asset

31. Brilliant Company has incurred the following

costs during the current year:
Cost of purchases based on vendor’s 5M
invoices
Trade Discounts on purchases 500,000
already deducted from vendor’s
invoices
Import Duties 400,000
Freight and insurance on purchases 1M
Other handling costs relating to 100,000
imports
Salaries of accounting department 600,000
Brokerage Commission paid to 200,000
agents for arranging imports
Sales commission paid to sales 300,000
agents
After-sales warranty costs 250,000

What is the total cost of purchases?

a. 5,700,000
b. 6,100,000
c. 6,700,000
d. 6,500,000