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Topic: Inventories ADN

Definition: these are assets that are

 Held for sale in the normal course of business

 In the process of production for such sale.
 In the form of materials or supplies to be consumed in the production process or in the rendering of
services.

Classification of inventories

1. Merchandising Business
 Merchandise Inventory or Inventory – goods purchased by a trading company for resale in the
enterprise’s ordinary course of business.
2. Manufacturing Business
 Raw materials Inventory – tangible goods purchased for direct use in the manufacture of goods for
sale.
 Work in Process Inventory – manufactured items requiring further processing
 Finished Goods Inventory – manufactured goods completed and ready for sale.
 Manufacturing Supplies Inventory – Items purchased for indirect use in the manufacture of goods
for resale.
3. Service Provider Business
 Work in Process Inventory – the cost of the service. The labor, and other costs of personnel
directly engaged in the providing the service, including supervisory personnel and attributable
overhead cost excluding any profit margins or non-attributable overheads.

Measurement of Inventories

Initial Measurement

o Inventories are initially measured at historical cost. The cost of inventories should include all
costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their
present location and condition.

o COST OF PURCHASE – purchase price, import duties and other taxes (other than those
subsequently recoverable by the enterprise from the taxing authorities), transport, handling and
other costs directly attributable to the acquisition of finished goods, materials and services.
Note: Trade discounts and rebates and other similar items are deducted in determining the
cost of purchase.

o COST OF CONVERSION – include costs directly related to the units of production, such as direct
labor and systematic allocation of fixed and variable production overheads that are incurred in the
production process.

The following are excluded from the cost of inventories.

 Abnormal waste
 Storage costs
 Administrative overheads unrelated to production
 Selling costs
 Foreign exchange differences arising directly on the recent acquisition of inventories invoiced in a
foreign currency
 Interest cost when inventories are purchased with deferred settlement terms.

Balance Sheet Measurement

Inventories should be measured at the lower of cost or net realizable value.
The net realizable value is the:
 Net selling price in the course of the business – estimated cost of completion and estimated costs
necessary to make the sale.
Inventories are usually written down to net realizable on an individual basis. In some cases, however, it
may appropriate to group similar or related items that can be properly value on aggregate.
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When an item of inventory has been written down to its net realizable value and if in subsequent balance
sheet period, the same item of inventory still on hand, a new assessment of net realizable value should be
made.

If there is a clear evidence of an increase in net realizable value because of change in economic condition
the amount of the write-down should be reversed. The amount of reversal should not exceed the original
amount of write-down that was recognized previously.

Establishment of the Year – End Inventory

1. Periodic System – calls for the physical counting of goods.

2. Perpetual System – provides a record of the cost and units remaining as of a particular date, physical
counting is necessary to determine the accuracy of the records.

Note: When physical count is not possible or practicable it would be necessary to estimate the value of the
inventory.

Include in the year-end inventory all item of inventories owned and controlled by the enterprise that are in good,
usable and salable condition within and outside the enterprise’s premises. The following items of inventories should
be considered.
1. Merchandise in Transit
 If the term of the shipment is SHIPPING POINT, include as inventory of the BUYER
 If the term of the shipment is DESTINATION, include as inventory of the SELLER.
 If the term of the contract is COST OF INSURANCE AND FREIGHT (CIF), the goods should be
included in the buyer’s inventory once the merchandise is delivered to the carrier. CIF
contract clearly stipulates that the buyer agreed to pay the lump sum cost of the merchandise, the
insurance and as well as the freight cost.
 If the term of the contract is FREE ALONG SIDE (FAS) the vessel, the seller is required to bring
the goods along side the vessel or carrier and cost of bringing the merchandise to the side of the
vessel or carrier is borne by the seller. Once the carrier takes possession of the merchandise title
to the goods passes to the buyer.

2. Goods on Consignment – include as inventory of the consignor.

3. Sales on Approval – goods sent on approval to a potential buyer should remain as inventory of the
seller until payment is received for items kept by the buyer.

4. Special Sales Contract

 PRODUCT FINANCING – Inventory of the seller.
Also known as a “park sale” because the seller parts (transfers) its inventory in the
buyer’s premises through sales contract that clearly specifies to purchase back the same
inventory
 SALE BUT BUYER GIVEN THE RIGHT TO RETURN -the revenue from the sales
transaction shall be recognized at the point of the sale only if all the following conditions are
met.
a) The seller’s price to the buyer is substantially fixed or determinable at the date of
sale.
b) The buyer has paid the seller, or the buyer is obligated to pay the seller and the
obligation is not contingent on resale of the product
c) The buyer’s obligation to the seller would not be changed in the event of theft or
physical destruction or damage of the product.
d) The buyer acquiring the product for resale has economic substance apart from that
provided by the seller.
e) The seller does not have significant obligations for future performance directly about
the resale of the product by the buyer
f) The amount of future returns can be reasonably estimated. If the above conditions
are not met, the seller should continue to recognize inventory.
 INSTALLMENT SALES – Goods should be considered sold or removed from inventory,
even though legal title has yet to pass the buyer. Included as INVENTORY of the BUYER.
 SEGREGATED GOODS – Mere segregation does not exclude such inventory, however, if
the segregation is due to sales contract such as special order, such inventory is excluded in the
inventory of the seller.
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Topic: Inventories ADN

Inventory Accounting Systems

1. Perpetual Inventory System
 Continuously keeps track of changes in the inventory account.
 Purchases of merchandise for resale or raw materials for production are debited to INVENTORY
rather than to purchases
 FREIGHT IN is debited to INVENTORY not purchases.
 PURCHASE RETURNS AND ALLOWANCES, PURCHASE DISCOUNTS are credited to
INVENTORY rather than to separate accounts
 Cost of Goods Sold recorded at the time of each sale by debiting COST OF GOODS SOLD and
crediting INVENTORY
2. Periodic Inventory System
 Acquisitions of merchandises are debited to PURCHASES account.
 Records are not maintain for withdrawals (sales) of inventory during the period.
 Determining inventory quantities and computing cost of goods sold are made only periodically
after a physical count of inventory.

The cocktail Wholesale Beverage Company purchase softdrinks from producers and then sells
them to retailers. The company began 2016 with the merchandise inventory of 120,000 on
hand. During 2016 additional merchandise is purchased on account at a cost of 600,000.
Cocktail’s supplier credit terms of 2/10,n/30. All discounts are taken. Cocktail uses the net
method to record purchase discounts. All purchases are made F.O.B Shipping point. Freight
charges paid by cocktail totalled 16,000. Merchandise costing 20,000 (net of discounts) was
returned to suppliers for credit. Sales for the year, all on account, totalled 830,000. The cost of
the softdrinks sold is 550,000. 154,000 of inventory remained on hand at the end of 2016.

Required: Journalize the transaction using Perpetual and Periodic System

Two methods in accounting for purchases and purchase discounts

1. Net Method – The cost of inventory is recorded net of cash discounts. Any available discounts not
taken are reported as either purchase discount lost or interest ezpense.
2. Gross Method – Inventory acquisition is recorded at the gross cost. Discounts taken are credited to the
PURCHASE DISCOUNT account.

Example: Assume that Gemstone Merchandisers purchased merchandise on credit. The invoice price was
8,000 with a 2% cash discount if paid within 10 days (2/10,n/30).

Required: Journalize
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The cost formulas for Inventory

o The cost of inventory that are not ordinarily interchangeable and goods or services produced and
segregated for specific projects shall be assigned using specific identification of their individual
costs.
o The cost of inventories that are ordinarily interchangeable shall be assigned by using the FIFO or
weighted average method.

FIFO METHOD - Assumes that the items of inventory which were purchased first are sold first,
and consequently the items remaining in inventory at the end of the period are those most
purchased or produced.
Criticism: mismatch of the oldest unit costs with the current revenues.

WEIGTHED AVERAGE – the cost of each item is determined from the weighted average of the
cost of similar items at the beginning of the period and the cost of similar items purchased or
produced during the period.

Weighted Average Cost - this method is used with the periodic inventory system. The
unit cost is computed one time, only at the end of each period by dividing the total cost of
goods by the total number of units available for sale.

Moving Average Cost – This method is designed for the perpetual inventory system,
under which new weighted cost is calculated after each purchase.

Illustration: The following information is obtained from everlasting corporation financial

records.
Units Unit Total
Date Cost Cost
Jan.1 Beginning Inventory 100 P10 P1,000
Mar.1 Purchases 400 12 4,800
Mar.5 Sales (from Mar. 1 purchases) (250)
May 2 Purchases 100 15 1,500
Aug. 1 Sales (from Mar. 1 purchases) (150)
Oct. 3 Purchases 100 25 2,500
Dec. 31 Ending Inventory (physical count) 300 ? ?

Required: Calculate Cost of goods sold and ending inventory using

1. Specific Identification
2. FIFO
3. Weighted Average - periodic
4. Moving Average – perpetual

Measurement of Inventories

 Inventories are required to be stated at the lower of cost and net realizable value (NRV). Inventories are
usually written down to net realizable value item by item. In some circumstances, however, it may be
appropriate to group similar or related items.

EXAMPLE:

Cost NRV LCNRV

Product A 200,000 180,000 180,000
Product B 300,000 250,000 250,000
Product C 100,000 130,000 100,000
Total 600,000 560,000 530,000
 The total carrying amount of inventories shall be 530,000, which is the most conservative amount by
applying the LCNRV approach.

Write-Down to Net Realizable Value

 If the ending inventory is recorded outright at 530,000, the writedown shall be immediately recognized in
cost of goods sold. This is the direct or cost of sales method.
 If the ending inventory is recorded first at the cost of 600,000, a loss of 70,000 with a corresponding credit
to an allowance account shall be recognized. This is the loss/allowance method.
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 Any write-down to NRV should be recognized as an expense in the period in which the write-down occurs.
 Any reversal should be recognized in the income statement in the period in which the reversal occurs.

Recognition as an Expense

 When inventories are sold, the carrying amount of those inventories shall be recognized as an expense in
the period in which the related revenue is recognized.
 The amount of any write-down of inventories to net realizable value and all losses of inventories shall be
recognized as an expense in the period the write-down or loss occurs.
 The amount of any reversal of any write-down of inventories, arising from an increase in net realizable
value, shall be recognized as a reduction in the amount of inventories recognized as an expense in the
period in which the reversal occurs.
 Some inventories may be allocated to other asset accounts, for example, inventory used as a component of
self-constructed property, plant or equipment. Inventories allocated to another asset in this way are
recognized as an expense during the useful life of that asset.

Required disclosures:

 Accounting policy for inventories.

 Carrying amount, generally classified as merchandise, supplies, materials, work in progress, and
finished goods. The classifications depend on what is appropriate for the enterprise.

 Carrying amount of any inventories carried at fair value less costs to sell.

 Amount of any write-down of inventories recognized as an expense in the period.

 Amount of any reversal of a writedown to NRV and the circumstances that led to such reversal.

 Carrying amount of inventories pledged as security for liabilities.

 Cost of inventories recognized as expense (cost of goods sold).

Inventory Estimation Techniques

 Gross Method – Based on the assumption that the gross profit applied by an entity to its products remains
approximately the same from period to period and therefore the relationship between cost of goods sold and
sales is constant.

Goods available for sale X

Less: Estimated cost of goods sold

Net sales* X

Less: Gross profit X X

Estimated ending inventory X

The cost of goods sold can also be computed if the net sale is multiplied by 1 less the GP rate if the gross
profit rate based on sales or net sales divided by 1 plus the gross profit rate if the gross profit rate is based
on cost.
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*Net sales shall be gross sales less “sales returns and allowance” or “sales returns” only in order for the
estimate in ending inventory not to be overstated.

 Retail Method – Employed by retailers dealing with numerous different items for sale with varying mark
up percentages to keep track unit cost.

Goods available for sale at retail X

Less: Net sales X

Employee discounts X

Normal losses X X

Estimated ending inventory X

Multiplied by the cost ratio %

Estimated ending inventory at cost X

 Conservative Cost Ratio = GAS at cost divided by GAS at retail before net markdown
 Average Cost Ratio = GAS at cost divided by GAS at retail (after net markdown)
 FIFO Cost Ratio = Purchases at cost divided by Purchases at retail after net markdown
 Net sales similar to the “gross profit method” of estimation is computed by ignoring the sales discount
and sales allowance if it is separated from sales returns.

- - END - -
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Topic: Inventories ADN

1. Which of the following inventories carried by a manufacturer is similar to the merchandise inventory of a
retailer?
a. Raw materials.
b. Work-in-process.
c. Finished goods.
d. Supplies.

2. Where should raw materials be classified on the balance sheet?

a. Prepaid expenses.
b. Inventory.
c. Equipment.
d. Not on the balance sheet.

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

a. Raw materials.
b. Equipment.
c. Finished goods.
d. Supplies.

4. Why are inventories included in the computation of net income?

a. To determine cost of goods sold.
b. To determine sales revenue.
c. To determine merchandise returns.
d. Inventories are not included in the computation of net income.

5. 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.

6. How is a significant amount of consignment inventory reported in the balance sheet?

a. The inventory is reported separately on the consignor's balance sheet.
b. The inventory is combined with other inventory on the consignor's balance sheet.
c. The inventory is reported separately on the consignee's balance sheet.
d. The inventory is combined with other inventory on the consignee's balance sheet.

7. Where should goods in transit that were recently purchased f.o.b. destination be included on the balance
sheet?
a. Accounts payable.
b. Inventory.
c. Equipment.
d. Not on the balance sheet.

8. If a company uses the periodic inventory system, what is the impact on net income of including goods in
transit f.o.b. shipping point in purchases, but not ending inventory?
a. Overstate net income.
b. Understate net income.
c. No effect on net income.
d. Not sufficient information to determine effect on net income.

9. If a company uses the periodic inventory system, what is the impact on the current ratio of including goods
in transit f.o.b. shipping point in purchases, but not ending inventory?
a. Overstate the current ratio.
b. Understate the current ratio.
c. No effect on the current ratio.
d. Not sufficient information to determine effect on the current ratio.

10. What is consigned inventory?

a. Goods that are shipped, but title transfers to the receiver.
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 shipper.
d. Goods that have been segregated for shipment to a customer.
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11. When using a perpetual inventory system,

a. no Purchases account is used.
b. a Cost of Goods Sold account is used.
c. two entries are required to record a sale.
d. all of these.

12. Goods in transit which are shipped f.o.b. shipping point should be
a. included in the inventory of the seller.
b. included in the inventory of the buyer.
c. included in the inventory of the shipping company.
d. none of these.

13. Goods in transit which are shipped f.o.b. destination should be

a. included in the inventory of the seller.
b. included in the inventory of the buyer.
c. included in the inventory of the shipping company.
d. none of these.

14. 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 f.o.b. 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 his or her convenience.
d. None of these.

15. Inventories include all of the following assets, except.

a. Held for sale in the ordinary course of business
b. In the process of production for sale
c. In the form of materials or supplies to be consumed in the production process or in the rendering of
services.
d. Held for use in the production or supply of services or goods.

16. The cost of inventory is the sum of

a. Cost of purchase and cost of conversion
b. Direct cost, indirect cost and other costs
c. Cost of conversion and other cost incurred in
d. Cost of conversion and other cost incurred in bringing the inventory to the present location and
condition.

17. The cost of purchase of inventory does not include

a. Purchase price
b. Import duties and irrecoverable taxes
c. Freight, Handling and other costs directly attributable to the acquisition of goods
d. Trade discounts, rebates and other similar items.

18. The cost of conversion of inventory include all of the following except
a. Costs directly related to the units of production, such as direct labor
b. Systematic allocation of fixed production overhead
c. Systematic allocation of variable production overhead
d. Systematic allocation of administrative overhead

19. The inventory of a service provider is described as work in progress and includes which of the following?
a. Labor and other cost of personnel directly engaged in providing the service
b. Compensation of supervisor directly engaged in providing the service
c. Attributable overhead incurred in proving the service
d. All these are included.

20. Which of the following should not be taken into account when determining the cost of inventory?
a. Storage costs of a part finished goods
b. Trade discounts
c. Recoverable purchase taxes
d. Import duties on shipping of inventory inward
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21. (Correct Inventory) The balance in Page Company’s Inventory account on December 31, 2019 was
P1,225,000 before the following information was considered.
o Goods shipped FOB DESTINATION, on December 31, 2019 from a vendor to Page were lost
in transit. The invoice cost of 45,000 was not recorded by Page. On December 28,2019, Page
notified the vendor of the lost shipment.
o Goods were in transit from a vendor to Page on December 31, 2019. The invoice cost was
P60,000 and the goods were shipped FOB SHIPPING POINT on December 28, 2019. Page
received the goods on January 4, 2020.
What amount of inventory should be reported in the December 31, 2019 statement of financial
position?
a. 1,225,000
b. 1,270,000
c. 1,285,000
d. 1,330,000

22. Alca Company’s inventory at June 30, 2019 was 750,000 based on physical count of goods priced at cost
and before any necessary year end adjustment relating to the following;
o Included in the physical count were goods billed to a customer FOB SHIPPING POINT on
June 20, 2019. These goods costing 15,000 were picked up by the carrier on July 9, 2019.
o Goods shipped FOB Destination on June 28, 2019 from a vendor to Alca was received on July
1, 2019. The invoice cost was 25,000
What amount should Alca report as inventory in its June 30, 2019 statement of Financial Position?
a. 735,000
b. 740,000
c. 750,000
d. 765,000

23. Violet Company’s Inventory at December 31, 2019 was 5,000,000 based on physical count priced at cost
and before any necessary adjustment for the following:
o Merchandise costing 200,000, shipped FOB SHIPPING POINT from a vendor on December
30, 2019 was received and recorded on January 5, 2020.
o Goods in the shipping area were excluded from inventory although shipment was not made
until January 2, 2019. The goods billed to the customer FOB SHIPPING POINT on
December 30, 2019, has a cost of 800,000
What amount should Violet report as inventory in its December 31, 2019 statement of financial
position?
a. 5,000,000
b. 5,200,000
c. 5,800,000
d. 6,000,000

24. The unadjusted physical inventory of Liberty Company at December 31, 2019 was 3,000,000. Other
information follows:
o Goods were received and record on January 2, 2019 with cost of 180,000. Information
revealed that the term of the shipment is FOB SHIPPING POINT and these goods were
shipped on December 29, 2019.
o Merchandise in the warehouse costing 240,000 was billed to the customer FOB SHIPPING
POINT on December 29, 2019. These were excluded from inventory but these were shipped
on January 3 , 2020
How much should Liberty report as inventory in its December 31, 2019 statement of financial
position?
a. 3,000,000
b. 3,180,000
c. 3,240,000
d. 3,420,000

25. The inventory on hand at December 31, 2019 for Conrad Company is valued at a cost of 947,800. The
following items were not included in this inventory amount:
o Purchased goods in transit, shipped FOB Destination. Invoice price 32,000, which includes
freight charges of 1,600
o Goods held on consignment by Conrad at a sales price of 28,000, including sales commission
of 20% of the sales price
o Goods sold to UBE COMPANY, under terms FOB DESTINATION invoiced for 24,400
which includes 1,000 freight charges to deliver the goods. The goods are in transit.
o Purchased goods in transit, terms FOB SHIPPING POINT. Invoice price 48,000. Freight costs
3,000
o Goods out on consignment to Can Company, sales price, 36,400. Shipping costs of 2,000
o Mark up on costs for all sales is 30%
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What is the correct cost of inventory to be reported in Conrad’s Financial statements?

a. 1,022,400
b. 1,041,800
c. 1,046,800
d. 1,078,800

26. Morgan Manufacturing Company has the following account balances at year end:
Office supplies 4,000
Raw materials 27,000
Work-in-process 59,000
Finished goods 72,000
Prepaid insurance 6,000
What amount should Morgan report as inventories in its balance sheet?
a. 72,000.
b. 76,000.
c. 158,000.
d. 162,000.

27. Lawson Manufacturing Company has the following account balances at year end:
Office supplies 4,000
Raw materials 27,000
Work-in-process 59,000
Finished goods 92,000
Prepaid insurance 6,000
What amount should Lawson report as inventories in its balance sheet?
a. 92,000.
b. 96,000.
c. 178,000.
d. 182,000.

28. Elkins Corporation uses the perpetual inventory method. On March 1, it purchased10,000 of inventory,
terms 2/10, n/30. On March 3, Elkins returned goods that cost1,000. On March 9, Elkins paid the supplier.
On March 9, Elkins should credit
a. purchase discounts for 200.
b. inventory for 200.
c. purchase discounts for 180.
d. inventory for 180.

29. Malone Corporation uses the perpetual inventory method. On March 1, it purchased 30,000 of inventory,
terms 2/10, n/30. On March 3, Malone returned goods that cost 3,000. On March 9, Malone paid the
supplier. On March 9, Malone should credit
a. purchase discounts for 600.
b. inventory for 600.
c. purchase discounts for 540.
d. inventory for 540.

30. Bell Inc. took a physical inventory at the end of the year and determined that 650,000 of goods were on
hand. In addition, Bell, Inc. determined that 50,000 of goods that were in transit that were shipped f.o.b.
shipping were actually received two days after the inventory count and that the company had 75,000 of
goods out on consignment. What amount should Bell report as inventory at the end of the year?
a. 650,000.
b. 700,000.
c. 725,000.
d. 775,000.

31. Bell Inc. took a physical inventory at the end of the year and determined that 475,000 of goods were on
hand. In addition, the following items were not included in the physical count. Bell, Inc. determined that
60,000 of goods were in transit that were shipped f.o.b. destination (goods were actually received by the
company three days after the inventory count).The company sold 25,000 worth of inventory f.o.b.
destination. What amount should Bell report as inventory at the end of the year?
a. 475,000.
b. 535,000.
c. 500,000.
d. 560,000.

32. Risers Inc. reported total assets of 1,200,000 and net income of 135,000 for the current year. Risers
determined that inventory was overstated by 10,000 at the beginning of the year (this was not corrected).
What is the corrected amount for total assets and net income for the year?
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a. 1,200,000 and 135,000.

b. 1,200,000 and 145,000.
c. 1,190,000 and 125,000.
d. 1,210,000 and 145,000.

33. Risers Inc. reported total assets of 1,600,000 and net income of 85,000 for the current year. Risers
determined that inventory was understated by 23,000 at the beginning of the year and 10,000 at the end of
the year. What is the corrected amount for total assets andnet income for the year?
a. 1,610,000 and 95,000.
b. 1,590,000 and 98,000.
c. 1,610,000 and 72,000.
d. 1,600,000 and 85,000.

34. Power company reviewed its year-end inventory and found the following items:
 A package containing a product costing 81,600 was standing in the shipping area when the
physical inventory count was conducted. This was not included in the inventory because it
was marked “Hold for shipping instructions”. The purchase order was dated December 19,
2019 but the package was shipped and the customer was billed January2, 2020.
 A special machine, fabricated to order for a particular customer, was finished and in the
shipping room on December 30, 2019. The customer was billed on that date and the machine
was excluded in the inventory. The machine costing 230,000 was shipped January 2, 2020.
 Merchandise costing 23,500 was received on January 3, 2020 and the related purchase invoice
was recorded January 5, 2020. The invoice showed the shipment was made December 29,
2019, FOB DESTINATION.
 Goods costing 150,000 were sold and delivered on December 20, 2019. The sale was
accompanied by a repurchase agreement that Power will “buyback” the inventory in February
2020.
How much is the inventory adjustment on December 31, 2019?
a. 81,600 increase
b. 231,600 increase
c. 461,600 increase
d. 485,999 increase

35. Marker Company has the following information pertaining to its merchandise inventory as of December 31,
2019:
 Inventory om hand (including merchandise received on consignment of 20,000) 200,000
 Inventory purchased with a buyback agreement 100,000
 Merchandise in transit, FOB SHIPPING POINT, including 5,000 freight charge 155,000
 Merchandise in transit, Free Alongside, including delivery cost alongside vessel
of 6,000 but excluding the cost of shipment of 3,000 250,000
 Merchandise in transit, CIF (including insurance costs and freight of 8,000) 175,000
What amount should Marker Company report as value of its inventory in its 2019 statement of
financial position?
a. 749,000
b. 757,000
c. 763,000
d. 857,000

36. (Consigned Inventory) Popeye Company had the following consignment transactions during the year 2019:
Inventory shipped on consignment to Olive, consignee 600,000
Freight paid by Popeye 40,000
Inventory received on consignment from ALAKING, consignor 1,000,000
Freight paid by ALAKING 100,000
No sales of consigned goods were made through December 31, 2019.
How much should POPEYE include as consigned inventory in its December 31, 2019 statement of
financial position?
a. 600,000
b. 640,000
c. 1,600,000
d. 1,900,000

37. (Consigned Inventory) On October 1, 2019, Saint Company consigned 50 sewing machines to Matthew
Company for sale at 20,000 each and paid 40,000 in transportation cost. On December 31, 2019, Matthew
reported the sale of 30 sewing machines and remitted 510,000. The remittance was net of agreed 15%
commission.
What amount should Saint recognize as consignment sales revenue for 2019?
a. 350,000
b. 470,000
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c. 510,000
d. 600,000

38. (Consigned Inventory) On December 1, 2019, Super Store received 1,000 leather jackets on consignment
from Star Company. Start cost for the leather jackets was 1,600 each and they were priced to sell at 2,000.
Commission rate was 10%. 200 leather jackets remained.
What amount should Super Store report as payable for consigned goods in its December 31, 2019 statement
of financial position?
a. 360,000
b. 1,440,000
c. 1,600,000
d. 1,800,000

39. (Consigned Inventory) B Company had the following consignment transactions during December 2019.
Inventory shipped on consignment to C Company 36,000
Freight paid by B 1,800
Inventory received on consignment from D 24,000
Freight paid by D 1,000
No sales of consigned inventory were made through December 31, 2019
What amount of consigned inventory should be included in B’s December 31, 2019 statement of financial
position?
a. 24,000
b. 25,000
c. 36,000
d. 37,800

40. (Cost of Sales) Feelings Company sold the selected merchandise on a consignment basis during 2019.
Feelings 2019 accounting records show the following information:
Inventory, January 1 244,000
Inventory on hand, December 31 290,000
Inventory on consignment, December 31 40,000
Purchases 1,080,000
Freight in 20,000
Freight out to customers 70,000
Freight out to consignees 10,000
What amount should Feelings report as a cost of goods sold in its 2019 statement of comprehensive
income?
a. 1,014,000
b. 1,024,000
c. 1,094,000
d. 1,354,000

41. (Inventoriable Cost) On December 28, 2019, Lancelot Company purchased goods costing 1,000,000. The
terms were FOB Destination.
The following costs were incurred in connection with the sale and delivery of the goods.
Packaging for shipment 20,000
Shipping 30,000
Special handling charges 40,000
These goods were received on December 31, 2019.
In Lancelot’s December 31, 2019 statement of financial position, how much of these goods should be
included in inventory?
a. 1,000,000
b. 1,040,000
c. 1,070,000
d. 1,090,000

42. The following information applies to Agony, Inc. for 2019:

Merchandise purchased for resale 400,000
Freight in 10,000
Freight out 5,000
Purchase Returns 2,000
How much is Agony’s 2019 inventoriable cost?
a. 400,000
b. 403,000
c. 408,000
d. 413,000

43. The following information is available for Color Mae Company for year 2019.
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Net Sales 3,600,000

Freight In 90,000
Purchase Discounts 50,000
Ending Inventory 240,000
The gross margin is 40% of net sales
What is the cost of goods available for sale?
a. 1,680,000
b. 1,920,000
c. 2,400,000
d. 2,440,000

44. (Cost of Sales) The accounting records of Token Company show the following information for 2019
IN STORE OUT ON CONSIGNMENT
Inventory, December 31 290,000 Inventory, December 31 40,000
Inventory, January 1 20,000 Inventory January 1 24,000
Purchases 960,000 Shipment from consignor 120,000
Freight in 20,000 Freight out to consignees 10,000
Freight out 60,000 Freight out 16,000

What would be the cost of sales of Token for 2019?

a. 904,000
b. 970,000
c. 1,014,000
d. 1,024,000

45. (Discount on Lost) Datacore, a computer atore in Virra Mall, Green Hills, specializes in the sale of IBM
compatibles and software packages and had the following transactions with one of its suppliers.
Purchase of IBM compatibles 328,000
Purchases of commercial software package 90,000
Returns and allowances 8,000
Purchase discounts 2,700
Purchases were made throughout the year on terms of 3/10,n/60. All returns and allowance took place
within 5 days purchase and prior to payment of account.
How much is the discount lost?
a. 6,900
b. 7,140
c. 9,600
d. 9,840

46. (Cost allocation) On March 1, 2019, Good Company purchased a tract of land for 18,000,000. Good
incurred additional cost of 4,500,000 during the remainder of year 2017 in preparing the land for sale. The
land 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, how much should be allocated to Class A lot?
a. 7,200,000
b. 8,640,000
c. 9,000,000
d. 10,800,000

NRV, FIFO AND LIFO

47. Which of the following is true about lower-of-cost-or-market?

a. It is inconsistent because losses are recognized but not gains.
b. It usually understates assets.
c. It can increase future income.
d. All of these.

48. The primary basis of accounting for inventories is cost. A departure from the cost basis of pricing the
inventory is required where there is evidence that when the goods are sold in the ordinary course of
business their
a. selling price will be less than their replacement cost.
b. replacement cost will be more than their net realizable value.
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c. cost will be less than their replacement cost.

d. future utility will be less than their cost.

49. When valuing raw materials inventory at lower-of-cost-or-market, what is the meaning of the term
"market"?
a. Net realizable value
b. Net realizable value less a normal profit margin
c. Current replacement cost
d. Discounted present value

50. In no case can "market" in the lower-of-cost-or-market rule be more than

a. estimated selling price in the ordinary course of business.
b. estimated selling price in the ordinary course of business less reasonably predictable costs of completion
and disposal.
c. estimated selling price in the ordinary course of business less reasonably predictable costs of completion
and disposal and an allowance for an approximately normal profit margin.
d. estimated selling price in the ordinary course of business less reasonably predictable costs of completion
and disposal, an allowance for an approximately normal profit margin, and an adequate reserve for possible
future losses.

51. Designated market value

a. is always the middle value of replacement cost, net realizable value, and net realizable value less a
normal profit margin.
b. should always be equal to net realizable value.
c. may sometimes exceed net realizable value.
d. should always be equal to net realizable value less a normal profit margin.

52. Lower-of-cost-or-market
a. is most conservative if applied to the total inventory.
b. is most conservative if applied to major categories of inventory.
c. is most conservative if applied to individual items of inventory.
d. must be applied to major categories for taxes.

53. An item of inventory purchased this period for 15.00 has been incorrectly written down to its current
replacement cost of 10.00. It sells during the following period for 30.00, its normal selling price, with
disposal costs of 3.00 and normal profit of 12.00. Which of the following statements is not true?
a. The cost of sales of the following year will be understated.
b. The current year's income is understated.
c. The closing inventory of the current year is understated.
d. Income of the following year will be understated.

54. When the direct method is used to record inventory at market

a. there is a direct reduction in the selling price of the product that results in a loss being recorded on the
income statement prior to the sale.
b. a loss is recorded directly in the inventory account by crediting inventory and debiting loss on inventory
decline.
c. only the portion of the loss attributable to inventory sold during the period is recorded in the financial
statements.
d. the market value figure for ending inventory is substituted for cost and the loss is buried in cost of goods
sold.

55. Recording inventory at net realizable value is permitted, even if it is above cost, when there are no
significant costs of disposal involved and
a. the ending inventory is determined by a physical inventory count.
b. a normal profit is not anticipated.
c. there is a controlled market with a quoted price applicable to all quantities.
d. the internal revenue service is assured that the practice is not used only to distort reported net income.

56. When inventory declines in value below original (historical) cost, and this decline is considered other than
temporary, what is the maximum amount that the inventory can be valued at?
a. Sales price
b. Net realizable value
c. Historical cost
d. Net realizable value reduced by a normal profit margin

57. Net realizable value is

a. acquisition cost plus costs to complete and sell.
b. selling price.
c. selling price plus costs to complete and sell.
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d. selling price less costs to complete and sell.

58. If a unit of inventory has declined in value below original cost, but the market value exceeds net realizable
value, the amount to be used for purposes of inventory valuation is
a. net realizable value.
b. original cost.
c. market value.
d. net realizable value less a normal profit margin.

59. Inventory may be recorded at net realizable value if

a. there is a controlled market with a quoted price.
b. there are no significant costs of disposal.
c. the inventory consists of precious metals or agricultural products.
d. all of these.

60. If a material amount of inventory has been ordered through a formal purchase contract at the 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.

61. The credit balance that arises when a net 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.

62. In 2006, Lucas Manufacturing signed a contract with a supplier to purchase raw materials in 2007 for
700,000. Before the December 31, 2006 balance sheet date, the market price for these materials dropped to
510,000. The journal entry to record this situation at December 31, 2006 will result in a credit that should
be reported
a. as a valuation account to Inventory on the balance sheet.
b. as a current liability.
c. as an appropriation of retained earnings.
d. on the income statement.

63. Which of the following is not a basic assumption of the gross profit method?
a. The beginning inventory plus the purchases equal total goods to be accounted for.
b. Goods not sold must be on hand.
c. If the sales, reduced to the cost basis, are deducted from the sum of the opening inventory plus purchases,
the result is the amount of inventory on hand.
d. The total amount of purchases and the total amount of sales remain relatively unchanged from the
comparable previous period.

64. The gross profit method of inventory valuation is invalid when

a. a portion of the inventory is destroyed.
b. there is a substantial increase in inventory during the year.
c. there is no beginning inventory because it is the first year of operation.
d. none of these.

65. Which statement is not true about the gross profit method of inventory valuation?
a. It may be used to estimate inventories for interim statements.
b. It may be used to estimate inventories for annual statements.
c. It may be used by auditors.
d. None of these.

66. A major advantage of the retail inventory method is that it

a. provides reliable results in cases where the distribution of items in the inventory is
different from that of items sold during the period.
b. hides costs from competitors and customers.
c. gives a more accurate statement of inventory costs than other methods.
d. provides a method for inventory control and facilitates determination of the periodic
inventory for certain types of companies.

67. An inventory method which is designed to approximate inventory valuation at the lower of cost or market
is
a. last-in, first-out.
b. first-in, first-out.
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c. conventional retail method.

d. specific identification.

68. The retail inventory method is based on the assumption that the
a. final inventory and the total of goods available for sale contain the same proportion of
high-cost and low-cost ratio goods.
b. ratio of gross margin to sales is approximately the same each period.
c. ratio of cost to retail changes at a constant rate.
d. proportions of markups and markdowns to selling price are the same.

69. Which statement is true about the retail inventory method?

a. It may not be used to estimate inventories for interim statements.
b. It may not be used to estimate inventories for annual statements.
c. It may not be used by auditors.
d. None of these.

70. When the conventional retail inventory method is used, markdowns are commonly ignored in the
computation of the cost to retail ratio because
a. there may be no markdowns in a given year.
b. this tends to give a better approximation of the lower of cost or market.
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.

71. To produce an inventory valuation which approximates the lower of cost or market using the conventional
retail inventory 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.

72. When calculating the cost ratio for the retail inventory method,
a. if it is the conventional method, the beginning inventory is included and markdowns are deducted.
b. if it is the LIFO method, the beginning inventory is excluded and markdowns are deducted.
c. if it is the LIFO method, the beginning inventory is included and markdowns are not deducted.
d. if it is the conventional method, the beginning inventory is excluded and markdowns are not deducted.

73. 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 which reflects the
item's selling price.
b. A record of the total cost and retail value of goods purchased.
c. A record of the total cost and retail value of the goods available for sale.
d. Total sales for the period.

74. Which of the following is not a reason the retail inventory method is used widely?
a. As a control measure in determining inventory shortages
b. For insurance information
c. To permit the computation of net income without a physical count of inventory
d. To defer income tax liability

75. Which of the following statements is false regarding an assumption of inventory cost flow?
a. The cost flow assumption need not correspond to the actual physical flow of goods.
b. The assumption selected may be changed each accounting period.
c. The FIFO assumption uses the earliest acquired prices to cost the items sold during a period.
d. The LIFO assumption uses the earliest acquired prices to cost the items on hand at the end of an
accounting period.

76. The average days to sell inventory is computed by dividing

a. 365 days by the inventory turnover ratio.
b. the inventory turnover ratio by 365 days.
c. net sales by the inventory turnover ratio.
d. 365 days by cost of goods sold.

77. The inventory turnover ratio is computed by dividing the cost of goods sold by
a. beginning inventory.
b. ending inventory.
c. average inventory.
d. number of days in the year.
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78. When using dollar-value LIFO, if the incremental layer was added last year, it should b multiplied by
a. last year's cost ratio and this year's index.
b. this year's cost ratio and this year's index.
c. last year's cost ratio and last year's index.
d. this year's cost ratio and last year's index.

79. Teel Distribution Co. has determined its December 31, 2019 inventory on a FIFO basis at 250,000.
Information pertaining to that inventory follows:
Estimated selling price 255,000
Estimated cost of disposal 10,000
Normal profit margin 30,000
Current replacement cost 225,000
Teel records losses that result from applying the lower-of-cost-or-market rule. At December 31, 2019, the
loss that Teel should recognize is
a. 0.
b. 5,000.
c. 20,000.
d. 25,000.

80. Under the lower-of-cost-or-market method, the replacement cost of an inventory item would be used as the
designated market value
a. when it is below the net realizable value less the normal profit margin.
b. when it is below the net realizable value and above the net realizable value less the normal profit margin.
c. when it is above the net realizable value.
d. regardless of net realizable value.
81. The original cost of an inventory item is above the replacement cost and the net realizable value. The
replacement cost is below the net realizable value less the normal profit margin. As a result, under the
lower-of-cost-or-market method, the inventory item should be reported at the
a. net realizable value.
b. net realizable value less the normal profit margin.
c. replacement cost.
d. original cost.

82. Gore Company's accounting records indicated the following information:

Inventory, 1/1/19 600,000
Purchases during 2019 3,000,000
Sales during 2019 3,800,000
A physical inventory taken on December 31, 2019, resulted in an ending inventory of 700,000. Gore's gross
profit on sales has remained constant at 25% in recent years. Gore suspects some inventory may have been
taken by a new employee. At December 31, 2019, what is the estimated cost of missing inventory?
a. 50,000.
b. 150,000.
c. 200,000.
d. 250,000.

83. Eaton Co. uses the retail inventory method to estimate its inventory for interim statement purposes. Data
relating to the computation of the inventory at July 31, 2019, are as follows:
Cost Retail
Inventory, 2/1/19 200,000 250,000
Purchases 1,000,000 1,575,000
Markups, net 175,000
Sales 1,750,000
Estimated normal shoplifting losses 20,000
Markdowns, net 110,000
Under the lower-of-cost-or-market method, Eaton's estimated inventory at July 31, 2019 is
a. 72,000.
b. 84,000.
c. 96,000.
d. 120,000.
84. At December 31, 2007, the following information was available from Dole Co.'s accounting records:
Cost Retail
Inventory, 1/1/19 147,000 203,000
Purchases 833,000 1,155,000
Additional markups 42,000
Available for sale 980,000 1,400,000
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Sales for the year totaled 1,050,000. Markdowns amounted to 10,000. Under the lower of- cost-or-market
method, Dole's inventory at December 31, 2019 was
a. 294,000.
b. 245,000.
c. 252,000.
d. 238,000.

85. On December 31, 2018, Lilly Co. adopted the dollar-value LIFO retail inventory method.Inventory data for
2019 are as follows:
LIFO Cost Retail
Inventory, 12/31/18 300,000 420,000
Inventory, 12/31/19 ? 550,000
Increase in price level for 201910%
Cost to retail ratio for 2019 70%
Under the LIFO retail method, Lilly's inventory at December 31, 2019, should be
a. 361,600.
b. 385,000.
c. 391,000.
d 400,100.

86. Remington Company sells product 1976NLC for 40 per unit. The cost of one unit of 1976NLC is 36, and
the replacement cost is 34. The estimated cost to dispose of a unit is 8, and the normal profit is 40%. At
what amount per unit should product 1976NLC be reported, applying lower-of-cost-or-market?
a. 16.
b. 32.
c. 34.
d. 36.

87. Joe Crede Corporation sells its product, a rare metal, in a controlled market with a quoted price applicable
to all quantities. The total cost of 5,000 pounds of the metal now held in inventory is 250,000. The total
selling price is 600,000, and estimated costs of disposal are 10,000. At what amount should the inventory of
5,000 pounds be reported in the balance sheet?
a. 240,000.
b. 250,000.
c. 590,000.
d. 600,000.

88. Pettengal Corporation sells its product, a rare metal, in a controlled market with a quoted price applicable to
all quantities. The total cost of 5,000 pounds of the metal now held in inventory is 150,000. The total
selling price is 350,000, and estimated costs of disposal are 5,000. At what amount should the inventory of
5,000 pounds be reported in the balance sheet?
a. 145,000.
b. 150,000.
c. 345,000.
d. 350,000.

89. Jermaine Dye Corporation acquired two inventory items at a lump-sum cost of 50,000. The acquisition
included 3,000 units of product LF, and 7,000 units of product 1B. LF normally sells for 15 per unit, and
1B for 5 per unit. If Dye sells 1,000 units of LF, what amount of gross profit should it recognize?
a. 1,875
b. 5,625.
c. 10,000.
d. 11,875.

90. Williamson Corporation acquired two inventory items at a lump-sum cost of 40,000. The acquisition
included 3,000 units of product CF, and 7,000 units of product 3B. CF normally sells for 12 per unit, and
3B for 4 per unit. If Williamson sells 1,000 units of CF, what amount of gross profit should it recognize?
a. 1,500.
b. 4,500.
c. 8,000.
d. 9,500.
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PAS 41 - AGRICULTURE

Objective of PAS 41

The objective of PAS 41 is to establish standards of accounting for agricultural activity -- the management of the
biological transformation of biological assets (living plants and animals) into agricultural produce (harvested
product of the enterprise's biological assets).

Key Definitions:

 Agricultural activity is the management by an entity of the biological transformation of biological assets
for sale, into agricultural produce, or into additional biological assets.
 Agricultural produce is the harvested product of the entity’s biological assets.
 A biological asset is a living animal or plant.
 Biological transformation comprises the processes of growth, degeneration, production, and procreation
that cause qualitative or quantitative changes in a biological asset.
 A group of biological assets is an aggregation of similar living animals or plants.
 Harvest is the detachment of produce from a biological asset or the cessation of a biological asset’s life
processes.
 Bearer plant is a living plant that:
a. Is used in the production process of agricultural produce,
b. Is expected to bear produce for more than one period
c. Has a remote likelihood of being sold (except as part of incidental scrap sales).

Initial Recognition

An enterprise should recognize a biological asset or agriculture produce only when the enterprise controls the asset
as a result of past events, it is probable that future economic benefits will flow to the enterprise, and the fair value or
cost of the asset can be measured reliably.

Measurement

 Biological assets should be measured on initial recognition and at subsequent reporting dates at fair value
less costs of disposal, unless fair value cannot be reliably measured.

 Agricultural produce should be measured at fair value less costs of disposal at the point of harvest.
Because harvested produce is a marketable commodity, there is no 'measurement reliability' exception for
produce.

 The gain on initial recognition of biological assets at fair value, and changes in fair value of biological
assets during a period, are reported in net profit or loss.

 A gain on initial recognition of agricultural produce at fair value should be included in net profit or loss for
the period in which it arises.

 All costs related to biological assets that are measured at fair value are recognized as expenses when
incurred, other than costs to purchase biological assets.

 Bearer plants are accounted for under PAS 16 using the cost model, or the revaluation model. Before
bearer plants are able to bear agricultural produce (i.e. before maturity), they are accounted for as self-
constructed items of property, plant and equipment. The agricultural produce of the bearer plant remains
within the scope of PAS 41 and is therefore accounted for at fair value.

 PAS 41 presumes that fair value can be reliably measured for most biological assets. However, that
presumption can be rebutted for a biological asset that, at the time it is initially recognized in financial
statements. In such a case,

 The asset is measured at cost less accumulated depreciation and impairment losses if the asset does not
have a quoted market price in an active market and for which other methods of reasonably estimating fair
value are determined to be clearly inappropriate or unworkable.
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 But the enterprise must still measure all of its other biological assets at fair value. If circumstances change
and fair value becomes reliably measurable, a switch to fair value less disposal costs is required.

Measurement of fair value

 A quoted market price in an active market for a biological asset or agricultural produce is the most reliable
basis for determining the fair value of that asset. If an active market does not exist, PAS 41 provides
guidance for choosing another measurement basis. First choice would be a market-determined price such as
the most recent market price for that type of asset, or market prices for similar or related assets; if reliable
market-based prices are not available, the present value of expected net cash flows from the asset should be
use, discounted at a current market-determined pre-tax rate.
 In limited circumstances, cost is an indicator of fair value, where little biological transformation has taken
place or the impact of biological transformation on price is not expected to be material.
 The fair value of a biological asset is based on current quoted market prices and is not adjusted to reflect
the actual price in a binding sale contract that provides for delivery at a future date.

Other Issues

a. The change in fair value of biological assets is part physical change (growth, etc.) and part unit price
change. Separate disclosure of the two components is encouraged, not required.

b. Fair value measurement stops at harvest. PAS 2, Inventories, applies after harvest.

c. Agricultural land is accounted for under PAS 16, Property, Plant and Equipment. However, biological
assets that are physically attached to land are measured as biological assets separate from the land.

d. Intangible assets relating to agricultural activity (for example, milk quotas) are accounted for under PAS
38, Intangible Assets.

e. Unconditional government grants received in respect of biological assets measured at fair value are
reported as income when the grant becomes receivable.

Disclosure requirements in PAS 41 include:

 Carrying amount of biological assets

 Description of an enterprise's biological assets, by broad group
 Change in fair value during the period
 Fair value of agricultural produce harvested during the period
 Description of the nature of an enterprise's activities with each group of biological assets and non-financial
measures or estimates of physical quantities of output during the period and assets on hand at the end of the
period
 Information about biological assets whose title is restricted or that are pledged as security
 Commitments for development or acquisition of biological assets
 Financial risk management strategies
 Methods and assumptions for determining fair value
 Reconciliation of changes in the carrying amount of biological assets, showing separately changes in value,
purchases, sales, harvesting, business combinations, and foreign exchange differences

Disclosure of a quantified description of each group of biological assets, distinguishing between consumable and
bearer assets or between mature and immature assets, is encouraged but not required. If fair value cannot be
measured reliably, additional required disclosures include:
 Description of the assets
 An explanation of the circumstances
 If possible, a range within which fair value is highly likely to fall
 Gain or loss recognized on disposal
 Depreciation method
 Useful lives or depreciation rates
 Gross carrying amount and the accumulated depreciation, beginning and ending

If the fair value of biological assets previously measured at cost now becomes available, certain additional
disclosures are required.

Disclosures relating to government grants include the nature and extent of grants, unfulfilled conditions, and
significant decreases in the expected level of grants.