HANDOUTS FOR INVENTORIES

1. 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
(This refers to purchase commitment which must be disclosed)

2. 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
(Liability for purchase commitment)

3. The gross margin (gross profit) method may not be used for
A. Internal and external interim reports
B. Internal and external year-end reports
C. Estimating inventories damaged by casualties
D. Testing the validity of inventory costs determined under either periodic or perpetual system

4.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.

5.The following information is available for Kerr Company for 2017:

Freight-in P 60,000 Selling expenses 300,000

Purchase returns 150,000 Ending 520,000
inventory

The cost of goods sold is equal to 300% of selling expenses.

What is the cost of goods available for sale?

A. P 900,000 B. P 1,480,000 C. P 1,330,000 D. P 1,420,000
(300 x 3 = 900; cost of goods available for sale – ending inventory = cost of sales)

6. Howe Company's accounting records indicated the following information:

Inventory, 1/1/2017 P 300,000

Purchases during 1,500,000
2017
Sales during 2017 2,000,000

A physical inventory taken on December 31, 2017, resulted in an ending inventory of P 350,000. Howe's gross
profit on sales has remained constant at 30% in recent years. Howe suspects some inventory may have been
taken by a new employee.

At December 31, 2017, what is the estimated cost of missing inventory?

A. P 50,000 B. P 75,000 C. P 100,000 D. P 150,000
(COS = 2M X 70% = 1.4M; 300 + 1,500 – x = 1.4M; 400 – 350 = 50)

7. Sun Trading lost 50% of its inventory by fire on December 31, 2017. No inventory had been taken on December
31, 2017. The following profit and loss data are available:

2017 2016 2015

Inventory, January 1 P 1,040,000 P 840,000 P 848,000
Purchases 3,600,000 2,876,000 2,836,000
Purchase returns 240,000 140,000 200,000
Sales 4,060,000 3,900,000 3,620,000
Sales returns 60,000 100,000 20,000

What is the value of inventory destroyed by fire?

A. P 1,600,000 B. P 1,760,000 C. P 800,000 D. P 880,000
(COS of 2015 (848 + 2,836 – 200 – 840) + COS of 2016 (840 + 2,876 – 140 – 1,040) = 5,180)
(Net sales of 2015 3,600 + NS of 2016 3,800 = 7,400) (% of COS to NS = 70%)
(2017: COS = 4M x 70% = 2.8M; 1,040 + 3,600 – 240 – x = 2.8M; only ½ was lost)

Michael John C. Ode, CPA

FINANCIAL ACCOUNTING & REPORTING
8. 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
C. Cost will be less than their replacement cost
D. Future utility will be less than their cost

9. 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

10. 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

11. David Store uses the FIFO retail method of inventory valuation. The following information is available:

AT COST AT
RETAIL
Beginning inventory P 12,000 P 30,000
Purchases 60,000 110,000
Net additional markups 10,000
Net markdowns 20,000
Sales (net of employee P 5,000 discounts) 85,000
Sales discounts to regular customers 1,000

Estimate the cost of ending inventory.

A. P 24,000 B. P 20,800 C. P 20,000 D. P 19,200

12. Dee Co. uses the retail inventory method to approximate the lower of average cost or market. The following
information is available for the current year:

COST RETAIL
Beginning inventory P 1,300,000 P 2,600,000
Purchases 18,000,000 29,200,000
Freight in 400,000
Purchase returns 600,000 1,000,000
Purchase allowances 300,000
Departmental transfer in 400,000 600,000
Net markups 600,000
Net markdowns 2,000,000
Sales 24,400,000
Sales discounts 200,000
Employee discounts 600,000

What should be reported as the estimated cost of inventory at the end of the current year?
A. P 3,120,000 B. P 3,200,000 C. P 3,000,000 D. P 3,840,000
(note: this uses the conventional method)

13. Jordan Company uses the retail inventory method to estimate its inventory. Data relating to the inventory
computation on December 31, 2017 are as follows:

COST RETAIL
Inventory, January 1 P 144,000 P 200,000
Purchases 816,000 1,260,000
Net markups 140,000
Sales 1,400,000
Sales return 36,000
Sales discount 10,000
Sales allowance 5,000
Estimated normal shoplifting losses 16,000
Net markdowns 100,000

Estimate the December 31, 2017 under the average cost retail method.
A. P 81,600 B. P 120,000 C. P 72,000 D. P 76,800
14. In retail method and inventory losses during the year were abnormal, they are deducted from
Michael John C. Ode, CPA
FINANCIAL ACCOUNTING & REPORTING
A. CGAS at retail C. Both A and B
B. CGAS at cost D. Neither A nor B

15. In the retail method of estimating inventory, which of the following is true?
A. Freight-in is included at both cost and retail
B. Mark-up is included at cost only
C. Purchase discount is included at retail
D. Departmental credit or transfer out is included at both cost and retail

16. Inventories are measured at

A. The lower of cost and net realizable value on an aggregate basis
B. The higher of cost and net realizable value on an aggregate basis
C. The lower of cost and net realizable value on an item by item basis
D. The higher of cost and net realizable value on an item by item basis

17. Produkto Mfg. has two products in its inventory which have costs and selling prices as follows:

Product One Product Two

Materials and conversion costs P 600,000 P 720,000
Selling prices 800,000 1,200,000
General administration costs 120,000 320,000
Estimated selling costs 240,000 280,000

At year-end, the manufacture of items of inventory has been completed but no selling costs have yet been
incurred.

What is the measurement of Product One and Product Two, respectively?

A. P 560,000 and P 920,000 C. P 600,000 and P 920,000
B. P 560,000 and P 720,000 D. P 600,000 and P 720,000

18. Starlord Co. sells musical instruments. At December 31, 2017, the balance in Starlord’s Inventory account was
P 50,200, and the Allowance for Inventory Writedown had a balance of P 3,200. The relevant inventory cost and
market data at December 31, 2017, are summarized in the schedule below:

Replacement Sales Net Realizable value Normal Profit

Cost Cost Price
Guitars P 8,900 P 8,600 P 9,150 P 8,700 P 640
Xylophone 9,400 9,200 9,300 8,500 744
s
Trumpets 12,500 13,500 12,900 11,100 1,161
Violins 19,400 11,400 20,500 19,700 2,050
Total P 50,200 P 42,700 P 51,850 P 48,000 P 4,595

What is the proper balance in the Allowance for Inventory Write-down at December 31, 2017?
A. P 7,500 B. P 2,200 C. P 3,200 D. P 2,500
[(8,900 – 8,700) + (9,400 – 8,500) + (12,500 – 11,100)]

19. If the freight arrangement is shipping point and freight collect, the buyer shall record
A. Freight-in and reduces his payable for the freight he paid
B. No freight-in but pays for the freight
C. Freight-in and pays for the freight
D. No freight-in but reduces his payable for the freight he paid

20. If the freight arrangement is shipping point and freight prepaid, the buyer shall record
A. Freight-in and increases his payable for the freight the seller paid
B. No freight-in but pays for the freight
C. Freight-in and pays for the freight
D. No freight-in but increases his payable for the freight the seller paid

21. If the freight arrangement is destination and freight prepaid, the seller shall record
A. Freight-out and reduces his receivable for the freight he paid
B. No freight-out but pays for the freight
C. Freight-out and pays for the freight
D. No freight-out but reduces his receivable for the freight he paid

22. Theoretically, cash discounts permitted on purchased raw materials should be

A. Added to other income, taken or not C. Deducted from inventory, taken or not
B. Added to other income, only if taken D. Deducted from inventory, only if taken

For the next set of questions:

Michael John C. Ode, CPA
FINANCIAL ACCOUNTING & REPORTING
Fritz Inc. provided the following data for its inventories:
Transactions Units Unit cost Total cost Units on
hand
January 1 balance 2,000 P 100.000 P 200,000 2,000
January 5 purchases 10,000 103.000 1,030,000 12,000
January 10 sale 8,000 4,000
January 11 purchases 16,000 105.625 1,690,000 20,000
January 27 sale 15,000 5,000

23. Under FIFO, what is the cost of ending inventory?

A. P 521,430 B. P 528,125 C. P 525,000 D. P 500,000
24. Under moving average method, what is the cost of ending inventory?
A. P 521,430 B. P 528,125 C. P 525,000 D. P 500,000
25. Under the weighted average method, what is the cost of ending inventory?
A. P 521,430 B. P 528,125 C. P 525,000 D. P 500,000

26. During a period of rising prices, a perpetual inventory system would result in the same peso amount of ending
inventory as a periodic inventory system under which of the following inventory cost flow method?
A. FIFO B. LIFO C. Weighted average D. Moving average

27. A technique for the measurement of the cost of inventories that takes into account normal levels of
materials and supplies, labor, efficiency and capacity utilization. They are regularly reviewed and, if
necessary, revised in the light of current conditions.
A. Standard cost method C. FIFO method
B. Gross profit method D. LIFO method

28. An entity returned merchandise purchased on account. Under a perpetual inventory system, the account
credited to book the return is
A. Purchases C. Inventory
B. Purchase returns and allowances D. Accounts payable

29. Which of the following transaction does not use the Merchandise Inventory account under the perpetual system?
A. Sales returns C. Freight on goods acquired
B. Purchase returns D. Freight on goods sold

30. What is the method of accounting for inventory in which the cost of goods sold is recorded each time a sale is
made?
A. Physical inventory system C. Periodic inventory system
B. Book inventory system D. Actual inventory system

For the next set of questions (Use the table on the 1 st page for guide):
Stephen is engaged in the manufacture of travel bags. The following schedule is presented for analysis by the
accountant of Stephen Manufacturing:

Merchandise acquired (on hand):

A. Total of invoice prices (includes P 1,000 worth of unsalable items) P 71,000
B. Freight paid by the seller on some of those acquired on F.O.B. Shipping point terms 2,500
C. Freight paid by Stephen on some of those acquired under F.O.B. Seller terms 3,500
D. Freight paid by Stephen on some of those acquired on F.O.B. Destination terms 3,000
E. Storage costs 5,000
F. Non-refundable purchase taxes 11,000
G. Value-added tax 14,000
(71 – 1 + 2.5 + 3.5 + 11)

31. From the given, inventories should be increased by

A. P 83,500 B. P 84,000 C. P 87,000 D. P 87,500

Consignment arrangements:
A. Held on consignment by Stephen P 5,000
B. Out on consignment, at normal selling price at 20% above cost of 18,000
C. Freight paid by Stephen on goods out on consignment 1,000
Goods manufactured:
A. Cost of goods manufactured (excluding costs enumerated below) P 100,000
B. Insurance cost during production 5,000
C. Abnormal amount of wasted materials, labor and costs 2,400
D. Interest on short-term loans obtained to manufacture goods 8,000
E. Annual depreciation of administrative building 25,000

32. From the given, inventories should be increased by

A. P 132,000 B. P 129,000 C. P 149,000 D. P 121,000
[(18/1.2) + 1] + 100 + 5
33. The following transactions relate to Harmony Company during 2017:

Michael John C. Ode, CPA

FINANCIAL ACCOUNTING & REPORTING

- Inventories, in-transit to Harmony, FOB Destination (includes packaging, shipping, P 100,000

handling costs of P 15,000 to be paid by Harmony)
- Inventories, in-transit to Harmony, FOB Shipping point (excludes freight and handling 50,000
charges paid by the supplier of P 5,000)
- Inventories, in-transit to Harmony, FOB Seller (includes insurance premium of P 1,000) 20,000
- Inventories, in-transit to customer, FOB Buyer (includes freight of P 2,000) 40,000
- Goods out on consignment (excludes transportation cost to consignee of P 2,000) 30,000
- Inventories in the warehouse, fabricated to the order of a specific customer (includes cost of
product design P 5,000) 50,000

Determine Harmony’s inventories.

A. P 230,000 B. P 275,000 C. P 147,000 D. P 145,000

34. Included in the cost of inventories

A. Storage costs C. Administrative overhead
B. Interest on loans obtained to buy inventories D. Fixed production overhead

35. Production overhead costs is included as conversion cost of inventories and are allocated on the basis of
Fixed production overhead Variable production overhead
A. Normal capacity Normal capacity
B. Normal capacity Actual capacity
C. Actual capacity Actual capacity
D. Actual capacity Normal capacity

36. Inventories of service providers

A. Work in progress B. Service inventory C. Contract billings D. Finished
services

37. Harvested agricultural crops or extracted mineral ores assured to be sold under a forward contract or government
guarantee are measured at
A. Fair value C. Net realizable value
B. Amortized cost D. Fair value less costs to sell

38. Commodities of broker-trader are measured at

A. Fair value C. Net realizable value
B. Amortized cost D. Fair value less costs to sell

39. Which of the following is treated as costs of inventories?

I. Normal amount of wasted materials, labor and production cost
II. Administrative overheads that contribute to bringing the inventories to their present location and condition
III. Unallocated overhead
A. I and II only B. I and III only C. II and III only D. I, II and III

40. The following items were included in Salem’s inventory account at December 31, 2016:

Merchandise out on consignment, at sales price,

(including 40% markup on cost) P 280,000
Goods purchased, in transit, shipped FOB Seller
(excluding P3,000 freight and P1,000 insurance) 180,000
Goods held on consignment by Salem 135,000
Imported inventory acquired on Dec. 15 US$ 2,000
(Exchange rates: Dec. 15 – US$50; Dec. 31 – US$48) 96,000
Recoverable purchase taxes on imported goods 12,000

At what amount should Salem present its inventory at December 31, 2016?
A. P 448,000 B. P 495,000 C. P 579,000 D. P 484,000
(200 + 180 + 3 + 1 + 100)

41. An entity may purchase inventories on deferred settlement terms. When the arrangement effectively contains a
financing element, that element
A. Is not recorded in the books
B. Is added to the cost of the inventories purchased
C. Is treated as an adjustment to cost of goods sold at the end of the period
D. Is recognized as interest expense over the period of the financing

42. “Bill and hold” sales, in which delivery is delayed at the buyer’s request but the buyer takes title and accepts
billing is recognized as revenue when
A. The goods are received by the buyer C. The goods are shipped to the buyer
B. The buyer has already paid in full D. The buyer takes title

Michael John C. Ode, CPA

FINANCIAL ACCOUNTING & REPORTING
43. “Bill and hold” sales, in which delivery is delayed at the buyer’s request but the buyer assumes title and accepts
invoicing, should be recognized when
A. The buyer makes an order.
B. The seller starts manufacturing the goods.
C. The title has been transferred but the goods are kept on the seller’s premises.
D. It is probable that the delivery will be made, payment terms have been established, and the buyer has
acknowledged the delivery instructions.

44. Revenue from lay away sales under which goods are delivered only when the buyer makes the final payment in a
series of installments is recognized when
A. Deposit is received C. Goods are delivered
B. Final payment has been received D. Goods are manufactured

45. In a sale and repurchase agreement when the seller has retained the significant risks and rewards of ownership,
even though legal title has been transferred
A. Revenue is not recognized
B. Revenue is recognized because legal title has been transferred
C. Revenue is recognized because a sale has occurred
D. Revenue is recognized because the repurchase agreement is not enforceable

46. All of the following costs should be charged against revenue in the period in which costs are incurred except for
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
Only abnormal losses are charged against revenue , i.e. expensed outright, in the period incurred; letter A was sold
and charged to cost of sales, B was expensed outright having no future economic benefit; C was also expensed
given that the shutdown was not anticipated or not normal

47. Which of the following types of interest cost incurred in connection with the purchase or manufacture of
inventory should be capitalized as a product cost?
A. Purchase discounts lost
B. Interest incurred on notes payable to vendors for routine purchases made on a repetitive basis
C. Interest on goods acquired on the installment basis
D. Interest incurred during the production of discrete projects such as ships or real estate projects
D qualifies as a borrowing cost and is capitalized.

Michael John C. Ode, CPA

FINANCIAL ACCOUNTING & REPORTING

“WHENEVER YOU FEEL LIKE QUITTING, ALWAYS THINK WHY YOU HAVE STARTED”

Michael John C. Ode, CPA