CHAPTER 5 – INVENTORIES

Revised Edition

Exercise 5-1: Matching Type. Write the correct letter on the space provided.

A. Product costs E. Perpetual inventory system I. Gross method

B. Consigned goods F. FIFO J. Periodic inventory system
C. Net method G. Specific identification K. Period costs
D. Trade discount H. FOB destination L. FOB shipping point

1. Terms under which title to merchandise transfers to the purchaser when the goods
are received.
2. A method of inventory valuation that reports inventory after consideration of any
purchase discounts.
3. A discount that converts a list price to the price a purchaser is actually charged.
4. A cost flow assumption that normally approximates the actual physical flow of
the merchandise.
5. A valuation method that reports the inventory cost before the consideration of
purchase discounts.
6. Records that provide a continuous summary of inventory activity.
7. Costs that are recognized as expenses during the period in which they are
incurred.
8. The cost flow assumption on which specific costs are attributed to identify items
of inventory.
9. Inventory that is physically located at a dealer, but the title is retained by the
shipper until the merchandise is sold.
10. An inventoriable costs.

Exercise 5 – 2: IDENTIFICATION. Write the term(s) on the space provided.

1. Assets held for sale in the ordinary course of business; in the

process of production for such sale; and in the form of materials
or supplies to be consumed in the production or in rendering of
services.
2. Trading arrangement in which a seller sends goods to a reseller
who pays the seller only as and when the goods are sold.
3. Goods available for sale during the period less any unsold
goods on hand at the end of the period.

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 4. The freight cost incurred by the seller.
5. A costing method in which all manufacturing costs—variable
and fixed, direct and indirect—that are incurred in production
are included in the cost of inventory.
6. Cost flow assumption that requires computation of a new
average unit cost after each purchase.
7. Costing method that varies directly with the production
volume, and is charged to products as manufacturing takes
place.
8. The freight cost incurred by the buyer.
9. Estimated selling price less estimated cost of completion and
estimated cost necessary to make the sale.
10. Completed products which are ready for sale.

Exercise 5 – 3: MULTIPLE CHOICE. Encircle the best answer.

1. Inventories are assets

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

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

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

3. 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.

4. Inventories should be measured at

a. Cost
b. Net realizable value
c. Lower of cost and market
d. Lower of cost and net realizable value

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 5. The cost of purchase of inventories does not include
a. Purchase price
b. Import duties and taxes
c. Freight, handling and other costs directly attributable to the acquisition of goods
d. Trade discounts, rebates and other similar items

6. In periods of rising prices, the inventory valuation procedure that results in the highest net
income is
a. the lowest of cost and net realizable value method
b. the net method
c. the average cost method
d. the FIFO method

7. Which of the following would not be reported as inventory?

a. Cars acquire for resale by a car dealers
b. Stocks and bonds held for resale by a brokerage firm
c. Partially completed goods held by a manufacturing company
d. Computer acquired by a trading company for office use

8. Which of the following describes the flow of product costs through the inventory accounts of
a manufacturer?
a. Raw materials, work in process, factory overhead, finished goods
b. Raw materials, work in process, finished goods
c. Raw materials, direct labor, factory overhead, finished goods
d. Raw materials, direct labor, factory overhead

9. The use of purchase discounts lost account implies that the recorded cost of the purchased
inventory item is its
a. invoice price
b. invoice price plus the purchase discount not taken
c. invoice price less the purchase discount taken
d. invoice price less the purchase discount available

10. If goods shipped FOB destination are in transit at the end of the year, they should be
included in the inventory balance of the
a. seller
b. freight company
c. buyer
d. buyer and seller

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11. Merchandise shipped FOB shipping point on the last day of the year should ordinarily be
included in
a. the buyer’s inventory balance
b. the seller’s inventory balance
c. freight company
d. both the buyer’s and the seller’s inventory balances

12. Goods in transit at year-end purchased FOB shipping point were appropriately recorded in the
purchases account but were incorrectly excluded from the ending inventory. What effect will
this omission have on the company’s assets and liabilities at year-end?
a. No effect, no effect
b. No effect, no effect
c. Overstated, no effect
d. Understated, no effect

13. The firm using the perpetual inventory method returned defective merchandise costing
P2,000 to one of its suppliers. This transaction will include a debit to
a. Accounts receivable
b. Merchandise inventory
c. Purchase returns & allowances
d. Accounts payable

14. Cost of goods sold is equal to (simplified choices)

a. Ending inventory + net purchases - beginning inventory.
b. Beginning inventory - net purchases + ending inventory.
c. Beginning inventory + net sales - ending inventory.
d. Beginning inventory + net purchases - ending inventory.

15. Net realizable value can be defined as

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

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Exercise 5 – 4: PROBLEM SOLVING
1. Inventory Cost. Lester Company provides the following data with respect to its inventory:

Goods counted in the warehouse ₱1,000,000

Goods included in the count specifically segregated per sales contract 25,000
Goods in the receiving department, returned by customer, in good condition 12,500
Goods ordered and in the receiving department, invoice not received 100,000
Goods ordered, invoice received but goods not received. Freight paid by seller 75,000
Goods shipped today, invoice mailed, FOB shipping point 62,500
Goods shipped today, invoice mailed, FOB shipping destination 38,000
Goods currently being used for window display 50,000
Goods in the counter for sale 200,000
Goods in the receiving department, refused by us because of damage 45,000
Goods included in count, damaged and unsalable 12,500
Goods in the shipping department 67,500

Compute the correct amount of inventory.

2. Gross and Net Method. Patient Retailers purchased merchandise with a list price of
₱150,000, subject to a trade discount of 15 percent and credit terms of 2/10, n/30.

At what amount should Patient record the cost of this merchandise if the gross method is
used?

3. Shipping Terms and Inventoriable Cost. Super Sale Club reported inventory of ₱36,400 at
December 31, 2020, end of its fiscal year. You discovered that the inventory amount included
the following:

 Merchandise costing ₱3,700 ordered on December 22, 2020; shipped to the company FOB
destination and arrived on January 2, 2021.
 Merchandise costing ₱4,800 held on consignment.
 Merchandise costing ₱6,200 ordered from a supplier on December 26, 2020; shipped FOB
shipping point on December 28 but had not arrived by December 31.
 Merchandise costing ₱5,900 ordered by a customer on December 27, 2019; shipped FOB
destination on December 29, 2020 for arrival at the customer’s warehouse on January 5,
2021.

Compute the correct amount of inventory to be reported in Super Sale’s December 31, 2020
statement of financial position.

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4. Cost Flow (FIFO and Moving Average). KDS Clothing sells jeans. During October 2020, its
inventory records for one brand of designer jeans were as follows:

Beginning inventory 100 pairs @ ₱120

Oct. 6 Purchase 40 pairs @ ₱125
Oct. 10 Sale 50 pairs
Oct. 15 Purchase 70 pairs @ ₱130
Oct. 20 Sale 100 pairs
Oct. 25 Purchase 40 pairs @ ₱130

a. Determine the periodic FIFO cost of goods sold.

b. Determine the ending inventory using moving average method (carry calculations to 4
decimal places and round off to 3).

5. Cost Flow (FIFO). The Pine Shop shows the following data related to an item of inventory:

Inventory, January 1 100 units @ ₱50

Purchase, January 9 300 units @ ₱54
Purchase, January 19 90 units @ ₱60
Inventory, January 31 150 units

a. What value should be assigned to the ending inventory using FIFO?

b. What value should be assigned to cost of goods sold using FIFO?

6. Gross and Net Method. Ace Corporation specializes in the sale of printing machine. It had
the following transactions with one of its suppliers:

Purchases of machines ₱ 3,400,000

Purchase returns and allowances 100,000
Purchase discounts taken 34,000

Purchases were made throughout the year on terms 2/10, n/30. All returns and allowances
took place within 7 days of purchase and prior to any payment on account.

How much is purchase discount lost?

7. Cost Flow (Single Transaction). VRL Enterprises uses the moving average method to
determine the cost of its inventory. During August 2020, VRL recorded the following
information pertaining to its inventory:

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 Units Unit cost Total cost
Balance, August 1 20,000 ₱10 ₱ 200,000
Sale, August 15 17,500
Purchase, August 22 10,000 ₱16 ₱ 160,000

What amount of inventory should VRL report in its August 31, 2020 statement of financial
position?

8. Inventory Cost and NRV: Estimation. Commodity Hyper sells for ₱2,400; selling expenses
are ₱440; normal profit is ₱600. The cost of Commodity Hyper is ₱1,500 and the replacement
cost is ₱1,200.

Compute for the lower of cost and net realizable value of Commodity Hyper.