LAGUNA STATE POLYTECHNIC UNIVERSITY

SINILOAN, CAMPUS

Auditing and Assurance: Concept and Application 2 May 26, 2021

07: Inventories Basic Instructor: John Bo S. Cayetano

LEARNING OBJECTIVES:
1. Inclusions and exclusions to inventories
2. Inventoriable costs
3. Shipping terms
4. Inventory system – periodic versus perpetual
5. Accounting for discount – gross method versus net method
6. Inventory and related accounts errors
7. Subsequent measurement of inventory
8. Impairment loss of inventory
9. Cost formula – FIFO
10. Cost formula – Average
11. Gains and losses from purchase commitment

REVIEW NOTES:

Inventories – Are assets:

1. Held for sale in the ordinary course of business:
a. Finished goods
b. Merchandise inventory

2. In the process of production for such sale (Work-in-process):

a. Raw materials used
b. Direct labor applied
c. Manufacturing (Factory) overhead applied

3. In the form of materials or supplies to be consumed in the production process or in rendering of services.
a. Raw materials unused
b. Factory supplies

Marketing and office supplies:

Are excluded because it is not consumed in the production process. It can included as prepaid asset or other-
current asset.

When to Include or Exclude Inventory:

Rule of possession – whoever possess the goods, holds the title to the goods and should be included in their
inventory. There are three exception to the rule of possession:
a. Goods on Consignment
• Consignor (shipped, sent out) – included
• Consignee (held on, received) – excluded

b. Goods in transit
• With transfer of title – included to buyer. The following shipping terms are with transfer of title:
- FOB shipping point
- FOB seller
- FOB cost, insurance, freight (CIF)
- FOB free alongside (FAS)

• Without transfer of title – included to seller. The following shipping terms are without transfer of title:
- FOB destination
- FOB buyer
- FOB ex-ship

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c. Sale with special terms:

• With transfer of title – included to buyer. The following special terms are with transfer of title:
- Bill and Hold Sale – Sale agreement where the seller agree to bill the buyer even though the goods
are still undelivered for the convenience of the buyer.
- Special Order – Order customized for a certain buyer and cannot be sold to other buyers.
- Sale on Installment – The goods are delivered even though the price is still substantially unpaid.

• Without transfer of title – included to seller. The following special terms are without transfer of title:
- Lay Away Sale – The goods will not be delivered unless the price is substantially paid.
- Sale on Approval – The seller provides a trial period to the buyer. If not satisfied the buyer has the
right to return the goods to the seller.
- Sale with Buy Back Agreement – This is accounted using the substance of the transaction instead
of the form. This is accounted as a loan where the inventory is used as a collateral.

Inventoriable Cost – The cost of inventories shall comprise:

1. Cost of purchase:
• Purchase price
• Import duties
• Irrecoverable taxes
• Freight-in
• Handling and other cost directly attributable

2. Cost of conversion:
• Direct labor
• Factory overhead

4. Other cost incurred in bringing the inventory into its present location and condition.

Clarifications:
1. Freight
• Freight in – included
• Freight to consignees – included
• Freight out – excluded
2. Insurance
• Insurance during transportation – included
• Insurance after transportation – excluded
3. Storage
• Storage of work-in-process – included
• Storage of raw materials – excluded
• Storage of finished goods – excluded
4. Waste, spoilage and repair cost of material, labor and overhead
• Normal – included
• Abnormal – excluded
5. Interest incurred
• Non routinely produce inventory – included
• Routinely produce inventory – excluded
6. Professional fees
• Related to purchase – included
• Related to sale – excluded
7. Cost of damaged goods
• On saleable condition – included
• On unsaleable condition – excluded

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 Shipping Terms Who should pay? Who actually paid?

FOB Shipping Point Freight Prepaid Buyer Seller

FOB Shipping Point Freight Collect Buyer Buyer

FOB Destination Freight Prepaid Seller Seller

FOB Destination Freight Collect Seller Buyer

Accounting Treatment Buyer Seller

Freight-in & Additional Receivable &

FOB Shipping Point Freight Prepaid
Additional Payable Deduction to Cash
Freight-in &
FOB Shipping Point Freight Collect Ignore
Deduction to Cash
Freight-out
FOB Destination Freight Prepaid Ignore
Deduction to Cash
Deduction to Payable and Freight-out
FOB Destination Freight Collect
Deduction to Cash Deduction to Receivable

Trade and Cash Discounts – The formula in computing the cash price of inventory is as follows:

List price P XX
Trade discount ( XX)
Invoice price P XX
Cash discount ( XX)
Cash price P XX

Trade and Cash Discounts:

Trade Cash

Reason/s of Reason other than prompt payment Encourage prompt payment

Discount

Accounting Not recorded separately (Purchases/Sales Recorded using either Gross or Net
Treatment is recorded net of trade discount) method

Gross method and Net method:

Gross Method Net Method

Purchase is initially recorded at invoice Purchase is initially recorded at

Initial recording price cash price
(gross of discount) (net of discount)

When discount is Discount is deducted to the purchases No adjustment – deducted already

taken

When discounts No adjustment – discount foregone already Discount foregone is reported as

not taken included in purchases “discount lost” included as other
expense

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Inventory System
Two inventory system are offered in accounting for inventories, namely periodic inventory system and perpetual
inventory system:

Periodic Perpetual

Requires physical counting of the goods to Requires stock cards that contains the inflow and
determine quantities outflow and balance of inventory

Use for individually small value inventories Use for individually large value inventories

Cost of goods sold is computed at the end of the

Cost of goods sold is computed every time goods
period as follows:
are sold:
Inventory beg. XX
Selling price XX
Net purchases XX
Cost ratio *XX
Inventory end. (XX)
Cost of goods sold XX
Cost of goods sold XX

Transaction Entry using Periodic Entry using Perpetual

Purchase on Dr. Purchases XX Dr. Inventory XX

account Cr. Accounts payable XX Cr. Accounts payable XX

Dr. Freight-in XX Dr. Inventory XX

Payment of freight
Cr. Cash XX Cr. Cash XX

Return of Dr. Accounts payable XX Dr. Accounts payable XX

purchased Cr. Purchase return XX Cr. Inventory XX
Dr. Accounts receivable XX
Cr. Sales XX
Dr. Accounts receivable XX
Sale on account
Cr. Sales XX
Dr. Cost of goods sold XX
Cr. Inventory XX
Dr. Sales return XX Dr. Sales return XX
Return of sale
Cr. Accounts receivable XX Cr. Accounts receivable XX

Dr. Cost of goods sold XX

To record cost of Dr. Inventory XX
No entry cost of goods sold and ending
goods sold and Dr. Purchase return XX
inventory is already updated
remaining inventory Cr. Purchases XX
Cr. Freight-in XX

When perpetual inventory system is used, a physical count of the units on hand should at least be made
once a year to determine the accuracy of the accounting records.

If the physical count indicates different amount from the accounting record, the accounting record should
be adjusted and the physical count should prevail.

Inventory, per perpetual record P XX

Inventory, per physical count ( XX)
Shortage P XX

If the shortage is normal, it is closed to cost of goods sold account. On the other hand, if the shortage is
abnormal it is classified and presented as other expenses.

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Inventory Errors:
For periodic inventory system, to determine the cost of goods sold, the amount of beginning inventory, purchases
and ending inventory should be determined. Any error from such amount will result to erroneous cost of goods
sold and subsequently erroneous net income.

Relationship to Cost of Goods Sold Relationship to Net Income

Beginning Inventory Direct Inverse
Net Purchases Direct Inverse
Ending Inventory Inverse Direct
Sales No Effect Direct

For perpetual inventory system, the cost of goods sold is determined by multiplying the sales to cost ratio. Thus,
the cost of goods sold is affected by the sales account.

Relationship to Cost of Goods Sold Relationship to Net Income

Sales Direct Direct
Inventory, Per Record Direct Inverse
Inventory, Physical Count Inverse Direct

Subsequent Measurement & Impairment:

Inventories shall be subsequently measured at the lower of cost or net realizable value (NRV). NRV is the
estimated selling price less the estimated cost of completion and the estimated cost of disposal. However, for
problem solving purposes, the computation of NRV will depend on the type of inventory:

Type NRV

Estimated selling price P XX

Estimated cost to repair ( XX)
Finished Goods
Estimated cost to sell ( XX)
NRV P XX

Estimated selling price P XX

Estimated cost to complete ( XX)
Work in process
Estimated cost to sell ( XX)
NRV P XX

Raw materials Replacement cost P XX

Lower of Cost of Net Realizable Value (LCNRV):

LCNRV should be computed on an item per item basis or individually and not on a total basis. The cost of each
item is compared to the NRV and select the lower amount. Each lower amount should be totaled to obtain the
LCNRV of the whole inventory.

Impairment of Inventory:
• If the NRV is higher than cost, the measurement of inventory will remain at cost and the increase in value
is not recognized.
• If the NRV is lower than cost, the measurement of inventory should be decreased to its NRV and the
decrease in value is presented as impairment loss.

1. Ending Inventory – Cost P XX

Ending Inventory – LCNRV ( XX)
Ending – Allowance for write down P XX

2. Beginning Inventory – Cost P XX

Beginning Inventory – LCNRV ( XX)
Beginning – Allowance for write down P XX

3. Ending – Allowance for write down P XX

Beginning – Allowance for write down ( XX)
Impairment (reversal of impairment) P XX
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 Impairment of Raw Materials:
The measurement of raw material will remain at cost if the finished goods in which it will be incorporated are
expected to be sold above total cost. However, it will be written down to its NRV or Replacement cost (RC) if the
total cost is higher than the expected selling price. First, compute the total cost:

Cost of raw materials P XX

Add: Cost to complete XX
Add: Cost to sell XX
Total cost P XX

GUIDE:

Impairment of raw materials Measurement of raw materials (RM)

Total Cost > Estimated Selling Price = With impairment Total Cost > Estimated Selling Price = RM is measured at RC
Total Cost < Estimated Selling Price = Without impairment Total Cost < Estimated Selling Price = RM is measured at Cost

Allowance Method VS. Direct Write Off Method:

Allowance method and direct write off method are both acceptable by the standard since it will provide the same
amount of cost of goods sold and inventory. The only difference is that, in allowance method – impairment is
separated from cost of goods sold, while in direct write off the impairment is already included in the cost of goods
sold.

Cost of Goods Sold – With Impairment

Impairment of inventory is treated as additional to cost of goods sold while gain on reversal of impairment is
treated as deduction to the cost of goods sold. Under periodic inventory system, cost of goods sold requires the
beginning inventory, purchases and ending inventory.

• If the allowance method is used, inventory balances used in the formula in computing cost of goods sold
is measured at cost.

• If the direct write off method is used, inventory balances used in formula in computing cost of goods sold
is measured at LCNRV.

COMPUTATION – Allowance Method:

Beginning inventory – cost P XX

Net purchases XX
Ending inventory – cost ( XX)
Cost of goods sold w/out impairment P XX
Impairment loss XX
Gain on reversal of impairment ( XX)
Cost of goods sold with impairment P XX

COMPUTATION – Direct Write Off Method:

Beginning inventory – LCNRV P XX

Net purchases XX
Ending inventory – LCNRV ( XX)
Cost of goods sold with impairment P XX

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Inventory Cost Flow
There are three (3) cost flow formula that an entity can use, namely:
1. Specific identification method
2. First-in, first-out (FIFO) method
3. Weighted average method

The main issue in inventory cost flow is the:

1. Determination of cost of goods sold.
2. Determination of cost of remaining inventory.

Specific Identification
For inventories that are not ordinarily interchangeable and segregated for specific projects is the specific
identification method. If the specific identification is impracticable under the circumstances, the company may
use either FIFO or weighted average depending on the accounting policy used by the entity. In specific
identification, unit cost of goods sold and unsold are identified in the problem that’s why this cost formula is rarely
seen the accounting problems.

FIFO Method
Assumes that the goods first purchased or produced are sold first and the remaining goods came from the latest
purchased or production. FIFO can be used either periodic or perpetual system. Regardless of the inventory
system the cost of goods sold and unsold are the same. The only difference is that:

Under FIFO periodic:

You are tracing the cost of goods unsold at the end of the period from the latest purchases. Thus, the cost of
ending inventory is determined first before determining the cost of goods sold.

Under FIFO perpetual:

You are tracing the cost of the goods sold during the period from the earliest purchases. Thus, the cost of goods
sold is determined first before determining the cost of ending inventory.

Weighted Average Method

Like FIFO, weighted average method can be used in conjunction with periodic or perpetual inventory system, but
unlike FIFO, it will lead to different amount of cost of goods sold and cost of ending inventory.

Weighted Average – Periodic:

The unit cost of goods sold and the unit cost of ending inventory is the same and that is the average unit cost.
The average unit cost is only computed once and that will apply for the whole period.

Total goods available for sale in Peso

Total goods available for sale in Units = Ave. unit cost

COMPUTATION:

1. Cost of goods sold:

Units sold P XX
Times: Average unit cost XX
Cost of goods sold P XX

2. Cost of ending inventory:

Ending inventory in units P XX

Times: Average unit cost XX
Cost of ending inventory P XX

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Weighted Average – Perpetual
This method is also known as moving average. Average unit cost is also computed as the basis of unit sold but
unlike periodic system, the average unit cost is computed every time there is a purchase of inventory. Unit cost
of inventory sold is based on the latest average unit cost before each sale.

Purchase Commitment
This is a contract between the company and a certain supplier wherein the company agree to purchase fixed
quantity of goods at fixed purchase price (a.k.a. contract price).

The objective of the company in entering the purchase commitment is that there should be available supplies at
a certain date the goods are needed and to locked-in the prices.

Loss in Entering Purchase Commitment

If the market price falls below the contract price, the company will pay more, because instead of purchasing the
goods at the dropped market price the company should pay the contract price. Loss and liability from entering
the purchase commitment is recognized.

Gain in Entering Purchase Commitment

If the market price raised above the contract price, the company will pay less, because instead of paying the goods
at inflated price, the company will only pay the contract price. Gain will be recognized but only up to the extent of
loss previously recognized.

Timing of Loss and Gain

If the year of entering the purchase commitment is in the same year of delivery of goods, loss is recognized only
once. But if the delivery of goods is in the year subsequent to the year of entering the contract, loss or gain will
be recognize in two periods, that will be:

1. Year-end of the year the company entered in the purchase commitment.

2. Date of the delivery.

COMPUTATION:

1. Loss on purchase commitment @ Year-end

Market value at year end P XX

Total contract price ( XX)
(Loss) on purchase commitment (P XX)

2. Loss on purchase commitment @ Delivery date

Market value at delivery date P XX

Market value at year end ( XX)
(Loss) on purchase commitment (P XX)

3. Purchases and accounts payable

Contract price P XX

GUIDE:

• Decrease in market value = Loss

• Increase in market value = Gain
• Gain is limited to the previously recorded loss

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DISCUSSION:
1. Inventories are assets defined by all of the following, except
A. Held for sale in the ordinary course of business.
B. In the process of production for such sale.
C. In the form of materials or supplies to be consumed in the production process or the rending or
services.
D. Used in the production or supply of goods and services for administrative purpose.

2. Which is incorrect concerning the maritime term FAS (free alongside)?

A. The seller must bear all expenses and risk in delivering the goods to the dock next to the vessel
on which they are to be shipped.
B. The buyer bears the cost of loading and cost if shipment.
C. Title passes to the buyer when the carrier takes possession of the goods.
D. Title passes upon receipt of the goods by the buyer.

3. A physical count on December 31, 2021 revealed that Valentina Company had inventory with a cost
of P4,400,000. The following items were excluded from this amount:

• Merchandise of P600,000 is held on consignment by Valentina.

• Goods costing P400,000 was shipped by Valentina “Ex-ship” to a customer on December 31,
2024. The customer received the goods on January 3, 2022.
• Merchandise costing P500,000 was shipped by Valentina “Free alongside” to a customer on
December 29, 2024. The customer received the goods on January 6, 2022.
• Goods costing P800,000 shipped by a vendor FOB destination on December 31, 2021 was
received by Valentina on January 7, 2022.
• Goods costing P700,000 was shipped by a supplier “CIF” on December 30, 2021 and received by
Valentina on January 10, 2022.

The true amount of inventory on December 31, 2021 is

A 4,900,000 C. 5,500,000
B. 5,400,000 D. 6,000,000

4. The following are costs excluded from the cost of inventories, except
A. Abnormal amounts of wasted materials, labor or other production costs
B. Storage costs, unless those costs are necessary in the production process before a further
production stage
C. Administrative overheads that do not contribute to bringing inventories to their present location
and condition
D. Import duties

5. Presented below is Seduco Company’s December 31, 2021 balance sheet:

Goods out on consignment at another company’s store 800,000

Goods purchased in transit, Free Alongside, including delivery cost alongside 80,000
the vessel of P2,000 but excluding the cost of shipment of P1,000
Goods purchased FOB shipping point that are in transit at December 31 120,000
Goods purchased FOB destination that are in transit at December 31 200,000
Goods sold and delivered on December 20. The goods were included in the 500,000
inventory because the sale was accompanied by a purchase agreement
requiring Seduco to buy back the inventory on February 2022
Goods sold FOB shipping point that are in transit December 31 120,000
Freight charges on goods purchased, FOB shipping point 80,000
Factory labor costs incurred on goods still unsold 50,000
Interest cost incurred for inventories that are routinely manufactured 40,000
Cost incurred to advertise goods held for resale 20,000
Materials on hand not yet placed into production 350,000
Office supplies 10,000
Raw materials which the company has started production, but which are not 280,000
completely processed
Factory supplies 20,000
Goods held on consignment from another company 450,000
Costs identified with units completed but not yet sold 260,000
Goods sold FOB destination that are in transit at December 31 40,000

How much of these items would typically be reported as inventory in the financial statements?
A 2,079,000 C. 2,579,000
B. 2,580,000 D. 3,079,000

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6. FOB destination point means that
A. The freight charges are actually to be paid by the seller
B. The freight charges are actually to be paid by the buyer
C. The ownership of goods is transferred upon receipt of the goods by the buyer and the seller is the
owner of the goods while in transit.
D. The ownership of goods is transferred upon receipt of the goods by the seller and the buyer is the
owner of the goods while in transit.

7. The seller actually paid the freight charges but is not legally responsible for the same.
A. FOB destination, freight prepaid
B. FOB destination, freight collect
C. FOB shipping point, freight prepaid
D. FOB shipping point, freight collect

8. The buyer paid the shipper freight charges and later asked for reimbursement from the seller. The term
agreed must have been
A. FOB destination point freight prepaid
B. FOB destination point freight collect
C. FOB shipping point freight prepaid
D. FOB shipping point freight collect

9. The entry of the buyer to record the settlement of a purchase on account amounting to P100,000 and
freight of P10,000 on a purchase transaction with terms of FOB destination, freight prepaid is
A. Dr. Freight-in P110,000
Cr. Cash P110,000
B. Dr. Accounts payable P100,000
Cr. Cash P100,000
C. Dr. Accounts payable P 100,000
Cr. Cash P 100,000
D. Dr. Freight-out P 10,000
Cr. Accounts receivable P 10,000

10. The entry of the buyer to record the settlement of a purchase on account amounting to P100,000 and
freight of P10,000 on a purchase transaction with terms of FOB shipping point, freight collect is
A. Dr. Freight-in P110,000
Cr. Cash P110,000
B. Dr. Accounts payable P100,000
Cr. Cash P100,000
C. Dr. Accounts payable P 90,000
Cr. Cash P 90,000
D. Dr. Freight-out P 10,000
Cr. Accounts receivable P 10,000

11. Under the gross method of recording purchases,

A. Cash discounts are initially ignored and are recorded only when taken.
B. Cash discounts are deducted from the cost of inventory on initial recognition.
C. Cash discounts lost are debited to “purchase discount lost” account
D. A and C

12. The use of purchase discounts account implies that the recorded cost of a purchased inventory item
is its
A. Invoice price
B. Invoice price plus any purchase discount lost
C. Invoice price less the purchase discount taken
D. Invoice price less the purchase discount allowable whether taken or not

13. The use of a discount lost account implies that the recorded cost of an inventory is
A. Invoice price
B. Invoice price plus the purchase discount lost
C. Invoice price less the purchase discount taken
D. Invoice price less the purchase discount allowable whether taken or not

Page 10 of 17
14. On December 3, Francis Company purchased inventory listed at P8,600 from Lyn Corporation. Terms
of the purchase were 3/10, n/20.

Francis Company also purchased inventory from Duck Company on December 10 for a list price of
P7,500. Terms of the purchase were 3/10, n/30. On December 16, Francis paid both suppliers for
these purchases.

If Francis uses the net method of recording purchases, the journal entry to record the payment on
December 16 will include
A. A debit to Accounts payable of P15,875
B. A debit to Purchase Discounts Lost of P258
C. A credit to Purchase Discounts of P258
D. A credit to Cash of P15,617

15. An entry debiting inventory and crediting cost of goods sold would be made when
A. Merchandise is sold and the perpetual inventory is used.
B. Merchandise is sold and the periodic inventory method is used.
C. Merchandise is returned and the periodic inventory method is used.
D. Merchandise is returned and the perpetual inventory method is used.

16. When a company uses the periodic inventory system in accounting for its merchandise inventory,
which of the following is true?
A. Purchases are recorded in the cost of goods sold account.
B. The inventory account is updated after each sale.
C. Cost of goods sold is computed at the end of the accounting periods rather than at each sale.
D. The inventory account is updated throughout the year as purchases are made.

17. Under this inventory system, a physical count is necessary before profit is determined
A. Perpetual
B. Periodic
C. FIFO
D. Both perpetual and periodic

18. Which of the following statements is incorrect about perpetual inventory system?
A. Inventory account is debited upon purchase
B. One of the entries made to make up return of goods sold on account is Dr. inventory and Cr. cost
of goods sold.
C. Sales allowance granted to customer on account would require an entry debiting sales returns
and allowance and crediting accounts receivable.
D. A physical inventory is made at year-end in order to set up the cost of goods sold.

19. In a perpetual inventory system, recording a sale on account involves debiting which of the following
accounts?
A. Only accounts receivable
B. Accounts receivable and inventory
C. Accounts receivable and cost of goods sold
D. Accounts receivable, cost of goods sold and inventory

20. When a company uses the perpetual inventory system in accounting for its merchandise inventory,
which of the following is false?
A. Total cost of goods sold is computed by deducting ending inventory from total goods available
for sale.
B. The inventory account is updated after each sale.
C. One of the entries to record return of goods is debit inventory and credit cost of goods sold.
D. None of the above.

21. Which of the following will result if the current year’s ending inventory amount is understated?
A. Cost of goods sold will be understated
B. Gross profit will be understated
C. Net income will be overstated
D. Retained earnings will be overstated

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22. A company discovered a P20,000 overstatement of its 2023 ending inventory after the financial
statements for 2023 were prepared. The effect of this error on the 2023 financial statement was:
A. Current assets were overstated and income was understated
B. Current assets were understated and income was overstated
C. Current assets were overstated and income was overstated
D. Current assets were understated and income was understated

23. The failure to record a purchase of merchandise on account even though the goods are properly
included in the physical inventory results in:
A. An overstatement of assets and net income
B. An understatement of assets and net income
C. An understatement of cost of goods sold and liabilities and an overstatement of assets
D. An understatement of liabilities and an overstatement of owner’s equity

24. Elrond Company began operations in 2021. During the first two years of operations, Elrond made
undiscovered errors in taking its year-end inventories that overstated 2021 ending inventory by
P50,000 and overstated 2022 ending inventory by P40,000. The combined effect of these errors on
reported income is

2021 2022 2023

A. P50,000 over P90,000 over P40,000 under
B. P50,000 over P40,000 over not affected
C. P50,000 under P90,000 under not affected
D. P50,000 over P10,000 under P40,000 under

25. Inventories are required to be stated at the

A. Lower of cost and net realizable value
B. Lower of cost and fair value
C. Lower cost and recoverable value
D. Lower of FIFO cost and net realizable value

26. Net realizable value (NRV) is computed as

A. Estimated selling price less estimated cost to sell
B. Estimated selling price less estimated cost to complete
C. Estimated selling price less estimated cost to complete and estimated cost to sell
D. Estimated selling price less estimated cost to complete, estimated cost to sell and normal profit
margin

27. Inventories are usually written down to net realizable value

A. By classification
B. By total
C. By segment
D. Item by item

28. Reversals of inventory write-downs

A. Are not prohibited under the PFRSs.
B. Should not exceed the amount of write-downs previously recognized.
C. Are always recognized in profit or loss.
D. All of these.

29. Squat Company uses the lower of cost or net realizable value inventory. Data regarding the items in
work-in-process inventory are presented below:

Product A Product B
Historical cost 24,000 18,800
Selling price 36,000 21,800
Estimated cost to complete 4,800 3,500
Estimated cost to sell 2,000 1,900
Replacement cost 20,800 16,800
Normal profit margin as a percentage of selling price 25% 25%

What amount should be reported as ending inventory using the LCNRV individual approach?
A 45,600 C. 42,800
B. 40,400 D. 48,000

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30. Net realizable value of inventories may fall below cost for a number of reason/s including:

I. Product obsolescence
II. Physical deterioration of inventories
III. An increase in the expected replacement costs
of the inventory
IV. An increase in the estimated cost of completion

A. I, II and IV only
B. II, III and IV only
C. I, III and IV only
D. I and II only

Numbers 31-32
At year-end, Eagles Company reported ending inventory at P15,000,000 and the allowance for inventory
writedown before any adjustment at P800,000.

Product 1 Product 2 Product 3 Product 4

Cost 4,000,000 5,000,000 3,500,000 2,500,000
Sales price 6,000,000 6,500,000 6,250,000 5,000,000
NRV 2,750,000 5,500,000 4,750,000 1,750,000
Normal profit 1,250,000 750,000 1,500,000 1,500,000
Replacement Cost 4,500,000 6,000,000 5,000,000 3,000,000

31. What is the measurement of inventory in the statement of financial position?

A 15,000,000 C. 14,750,000
B. 13,000,000 D. 18,750,000

32. What amount of loss on inventory writedown should be included in cost of goods sold?
A 2,000,000 C. 1,200,000
B. 2,800,000 D. 1,250,000

33. Jenny Company uses a periodic inventory accounting system and values its inventory by using the
lower of cost or net realizable value method. The allowance method is used in applying the lower of
cost or net realizable value.

The company adjusts and closes its book annually on December 31. Below are the cost and market
values of the company’s year-end inventories for a three-year period:

Cost NRV
December 31, 2021 700,000 700,000
December 31, 2022 560,000 460,000
December 31, 2023 640,000 580,000

Which of the following journal entries would be correct as of December 31, 2023, to apply the lower of
cost or NRV?
A. Dr. Inventory 580,000
Cr. Income summary 580,000
B. Dr. Impairment loss 60,000
Cr. Allowance of inventory write down 60,000
C. Dr. Allowance of inventory write down 40,000
Cr. Gain on reversal of impairment 40,000
D. Dr. Cost of Goods Sold 60,000
Cr. Allowance of inventory write down 60,000

34. Raw materials and manufacturing supplies held for use in the production of inventories are
A. Required under PAS 2 – Inventories, to be separately presented from the other inventories.
B. Not disclosed since they are normally immaterial.
C. Not written down below cost if the finished products in which they will be incorporated are
expected to be sold at or above cost.
D. All of these.

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Numbers 35-36

The following figures relate to inventory of materials held by Axew Corporation at December 31:

Item X Item Y

Cost 200,000 400,000

Replacement cost 180,000 370,000

Estimated cost to convert materials into finished goods 100,000 200,000

Estimated selling price of finished goods 320,000 610,000

Estimated cost to sell 10,000 15,000

35. What is the measurement of inventory in the statement of financial position?

Item X Item Y

A. 200,000 400,000
B. 180,000 370,000
C. 200,000 370,000
D. 210,000 395,000

36. Axew Corporation should recognize loss on write-down of inventory of materials of

A 50,000 C. 5,000
B. 30,000 D. 0

Numbers 37-39

On December 31, 2020, Roseland Company experienced a decline in the value of inventory resulting in
writedown from P4,000,000 cost to P3,500,000 net realizable value. The entity used the allowance method
to record the necessary adjustment. In 2021, market conditions have improved dramatically.

On December 31, 2021, the inventory had a cost of P5,000,000 and net realizable value of P4,800,000.
The entity made purchases of P20,000,000 in 2021?

37. What amount should be recognized as gain on reversal of inventory writedown in 2021?
A 200,000 C. 500,000
B. 300,000 D. 0

38. What amount should be reported as cost of goods sold in 2021?

A 19,000,000 C. 18,700,000
B. 19,300,000 D. 24,000,000

39. If the company is using direct write off method, what amount should be reported as cost of goods
sold in 2021?
A 19,000,000 C. 18,700,000
B. 19,300,000 D. 24,000,000

40. The proper cost method for inventories that are not ordinarily interchangeable and segregated for
specific projects is the
A. Specific identification C. Last in, last out
B. First in, first out D. Weighted average

41. If the specific identification of costing inventory is impracticable under the circumstances, the cost of
inventories is assigned by using set of cost flow assumptions?
A. First in, first out or weighted average
B. Last in, last out or weighted average
C. First in, first out or last in last out
D. Last in, last out or last in, first out

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42. During period of rising prices, when the FIFO inventory cost flow method is used, a perpetual inventory
system would
A. not be permitted
B. result in the same ending inventory as a periodic inventory system
C. result in a higher ending inventory than a periodic inventory system
D. result in a lower ending inventory than a periodic inventory system.

43. The FIFO inventory cost flow method may be applied to which of the following inventory systems?
A. Periodic inventory system
B. Perpetual inventory system
C. Either periodic or perpetual
D. Neither periodic or perpetual

Numbers 44-45

Seahawks used the perpetual system. The following information has been extracted from the records
about one product:
Date Transaction Units Unit cost Total cost
January 1 Beginning bal. 8,000 70 560,000
6 Purchase 3,000 75 225,000
February 5 Sale 10,000
March 5 Purchase 11,000 80 880,000
March 8 Purchase return 800 80 64,000
April 10 Sale 7,000
April 30 Sale return 300

44. If the FIFO cost flow method is used, what is the cost of the inventory on April 30?
A 360,000 C. 337,500
B. 315,000 D. 400,000

45. If the weighted average cost flow method is used, what is the cost of the inventory on April 30?
A 337,500 C. 353,430
B. 339,840 D. 348,750

46. The pricing of issues from inventory must be deferred until the end of the accounting period under
which of the following method of inventory valuation?
A. Moving average C. Specific identification
B. Weighted average D. FIFO

47. During a move to a new location, the inventory records of 98 Degrees were misplaced. The
bookkeeper has been able to gather some data for the July purchases:

Units Unit cost Total cost

July 5 10,000 65 650,000
10 12,000 70 840,000
15 15,000 60 900,000
25 14,000 55 770,000

On July 31, 17,000 units were on hand. The sales for July amounted to P6,000,000 or 60,000 units at
P100 per unit.

The entity always used a perpetual FIFO inventory costing system. Gross profit on sales for July was
P2,400,000.

What was the cost of inventory on July 1?

A 1,390,000 C. 950,000
B. 2,400,000 D. 760,000

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48. White Farm Supply’s records for the first 3 months of its existence show purchases of Commodity A
as follows:

Number of units Cost

August 5,500 280,500
September 8,000 416,000
October 5,100 270,300
Total 18,600 966,800

The inventory of Commodity A at the end of October using FIFO is valued at P363,900.

Assuming that none of commodity A was sold during August and September, what value would be
shown at the end of October if average cost was assumed?
A 351,900 C. 358,662
B. 353,300 D. 365,700

49. The following information was available from the inventory records of Bago Company for January:

Units Unit cost

Balance at January 1 30,000 9.77

Purchases:
January 6 20,000 10.30
January 26 27,000 10.71

Sales:
January 7 25,000
January 31 40,000

What amount of inventory should be reported under the moving average method? (use two decimal
unit cost)
A 126,060 C. 123,120
B. 122,880 D. 124,370

50. Losses arising from firm and non-cancellable purchase commitments of inventory items, if material
should be
A. Recognized in the accounts by debiting loss on purchase commitments and crediting estimated
liability for loss on purchase commitments.
B. Charged to retained earnings
C. Disclosed in the notes
D. Ignored

51. During 2020, Hella signed a non-cancellable contract to purchase 2,000 pounds of raw materials at
P60 per pound in 2021.

On December 31, 2020, the market price of the raw material is P55 per pound, and the selling price
of the finished product is expected to decline accordingly.

The financial statements prepared for 2020 should report

A. A note or memorandum describing the expected loss on the purchase commitment.
B. An appropriation of accumulated profits for P10,000.
C. A loss of P10,000 in the statement of comprehensive income
D. Nothing regarding this matter

52. At the end of the fiscal year, Olympus Airlines has an outstanding non-cancellable purchase
commitment for the purchase of 2 million gallons of jet fuel at a price of P4.50 per gallon for delivery
during the coming summer.

If the market price of jet fuel at the end of the year is P4.00, how would this situation be reflected in
the annual financial statements?
A. Report gain of P1,000,000 in the income statement.
B. Record loss and estimated liability of P1,000,000.
C. Record purchases and accounts payable amounting to P8,000,000.
D. Disclose only the existence of the purchase commitment in the notes to FS.

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53. The credit balance that arises when a loss on purchase commitment is recognized should be
A. Presented as a current liability
B. Subtracted from ending inventory
C. Presented as an appropriate of retained earnings
D. Presented in the income statement

Numbers 54-56

During 2021, Tartarus Company signed a noncancellable contract to purchase 500 sacks of rice at P900
per sack with delivery to be made in 2022.

On December 31, 2021, the price of rice had fallen to P850 per sack. On May 9, 2022, Tartarus Company
accepts delivery of rice when the price is P880 per sack.

54. In December 31, 2021 income statement, what amount of loss on purchase commitment should be
recognized?
A 15,000 C. 25,000
B. 10,000 D. 0

55. What amount of recovery of loss on purchase commitment should Tartarus recognize on May 9, 2022?
A 10,000 C. 25,000
B. 15,000 D. 0

56. What amount of purchases should be recorded on May 9, 2022?

A 450,000 C. 425,000
B. 440,000 D. 480,000

57. Under PAS 2, they are “individuals who buy or sell commodities for others or on their own account.”
A. Commissioner
B. Broker-traders
C. Commoditers
D. Find seekers

58. Under PAS 2, commodities of broker-traders are measured at

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

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