Chapter 03

Basic Concept of Inventory and Inventory Management

1) 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 the vessel of P2,000
but excluding the cost of shipment of P1,000 80,000
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 inventory because the
sale was accompanied by a purchase agreement requiring Seduco to buy back the inventory
on February 2022 500,000
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 completely processed 280,000
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
B. 2,580,000
C. 2,579,000
D. 3,079,000

2) A physical count on December 31, 2024 revealed that AAA 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 AAA.
• Goods costing P400,000 was shipped by AAA “Ex-ship” to a customer on December 31, 2024. The customer
received the goods on January 3, 2025.
• Merchandise costing P500,000 was shipped by AAA “Free alongside” to a customer on December 29, 2024.
The customer received the goods on January 6, 2025.
• Goods costing P800,000 shipped by a vendor FOB destination on December 31, 2024 was received by AAA on
January 7, 2025.
• Goods costing P700,000 was shipped by a supplier “CIF” on December 30, 2024 and received by AAA on
January 10, 2025.
What is the correct amount of inventory on December 31, 2024?
A. 4,900,000
B. 5,400,000
C. 5,500,000
D. 6,000,000

3) 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
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D. A credit to Cash of P15,617
FAR by: John Bo S. Cayetano, CPA, MBA
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 Numbers 4, 5, 6, 7, 8 and 9
Havana Brown Company reported the following net income figures without knowledge of inventory errors.

Year Reported Net Income Error in Ending Inventory

2019 500,000 Overstated 50,000
2020 520,000 Overstated 90,000
2021 540,000 Understated 110,000
2022 560,000 No error
2023 580,000 Understated 20,000
2024 600,000 Overstated 100,000
Based on the above and the result of your audit, compute the corrected profit for the following year:

4) 2019
A. 550,000
B. 450,000
C. 360,000
D. 500,000
5) 2020
A. 480,000
B. 570,000
C. 560,000
D. 430,000
6) 2021
A. 740,000
B. 650,000
C. 630,000
D. 560,000
7) 2022
A. 670,000
B. 650,000
C. 470,000
D. 450,000
8) 2023
A. 600,000
B. 580,000
C. 560,000
D. 500,000
9) 2024
A. 580,000
B. 520,000
C. 500,000
D. 480,000

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Cost Accounting by: John Bo S. Cayetano, CPA, MBA

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