Inventory

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1. ‘In which of the following shall PAS 2 Inventories be applied?
a. Buildings constructed and to besold to third parties in the ordinary course of business under
specifically negotiated construction contracts.
b. Shares of stocks held for trading
c. Animals and plants that are managed and to be sold in the ordinary course of business
d. Inventory of a service provider consisting only of direct labor and overhead

2. PAS 2 Inventories shall not be applied to which of the following?

a. minor tools and spare parts
b. buildings being sold by a “buy and sell” real estate entity
c. obsolete inventory
d. assets held for use in the production or supply of goods or services

3. The measurement provisions of PAS 2 Inventories do not apply to which of the following?
I. Inventories of producers of agricultural, forest, and mineral products to the extent that they are
measured at net realizable value in accordance with well-established practices in those
industries.
II. Inventories of commodity broker-traders measured at fair value less costs to sell.
III. Inventories of a retail store.
IV. Inventories of a service concessionaire.
a. I, II b. I, II, III c. III, IV d. I, II, III, IV

4. PAS 2 Inventories may not be applied to which of the following,?

a. inventories consisting of agricultural, mineral and forest products
b. minor spare parts, tools and lubricants
c. commodities of broker traders measured at fair value less costs to sell
d. unfinished products undergoing processing

5. Inventories of commodity broker-traders are measured at

a. fair value c. net realizable value
b. cost d. fair value less costs to sell

Recognition
6. Which of the following is correct regarding the recognition of inventories?
a. Inventories are recognized only when legal title is obtained
b. Inventories are recognized only when they meet the definition of inventory and they
qualify for recognition as assets.
c. Inventories include only those that are readily available for sale in the ordinary course of
business.
d. Inventories are recognized only by entities engaged in trading or manufacturing
operations.
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7. Inventories are assets (choose the incorrect one)

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a. Held for sale in the ordinary course of business.

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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 goods or services.
(Adapted)

8. Ownership over inventories is normally transferred to the buyer

a. when legal title to the inventories is transferred
b. when the purchase price is fully paid
c. upon shipment of the goods by the seller to the buyer
d. upon filling-up the sales order

9. Which of the following is incorrect regarding the accounting for inventories?

a. Legal title over inventories normally passes when possession over of the goods is
transferred.
b. Transfer of ownership over inventories may precede, coincide with, or follow the transfer
of physical possession of the goods.
c. Ownership over inventories may be transferred to the buyer even when legal title to the
goods is retained by the seller.
d. Transfer of ownership over inventories may coincide with or follow but never precedes the
transfer of physical possession of the goods.

10. When accounting for inventories,

a. the form of the sales contract is more important than its substance
b. the agreement between the seller and the buyer shall be considered in determining the
timing of transfer of ownership over the goods
c. the sales contract is ignored since ownership over inventories are transferred only upon
receipt of delivery by the buyer
d. a journal entry is made only upon receipt of the delivery by the purchaser

11. Ownership over inventories is normally transferred from the seller to the buyer
I. When the significant risks and rewards of ownership are transferred to the buyer
II. The seller retains continuing managerial involvement to the degree usually associated with
neither ownership nor effective control over the goods sold
III. The seller retains neither continuing managerial involvement to the degree usually associated
with ownership nor effective control over the goods sold
a. I, II b. II, III c. I, III d. I, II, III

Goods in transit
12. In accounting for inventories, which of the following statements is incorrect?
a. In daily transactions, strict adherence to the passing of legal title is not practicable.
b. Regardless of location, an entity shall report in its financial statements all inventories over
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which it holds legal title to or has gained control of the related economic benefits.
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c. On inventory cut-off, an entity shall include in its inventory only those goods which are on
hand.
d. Goods that are in transit as of inventory cut-off date may be included as part of inventory.

13. Identify the incorrect statement regarding goods in transit.

a. Depending on the terms of sales contract, goods in transit may form part of the inventories
of the buyer or the seller or, in rare cases, both the buyer and the seller.
b. Accounting procedures for goods in transit are normally performed only on inventory
cut-off.
c. Goods in transit form part of the inventory of the entity who holds legal title to the goods.
d. Accounting for goods in transit are normally performed by trading or manufacturing
entities but not by service oriented entities.

14. Who owns the goods in transit under FOB shipping point?
a. buyer b. seller c. either a or b d. none

15. Who owns the goods in transit under FOB destination?

a. buyer b. seller c. either a or b d. none

16. Under this shipping cost agreement, freight is not yet paid upon shipment. The carrier collects
shipping costs from the buyer upon delivery.
a. freight collect c. FOB shipping point
b. freight prepaid d. FOB destination

17. Under this shipping cost agreement, freight is paid in advance by the seller before shipment.
a. freight collect c. FOB shipping point
b. freight prepaid d. FOB destination

18. Under this shipping cost agreement, the buyer initially pays the freight of the goods delivered.
a. freight collect c. FOB shipping point
b. freight prepaid d. FOB destination

19. Under this agreement, the seller should pay for the freight of goods delivered.
a. freight collect c. FOB shipping point
b. freight prepaid d. FOB destination

20. Under a freight collect shipping cost agreement, who is supposed to pay for the freight?
a. buyer b. seller c. either a or b d. none

21. Who should properly shoulder the freight of the goods shipped?
a. the entity who owns the goods c. the seller
b. the buyer d. the shipper
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22. If the term of a sale or purchase transaction is FOB Shipping Point, ownership is transferred
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a. upon shipment of the goods
b. after production is finished
c. when the buyer receives the goods
d. either a or c

23. If the term of a purchase transaction is FOB Shipping Point, liability is recognized
a. upon shipment of the goods
b. after production is finished
c. upon receipt of buyer of the goods shipped
d. either a or c

24. If the terms of a purchase or sale transaction is FOB Destination, ownership is transferred
a. upon the shipment of goods
b. after production is finished
c. when the buyer receives the goods
d. either a or c

25. If the term of a purchase transaction is FOB Destination, liability is recognized

a. upon the shipment of goods
b. after production is finished
c. upon receipt of buyer of the goods shipped
d. either a or c

26. If the term of a purchase transaction is FOB Shipping Point, Freight collect, the party who
finally shoulders the freight is the
a. buyer b. seller c. shipping company d. LBC

27. If the term of a purchase transaction is FOB Destination, Freight collect, the party who finally
shoulders the freight is the
a. buyer b. seller c. Air21 d. accountant

28. If the term of a purchase transaction is FOB Shipping Point, Freight prepaid, the party who
finally shoulders the freight is the
a. buyer b. seller c. FedEx d. auditor

29. If the term of a purchase transaction is FOB Shipping Point, Freight prepaid, the party who
initially shouldered the freight is the
a. buyer b. seller c. shipping company d. JRS

30. The entry to record the P10,000 freight paid by the buyer on a purchase transaction with terms
of FOB Shipping Point, Freight Collect is
a. Freight-in 10,000 c. Freight-in 10,000
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Cash 10,000 Accounts receivable 10,000

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b. Freight-out 10,000 d. Freight-in 10,000

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Accounts receivable 10,000 Accounts payable 10,000

31. The entry to record the settlement of P10,000 freight on a purchase transaction with terms of
FOB Shipping Point, Freight Prepaid is
a. Accounts payable 10,000 c. Freight-in 10,000
Cash 10,000 Accounts receivable 10,000
b. Freight-in 10,000 d. Answer not given
Accounts payable 10,000

32. The entry to record the P10,000 freight paid by the buyer on a purchase transaction with terms
of FOB Destination, Freight Collect is
a. Freight-in 10,000 c. Freight-in 10,000
Cash 10,000 Accounts receivable 10,000
b. Freight-out 10,000 d. Accounts payable 10,000
Cash 10,000 Cash 10,000

33. The entry to record the settlement of P10,000 freight on a purchase transaction with terms of
FOB Destination, Freight Prepaid is
a. Freight-in 10,000 c. Freight-in 10,000
Cash 10,000 Accounts receivable10,000
b. Freight-out 10,000 d. None
Accounts payable 10,000

34. The entry to record the payment of P10,000 freight on a purchase transaction with terms of
FOB Destination, Freight Collect is
a. Freight-in 10,000 c. Freight-in 10,000
Cash 10,000 Accounts payable 10,000
b. Freight-out 10,000 d. Answer not given
Accounts payable 10,000

35. On January 1, an entity ordered goods under a purchase transaction with terms of FOB
Destination, Freight Collect. The goods were received on January 3 and freight of P10,000
was paid to the shipper. What is the entry on January 5, when the entity settles the purchase?
a. Freight-in 10,000 c. Accounts payable 90,000
Accounts payable 100,000 Cash 90,000
Cash 110,000
b. Accounts payable 100,000 d. Freight-out 10,000
Cash 100,000 Accounts receivable 10,000

36. The entry 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
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a. Freight-in 10,000 c. Accounts payable 90,000

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Accounts payable 100,000 Cash 90,000

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Cash 110,000
b. Accounts payable 100,000 d. Freight-out10,000
Cash 100,000 Accounts receivable 10,000

37. The entry 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
Prepaid is
a. Freight-in 10,000 c. Accounts payable 90,000
Accounts payable 100,000 Cash 90,000
Cash 110,000 d. Freight-out 10,000
b. Accounts payable 110,000 Accounts receivable10,000
Cash 110,000

38. On January 1, an entity ordered goods under a purchase transaction with terms of FOB
Shipping point, Freight Collect. The goods were received on January 3 and freight of P10,000
was paid to the shipper. What is the entry on January 5, when the entity settles the purchase?
a. Freight-in 10,000 c. Accounts payable 100,000
Accounts payable 90,000 Cash 100,000
Cash 100,000 d. Accounts payable 90,000
b. Accounts payable 110,000 Cash 90,000
Cash 110,000

39. When the buyer pays the freight on a sales transaction with terms of FOB Destination, Freight
Collect, the entry to record the payment for the freight is
a. Freight-out xx c. Accounts receivable xx
Cash xx Cash xx
b. Freight-in xx d. Accounts payable xx
Cash xx Cash xx

40. When the buyer settles the freight on a sales transaction with terms of FOB Destination,
Freight Prepaid, the entry to record the payment for the freight is
a. Freight-out xx c. Accounts payable xx
Cash xx Cash xx
b. Freight-in xx d. None of the choices
Cash xx

41. No special accounting treatment is necessary if the terms of purchase is

a. FOB Destination, Freight Collect
b. FOB Shipping point, Freight Prepaid
c. FOB Destination, Freight Unpaid
d. FOB Shipping point, Freight Collect
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Consigned goods
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42. Which statement is true?

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a. Until goods are sold by the consignee, the consignor includes the goods in his/her
inventory at cost, less handling and shipping costs incurred in the delivery and consignee.
b. When goods are sold on an installment plan, the seller retains title and continues to
include them on his/her balance sheet until full payment has been received.
c. Title to goods cannot be transferred to the buyer before shipment occurs.
d. In accounting for inventory, economic substance should take precedence over legal form
(Adapted)

43. Which of the following is incorrect regarding the accounting for consigned goods?
a. Consigned goods are properly included in the inventory of the consignor and not the
consignee.
b. Freight incurred by the consignor in delivering the consigned goods to the consignee
forms part of the cost of inventories
c. The consignee records consigned goods received from the consignor through journal
entries.
d. The consignor should not recognize revenue until the consigned goods are sold by the
consignee to third parties.

44. Costs of delivering consigned goods to the consignee should be

a. expensed immediately
b. capitalized and included in the inventory of the consignee
c. capitalized and included in the inventory of the consignor
d. recorded be the consignor through memo entry

Inventory financing and other terms

45. All of the following may properly be included in inventory, except
a. goods sold by an entity under a sale with repurchase agreement
b. goods pledged by an entity as security for a loan obtained
c. goods borrowed by an entity to be replaced with similar goods in the future
d. goods transferred by an entity to another entity to be replaced with similar goods in the
future

46. Which of the following may properly be included in inventory?

a. goods sold by an entity under a sale with right of return and future returns can be reliably
estimated
b. goods sold by an entity on installment basis and possession over the goods is transferred to
the buyer but legal title is retained by the entity to protect collectibility of the amount due
c. goods sold by an entity under a sale that qualifies as “bill and hold” sale
d. goods sold by an entity under a sale that qualifies as “lay away sale” and amount due from
the buyer is not yet collected in full
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47. It is a type of sale in which the buyer takes title and accepts billing but delivery of the goods is
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delayed at the buyer’s request.

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a. buy and hold sale c. cash and carry
b. lay away sale d. bill and hold

48. It is a type of sale in which goods are delivered only when the buyer makes the final payment
in a series of installments.
a. installment sale c. cash on delivery
b. lay away sale d. run away sale

49. The goods sold on a “bill and hold” sale is included in the inventory of the
a. buyer b. seller c. either a or b d. both a and b

50. Prior to delivery, the goods sold on a “lay away” sale is included in the inventory of the
a. buyer b. seller c. either a or b d. both a and b

51. The goods sold under a bill and hold sale are excluded from the seller’s inventory and
included in the buyer’s inventory at the time of sale when title passes to the buyer and he
accepts billing, provided which of the following is met
a. Delivery is probable
b. Goods sold are on hand, identified, and ready for delivery to the buyer at the time of sale
c. The buyer specifically acknowledges the deferred delivery instructions
d. The usual payment terms apply
e. All of the choices

52. The goods sold under a lay away sale is included in the seller’s inventory until delivery is
made to the buyer except when
a. the term of the sale is freight prepaid
b. the title to the goods is retained by the seller solely to protect collectibility of the amount
due
c. the purchase price is substantially paid
d. the goods are lost without the fault of the seller

Financial statement presentation

53. The line-item “inventories” presented on the face of the statement of financial position of a
manufacturing entity is composed of all of the following, except
a. raw materials and manufacturing supplies c. finished goods
b. work-in-process d. office supplies

54. Inventories are classified on the statement of financial position as

a. current assets c. financial instruments
b. noncurrent assets d. intangible assets

55. Which of the following is not included as inventory?

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a. raw materials and components c. work in-process

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b. goods in-transit sold FOB destination d. long-term major spare parts

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56. In a manufacturing company, inventory that is ready for sale is called

a. raw materials c. finished goods
b. work in process d. store supplies

Inventory systems
57. The major objective of inventory accounting is
a. valuation of assets in the statement of financial position
b. proper matching of costs with related revenues
c. proper selection of appropriate cost flow formula
d. proper determination of periodic income and valuation of assets

58. Mr. Eugene Krab’s “buy and sell” business involves a large quantity of low-valued inventory.
Because of the fast turnover of inventory, it is often impracticable to perform periodic
physical count of inventory. In fact, the cost of inventory is often approximated in Krab’s
quarterly reports. Which of the following inventory systems is most suitable for Krab’s
business?
a. perpetual system c. plankton system
b. periodic system d. a or b

59. SpongebobSquarepants Co. utilizes an automated accounting system in which Spongebob

inputs the serial number of each item of inventory in the system. This enables Spongebob to
track the movement of each inventory. Which inventory system is most likely to be used by
Spongebob?
a. perpetual system d. spatula system
b. periodic system e. a or b
c. patty system

60. The “inventory” account is updated for each purchase and sale of inventory under this type of
accounting system
a. respiratory system c. perpetual system
b. automatic system d. periodic system

61. Cost of goods sold is a residual amount under this system.

a. skeletal system c. perpetual system
b. endocrine system d. periodic system

62. Patrick Star uses the perpetual inventory system. During the period, Patrick Star returned
goods previously purchased for P300,000 to the seller. Ten percent of the goods returned were
purchased on cash basis. Which entry is most likely to have been made to record the
transaction?
a. Accounts payable 270,000 c. Accounts payable 300,000
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Purchases 270,000 Purchase return 300,000

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b. Accounts payable 270,000 d. Accounts payable 270,000

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Cash 30,000 Accounts receivable 30,000
Inventory 300,000 PurchaseReturns 300,000

63. In a perpetual inventory system, an inventory flow assumptions used primarily for
determining which cost to use in:
a. recording purchases of inventory
b. recording the cost of goods sold
c. recording sales revenue
d. forecasts of future operating results
(Adapted)

64. Which of the following statements is incorrect regarding inventory systems?

a. An entity needs to have a ledger book in order to use the perpetual system.
b. Cost of goods sold is determined only periodically under the periodic system, whereas,
cost of goods sold can be determined at any given time under the perpetual system.
c. Physical count is performed basically as an internal control procedure under perpetual
system, whereas, physical count must be performed under periodic system in order to
properly compute for the profit or loss during the period.
d. Internal control is enhanced under periodic system.

65. Prior to physical count, the balance of the inventory account of an entity using the periodic
system is
a. equal to the beginning balance of inventory plus net purchases less cost of goods sold
b. equal to the net purchases less cost of goods sold minus increase in inventory during the
period
c. equal to the beginning balance of inventory plus cost of goods sold less net purchases
d. equal to the beginning balance of inventory

66. Prior to physical count, cost of goods sold under the periodic system is equal to
a. net purchases plus increase in inventory during the period
b. net purchases minus increase in inventory during the period
c. net purchases plus decrease in inventory during the period
d. zero

67. The following account is affected when recording a return of inventory to the vendor under a
perpetual inventory system:
a. merchandise inventory c. accounts receivable
b. cash d. purchase returns and allowances
(Adapted)

68. A perpetual inventory system would most likely be used by a(n)

a. automobile dealership c. drugstore
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b. hardware store d. convenience store

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(Adapted)
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69. Funk Co. is selecting its inventory system in preparation for its first year of operations. Funk
intends to use either the periodic weighted-average method or the perpetual moving-average
method, and to apply the lower of cost or market rule either to individual items or to the total
inventory. Inventory prices are expected to generally increase throughout 20x3, although a
few individual prices will decrease. What inventory system should Funk select if it wants to
maximize the inventory carrying amount at December 31, 20x3?
(Item #1) Inventory method; (Item #2) Cost or market application
a. Perpetual, Total inventory c. Periodic, Total inventory
b. Perpetual, Individual item d. Periodic, Individual item
(Adapted)

Inventory errors under periodic system

70. If a company incorrectly includes consignment items in the ending inventory, the net effects
on the cost of goods sold and profit for the period, respectively, are
a. Overstatement, Understatment
b. Understatement, Overstatement
c. Overstatement, overstatement
d. The next period’s account will be correct

71. When the opening balance of inventory or net purchases during the period is overstated, profit
for the period is
a. understated b. overstated c. either a or b d. no effect

72. Cost of goods sold is understated if

a. beginning inventory is overstated c. ending inventory is understated
b. net purchases is overstated d. ending inventory is overstated

73. If ending inventory is understated, (choose the incorrect statement)

a. cost of goods sold is overstated c. net purchases is unaffected
b. profit for the year is understated d. profit for the year is overstated

74. If purchase returns is understated,

a. profit for the period is understated c. ending inventory is overstated
b. cost of goods sold is understated d. profit for the period is overstated

75. Under the periodic system, which of the following statements is correct?
a. If purchase returns is understated, ending inventory is unaffected
b. If purchase returns is understated, cost of goods sold is understated
c. If purchase returns is understated, beginning inventory is understated
d. If purchase returns is understated, net purchases is unaffected
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Measurement
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76. At each reporting period, inventories are measured at

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a. cost c. cost plus direct acquisition costs
b. lower of cost or NRV d. fair value less cost to sell

77. The cost of inventories includes

I. Cost of purchase
II. Costs of conversion
III. Other costs necessary in bringing the inventory in its intended condition and location
a. I b. II c. I, II d. I, II, III

78. The purchase cost of inventories includes all of the following, except
a. purchase price
b. import duties and non-refundable taxes
c. freight cost incurred in bringing the inventory to its intended location
d. Value added taxes paid by a VAT registered payer

79. Which of the following costs is included as part of cost of inventories?

a. Abnormal amounts of wasted materials, labor or other production costs
b. Storage costs
c. Administrative overheads
d. Selling costs
e. None of the choices

80. When determining the unit cost of an inventory item, which of the following should be
included?
a. interest on loans obtained to purchase the item
b. advertising costs incurred to promote sale
c. freight cost on the item purchased
d. storage costs incurred prior to sale

81. Which of the following is least likely to be included in determining the cost inventory?
a. Interest cost for amounts borrowed to finance the purchase of inventory
b. Purchasing costs
c. Receiving and unpacking costs
d. Freight costs

82. Which of the following costs of conversion cannot be included in cost of inventory?
a. Cost of direct labor.
b. Factory rent and utilities.
c. Salaries of sales staff (sales department shares the building with factory supervisor).
d. Factory overheads based on normal capacity.
(Adapted)
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83. The cost of inventory should not include

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I. Purchase price.
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II. Import duties and other taxes.
III. Abnormal amounts of wasted materials.
IV. Administrative overhead.
V. Fixed and variable production overhead.
VI. Selling costs.
a. II, III, IV, V b. III, IV, VI c. I, II d. II, III, IV, V, VI
(Adapted)

84. Reporting inventory at the lower of cost or NRV is a departure from the accounting principle
of
a. Historical cost c. Conservatism
b. Consistency d. Full disclosure

85. When using the periodic inventory method, which of the following generally would not be
separately accounted for in the computation of cost of goods sold?
a. Trade discounts applicable to purchases during the period
b. Cash discounts taken during the period
c. Purchase returns and allowances of merchandise during the period
d. Cost of transportation-in (freight-in) for merchandise purchased during the period

Accounting for discounts

86. Accounts such as Purchase Returns, Sales Returns, Purchase Discounts, Freight-in and
Allowance for Purchase Discounts are used in
a. Perpetual Method and Gross Method
b. Perpetual Method and Net Method
c. Periodic Method and Net Method
d. Periodic Method and Gross Method

87. The use of Allowance for Purchase Discounts account is based on which accounting concept
a. matching c. net method
b. gross method d. periodic method

88. The Purchase Discounts Lost account is used under

a. gross method c. perpetual system
b. net method d. periodic system

89. The Purchase Discounts account is used under

a. gross method c. perpetual system
b. net method d. periodic system

90. Theoretically, the net method should be used in recording purchases. Cash discounts not
availed of is preferably presented in the statement of profit or loss and other comprehensive
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income as
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a. cost of goods soldc. other expense

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b. finance cost d. b or c

91. Theoretically, the net method should be used in recording purchases. Trade discounts taken is
preferably presented in the statement of profit or loss and other comprehensive income as
a. cost of goods sold c. other expense
b. operating expense d. not presented

Cost formulas
92. Generally accepted accounting principles require the selection of an inventory cost flow
method which:
a. emphasizes the valuation of inventory for balance sheet purposes
b. most closely approximates lower of cost and net realizable value for the ending inventory
c. most clearly reflects the periodic income
d. matches the physical flow of goods from inventory with sales revenue
e. yields the most conservative amount of reported income
(Adapted)

93. All of the following correctly describe the average cost inventory cost flow method except:
a. a moving average cost is used with a perpetual inventory system only.
b. the average cost methods are based on the view that the cost of inventory on hand and the
cost of goods sold during a period should be representative of all purchase costs available
for the period
c. a weighted-average unit cost is used with a periodic inventory system only
d. a moving average cost is used with either a periodic or a perpetual inventory system
(Adapted)

94. The specific identification method can be used only:

a. in income tax returns
b. for financial reporting purposes(but not in income tax returns)
c. when the individual items in inventory are similar in terms of cost, function, and sales
revenue
d. when the actual acquisition costs of individual units can be determined from the
accounting records
(Adapted)

95. The average method of cost flow assumption, when used in a perpetual inventory system, is
called
a. moving average c. simple average
b. weighted average d. b or c

96. Alcoholica Co. sells a wide variety of beverages. Because of the way Alcoholica stores its
inventory, the most recently purchased cases are usually the ones being sold first. Given these
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circumstances, what flow assumption must Alcoholica use?

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a. Specific identification c. Average cost

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b. FIFO d. Any assumption it wishes
(Adapted)

97. Which of the following methods of measuring the cost of goods sold most closely parallels
the actual physical flow of the merchandise?
a. LIFO b. FIFO c. Average cost d. Specific Identification
(Adapted)

98. Cost of goods sold and ending inventory is the same under a periodic system as under a
perpetual system when the entity uses
a. FIFO b. LIFO c. Weighted average d. Specific identification

99. Which inventory costing method would not be appropriate for a manufacturer using a
perpetual inventory system?
a. FIFO
b. specific identification
c. simple weighted average
d. combination of FIFO and specific identification
(Adapted)

100. When the FIFO method is used, ending inventory units are priced at the
a. most recent price c. earliest price
b. the average price d. none of choices
(Adapted)
101. Which inventory cost flow formula is not permitted under PAS 2 Inventories?
a. Average cost b. LIFO c. FIFO d. All are permitted

102. The inventory cost flow assumption where the cost of the most recent purchase is matched
first against sales revenues is
a. FIFO b. Average c. Specific identification d. none

103. In a period of falling prices, the inventory method that gives the lowest possible value for
ending inventory is:
a. gross profitb. FIFO c. LIFO d. weighted average
(Adapted)

104. A corporation entered into a purchase commitment to buy inventory. At the end of the
accounting period, the current market value of the inventory was less than the fixed purchase
price, by a material amount. Which of the following accounting treatments is most
appropriate?
a. Describe the nature of the contract in a note to the financial statements, recognize a loss in
the income statement, and recognize a liability for the accrued loss
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b. Describe the nature of the contract and the estimated amount of the loss in a note to the
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financial statements, but do not recognize a loss in the income statement

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c. Describe the nature of the contract in a note to the financial statements, recognize a loss in
the income statement, and recognize a reduction in inventory equal to the amount of the
loss by use of a valuation account
d. Neither describes the purchase obligation nor recognize a loss on the income statement or
balance sheet
(AICPA)

Lower of cost or net realizable value

105. Which of the following is not an acceptable basis for valuation of certain inventories in
published financial statements?
a. Historical cost
b. Current replacement cost
c. Prime cost
d. Current selling price less cost of disposal
(Adapted)

106. 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 normal profit margin
c. Replacement cost
d. Original cost
(Adapted)

107. Under current standards, inventories of a trading entity should be measured at

a. Fair Value less cost to sell
b. the lower of Cost or Market, with ceiling on replacement cost
c. the lower of Cost or estimated selling price less and cost to sell
d. the lower of Cost or estimated selling price less cost of completion and cost to sell

108. Which statement is correct concerning the valuation of inventory at lower of cost or NRV?
I. Inventories are usually written down to net realizable value on an item by item basis.
II. It is not appropriate to write down inventories based on a classification of inventory, for
example, finished goods or all inventories in a particular industry or geographical segment.
a. I only b. II only c. Both I and II d. Neither I nor II

109. The costing of inventory must be deferred until the end of the accounting period under which
of the following method of inventory valuation?
a. Moving average c. LIFO perpetual
b. Weighted average d. FIFO
16
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 Inventory
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110. Which inventory costing method would a company that wishes to maximize profits in a
period of rising prices use?
a. FIFO c. Weighted average
b. Peso-value LIFO d. Moving average
(AICPA)

111. Which of the following is/are true under PAS 2?

I. Inventories can only be "written down" but not "written up."
II. Inventories may be “written up” above their cost if it is clear that their values have increased
subsequent to previous write-down.
III. Storage costs is included in the cost of inventory only when storage cost is necessary in
bringing the inventory to its intended condition and location.
a. II only b. I, II & III c. III onlyd. I & III

112. Which of the following are considered in determining the cost of an item of inventory?
I. Material wasted due to a machine breakdown
II. Import duties on shipping of inventory inwards
III. Storage costs of finished goods
IV. Trade discounts received on purchase of inventory
a. I, II b. III, IV c. II, IV d. I, II, III, IV
(ACCA)

113. According to PAS 2 Inventories, which of the following costs should be included in inventory
valuations?
I. Transport costs for raw materials
II. Abnormal material usage
III. Storage costs relating to finished goods
IV. Fixed production overheads
a. I, II b. III, IV c. II, III d. I, IV
(ACCA)

114. How should import duties be dealt with when valuing inventories at the lower of cost and net
realizable value (NRV) according to PAS 2 Inventories?
a. added to cost c. deducted in arriving at NRV
b. ignored d. deducted from cost
(ACCA)

115. How should prompt payment discount not taken be dealt with when valuing inventories at the
lower of cost and net realizable value (NRV) using the gross method?
a. added to cost c. deducted in arriving at NRV
b. ignored d. deducted from cost
17

116. How should sales staff commission be dealt with when valuing inventories at the lower of
Page

cost and net realizable value (NRV), according to PAS 2 Inventories?

 Inventory
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a. added to cost c. deducted in arriving at NRV
b. ignored d. deducted from cost
(ACCA)

117. How should trade discounts be dealt with when valuing inventories at the lower of cost and
net realizable value (NRV) according to PAS 2 Inventories?
a. added to cost c. deducted in arriving at NRV
b. ignored d. deducted from cost
(ACCA)

118. Are the following statements true or false, according to PAS 2 Inventories?
I. Cost of factory management should be included in the cost of inventory.
II. Maintenance expenses for an item of equipment used in the manufacturing process should be
included in the cost of inventory.
a. False, false b. False, true c. True, false d. True, true
(ACCA)

119. The Hetfield Company has two products in its inventory which have costs and selling prices
per unit as follows:
Product X Product Y
Selling price 200 300
Materials and conversion costs 150 180
General administration costs 30 80
Selling costs 60 70
Profit/(loss) (40) (30)

At year-end, the manufacture of items of inventory has been completed but no selling costs have
yet been incurred. According to PAS 2 Inventories, how should Product X and Product Y carried
in Hetfield's statement of financial position, respectively?
a. NRV, NRV b. NRV, Cost c. Cost, NRV d. Cost, Cost
(ACCA)

Inventory estimation
120. A major advantage of the retail inventory method is that it
a. Permits companies which use it to avoid taking an annual physical inventory
b. Gives a more accurate statement of inventory cost than other methods.
c. Hides costs from customers and employees.
d. Provides a method for inventory control and facilitates determination of the periodic
inventory.
(Adapted)

121. According to PAS 2 Inventories, which of the following may be used in estimating inventory
18

for interim period reporting?

Page

I. Conservative, Conventional or LCM Method

 Inventory
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II. Average Method
III. First-in, first out (FIFO) Method
a. II b. I, II c. II, III d. I, II, III

122. Which inventory costing method is most useful in estimating the amount of inventory lost or
destroyed by theft, fire, or other hazards?
a. FIFO c. gross profit method
b. average cost method d. LIFO
(Adapted)

123. Cost of goods available for sale consists of the

a. cost of beginning inventory and the cost of ending inventory.
b. cost of ending inventory and the cost of goods purchased during the year.
c. cost of beginning inventory and the cost of goods purchased during the year.
d. difference between the cost of goods purchased and the cost of goods sold during the
year.

124. The operating expenses section of a statement of earnings for a merchandising company
would not include
a. freight out c. cost of goods sold
b. utilities expense d. insurance expense
(Adapted)

125. If a company wrote a check for P500 for the advance payment for a copy machine they
purchased yet to be delivered the Accounts Payable account would
a. increase c. not be affected
b. decrease d. no one knows for sure
(Adapted)

126. The cost of goods available for sale is allocated between

a. beginning inventory and ending inventory
b. beginning inventory and cost of goods on hand
c. ending inventory and cost of goods sold
d. beginning inventory and cost of goods sold

127. Which of the following statements is(are) correct?

I. To calculate cash payments for purchases, the cost of goods sold must be known, along with
the changes in inventory and accounts payable during the period.
II. Cost of goods sold is equal to net purchases minus increase in inventory.
III. Cost of goods sold is equal to net purchases plus increase in inventory.
a. I, II b. I, II, III c. II, III d. I, III
19

128. A binding agreement for the exchange of a specified quantity of resources at a specified price
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on a specified future date or dates

 Inventory
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a. purchase order c. purchase contract
b. firm commitment d. purchase committed

PROBLEM SOLVING

1. A listing of the Emma Company's inventory items at the end of 2005 totals P950,000.
Included in this amount are the following items:
Merchandise in transit as of 12/12/2005, purchased FOB shipping point 68,000
Goods held by Emma as consignee, from Ronald 50,000
Goods out on consignment, at coat plus 50%
Markup on cost plus P1,000 delivery charge 61,000
What is the peso amount of Emma's 2005 ending Inventory that should be reported on the
balance sheet?
A. 831,000 C. 879,000
B. 862,000 D. 880,000

2. The unadjusted physical inventory of Erzil Company at December 31, 2003 was
P5,000,000. Other information follows:
 Goods were received and recorded on January 4, 2004 with cost of P500,000. These goods
were shipped by suppliers on December 29, 2003, FOB shipping point.
 Goods in the warehouse costing P1,500,000 were billed to the customer FOB shipping
point on December 29, 2003. The goods were included in inventory because they were
shipped on January 3, 2004.
How much should Erzil report as inventory on its December 31, 2003 balance sheet?
A. 5,500,000 C. 4,000,000
B. 7,000,000 D. 5,000,000 CPAR 0503

3. In an annual audit of Tristan John Company, you find that a physical inventory on
December 31, 2004, showed merchandise with a cost of P440,000 was on hand at that date.
You also find the following transactions near the dosing date.
A. A special machine, fabricated to order for a customer casting 15,000, was finished
and specifically segregated in the back part of the shipping room on December 31,
2004. The customer was billed on that date and the machine excluded from inventory
although it was shipped on January 4, 2006.
B. Merchandise costing P3,000 was received an January 3, 2005, and the related
purchase invoice recorded January 5. The invoice showed the equipment was made
on December 29, 2004, f.o.b. destination.
C. A packing case containing a product costing P34,000 was standing in the shipping
room when the physical inventory was taken. It was not included in the inventory
because it was marked "hold for slipping instructions". Your investigation revealed
that the customer's order was dated December 18, 2004 but that the case was shipped
and the customer billed on January 10, 2005.
20

D. Merchandise received on January 6, 2005, costing P6,000 was entered in the purchase
Page

journal on January 3, 2005. The invoice showed shipment was made f.o.b. supplier !s
 Inventory
___________________________________________________________
warehouse on December 31, 2004.
E. Merchandise costing P7,000 was received on December 28, 2004, and theinvoice was
not recorded. You located it in the hands of the purchasing agent and it was marked
on consignment.
The amount of inventory that should appear on the balance sheet at December 31, 2004 is
A. 480,000 C. 487,000
B. 495,000 D. 502,000

4. In your audit of Jones Company, you find that a physical inventory on December 31, 2005,
showed merchandise with a cost of P4,000,000 was on hand at that date. You also
discover the following items were ail excluded from the count:
A. Merchandise costing P160,000, which was held by Jones on consignment. The
consignor is a subsidiary.

B. A special machine, fabricated to order for a customer costing P400,000, was finished and
specifically segregated in the back part of the shipping room on December 31, 2005. The
customer was billed on that date and the machine excluded from inventory although it
was shipped on January 4, 2006.
C. Merchandise costing P80,000, which was shipped by Jones f.o.b. destination to a
customer on December 31, 2005. The customer expects to receive the merchandise on
January 3, 2006.
D. Merchandise costing P120.000 which was shipped by Jones f.o.b. shipping point to a
customer on December 29, 2005.
E. Merchandise costing P50,000 shipped by a vendor f.o.b. seller on December 28, 2005
and received by Jones on January 10, 2005.

The corrected balance of Jones' inventory should be

A. 4,530,000 C. 4,690,000
B. 4,480,000 D. 4,130,000 CPAR 0505

5. On December 26, 2004, Karen Company purchased goods costing P5,000,000. The
freight term is FOB destination. Some of the costs incurred in connection with the sale
and delivery if the goods were:
Packaging for shipment 100,000
Shipping 200,000
Special handling charges 300,000
These goods were received on December 31, 2004. In the December 31, 2004 balance sheet,
what amount of cost for these goods should be included in inventory?
A. 5,000,000 C. 5,300,000
B. 5,600,000 D. 5,500,000 CPAR 0504

6. During January 2004, Riza Company which maintains a perpetual inventory system,
recorded the following information pertaining to its inventory:
21

Units Unit cost Total cost Units on hand

Page

Balance on 1/1 10,000 200 2,000,000 10,000

 Inventory
___________________________________________________________
Purchased on 1/5 6,000 400 2,400,000 16,000
Sold on 1/15 9,000 7,000
Purchased on 1/20 5,000 600 3,000,000 12,000
Under the LIFO method, what amount should Riza report as inventory at January 31, 2004?
A. 2,800,000 C. 5,600,000
B. 4,400,000 D. 5,400,000 CPAR 1004

7. M
8. Paula Company has a recent gross profit history of 40% of cost. The following data are
available for the year 2005:
Inventory – January 13,250
Purchases 20,000,000
Net sales 25,200,000
Purchases returns 350,000
Freight in 100,000
Using the gross profit method, the estimated cost of goods sold for 2005 should be
A. 18,000,000 C. 23,000,000
B. 15,120,000 D. 5,000,000 CPAR 0505

9. On December 31, 2003, a fire at Bernadette Company’s warehouse caused severe damage
to its entire inventory. Based on recent history, Bernadette has a gross profit of 25% on
cost. The records of Bernadette for the year ended December 31, 2003 showed beginning
inventory of P5,000,000, net purchases of P14,000,000 and net sales of P15,000,000. A
physical inventory disclosed usable damaged goods which can be sold to a jobber for
P1,500,000. Using the gross profit method, the estimated value of goods destroyed by the
fire on December 31, 2003 should be
A. 7,000,000 C. 7,750,000
B. 5,500,000 D. 6,250,000 CPAR 1003

10. On June 30, 2003, a storm damaged a warehouse of Robert Company. The entire
inventory and many accounting records stored in the warehouse were completely
destroyed. Although the inventory was not insured, a portion could be sold for scrap.
Through the use of microfilmed records, the following data are assembled.
Inventory, January 1 7,500,000
Purchases, January 1 – June 30 31,500,000
Cash sales, January 1 – June 30 5,000,000
Collection of accounts receivable, January 1 – June 30 45,000,000
Accounts receivable, January 1 3,000,000
Accounts receivable, June 30 4,000,000
Salvage value of inventory 400,000
Gross profit percentage of sales 40%
22

The inventory loss as a result of the storm should be reported at

A. 8,400,000 C. 9,000,000
Page

B. 8,000,000 D. 8,600,000 CPAR 1003

 Inventory
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11. On December 31, 2003, a fire damaged the warehouse and factory of Roxy Company,
completely destroying the work in process inventory. There was no damage to either the
raw materials or finished goods. The physical inventory revealed the following:
January 1 December 31
Raw materials 1,700,000 2,000,000
Work in process 4,300,000 0
Finished goods 6,000,000 4,500,000
The gross profit margin historically approximated 30% of sales. The sales for the year
amounted to P20,000,000. Raw material purchases totaled P4,000,000. Direct labor costs for
the year were P5,000,000, and manufacturing overhead has been applied at 60% of direct labor.
What was the inventory fire loss on December 31, 2003?
A. 3,500,000 C. 2,500,000
B. 3,800,000 D. 1,500,000

12. On October 15, 2004, a fire destroyed all the stock of equipment of Jan Company in its
rented stockroom. The records of the firm showed the following information:
Inventory, January 1 500,000
Sales, January 1 to October 15 3,840,000
Sales return and allowance 40,000
Purchases, January 1, to October 15 3,550,000
Purchase return and allowance 60,000
Cost of stock on display room, not destroyed 330,000
Summary of prior years’ sales:
2003 2002 2001
Sales 3,700,000 3,500,000 3,000,000
Cost of sales 2,370,000 2,520,000 2,250,000
How much is the estimated cost of the merchandise lost in the fire on October 15, 2004?
A. 1,228,000 C. 1,330,000
B. 1,000,000 D. 972,000 CAPR 1004

13. On the night of June 30, 2003 a fire destroyed most of the merchandise inventory of May
Company. All goods were completely destroyed except for partially damaged goods that
normally sell for P500,000 and that had an estimated net realizable value of P100,000 and
goods out on consignment on June 30, 2003 costing P1,000,000. The inventory on
January 1, 2003 was P2,500,000. The net purchase and net sales from January 1 through
June 30, 2003 were P24,000,000 and P30,000,000 respectively. The condenses income
statement information for the past three years appears below:

2002 2001 2000

23

Net sales 25,000,000 15,000,000 5,000,000

Cost of goods sold 18,200,000 10,000,000 3,300,000
Page

May Company estimated that the rate of gross margin on sales in 2003 is equal to the weighted
 Inventory
___________________________________________________________
average rate for the past three years. Using the gross margin method, what is the estimated
amount of fire loss?
A. 4,400,000 C. 5,400,000
B. 5,500,000 D. 4,000,000

14. The records of May's Department acre report the following data for the month of January
2005:
Sales 7,100,000 Mark down 600,000
Sales allowance 100,000 Mark down cancellations 100,000
Sales returns 500,000 Freight on purchases 100,000
Employee discounts 200,000 Purchases at cost 4,500,000
Theft and other losses 100,000 Purchase returns at cost 240,000
Initial markup on 2,900,000 Purchase returns at sales price 350,000
purchases
Additional mark up 250,000 Beg. inventory at cost 440,000
Mark up cancellations 100,000 Beg. inventory at sales price 800,000
Using the conventional retail inventory method, May's ending inventory is
A. 360,000 C. 420,000
B. 384,000 D. 448,000 CPAR 0505

15. At December 31, 2003, the following information was available from Febe Company’s
accounting records.
Cost Retail
Inventory – 1/1 3,000,000 5,000,000
Purchases 16,800,000 25,000,000
Sales for the year amounted to P20,000,000. Markups and markdowns totaled P3,000,000 and
P1,000,000 respectively. Discounts granted employees and cash discounts to customers were
P2,000,000 and P3,000,000 respectively. Under the approximate lower of average cost or
market retail method, Febe’s inventory at December 31, 2003 was
A. 4,200,000 C. 6,000,000
B. 6,600,000 D. 6,187,500 CPAR 1003

16. Joemille Company uses the retail inventory method. Information relating to the
computation of the inventory at December 31, 2004 is:
Cost Retail
Inventory, January 1 3,000,000 4,000,000
Purchases 17,000,000 24,000,000
Freight in 1,000,000
Net markups 2,000,000
Net markdowns 2,000,000
Sales 20,000,000
24

Estimated normal shrinkage due to breakage and theft is 5% of sales

Page

The estimated inventory on December 31, 2004, at the lower of cost or market using the retail
inventory method should be
 Inventory
___________________________________________________________
A. 4,900,000 C. 6,000,000
B. 5,600,000 D. 5,250,000 CPAR 1004

17. The records of Michael Company showed the following for the current year.
Cost Retail
Beginning inventory 340,000 640,000
Purchases 4,500,000 7,300,000
Freight in 100,000
Purchase return 150,000 250,000
Purchase allowance 90,000
Departmental transfer in 100,000 160,000
Net markup 150,000
Net markdown 500,000
Sales 6,760,000
Sales allowance 50,000
Sales return 150,000
Employee discount 100,000
Spoilage and breakage 200,000
Under the lower of cost of average cost or market retail method, Michael Company's cost of
goods sold is
A. 4,410,000 C. 4,416,000
B. 4,440,000 D. 4,384,000

18. Consolacion Company installs replacement siding, windows, and louvered glass doors for
family homes at December 31, 2004, the balance of raw materials inventory account was
P502,000, and the allowance for inventory write down was P33,000. The inventory cost
and market data at December 31, 2004, are as follows:
Replacemen Sales Net Normal
Cost t Cost Price Realizable Profit
value
Aluminum siding 86,000 87,000 5,000
89,000 91,500
Mahogany siding 92,000 85,000 7,000
94,000 93,000
Louvered glass 125,000 135,000 129,000 111,000 10,000
door
Glass window 194,000 114,000 205,000 197,000 20,000
Total 502,000 427,000 518,500 480,000 32,000
The correct balance of the raw materials inventory after any allowance for write down is
A. 427,000 C. 480,000
25

B. 486,500 D. 477,000 CPAR 1004

Page
 Inventory
___________________________________________________________

Use the following information for the next two questions:

ABC Co. purchased goods with invoice price of ₱3,000 on account on December 27, 20x1. The
related shipping costs amounted to ₱50. The seller shipped the goods on December 31, 20x1. ABC
Co. received the goods on January 2, 20x2 and settled the account on January 5, 20x2.

19. How much is the capitalizable cost of the inventory purchased if the terms of the
shipment are FOB shipping point, freight prepaid?
a. 3,050 b. 3,000 c. 2,950 d. 0

20. How much is the net cash payment to the supplier if the terms of the shipment are FOB
destination, freight collect?
a. 3,050 b. 3,000 c. 2,950 d. 0

Total inventory
21. ABC Co. provided you the following information for the purpose of determining the
amount of its inventory as of December 31, 20x1:
Goods located at the warehouse (physical count) 3,400,000
Goods located at the sales department (at cost) 15,800,000
Goods in-transit purchased FOB Destination 2,400,000
Goods in-transit purchased FOB Shipping Point 1,600,000
Freight incurred under “freight prepaid” for the goods
purchased under FOB Shipping Point 80,000
Goods held on consignment from XYZ, Inc. 1,800,000

How much is the total inventory on December 31, 20x1?

a. 25,080,000 b. 25,080,000 c. 20,880,000 d. 20,800,000

Consigned goods
22. ABC Co. consigned goods costing ₱14,000 to XYZ, Inc. Transportation costs of
delivering the goods to XYZ totaled ₱3,000. Repair costs for goods damaged during
transportation totaled ₱1,500. To induce XYZ, Inc. in accepting the consigned goods,
ABC Co. gave XYZ ₱2,000 representing an advance commission. How much is the cost
of the consigned goods?
a. 20,500 b. 18,500 c. 17,000 d. 14,000

Correct inventory and accounts payable

Use the following information for the next two questions:
On December 31, 20x1, ABC Co. has a balance of ₱240,000 in its inventory account determined
through physical count and a balance of ₱90,000 in its accounts payable account. The balances
were determined before any necessary adjustment for the following:
26

a. Segregated goods in the shipping area marked “Bill and hold sale” were included in inventory
Page

because shipment was not made until January 4, 20x2. The goods were sold to the customer
 Inventory
___________________________________________________________
on a “bill and hold” sale for ₱20,000. The cost of the goods is ₱10,000. The goods were
already packed and ready for shipment. Both ABC and the buyer acknowledged the shipping
term.
b. A package containing a product costing ₱80,000 was standing in the shipping area when the
physical inventory was conducted. This was included in the inventory although it was marked
“Hold for shipping instructions.” The sale order was dated December 17 but the package was
shipped and the customer was billed on January 4, 20x2.
c. Merchandise costing ₱10,000, shipped FOB destination from a vendor on December 30, 20x1,
was received and recorded on January 5, 20x2.
d. Goods shipped F.O.B. shipping point on December 27, 20x1, from a vendor to ABC Co. were
received on January 6, 20x2. The invoice cost of ₱30,000 was recorded on December 31,
20x1 and included in the count as “goods in-transit.”

23. How much is the adjusted balance of inventory?

a. 240,000 b. 230,000 c. 160,000 d. 200,000

24. How much is the adjusted balance of accounts payable?

a. 90,000 b. 80,000 c. 60,000 d. 100,000

Inventories under financing agreement, Installment sales

25. The records of ABC Co. show the following:
a. Goods sold on an installment basis to XYZ, Inc., title to the goods is
retained by ABC Co. until full payment is made. XYZ, Inc. took possession
of the goods. 150,000
b. Goods sold to Alpha Co., for which ABC Co. has the option to repurchase
the goods sold at a set price that covers all costs related to the inventory. 280,000
c. Goods sold where large returns are unpredictable. 70,000
d. Goods received from Beta Co. for which an agreement was signed
requiring ABC Co. to replace such goods in the near future.
50,000

How much is included as part of inventory?

a. 50,000 b. 120,000 c. 270,000 d. 330,000

Bill and hold and Lay away

26. The following are among the transactions of ABC Co. during the year:
 Purchased goods costing ₱20,000 from XYZ, Inc. Billing was received although delivery was
delayed per request of ABC Co. The goods purchased were segregated and ready for delivery
on demand.
 Purchased goods costing ₱35,000 from Alpha Corp. on a lay away sale agreement. The goods
were not yet delivered until after ABC makes the final payment on the purchase price. ABC Co.
made total payments of ₱34,920 during the year.
27
Page

How much of the goods purchased above will be included in ABC’s year-end inventory?
 Inventory
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a. 55,000 b. 54,920 c. 34,920 d. 0

Errors in inventory
27. ABC Co. uses the periodic inventory system. In the current year, ABC’s ending inventory
is understated by ₱20,000. Which of the following statements is correct?
a. ABC’s cost of goods sold is understated by ₱20,000.
b. ABC’s gross income is understated by ₱20,000.
c. ABC’s net purchases are understated by ₱20,000.
d. ABC’s profit is overstated by ₱20,000.

Cost of purchase
28. ABC Co., a VAT payer, imported goods from a foreign supplier. Costs incurred by ABC
include the following: purchase price, ₱250; import duties, ₱20; value added tax, ₱15;
transportation and handling costs, ₱5; and commission to broker, ₱2. How much is the
cost of purchase of the imported goods?
a. 292 b. 277 c. 257 d. 255

Deferred payment
29. On January 1, 20x1 ABC Co. acquired goods for sale in the ordinary course of business
for ₱250,000, excluding ₱5,000 refundable purchase taxes. The supplier usually sells
goods on 30 days’ interest-free credit. However, as a special promotion, the purchase
agreement for these goods provided for payment to be made in full on December 31, 20x1.
In acquiring the goods transport charges of ₱2,000 were incurred; these were due on
January 1, 20x1. An appropriate discount rate is 10 per cent per year. How much is the
initial cost of the inventories?
a. 229,273 b. 224,727 c. 250,000 d. 257,000

30. ABC Co. acquired a tract of land for ₱2,000,000. The land was developed and subdivided
into residential lots at an additional cost of ₱200,000. Although the subdivided lots are
relatively equal in sizes, they were offered at different sales prices due to differences in
terrain and locations. Information on the subdivided lots is shown below:
Lot group No. of lots Price per lot
A 4 480,000
B 10 240,000
C 15 192,000

During the year, 2 lots from the A group, 3 lots from the B group and 12 lots from the C group
were sold. How much gross income is recognized during the year?
a. 2,766,667 b. 2,783,333 c. 2,860,000 d. 2,877,333

Cost formulas
Use the following information for the next four questions:
28

ABC Co. is a wholesaler of guitar picks. The activity for product “Pick X” during August is
Page

shown below:
 Inventory
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Date Transaction Units Unit cost Total cost

1-Aug Inventory 2,000 ₱ 28.80 ₱ 57,600
7 Purchase 3,000 29.76 89,280
12 Sales 4,200
13 Purchase 4,800 30.40 145,920
14 Sales return 600
22 Sales 3,800
29 Purchase 1,900 30.88 58,672
30 Purchase return 300 30.88 (9,264)
Total goods available for sale ₱ 342,208

31. How much are the ending inventory and cost of goods sold under the FIFO – periodic
cost flow formula?
Ending inventory Cost of goods sold
a. 219,840 122,368
b. 112,341 229,867
c. 122,368 219,840
d. 122,386 219,804

32. How much are the ending inventory and cost of goods sold under the FIFO – perpetual
cost flow formula?
Ending inventory Cost of goods sold
a. 219,840 122,368
b. 112,341 229,867
c. 122,368 219,840
d. 122,386 219,804

33. How much are the ending inventory and cost of goods sold under the weighted average –
periodic cost flow formula?
Ending inventory Cost of goods sold
a. 229,840 112,160
b. 126,468 215,740
c. 120,080 222,128
d. 120,072 222,153
29

34. How much are the ending inventory and cost of goods sold under the weighted average –
perpetual cost flow formula?
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Ending inventory Cost of goods sold

 Inventory
___________________________________________________________
a. 121,813 220,395
b. 122,468 219,740
c. 122,017 220,191
d. 123,384 218,824

Write-down of inventories
35. ABC Co. buys and sells products A & B. The following unit costs are available for the
inventory as of December 31, 20x1: (All costs are borne by ABC Co.)
A B
Number of units 2,000 3,000
Purchase cost per unit ` ₱125 ₱190
Delivery cost from supplier 10 30
Estimated selling price 150 250
Selling costs 22 28
General and administrative 15 18

How much total inventory shall be reported in the 20x1 financial statements?
a. 916,000 b. 930,000 c. 936,000 d. 696,000

Write-down of raw materials

36. The raw materials inventory of ABC Co. on December 31, 20x1 have a cost of ₱20,000
and an estimated net realizable value of ₱18,000. Information on finished goods are as
follows:
Cost……………………………………….₱250,000
NRV…………………….…………………₱280,000

How much is the total inventory on December 31, 20x1?

a. 268,000 b. 270,000 c. 298,000 d. 300,000

Reversal of write-down
Use the following information for the next two questions:
ABC Co. has the following comparative information regarding its inventories.
20x2 20x1
Inventory, December 31 at cost
30,000 24,000
Inventory, December 31 at NRV
33,000 22,000
Cost of goods sold before adjustments 180,000
200,000

ABC recognizes write-downs of inventories in cost of goods sold.

30

37. How much is the cost of goods sold in 20x1?

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a. 200,000 b. 202,000 c. 198,000 d. 220,000

 Inventory
___________________________________________________________

38. How much is the cost of goods sold in 20x2?

a. 178,000 b. 177,000 c. 182,000 d. 183,000

Purchase commitment
39. On January 1, 20x1, ABC Co. signed a three year, noncancelable purchase contract,
which allows ABC Co. to purchase up to 12,000 units of a microchip annually from XYZ
Co. at ₱15 per unit and guarantees a minimum annual purchase of 3,000 units. At
year-end, it was found out that the goods are obsolete. ABC Co. had 4,000 units of this
inventory at December 31, 20x1, and believes these parts can be sold as scrap for ₱5 per
unit. How is the loss on purchase commitment to be recognized on December 31, 20x1?
a. 70,000 b. 100,000 c. 60,000 d. 0

Gross profit based on sales

40. On October 1, 20x1, the warehouse of ABC Co. and all inventories contained therein
were damaged by flood. Off-site back up of data base shows the following information:
Inventory, Jan. 1 10,000
Accounts payable, Jan. 1 3,000
Accounts payable, Sept. 30 2,000
Payments to suppliers 50,000
Freight-in 500
Purchase returns 500
Sales from Jan. to Sept. 80,000
Sales returns 5,000
Sales discounts 2,000
Gross profit rate based on sales 30%

Additional information:
Goods in transit as of October 1, 20x1 amounted to ₱1,000, cost of goods out on consignment is
₱1,200, and materials damaged by flood can be sold at a salvage value of ₱1,800. How much is
the inventory loss due to the flood?
a. 3,000 b. 2,500 c. 4,400 d. 4,900

Gross profit rate based on cost

41. On October 1, 20x1, the warehouse of ABC Co. and all inventories contained therein
were razed by fire. Off-site back up of data base shows the following information:
Inventory, Jan. 1 20,000
Net purchases 190,000
Net sales from Jan. to Sept. 240,000
Gross profit rate based on cost 25%

Twenty percent of the inventory contained in the warehouse has been salvaged from the fire while
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half is partially damaged and can be sold as scrap at thirty percent of its cost. How much is the
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inventory loss due to the fire?

 Inventory
___________________________________________________________
a. 18,000 b. 5,400 c. 9,000 d. 11,700

Cost of goods sold

42. Based on the following information, how much is the cost of goods sold?
Decrease in inventory 12,000
Increase in accounts payable 16,000
Payments to suppliers 80,000

a. 108,000 b. 96,000 c. 76,000 d. 84,000

Retail method
Use the following information for the next two questions:
Presented below is information pertaining to ABC Co.:
Cost Retail
Inventory, January 1 21,750 35,000
Purchases 138,250 200,750
Freight-In 5,000 -
Purchase discounts 1,250 -
Purchase returns 13,000 21,500
Departmental Transfers-In (Debit) 2,500 3,750
Departmental Transfers-Out (Credit) 2,000 3,000
Markups 15,000
Markup cancellations 5,000
Markdowns 30,000
Markdown cancellations 7,500
Abnormal spoilage (theft and casualty loss) 12,500 17,500
Sales 109,500
Sales returns 6,250
Sales discounts 2,500
Employee discounts 1,250
Normal spoilage (shrinkage and breakages) 500

43. How much is the ending inventory using the Average cost method?
a. 60,750 b. 60,000 c. 61,050 d. 62,400

44. How much is the ending inventory using the FIFO cost method?
a. 60,750 b. 60,000 c. 61,050 d. 62,400

45. Oslo Corporation has two products in its ending inventory, each accounted for at the
lower of cost or market. A profit margin of 30% on selling price is considered normal for
each product. Specific data with respect to each product follows:
Product #1 Product #2
32

Historical cost P20.00 P 35.00

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Replacement cost 22.50 27.00

 Inventory
___________________________________________________________
Estimated cost to dispose 5.00 13.00
Estimated selling price 40.00 65.00
In pricing its ending inventory using the lower-of-cost-or-market, what unit values should. Oslo
use for products #1 and #2, respectively?
a.P20.00 and P32.50.
b.P23.00 and P32.50.
c.P23.00 andP 30.00.
d.P22.50 and P27.00.

46. Muckenthaler Company sells product 2005WSC forP30 per unit. The cost of one unit of
2005WSC isP27, and the replacement cost isP26. The estimated cost to dispose of a unit
isP6, and the normal profit is 40%. At what amount per unit should product 2005WSC be
reported, applying lower-of-cost-or-market?
a.P12.
b.P24.
c.P26.
d.P27.

47. Lexington Company sells product 1976NLC forP50 per unit. The cost of one unit of
1976NLC isP45, and the replacement cost isP43. The estimated cost to dispose of a unit
is P10, and the normal profit is 40%. At what amount per unit should product 1976NLC
be reported, applying lower-of-cost-or-market?
a.P20.
b.P40.
c.P43.
d.P45.

48. Given the acquisition cost of product Z isP64, the net realizable value for product Z is
$58, the normal profit for product Z isP5, and the market value (replacement cost) for
product Z isP60, what is the proper per unit inventory price for product Z?
a.P64.
b.P60.
c.P53.
d.P58.

49. Given the acquisition cost of product ALPHA isP17, the net realizable value for product
ALPHA isP16.70, the normal profit for product ALPHA isP1.24, and the market value
(replacement cost) for product ALPHA isP14.72, what is the proper per unit inventory
price for product ALPHA?
a.P17.00.
b.P15.46
c.P14.72.
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d.P16.70.
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