FINANCIAL ACCOUNTING 1

INVENTORY
THEORIES
1. Which of the following is not true regarding inventories?
a. Held for sale in the ordinary course of business
b. In the process of production for sale
c. In the form of materials or supplies to be consumed in the production process
d. Held for use in the production or supply of goods or services
2. Which of the following would not likely be reported as inventory?
a. Land acquired for resale by a real estate firm
b. Stocks and bonds held for resale by brokerage firm
c. Partially completed goods held by a manufacturing firm
d. Machinery acquired by a manufacturing firm for the use in the production process
3. Which of the following describes the flow of product costs through inventory account of the manufacturer?
a. Raw materials, goods in process, factory overhead, finished goods
b. Raw materials, goods in process, finished goods
c. Raw materials, direct labor, factory overhead, finished goods
d. Raw materials, direct labor, factory overhead
4. The costs of purchase of inventories comprise all of the following, except
a. Purchase price
b. Import duties and other taxes
c. Transport handling and other costs directly attributable to the acquisition of inventories
d. Trade discount, rebates and other similar terms
5. The cost of conversion of inventories include all of the following, except
a. Costs directly attributable to the units of production, such as direct labor
b. Systematic allocation of fixed production overhead
c. Systematic allocation of variable production overhead
d. Systematic allocation of administrative overhead
6. Fixed production overheads include all of the following, except
a. Indirect materials and indirect labor
b. Depreciation of factory building
c. Maintenance of factory equipment
d. Cost factory management and administration
7. How should unallocated fixed overhead costs be treated?
a. Allocated to finished goods and cost of goods based on ending balances in the accounts
b. Allocated to raw materials, work in process and finished goods, based on the ending balances of
the accounts
c. Recognized as an expense in the period in which they are incurred
d. Allocated to work in process, finished goods and cost of goods sold based on ending balances of
the accounts
8. The credit balance that arises when a net loss in a purchase commitment is recognized should be
a. Presented as current liability
b. Subtracted from ending inventory
c. Presented as an appropriation of retained earnings
d. Presented in the income statement
9. Which of the following s not acceptable is not an acceptable basis for valuation of inventories in published
financial statements?
a. Historical cost
b. Standard cost
c. Prime cost
d. Current selling price less cost to complete and cost to sell
10. The cost of inventories that are not ordinarily interchangeable and goods or services produced and
segregated for specific projects shall be measured using
a. FIFO method
b. Weighted average method
c. LIFO method
d. Specific identification method
11. The specific identification method of inventory costing

FINANCIAL ACCOUNTING 1

12.

13.

14.

15.

16.

17.

18.

19.

20.

a. Eliminates all opportunity of profit manipulation

b. Matches the flow of recorded cost with physical flow of goods
c. Can be used only with perpetual inventory method
d. Is in violation of GAAP
The cost of inventories shall be measured using
a. FIFO method
b. Weighted average method
c. LIFO method
d. Either A or B
Net realizable value is
a. Current replacement cost
b. Estimated selling price
c. Estimated selling price less estimated cost to complete
d. Estimated selling price less estimated cost to complete and cost to sell
What is the maximum amount at which inventory can be valued when the goods have experienced
permanent decline in value?
a. Historical cost
b. Sales price
c. Net realizable value
d. Net realizable value less normal profit margin
Inventories are usually written down to net realizable value
a. Item by item
b. By classification
c. By total
d. By segment
During periods of rising prices, when FIFO method is used, a perpetual inventory system would
a. Not be permitted
b. Results in a higher ending inventory than periodic inventory system
c. Result in the same ending inventory as the periodic inventory system
d. Results in a lower ending inventory than periodic inventory system
This method is often used for convenience for measuring inventories of large number or rapidly changing
items with similar margins for which it is impracticable to use other costing methods
a. Standard costing method
b. Retail method
c. Gross profit method
d. Relative sales price method
In applying retail method, the standard requires the use of
a. Conservative retail
b. Average cost retail
c. FIFO retail
d. LIFO retail
To produce an inventory valuation which approximates the lower of average cost or market using the
conservative retail method, the computation of the ratio of cost to retail should
a. Include markups but not markdowns
b. Include markups and markdowns
c. Ignore both markups and markdowns
d. Include markdowns but not markups
The gross profit method of estimating ending inventory may be used for all of the following, except
a. Higher retail prices
b. Lower net markups
c. More employee discounts given
d. Higher freight charges
PROBLEMS

1. ACER Company reported P5,000,000 of inventory on December 31, 2015 based on physical count.
Additional information is as follows:

FINANCIAL ACCOUNTING 1

2.

3.

4.

5.

Excluded from the physical count were goods billed to customer, FOB shipping point, on
December 31, 2015. The goods had a cost of P200,000 and had been billed at P350,000.
The shipment is ready for pick-up by the delivery contractor on January 5, 2016
Goods were in transit from a vendor. The invoice cost was P300,000 and goods were
shipped FOB shipping point on December 31, 2015
Work in process costing P400,000 was sent to an outside processor for finishing on
December 10, 2015
Goods out on consignment with sales price of P1,000,000 and markup of 25% on cost.
Shipping cost amounted to P50,000.
What is the correct amount of inventory on December 31, 2015?
a. P6,750,000
b. P6,700,000
c. P6,550,000
d. P6,950,000
On June 1, 2015, Hanabishi sold merchandise with a list price of P5,000,000 to a customer. Hanabishi
allowed trade discounts of 20% and 10%. Credit terms were 5/10, n/30 and the sale was made FOB
shipping point. Hanabishi prepaid P100,000 of delivery cost for the customer as an accommodation. On
June 11, 2015 what is the full remittance from the customer?
a. P3,600,000
b. P3,420,000
c. P3,700,000
d. P3,520,000
Hogwarts School of Witchcrafts entered into a purchase commitment on November 15, 2015 to purchase
100,000 barrels of aviation fuel for P55 per barrel on March 31, 2016. The entity entered into this purchase
commitment to protect itself against the volatility in the aviation fuel market. By December 31, 2015, the
purchase price of aviation fuel had fallen to P50 per barrel. However, by March 31, 2016, when the entity
took delivery of the 100,000 barrels the price of aviation fuel had risen to P58 per barrel. How much should
be recognized as gain on purchase commitment for 2016?
a. P500,000
b. P300,000
c. P800,000
d. P0
The following information was derived from the accounting records of Empleo Company for the current
year:
Myras warehouse
Goods held by consignees
Beginning inventory P
1,100,000
120,000
Purchases
4,800,000
600,000
Freight in..
100,000
Transportation to consignee.
50,000
Freight out
300,000
80,000
Ending inventory.
1,450,000
200,000
What is the cost of goods sold for the current year?
a. P4,550,000
b. P4,850,000
c. P5,070,000
d. P5,120,000
Hannah Company purchases motorcycles from various countries and exports them to Europe. Hannah
Company has incurred the following costs during the current year:
Cost of purchases based on vendors invoice.. P
5,000,000
Trade discount on purchases, already deducted from invoice..
500,000
Import duties
400,000
Freight and insurance on purchases..
1,000,000
Other handling costs relating to imports.
100,000
Brokerage commission paid to agents for arranging imports.
200,000
Sales commission paid to sales agents.
300,000

FINANCIAL ACCOUNTING 1

6.

7.

8.

9.

10.

After sales warranty cost..

250,000
Salaries of accounting department..
600,000
What is the total cost of the purchases?
a. P5,700,000
b. P6,100,000
c. P6,700,000
d. P6,500,000
On July 1, 2015, Dreamworks Animation recorded purchases of inventory of P3,000,000 and P2,000,000
under credit terms of 2/15, n/30. The payment due on the P3,000,000 purchase was remitted on July 16,
2015. The payment due on the P2,000,000 purchase was remitted on July 31. Under the net method and
gross method, these purchases should be included at what amount in the determination of the cost of
goods available for sale?
Net Method
Gross Method
a. P 4,900,000
P4,940,000
b. P4,900,000
P5,000,000
c. P4,940,000
P4,900,000
d. P5,000,000
P4,900,000
The following information has been extracted from the records of Marianne Company about one of its
product:
Unit
Unit Cost
Total
Jan. 1
Beginning Balance
10,000
150
1,500,000
5
Purchase
10,000
180
1,800,000
15
Sale
15,000
16
Sales Return
1,000
25
Purchase
4,000
200
800,000
26
purchase return
500
200
100,000
Under the FIFO, what should be reported respectively as cost of ending inventory and cost of goods sold?
a. 1,780,000 and 2,220,000
b. 1,790,000 and 2,210,000
c. 1,425,000 and 2,575,000
d. 1,900,000 and 2,100,000
Using the same information in no. 7, under the perpetual average method or moving average method, what
should be reported respectively as cost of ending inventory and cost of goods sold?
a. 1,690,000 and 2,310,000
b. 1,790,000 and 2,210,000
c. 1,700,500 and 2,299,500
d. 1,616,995 and 2,383,005
Using the same information in no. 7, under the periodic average method or weighted average method, what
should be reported respectively as cost of ending inventory and cost of goods sold?
a. 1,616,995 and 2,383,005
b. 1,790,000 and 2,210,000
c. 1,678,365 and 2,321,635
d. 1,700,000 and 2,300,000
Vista Company provided the following data for 2015
Inventory January 1
Cost P
3,000,000
Net Realizable Value..
2,800,000
Net Purchases
8,000,000
Inventory December 31
Cost...
4,000,000
Net Realizable Value..
3,700,000
Under PAS 2, Inventories, what should be reported as cost of goods sold?
a. P7,000,000
b. P7,100,000
c. P7,300,000

FINANCIAL ACCOUNTING 1

d. P7,200,000
11. On December 31, 2015, Neverland Companys ending inventory was P3,000,000, and the allowance for
inventory write down before any adjustment was P150,000. Relevant information on December 31, 2015
follows:
Cost
Replacement Cost
Sales Price
NRV
Profit
Bags
800,000
900,000
1,200,000
550,000
250,000
Shoes
1,000,000
1,200,000
1,300,000
1,100,000
150,000
Clothing
700,000
1,000,000
1,250,000
950,000
300,000
Lingerie
500,000
600,000
1,000,000
350,000
300,000
How much loss on inventory write down is included in 2010 cost of sales?
a. P50,000
b. P200,000
c. P400,000
d. P250,000
12. Using the same information in no. 11, at what amount should the inventory be carried in the statement of
financial position?
a. P3,000,000
b. P2,950,000
c. P2,600,000
d. P3,350,000
13. Globalports accounting records indicated the following for 2015:
Inventory, January 1.. P
5,000,000
Purchases
23,000,000
Sales.
25,000,000
A physical inventory taken on December 31, 2015 resulted in an ending inventory of P5,000,000. On
December 31, 2015, unsold goods on consignment with selling price of P1,500,000 are in the hands of the
consignee. The gross profit on cost remained constant at 25% in recent years. Globalport suspects that
some inventory may have been taken by a new employee. At December 31, 2015, what is the estimated
cost of missing inventory?
a. P3,050,000
b. P3,350,000
c. P1,800,000
d. P1,500,000
14. On the night of September 30, 2015, a fire destroyed most of the merchandise inventory of Emerald
Corporation. All goods were completely destroyed except for partially damaged goods that normally sell for
P100,000 and that had an estimated realizable value of P25,000 and undamaged goods that normally sell
for P60,000. The following data are available
Inventory January 1. P
600,000
Net purchases, January 1 to September 30..
4,300,000
Net sales, January 1 to September 30.
5,600,000
Total
2009
2008
2007
Net Sales
9,000,000
5,000,000
3,000,000
1,000,000
Cost of sales
6,750,000
3,840,000
2,200,000
710,000
Gross profit
2,250,000
1,160,000
800,000
290,000
What is the estimated amount of fire loss on September 30, 2015?
a. P700,000
b. P615,000
c. P630,000
d. P580,000
15. On December 31, 2015, the Fire Nation attacked and damaged the warehouse and factory of the Earth
Kingdom, completely destroying the work in process inventory. There was no damage to either the raw
materials or the finished goods inventory. The physical inventory revealed the following:
January 1
December 31
Raw Materials P
1,700,000
2,000,000

FINANCIAL ACCOUNTING 1

16.

17.

18.

19.

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 amounted to
P5,000,000, and manufacturing overhead has been applied at 60% of direct labor. What was the inventory
loss on December 31, 2015?
a. P3,500,000
b. P3,800,000
c. P2,500,000
d. P1,500,000
Johnson and Johnsons Company uses the retail inventory method to approximate its ending inventory. The
following information is available for the current year:
Cost
Retail
Beginning inventory
P
650,000
1,200,000
Purchases
9,000,000
14,700,000
Freight in
200,000
Purchase returns
300,000
500,000
Purchase allowances
150,000
Departmental transfer in
200,000
300,000
Net markups
300,000
Net markdowns
1,000,000
Sales
9,500,000
Sales discount
100,000
Employee discounts
500,000
Estimated normal shoplifting losses
600,000
Estimated normal shrinkage
400,000
What should be reported as the estimated cost of ending inventory using the lower of average cost or
market?
a. P2,400,000
b. P2,460,000
c. P3,060,000
d. P2,700,000
Using the same information in no. 16, what should be reported as estimated cost of ending inventory using
the average cost approach of applying retail method?
a. P2,560,000
b. P2,624,000
c. P3,264,000
d. P2,880,000
Blackberry Inc. uses retail method of inventory valuation. The following information is available:
Cost
Retail
Beginning inventory
P
1,400,000
2,000,000
Purchases
5,850,000
8,000,000
Net markups
1,500,000
Net markdowns
500,000
Sales
7,500,000
What would be the estimated cost of the ending inventory using FIFO retail?
a. P2,275,000
b. P2,375,000
c. P2,310,000
d. P2,205,000
Robinsons Corporations usual sales term are n/60. FOB shipping point. Sales, net of returns and
allowances, totaled P9,200,000 for the year ended December 31, 2015, before year-end adjustments.
Additional data are as follows:

FINANCIAL ACCOUNTING 1

On December 31, 2015, Robinsons authorized a customer to return, for full credit, goods
shipped and billed at P200,000 on December 15, 2015. The returned goods were received
by Robinsons on January 15, 2016, and P200,000 credit memo was issued and recorded
on the same date.
Goods with an invoice amount of P300,000 were billed and recorded on January 15, 2016.
The goods were shipped on December 31, 2015
Goods with an invoice amount of P400,000 were billed and recorded on December 31,
2015. The goods were shipped on January 15, 2016
What amount should be reported as net sales for 2015?
a. P9,300,000
b. P9,100,000
c. P9,000,000
d. P8,900,000
20. Air21 Express accounts payable on December 31, 2015 totaled P4,500,000 before any necessary yearend adjustments relating to the following transactions:
On December 31, 2015, Air21 Express wrote and recorded checks to creditors totaling P2,000,000 causing
an overdraft of P500,000 in its bank account on December 31, 2015. The checks were mailed on January
15, 2016.
On December 31, 2015, Air21 Express purchased and received goods for P750,000, terms 2/10, n/30. It
record purchases and accounts payable at net amount. The invoice was recorded and paid January 10,
2016
Goods shipped FOB destination on December 31, 2015 from a vendor to Air21 Express were received
January 15, 2016. The invoice cost was P325,000.
On December 31, 2015, what amount should Air21 Express report as accounts receivable?
a. P7,575,000
c. P7,235,000
b. P7,250,000
d. P7,553,000