PAS 2 INVENTORY

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 rendering
or services
d. Used in the production or supply of goods and services for administrative purposes

2. Which inventory of a manufacturer is similar to the merchandise inventory of a retailer?

a. Raw materials c. Finished goods
b. Work in process d. Supplies

3. Why is inventory included in the computation of net income?

a. To determine cost of goods sold
b. To determine sales revenue
c. To determine merchandise returns
d. Inventory is not included in the computation of net income

4. The cost of inventory is the sum of

a. Costs of purchase and costs of conversion
b. Direct costs, indirect costs and other costs
c. Costs of purchase, costs of conversion and other costs incurred in bringing the inventory to
their present location and condition
d. Costs of conversion and other costs incurred in bringing the inventory to the present
condition

5. The costs of purchase of inventory 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 inventory
d. Trade discounts, rebates and other similar items

6. Which of the following should be taken into account when determining the cost of inventory?
a. Storage cost of past-finished goods
b. Abnormal freight in
c. Recoverable purchase tax
d. Interest on inventory loan

7. When allocating costs to inventory produced for the period, fixed overhead should be based upon
a. The actual amounts of goods produced during the period
b. The normal capacity of production facilities
c. The highest production levels in the last three periods
d. The lowest production levels in the last three periods

8. How should unallocated fixed overhead costs be treated?

a. Allocated to finished goods and cost of goods sold
b. Allocated to raw materials, work in process and finished goods
c. Recognized as an expense in the period when incurred
d. Allocated to work in process, finished goods and cost of goods sold
9. Variable production overheads are allocated to each unit of production on the basis of the
a. Normal capacity of the production facilities
b. Actual use of the production facilities
c. Either the normal capacity or the actual use of production facilities
d. Neither the normal capacity nor the actual use of production facilities

10. The inventory of a service provider is described as work in progress and includes
a. Labor cost of personnel directly engaged in providing the service
b. Compensation of supervisors directly engaged in providing the service
c. Attributable overhead incurred in providing the service
d. All of these

11. 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 of 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

12. Which is incorrect concerning the maritime term CIF (cost, insurance and freight)?
a. The buyer agrees to pay in a lump sum the cost of goods, insurance and freight charge
b. The seller must deliver the goods to the carrier and pay for the cost of loading only
c. The seller must deliver the goods to the carrier and pay for the cost of loading and cost of
shipment
d. Title passes to the buyer upon delivery of the goods to the carrier

13. Theoretically, freight and warehousing costs incurred in the transfer of consigned goods from the
consignor to the consignee should be considered
a. An expense by the consignor c. Inventoriable by the consignor
b. An expense by the consignee d. Inventoriable by the consignee

14. Under the net method, which of the following should be included in cost of inventory?
a. Freight cost
b. Purchase discount not taken
c. Both freight cost and purchase discount not taken
d. Neither freight cost nor purchase discount taken

15. 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

16. The use of purchase discount 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

17. When a portion of inventory has been pledged as security on a loan

a. The value of the portion pledged should be subtracted from the debt
 b. An equal amount of retained earnings should be appropriated
c. The fact should be disclosed but the amount of current assets should not be affected
d. The cost of the pledged inventory should be transferred from current to noncurrent asset

18. 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 appropriation of retained earnings
d. Presented in the income statement

19. Which of the following is not an acceptable basis for valuation of inventory?
a. Historical cost
b. Standard cost
c. Prime cost
d. Current selling price less cost to complete and cost to sell

20. 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 c. LIFO
b. Average method d. Specific identification

21. Which is the reason why the specific identification method may be considered ideal?
a. The potential for manipulation of income is reduced
b. There is no arbitrary allocation of cost
c. The cost flow matches the physical flow
d. It is applicable to all types of inventory

22. Which inventory costing method most closely approximates current cost for ending inventory?
a. Average c. LIFO
b. FIFO d. Specific identification

23. 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

24. LCNRV of inventory

a. Is always either the net realizable value or cost
b. Should always be equal to net realizable value
c. May sometimes be less than net realizable value
d. Should always be equal to estimated selling price less cost to complete

25. Net realizable value is the

a. Estimated selling price
b. Estimated selling price less cost of disposal
c. Estimated selling price less cost to complete
d. Estimated selling price less cost to complete and cost of disposal

26. LCNRV
a. Gives the lowest valuation if applied to total inventory
b. Gives the lowest valuation if applied to major groups of inventory
 c. Gives the lowest valuation if applied to individual items of inventory
d. Must be applied to major groups for tax purposes

27. Which of the following statements is true regarding writedown and reversal of writedown?
a. Reversal of inventory writedown is prohibited
b. Separate reporting of reversal of inventory writedown is required
c. Entities are required to record inventory writedown in a separate loss account
d. All of the choices are true

28. Reporting inventory at the lower of cost and net realizable value is a departure from
a. Historical cost c. Conservatism
b. Consistency d. Full disclosure

29. How should prompt payment discount be dealt with when valuing inventory at LCNRV?
a. Added to cost c. Deducted in arriving at NRV
b. Ignored d. Deducted from cost

30. How should trade discounts be dealt with when valuing inventory at LCNRV?
a. Added to cost c. Deducted in arriving at NRV
b. Ignored d. Deducted from cost

31. How should sales staff commission be dealt with when valuing inventory at LCNRV?
a. Added to cost c. Deducted in arriving at NRV
b. Ignored d. Deducted from cost

32. Which of the following is a characteristic of a perpetual inventory system?

a. Inventory purchases are debited to a purchases account
b. Inventory records are not kept for every item
c. Cost of goods sold is recorded each time a sale is made
d. Cost of goods sold is determined as the amount of purchases less the change in inventory

33. When the FIFO inventory cost flow method is used, a perpetual inventory system would
a. Not be permitted
b. Result in a higher ending inventory than a periodic inventory system
c. Result in the same ending inventory as a periodic inventory system
d. Result in a lower ending inventory than a periodic inventory system

34. This is often used for convenience for measuring inventories of large number of rapidly changing
items with similar margins for which it is impracticable to use other costing method
a. Standard cost method c. Gross profit method
b. Retail method d. Relative sales price method

35. To produce an inventory valuation which approximates LCNRV using the conventional 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

36. What is the effect of freight in on the cost-retail ratio when using the conservative retail method?
a. Increases the cost-retail ratio
 b. No effect on the cost-retail ratio
c. Depends on the amount of the net markups
d. Decreases the cost-retail ratio

37. What is the effect of net markups on the cost-retail ratio when using the conservative retail
method?
a. Increases the cost-retail ratio c. Depends on the amount of the net markdowns
b. No effect on the cost-retail ratio d. Decreases the cost-retail ratio

38. The gross margin method may be used for all of the following, except
a. Internal as well as external interim reports
b. Internal as well as external year-end reports
c. Estimate of inventory destroyed by fire or other casualty
d. Rough test of the validity of an inventory cost determined under either periodic or perpetual

39. The use of the gross profit method assumes

a. The amount of gross profit is the same as in prior years
b. Sales and cost of goods sold have not changed from previous years
c. Inventory value has not increased from previous years
d. The relationship between selling price and cost of goods sold is similar to prior years

40. This is defined as those who buy or sell commodities for others or on their own account
a. Brokers c. Commission agents
b. Traders d. Broker-traders

41. The commodities of broker-traders are measured at

a. Fair value c. Net realizable value
b. Fair value less cost of disposal d. Lower of cost and net realizable value

INVENTORY

1. Zhedrick company reported P5,000,000 of inventory on December 31, 2014 based on physical
count. Additional information is as follows:

Goods sold to a customer on December 31, 2014 which are being held for the customer to call at
the customers convenience with a cost of P150,000 and included in the count

Excluded from the physical count were goods billed to a customer, FOB shipping point, on
December 31, 2014. 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 15, 2015

Goods were in transit from a vendor. The invoice cost was P300,000 and goods were shipped
FOB seller on December 31, 2014

Work in process costing P400,000 was sent to an outside processor for finishing on December 31,
2014

Goods out on consignment with sales price of P1,000,000 and markup of 25% on cost. Shipping
costs amounted to P50,000. What is the correct amount of inventory on December 31, 2014?
a. 6,900,000 b. 6,850,000 c. 6,600,000 d. 6,750,000
2. Jocen company incurred the following costs during the current year:

Cost of purchases based on invoices 5,000,000

Trade discounts already deducted from invoices 500,000
Import duties 400,000
Freight and insurance on purchases 600,000
Other handling costs on imports 100,000
Commission paid to agents for arranging imports 200,000
Sales commission paid to sales agents 300,000
Salaries of accounting department 1,000,000
After sales warranty costs 250,000

What is the total cost of purchases?

a. 6,300,000 b. 5,800,000 c. 6,100,000 d. 6,600,000

3. On June 1, 2014, Elmer company sold merchandise with a list price of P5,000,000 to a customer.
The entity allowed trade discounts of 20% and 10%. Credit terms were 5/10, n/30 and the sale
was made FOB shipping point. The entity prepaid P100,000 of delivery cost for the customer as
an accommodation. On June 11, 2014, what is the full remittance from the customer?
a. 3,600,000 b. 3,420,000 c. 3,700,000 d. 3,520,000

4. On July 1, 2014, Novie company recorded purchases of inventory of P3,000,000 and P2,000,000
under credit terms of 2/15, net/30. The payment due on the P3,000,000 purchase was remitted on
July 16. The payment due on the P2,000,000 purchase was remitted on July 31. Under the gross
method and net method, respectively, these purchases should be included at what amount in the
determination of cost of goods available for sale?
a. 4,900,000 and 4,940,000 c. 4,940,000 and 4,900,000
b. 4,900,000 and 5,000,000 d. 5,000,000 and 4,900,000

5. Stella company reported accounts payable of P2,200,000 on December 31, 2014 before
considering the following data:

Goods shipped to the entity on December 31, 2014 FOB shipping point were lost in transit. The
invoice cost of P40,000 was not recorded. On January 15, 2015, the entity filed a P40,000 claim
against common carrier

On December 30, 2014, a vendor authorized the entity to return for full credit goods shipped and
billed at P70,000 on December 15, 2014. The returned goods were shipped by the entity on
December 31, 2014. A P70,000 credit memo was received and recorded by the entity on January
15, 2015

On December 31, 2014, the entity has a P500,000 debit balance in accounts payable to a supplier
resulting from an advance payment for goods to be manufactured to the entitys specifications

What amount should be reported as accounts payable on December 31, 2014?

a. 2,170,000 b. 2,680,000 c. 2,730,000 d. 2,670,000

6. Faith companys usual sales terms are net 60 days. FOB shipping point. Sales, net of returns and
allowances, totaled P9,200,000 for the year ended December 31, 2014, before year-end
adjustments. Additional data are as follows:
 On December 31, 2014, the entity authorized a customer to return, for full credit, goods shipped
and billed at P200,000 on December 15, 2014. The returned goods were received by the entity on
January 15, 2015, and a 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, 2015. The
goods were shipped on December 31, 2014.

Goods with an invoice amount of P400,000 were billed and recorded on December 31, 2014. The
goods were shipped on January 15, 2015.

What amount should be reported as net sales for 2014?

a. 9,300,000 b. 9,100,000 c. 9,000,000 d. 8,900,000

7. On October 1, 2014, Maricon company sold 100,000 gallons of heating oil at P50 per gallon.
Fifty thousand gallons were delivered on December 15, 2014 and the remaining 50,000 gallons
were delivered on January 15, 2015. Payment terms were 50% due on October 1, 2014, 25% on
the first delivery and the remaining 25% due on second delivery. What amount of sales revenue
should be recognized in 2014?
a. 5,000,000 b. 2,500,000 c. 3,750,000 d. 1,250,000

INVENTORY VALUATION

1. Jamaica company provided the following information:

Units Unit cost Total cost
Jan. 1 Beginning balance 10,000 150 1,500,000
5 Purchase 10,000 180 1,800,000
15 Sale 15,000
16 Sale return 1,000
25 Purchase 4,000 200 800,000
26 Purchase return 500 200 100,000

A. Under the FIFO, what amount should be reported respectively as cost of ending inventory and
cost of goods sold?
a. 1,780,000 and 2,220,000 c. 1,425,000 and 2,575,000
b. 1,790,000 and 2,210,000 d. 1,900,000 and 2,100,000

B. Under the perpetual average method or moving average, what amount should be reported
respectively as cost of ending inventory and cost of goods sold?
a. 1,690,000 and 2,310,000 c. 1,700,500 and 2,299,500
b. 1,790,000 and 2,210,000 d. 1,616,995 and 2,383,005

C. Under the periodic average method or weighted average, what amount should be reported
respectively as cost of ending inventory and cost of goods sold?
a. 1,616,995 and 2,383,005 c. 1,678,365 and 2,321,635
b. 1,790,000 and 2,210,000 d. 1,700,000 and 2,300,000

2. Nathalie company provided the following data for the current year:
Inventory January 1:
Cost 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
What amount should be reported as cost of goods sold under the LCNRV?
a. 7,000,000 b. 7,100,000 c. 7,300,000 d. 7,200,000

3. Based on physical count on December 31, 2014, Glydel company determined the chocolate
inventory on a FIFO basis at P2,600,000 with a replacement cost of P2,000,000. The entity
estimated that after processing cost of P1,500,000, the chocolate inventory could be sold as
finished candy bars for P4,000,000. The normal profit margin is 10% on sales. What amount
should be reported as chocolate inventory on December 31, 2014?
a. 2,500,000 b. 2,600,000 c. 2,100,000 d. 2,000,000

4. Claudine company provided the following information during the current year:
Product 1 Product 2
Materials and conversion cost 3,000,000 3,600,000
Selling price 4,000,000 6,000,000
Estimated selling cost 1,200,000 1,400,000
General administration cost 600,000 1,600,000
Normal profit margin on sales 1,000,000 1,500,000
At year-end, the manufacture of the products has been completed but no selling cost has yet been
incurred. What total amount should be reported as inventory at year-end?
a. 6,400,000 b. 6,600,000 c. 4,900,000 d. 5,800,000

5. Rellyne company provided the following information:

2013 2014
Net income using LIFO 2,800,000 3,000,000
Year-end inventory:
LIFO 1,000,000 1,400,000
FIFO 1,500,000 2,000,000
What is the net income for 2014 using FIFO cost flow?
a. 3,300,000 b. 3,100,000 c. 3,600,000 d. 2,900,000

6. Joy company used the average method for internal reporting and LIFO for financial statement and
income tax reporting. On December 31, 2014, the inventory was P375,000 using average and
P320,000 using LIFO. The unadjusted balance of the LIFO reserve account on December 31,
2014 was P35,000. The cost of goods sold account had a balance of P3,500,000 from transactions
recorded during the current year. What amount should be reported as cost of goods sold for 2014?
a. 3,520,000 b. 3,480,000 c. 3,500,000 d. 3,555,000

7. During the current year, Shaira company purchased a tract of land for P12,000,000. The entity
incurred additional cost of P3,000,000 in preparing the land for sale. The tract of land was
subdivided into residential lots as 100 Class A lots with sales price of P240,000 per lot, 100 Class
B lots with sales price of P160,000 per lot, and 200 Class C lots with sales price of P100,000 per
lot. What amount of the costs should be allocated to Class A lots?
a. 3,000,000 b. 3,750,000 c. 6,000,000 d. 7,200,000

8. On December 1, 2014, Kia company entered into a commitment to purchase 100,000 barrels of
aviation fuels for P55 per barrel on March 31, 2015. The entity entered into this purchase
commitment to protect itself against the volatility in the aviation fuel market. By December 31,
2014, the purchase price of aviation fuel had fallen to P50 per barrel. However, by March 31,
 2015, when the entity took delivery of the 100,000 barrels the price of aviation fuel had risen to
P58 per barrel. What amount should be recognized as gain on purchase commitment for 2015?
a. 500,000 b. 300,000 c. 800,000 d. 0

GROSS PROFIT AND RETAIL METHOD

1. Shella company reported the following information for 2014:

Inventory, January 1 5,000,000
Net purchases 23,000,000
Sales 30,000,000
Sales returns 3,000,000
Sales discounts 1,000,000
A physical inventory taken on December 31, 2014 resulted in an ending inventory of P4,000,000.
On December 31, 2014, unsold goods on consignment with selling price of P1,000,000 are in the
hands of a consignee. The gross profit was 25% on cost. On December 31, 2014, what is the
estimated cost of inventory shortage?
a. 2,400,000 b. 1,400,000 c. 1,600,000 d. 1,275,000

2. On the night of December 31, 2014, a fire destroyed most of the merchandise inventory of Marie
company. All goods were completely destroyed except for partially damaged goods that normally
sell for P100,000 and that had an estimated net realizable value of P25,000 and undamaged goods
that normally sell for P60,000.
Inventory, January 1, 2014 600,000
Net purchases for 2014 4,300,000
Net sales for 2014 5,600,000

Total 2013 2012 2011

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 income 2,250,000 1,160,000 800,000 290,000
What is the estimated amount of fire loss on December 31, 2014?
a. 700,000 b. 615,000 c. 630,000 d. 580,000

3. On December 31, 2014, a fire damaged the warehouse and factory of Katrina 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
amounted to P5,000,000, and manufacturing overhead has been applied at 60% of direct labor.
What was the inventory fire loss on December 31, 2014?
a. 3,500,000 b. 3,800,000 c. 2,500,000 d. 1,500,000

4. Krishtel company used the retail inventory method to approximate the ending inventory. The
following information is available for the current year:
Cost Retail
Beginning inventory 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
Departamental transfer in 200,000 300,000
Net markups 300,000
Net markdowns 1,000,000
Sales 9,500,000
Sales discounts 100,000
Employee discounts 500,000
Estimated normal shoplifting losses 600,000
Estimated normal shrinkage 400,000
A. What is the estimated cost of ending inventory using the conservative approach?
a. 2,400,000 b. 2,460,000 c. 3,060,000 d. 2,700,000

B. What is the estimated cost of ending inventory using the average cost approach?
a. 2,560,000 b. 2,624,000 c. 3,264,000 d. 2,880,000

5. Jahara company provided the following amounts all at retail:

Beginning inventory 200,000 Sales 3,600,000
Purchases 6,000,000 Sales return 100,000
Purchase return 300,000 Employee discounts 250,000
Net markup 900,000 Normal shortage 200,000
Net markdown 150,000 Abnormal shortage 400,000

What is the ending inventory at retail?

a. 2,300,000 b. 2,700,000 c. 2,800,000 d. 2,900,000

6. Ricalyn company used the FIFO retail method of inventory valuation.

Cost Retail
Beginning inventory 1,400,000 2,000,000
Purchases 5,850,000 8,000,000
Net markup 1,500,000
Net markdown 500,000
Sales 7,500,000
What is the estimated cost of the ending inventory using the FIFO approach?
a. 2,275,000 b. 2,375,000 c. 2,310,000 d. 2,205,000