INVENTORIES (IAS2/PAS2)

SCOPE
PAS 2 applies to all inventories except
work in progress arising under construction contracts, including directly related service
contracts
financial instruments
biological assets related to agricultural activity and agricultural produce at the point of
harvest

DEFINITIONS
Inventories are assets:
(a) held for sale in the ordinary course of business;
(b) in the process of production for such sale; or
(c) in the form of materials or supplies to be consumed in the production process or in
the rendering of services.

Test of Ownership
a. Legal Test and Exception to the Legal Test
a.1 Title is not synonymous with possession of goods on hand.
a.1.1Goods on hand may not be owned.
a.1.2Goods not on hand may be owned.
a.2 The following matters causes confusion in ownership
a.2.1Goods in transit
a.2.2Consignment sales
a.2.3Goods held by customers on approval or trial basis

MEASUREMENT OF INVENTORIES
Inventories shall be measured at the lower of cost and net realizable value.

Cost of inventories
a. Costs of purchase
a.1 purchase price
a.2 import duties and other taxes (other than those subsequently recoverable by
the entity from the taxing authorities)
a.3 Transport
a.4 Handling
a.5 other costs directly attributable to the acquisition of finished goods, materials
and services
⮚ Trade discounts, rebates and other similar items are deducted in determining the
costs of purchase.

b. Costs of conversion
b.1 direct labor
b. 2 fixed and variable production overheads
⮚ The allocation of fixed production overheads to the costs of conversion is based on
the normal capacity of the production facilities.
⮚ Where there is low level of production and idle plant, the amount of fixed overhead
allocated is not increased. Unallocated overheads are recognized as an expense.
⮚ In periods of abnormally high production, the amount of fixed overhead allocated to
each un it of production is decreased so that inventories are not measured above
cost.
⮚ Absorption (full) Costing vs. Variable (Direct) Costing

⮚ Joint and By-products

When the costs of conversion of each product are not separately identifiable,
they are allocated between the products on a rational and consistent basis.
● relative sales value of each product either at the stage in the production
process when the products become separately identifiable,
● or at the completion of production.
● If immaterial, they are often measured at net realisable value and this
value is deducted from the cost of the main product.

c. Other costs (non-production overhead such as costs of designing products for specific
customers
 c.1 Cost excluded from the cost of inventories:
c.1.1 abnormal amounts of wasted materials, labor or other production
costs
c.1.2 storage costs, unless those costs are necessary in the production
process before a further production stage
c.1.3 administrative overheads that do not contribute to bringing
inventories to their present location and condition
c.1.4 Selling costs
c.1.5.Finance cost
An entity may purchase inventories on deferred settlement terms.
When the arrangement effectively contains a financing element,
that element, for example a difference between the purchase price
for normal credit terms and the amount paid, is recognized as
interest expense over the period of the financing.

c.2 Cost formulas

c.2.1 Specific identification method
The cost of inventories of items that are not ordinarily
interchangeable and goods or services produced and segregated
for specific projects shall be assigned by using specific
identification of their individual costs.
Generally impractical!
c.2.2.First-in, First-out (FIFO)
The FIFO formula assumes that the items of inventory that were
purchased or produced first are sold first, and consequently the
items remaining in inventory at the end of the period are those
most recently purchased or produced.
c.2.3 Weighted average
Under the weighted average cost formula, the cost of each item is
determined from the weighted average of the cost of similar items
at the beginning of a period and the cost of similar items
purchased or produced during the period. The average may be
calculated on a periodic basis, or as each additional shipment is
received, depending upon the circumstances of the entity.

⮚ Once chosen, the cost formula has to be applied consistently, unless the
change is justified under IAS 8.
⮚ Inventories similar in nature should be treated with similar cost formula.
Differences in geographical area do not justify the use of a different cost
formula.

d. Net Realizable Value

When is cost unrecoverable?
● Damaged
● Obsolete
● >cost to complete or > cost to sell
What about raw materials, do we write them down to NRV?
Writing down of inventories to their net realizable value must be done
● Is consistent with the view that assets should not be carried in excess
of amounts expected to be realized from their sale or use.
● On ITEM BY Item basis
● Do not write down on the basis of CLASS
● Assessment of NRV is done in each subsequent period
🖙 When the previous cause of the reduction in inventory
value no longer exists, reversal of write-down is made.
🖙 reversal is limited to the amount of the original write-down
🖙 reversal of write-down reduces cost of sales

RECOGNITION AS AN EXPENSE
🖙 when inventories are sold
🖙 inventory write-down

Inventory Estimation
⮚ When do we use inventory approximation or estimation?
⮚ When inventories are destroyed by catastrophe, fire, and theft
⮚ To prove reasonableness of physical count Interim reports

Methods:
 ⮚ Gross Profit Method
Gross profit ratio is assumed to be approximately the same from period to
another.

Total Goods Available for Sale (TGAS) xx

Less: Cost of Goods Sold (COGS) xx
Ending Inventory (approximate) xx

Where COGS is computed:

Net Sales x COGS Ratio (if GP rate given is based on sales)
Net sales ÷ Sales Ratio (if GP rate given is based on cost)
In computing Net Sales DISREGARD sales allowances and sales
discount as they do not affect the physical volume of goods.
If the account title used is “sales returns and allowances” without details,
it is construed as returns.
Illustration:
Inventory, beginning 800,000
Purchases 6,000,000
Purchase return 190,000
Purchase allowance 60,000
Purchase discount 240,000
Freight in 65,000
Sales 8,400,000
Sales return 440,000
Sales allowance 140,000
Sales discount 160,000

Compute for ending inventory if

GP RATE ON SALES is 25%
GP RATE ON COST is 25%

b. Retail Method
The retail method is often used in the retail industry for measuring inventories of
large numbers of rapidly changing items with similar margins for which it is
impracticable to use other costing methods.
The cost of the inventory is determined by reducing the sales value of the
inventory by the appropriate percentage gross margin.
The percentage used takes into consideration inventory that has been marked
down to below it s original selling price. An average percentage for each retail
department is often used.

Total Goods Available for Sale (TGAS) @ selling or retail price xx

Less: Net Sales xx
Ending Inventory @ selling price xx
Multiply by Cost Ratio xx
Ending Inventory @ cost (approximate) xx

Where Cost Ratio is computed:

TGAS @Cost ÷ TGAS @ Selling Price

In computing Net Sales DISREGARD sales allowances and sales discount as

they do not affect the physical volume of goods.
Illustration:
Cost Retail
Inventory, beginning 300,000 460,000
Purchases 800,000 1,300,000
Purchase return (110,000) ( 160,000)
Purchase allowance ( 10,000)
Purchase discount ( 40,000)
Freight in 20,000
TGAS 960,000 1,600,000

Sales 1,260,000
Sales return ( 60,000)
Net Sales 1,200,000
Inventory, end @ retail 400,000
Multiply by Cost Ratio (960,000/1,600,000) 60%
Inventory, end @ cost 240,000

Conservative or conventional approach

Accounts for additional markup and markup cancellation
Average cost approach
Accounts for additional markup, markup cancellation, markdown and markdown
cancellation
FIFO
Accounts for additional markup, markup cancellation, markdown and markdown
cancellation plus current cost ratio
PROBLEM SOLVING

Problem 1

Pau Company had 61,200 units on December 31, 2017, based on physical count of
goods on that date. The following items have not yet been recorded as purchases and
sales as of December 31.

No. Transaction Terms Number of Units

1 Purchase FOB shipping point 1,500
2 Purchase FOB destination 1,800
3 Sale FOB shipping point 3,900
4 Sale FOB destination 3,000

Items 1-4 were shipped by the seller December 31, 2017 and received by the buyer
January 5, 2018.

Required:

How many units should be considered as inventory at the end of December 31, 2017?

Reported units on December 31, 2017 61,200

Adjustments:
No. 1 item – Purchased FOB shipping point
still in transit not included in purchases 1,500
No. 4 item – Sold FOB destination still in transit not
included in inventory 3,000
Correct inventory quantity 65.700

Problem 2

Camil Company is preparing its 2017 year-end financial statements. Prior to any
adjustments, inventory is valued at Php3,375,000. The following information has been
found relating to certain inventory transactions.

a. Goods valued at Php660,000 are on consignment with a customer. These goods

are not included in the Php3,375,000 inventory figure.
b. Goods costing Php162,000 were received from a vendor on January 3, 2018.
The related invoice was received and recorded on January 12, 2018. The goods
were shipped on December 31, 2017, terms FOB shipping point.
c. Goods costing Php510,000 were shipped on December 31, 2017, and were
delivered to the customer on January 5, 2018. The terms of the sale were FOB
shipping point. The goods were included in ending inventory of 2017, even
though the sale was recorded in 2017.
d. A Php210,000 shipment of goods to a customer on December 31, 2017, terms
FOB destination was not included in the year-end inventory. The goods cost
Php156,000 and were delivered to the customer on January 5, 2018. The sale
was properly recorded in 2018.
e. An invoice for goods costing Php210,000 was received and recorded as a
purchase on December 31, 2017. The related goods, shipped FOB destination,
were received on January 5, 2018, and thus were not included in the physical
inventory.
f. Goods valued at Php390,000 are on consignment from a vendor. These goods
are not included in the year- end inventory figure.
g. A Php360,000 shipment of goods to a customer on December 30, 2017, terms
FOB destination, was recorded as a sale in 2017. The goods costing
Php192,000 and delivered to the customer on January 8, 2018, were not
included in 2017 ending inventory.

Required:
Determine the correct inventory amount to be reported on Camil’s statement of financial
position at December 31, 2017.
 Reported inventory Php 3,375,000
Adjustments:
a. Goods out on consignment 660,000
b. Goods purchased in transit FOB shipping point 162,000
c. Goods sold in transit FOB shipping point
included in inventory ( 510,000)
d. Goods sold in transit FOB destination
not included in inventory 156,000
g. Goods sold in transit FOB destination
not included in inventory 192,000

Correct inventory Php 4,045,000

==============

Problem 3

Camil Trading’s inventory at the end of 2017 is Php19,000,000, before considering the
following information.
Included in the amount are the following items:
a. Merchandise in transit, purchased FOB shipping point, Php1,360,000
b. Merchandise in transit, purchased FOB destination, with invoice cost of
Php840,000.
c. Goods held on consignment, Php1,000,000
d. Goods out on consignment, at cost plus 50% mark up on cost plus
Php20,000 delivery charge, Php1,220,000.
Excluded in the amount are the following items:
a. Merchandise in transit tom customers, FOB shipping point, at selling price of
Php1,080,000, which includes a 40% mark up on selling price.
b. Merchandise in transit to customers, FOB destination at selling price of
Php800,000, which includes a 40% markup on selling price.
c. Merchandise sold, in transit, “cost, insurance, freight” charged to the buyer,
with selling price of Php360,000 and cost of Php240,000.

Required: What is the correct amount of inventory?

Reported inventory Php 19,000,000

Merchandise in transit purchased FOB destination (840,000)
Goods held on consignment ( 1,000,000)
Mark up on goods out on consignment
Sales price 1,200,000
Cost (1,200,000÷ 1.5) 800,000 (400,000)
Merchandise in transit to customers FOB destination
800,000 x (100% - 40%) 480,000
Correct inventory Php 17,240,000
==========

Problem 4

The physical inventory on December 31, 2017 of Mari Company showed merchandise at
Php1,032,000. You discovered that the following items were excluded from this amount:
a. Merchandise costing Php189,000 shipped by a vendor FOB shipping point on
December 31, 2017 and received by Mari Company on January 8, 2018.
b. Merchandise costing Php240,000 shipped by a vendor FOB destination on
December 30, 2017 and received by Mari Company on January 7, 2018.
c. Merchandise costing Php75,000 which was shipped FOB destination to a
customer on December 29, 2017. The customer expected to receive the
merchandise on January 3, 2018.
d. Merchandise costing Php171,000 which was shipped FOB shipping point to a
customer on December 29, 2017. The goods are scheduled to arrive at the
destination point on January 8, 2018.
Required:
What is the correct amount of inventory that should appear on Mari’s December 31,
2017 statement of financial position?

Physical inventory at December 31, 2017 P 1,032,000

Merchandise in transit shipped FOB shipping point (a) 189,000
Merchandise sold FOB destination still in transit (c) 75,000
Correct inventory at December 31, 2017 P 1,296,000

Problem 5

The following data were taken from the inventory records of COD department store for
March 2017:
Units Unit Cost Total Cost
Balance at March 1 2,400 Php 10.75 Php 25,800
Purchases: March 15 1,900 11.35 21,565
22 3,800 11.80 44,840
Sales : March 12 2,200
28 3,600
Balance at March 31 2,300

Required: Determine the inventory value at march 31 assuming that (Round off to the
nearest peso)
a. Moving weighted average
b. Weighted average
c. FIFO
a. Cost of ending inventory
3/1 2,400@ 10.75 25,800
3/15 1,900@ 11.35 21,565
4,300@ 11.02 47,365
3/12 2,200@ 11.02 24,244
2,100@ 11.01 23,121
3/28 3,800@ 11.80 44,840
5,900@ 11.52 67,961
3/31 3,600@ 11.52 41,472
2,300@ 11.52 26,489

b.Cost of goods available for sale (25,800 + 21,565 + 44,840) P92,205

Number of units available for sale (2,400 + 1,900 + 3,800) ÷ 8,100
Weighted average cost per unit P 11,38
Number of units in ending inventory x 2,300
Cost of ending inventory P26,174

Problem 6

Toyota Corporation, which was established in 2015, manufactures lubricants used by car
manufacturers. The following data were abstracted from the company’s records:

2015 2016 2017

Number of units produced 26,000 36,000 50,000
Number of units sold 20,000 32,000 48,000
Production cost per unit Php 700 Php 820 Php 850

Sales for each year:

2015 Php 24,000,000
2016 37,600,000
2017 58,800,000

Required: Determine the amount of the gross profit for each year 2015, 2016, 2017,
using FIFO method and weighted average method.
(a) FIFO 2015 2016 2017
Sales P24,000,000 P37,600,000 P58,800,000
Cost of goods sold 14,000,000 25,520,000 40,500,000
Gross profit P10,000,000 P12,080,000 P18,300,000
Cost of goods sold:
2015 20,000 x700 = 14,000,000
2016 6,000 x 700 = 4,200,000
26,000 x 820 = 21,320,000 25,520,000
2017 10,000 x 820 = 8,200,000
38,000 x 850 = 32,300,000 40,500,000

(b) Weighted average 2015 2016 2017

Sales P24,000,000 P37,600,000 P58,800,000
Cost of goods sold 14,000,000 25,691,520 40,422,720
Gross profit P10,000,000 11,908,480, P18,377,280
Cost of goods sold:
2015 20,000 x 700 14,000,000
2016 (6,000 x 700) + (36,000 x 820) x 32,000* 25,691,520
42,000
2017 (10,000 x 802.86) + (50,000 x 850) x 48,000*40,422,880
30,000
*unit costs were rounded off to nearest centavo: 802.86 and 842.114, for 2015 and
2016, respectively.

Problem 7

Based on a physical inventory taken on December 31, 2017, Joyce Company

determined its chocolate inventory on a FIFO basis at Php156,000. Joyce Company
estimated that, after further processing costs of Php72,000, the chocolate could be sold
as finished candy bars for Php240,000. Joyce Company ‘s normal profit margin is 10%
of sales.

Required:
Under the lower of cost or net realizable value, what amount should Joyce Company
report as chocolate inventory on its December 31, 2017 statement of financial position.

Cost (under FIFO basis) P 156,000

Net realizable value (240,000 – 72,000) 168,000
--------------------
Lower of cost and net realizable value P 156,000

Problem 8

The following information is available for Uniwide Sales Trading:

Product Ama Bama Cama Dama

Cost Php 102 Php 45 Php 24 Php 9
Estimated sales price 120 60 30 15
Estimated disposal costs 15 18 8 5
Number of Units 8,000 12,000 11,000 14,400

Required:
Using the lower of cost and net realizable value, determine the total inventory value to
be presented in Uniwide Sales Trading’s statement of financial position.

Produc Cost NRV Lower Quantity Amount

t
Ama 102 (120-15) 105 102 8,000 816,000
Bama 45 (60-18)42 42 12,000 504,000
Cama 24 (30-8) 22 22 11,000 242,000
Dama 9 (15-5)10 9 14,400 129,600
TOTAL 1,691,600
Problem 9

The following information pertains to Pau Company at December 31, 2017:

Inventory, January 1 Php 2,800,000

Purchases during the year 13,200,000
Inventory, December 31:
Cost 2,400,000
NRV 2,000,000

Prior to 2017, the application of lower of cost and net realizable value never produced a
write down in the company’s inventory to an amount below cost.

Required:
What is the cost of goods sold assuming the company applies the lower of cost and net
realizable value using the allowance method.

Inventory, January 1 Php 2,800,000

Purchases during the year 13,200,000
Cost of goods available for sale 16,000,000
Less Inventory, December 31 2,400,000
Cost of goods sold Php 13,600,000

Problem 10

You audit of Mari Company’s inventory and related records revealed the following
information:
Inventory, January 1, 2017 Php 900,000
Purchases for the year 2017 7,300,000
Sales for the year 2017 8,400,000

You conducted a physical inventory on December 31, 2017 and determined

Php1,000,000 was in the company’s warehouse. The company’s president suspects
some new employees may have pilfered a portion of the inventory.

Required:

Determine the estimated cost of the missing inventory, assuming Mari Company’s gross
profit remained constant at
a. 40% on sales
b. 405 on cost of sales

(a) Gross profit is 40% based on sales

Merchandise inventory, January 1, 2017 P 900,000
Purchases for the year 7,300,000
Cost of goods available for sale P8,200,000
Less estimated cost of goods sold (8,400,000 x 60%) 5,040,000
Estimated cost of ending inventory P3,160,000
Physical inventory on December 31, 2017 500,000
Estimated cost of the missing inventory P2,660,000

(b) Gross profit is 40% based on cost of sales

Merchandise inventory, January 1, 2017 P 900,000
Purchases for the year 7,300,000
Cost of goods available for sale P8,200,000
Less estimated cost of goods sold (8,400,000/1.40) 6,000,000
Estimated cost of ending inventory P2,200,000
Physical inventory on December 31, 2017 500,000
Estimated cost of the missing inventory P1,700,000
Problem 11

On May 6, 2017, a flash flood caused damage to the merchandise stored in the
warehouse of Pau Company. You were asked to submit an estimate of the merchandise
destroyed in the warehouse. The following data were established.

2016 net sales, Php16,000,000 matched against cost of Php11,200,000. Merchandise

inventory, January 1, 2017 was Php4,000,000, 90% of which was in the warehouse and
10% in downtown showroom.

From January 1, 2017 to date of flood, you ascertained invoice value of purchase (all
stored in the warehouse), Php2,000,000; freight inward, Php80,000; purchase returns,
Php120,000.

Cost of merchandise transferred from the warehouse to showroom was Php160,000 and
net sales January 1 to May 6, 2017 (all warehouse stock), Php6,400,000.

Required:
Assuming gross profit rate in 2017 to be the same as in the previous year, what was the
estimated cost of merchandise destroyed by the flood?

Merchandise inventory, January 1 P 4,000,000

Purchases (2,000,000 + 80,000 – 120,000) 1,960,000
------------------------
Cost of Goods Available for Sale 5,960,000
Estimated Cost of Goods Sold (6,400,000 x 70%) 4,480,000
------------------------
Estimated Ending Inventory 1,480,000
Less: Goods Undamaged located in Showroom
(400,000*** + 160,000) 560,000
------------------------
Estimated Cost of Merchandise Destroyed by the Flood) 920,000
==============

*11,200,000/16,000,000 = 70%
** 4,000,000 x 10% = 400,000

Problem 12

Camil Company is engaged in buying and selling of cleansing products. The following
transactions and other information are available for the year ended December 31, 2017:

Inventory, January 1, 2017 Php 200,000

Gross purchases, all under the credit terms
2/10, n/30 5,000,000
Purchase returns made by the company, all
made before payment of accounts 80,000
Gross sales 7,380,000
Sales allowances granted 30,000
Sales returns 180,000

At December 31, 2017, purchases costing Php100,000 were in transit, FOB shipping
point.

80% of purchases made were settled within the discount period.

Required:
Determine the estimated cost of inventory at December 31, 2017, assuming that the
company maintains sells its products allowing a 40% gross profit on sales.
 Inventory, January 1 P 200,000
Purchases P5,000,000
Purchase returns (80,000)
Purchase discounts (5,000,000 x 80%) x 2% (80,000) 4,840,000
Total P 5,040,000
Estimated cost of goods sold
(7,380,000 – 180,000) x 60% 4,320,000
------------------
Estimated cost of ending inventory P 720,000
Goods in transit ( 100,000)
Estimated cost of ending inventory P 620,000

Problem 13

Angel Company began operations in 2014. On August 28, 2017, a fire broke out in the
company’s warehouse destroying all inventory and most of the accounting records. The
following information was assembled from the microfilmed records. All sales and
purchases are on account.

January 1, 2017 August 28, 2017

Inventory Php 575,400
Accounts receivable 522,360 Php 515,560
Accounts payable 352,560 491,400

Collection from customers,

1/1/17-8/28/17 3,015,200
Payments to suppliers
1/1/17-8/28/17 1,950,000
Goods out on consignment on
August 28,2017, at cost 195,000
Goods in transit at August
28, 2017 purchased
FOB shipping point 69,000

The company’s average gross profit percentage for the past three years is 30%.

Required: What is the inventory fire loss?

Inventory, January 1, 2017 P 575,400

Purchases:
Payments to suppliers P1,950,000
Accounts Payable, 8/28/17 491,400
Accounts Payable, 1/1/17 ( 352,560) 2,088,840
Cost of goods available for sale P2,664,240
Estimated cost of goods sold:
Collections from customers P3,015,200
Accounts Receivable, 8/28/17 515,560
Accounts Receivable, 1/1/17 ( 522,360)
Sales P3,008,400
Cost percentage 70% 2,105,880
Estimated cost of ending inventory P 558,360
Less undamaged goods:
Goods out on consignment P 195,000
Goods in transit 69,500 264,500
Estimated inventory fire loss P 293,860
Problem 14
Camil Department Store uses the retail method of inventory. At the end of June, the
records of the company provided the following information:

Purchases during June: at cost, Php2,400,000; at retail, Php4,000,000

Sales during June: Php3,500,000
Inventory, June 1: at cost, Php355,000; at retail, Php750,000.

Required:
Estimate the ending inventory and cost of goods sold for June under (a) FIFO cost basis
and (b) Average cost basis.

(a) FIFO cost basis

Cost Retail
Inventory, June 1 P 355,000 P 750,000
Purchases 2,400,000 4,000,000
Available for sale P2,755,000 P4,750,000
Sales 3,500,000
Inventory, June 30 at retail P1,250,000
Cost percentage 60%
(2,400,000/4,000,000=60%)
Estimated cost of inventory P 750,000
Cost of goods available for sale P2,755,000
Less estimated cost of
ending inventory 750,000
Estimated cost of goods sold P2,005,000

(b) Average cost basis

Inventory, June 30 at retail P1,250,000
Cost percentage 58%
(2,755,000/4,750,000=58%
Estimated cost of inventory P 725,000
Cost of goods available for sale P2,755,000
Less estimated cost of
ending inventory 725,000
Estimated cost of goods sold P2,030,000

Problem 15
Lacoste Company uses the FIFO retail method of inventory valuation. The following
information is available:
Cost Retail
Inventory, beginning Php 145,000 Php 160,000
Purchases (net) 283,920 420,800
Additional markups 25,200
Mark up cancellations 9,200
Markdowns 38,100
Markdowns cancellation 6,900
Sales 450,000
Sales returns 15,200
Sales discounts 3,800

Required:

What would be the estimated cost of ending inventory, using average cost retail?

Average cost retail

Cost Retail
Beginning Inventory 145,000 160,000
Purchases 283,920 420,800
Additional markups 25,200
Markup cancellations (9,200)
Markdown (38,100)
Markdown cancellations 6,900
Total available for sale 428,920 565,600
Cost to retail ratio
(428,920/565,600=75.8%
 Sales , net of sales returns (450,000- (434,800)
15,200)
---------------
-
Ending inventory at retail 130,800
Ending inventory at average
cost retail (130,800 x 75.8%) 99,146

MULTIPLE CHOICE (THEORY)

1. The factor which determines whether or not goods should be included in a physical
count of inventory is ___________.
a. physical possession.
b. legal title.
c. management's judgment.
d. whether or not the purchase has been paid for.

2. If goods in transit are shipped FOB destination

a. the seller has legal title to the goods until they are delivered.
b. the buyer has legal title to the goods until they are delivered.
c. the transportation company has legal title to the goods while the goods are in transit.
d. no one has legal title to the goods until they are delivered.

3. A recommended internal control procedure when undertaking a physical stocktake, is

that the counting should be done by employees who do not have custodial responsibility
for the inventory. This is an example of what type of internal control procedure?
a. Establishment of responsibility
b. Documentation of procedure
c. Segregation of duties
d. Division of labour

4. Westcoe’s goods in transit at December 31 include:

sales made purchases made
(1) FOB destination (3) FOB destination
(2) FOB delivery point (4) FOB delivery point
Which items should be included in Westcoe's inventory at December 31?
a. (2) and (3)
b. (1) and (4)
c. (1) and (3)
d. (2) and (4)

5. Goods in transit should be included in the inventory of the buyer when the
a. public carrier accepts the goods from the seller.
b. terms of sale are FOB delivery point.
c. terms of sale are FOB destination.
d. none of the above.

6. A firm just starting in business purchased three inventory items at the following prices.
First purchase Php80; second purchase Php95; third purchase Php85. If the firm sold
two units for a total of Php240 and used FIFO costing, the gross profit for the period
would be __________.
a. Php65. c. Php60
b. Php75. d. Php50

Use the following information for questions 7–8.

An entity just starting business made the following four inventory purchases in June:
June 1 150 units Php1,500
June 10 20 units 1,170
June 15 20 units 1,260
June 1320 units 990
Php 4,920

7. A physical count of inventory on June 30 reveals that there are 200 units on hand.
Using the FIFO inventory method the amount allocated to cost of sales for June is
a. Php3,500. c. Php4,770
b. Php4,659. d. Php4,200
8. Using the weighted average cost method the amount allocated to the ending inventory
on June 30 is ___________.
a. Php185. c. Php261
b. Php226. d. Php196.

9. Inventory costs may be thought of as a pool of costs consisting of which two

elements?
a. The cost of beginning inventory and the cost of ending inventory
b. The cost of ending inventory and the cost of goods purchased during the year
c. The cost of beginning inventory and the cost of goods purchased during the
year
d. The difference between the costs of goods purchased and the cost of sales during the
year

10. A problem with the specific identification method of inventory valuation is that
a. inventories can be reported at actual costs.
b. some types of inventory cannot use the method.
c. matching is not achieved.
d. the lower of cost or net realisable value rule cannot be applied.

11. The accounting principle that requires the cost flow assumption be consistent with
the physical movement of goods in the warehouse is
a. called the matching principle.
b. called the consistency principle.
c. nonexistent; that is, there is no such accounting requirement.
d. called the physical flow assumption.

12. Which statement is correct with respect to inventories?

a. The FIFO method assumes that the earliest goods acquired are the last to be sold.
b. It is generally good business management to sell the most recently acquired goods
first.
c. Under FIFO the ending inventory is based on the latest units purchased.
d. FIFO seldom coincides with the actual physical flow of inventory.

13. If companies have identical inventoriable costs but use different inventory flow
assumptions, when the price at which goods are purchased has not been constant, then
the
a. cost of sales for the companies will be identical.
b. cost of goods available for sale of the companies will be identical.
c. ending inventory of the companies will be identical.
d. profit of the companies will be identical.

14. The specific identification method of inventory costing

a. always maximises an entity's profit.
b. always minimises an entity's profit.
c. has no effect on an entity's profit.
d. cannot predict whether the profit will be higher or lower than with other
methods of inventory valuation.

15. The managers of Teng Enterprises receive performance bonuses based on the profit
of the firm. Which inventory costing method are they likely to favour in periods of rising
prices?
a. FIFO
b. Weighted-average Cost
c. LIFO
d. Physical inventory method

16. Understating beginning inventory will understate

a. assets.
b. cost of sales.
c. profit.
d. owner's equity.
17. An entity uses the periodic inventory method and beginning inventory is overstated
by Php4,000 in year 2 because the ending inventory in year 1 was overstated by
Php4,000. The position of the statement of financial position at the end of year 2 is
Assets Owner’s Equity
a. Overstated Overstated
b. Correct Correct
c. Understated Understated
d. Overstated Correct

18. The E, S and J partnership made an inventory count on December 31, 2009. During
the count, one of the clerks made the error of counting an inventory item twice. For the
statement of financial position at December 31, 2009, the effects of this error are
Assets Liabilities Owner’s Equity
a. overstated understated overstated
b. understated no effect understated
c. overstated no effect overstated
d. overstated overstated understated

19. The following information is available for Tye Manufacturing at December 31 2009.
Beginning inventory Php80,000; ending inventory Php120,000; cost of sales
Php1,200,000; and sales Php1,600,000. Tye’s inventory turnover ratio in 2009 is
a. 12 times. c. 16times
b. 15 times. d. 10 times

20. The Jansen Company uses the perpetual inventory system and the moving average
method to value inventories. On August 1, there were 10,000 units valued at Php30,000
in the beginning inventory. On August 10, 20,000 units were purchased for Php6 per
unit. On August 15, 24,000 units were sold for Php12 per unit. The amount charged to
cost of sales on August 15 was
a. Php80,000. c. Php144,000
b. Php120,000. d. Php108,000

21. Under the gross profit method, each of the following items are estimated except for
a. cost of ending inventory.
b. cost of sales.
c. cost of goods purchased.
d. gross profit.

22. The Watson Department Store utilises the retail inventory method to estimate its
inventories. It calculated its cost to retail ratio during the period at 75%. Goods available
for sale at retail amounted to Php200,000 and goods were sold during the period for
Php125,000. The estimated cost of the ending inventory is
a. Php75,000. c. Php56,250
b. Php150,000. d. Php100,000

23. Wiley’s records indicate the following information for the year:
Inventory 1/1 Php 440,000
Purchases 1,800,000
Net Sales 2,400,000
On December 31 a physical inventory determined that ending inventory of php480,000
was in the warehouse. Wiley’s gross profit on sales has remained constant at 30%.
Wiley suspects some of the inventory may have been taken by a new employee. At
December 31 what is the estimated cost of missing inventory?
a. Php80,000.
b. Php160,000.
c. Php240,000.
d. Php560,000.

24. Which of the following would not be reported as inventory?

a. Land acquired for resale by real estate firm.
b. agricultural produce held by a firm.
c. Partially completed goods held by a manufacturing company.
d. Machinery acquired by a manufacturing company for use in the production
process.

25. Goods on consignment should be included in the inventory of

a. the consignor
b. the consignee
c. both the consignor and the consignee
d. neither the consignor nor the consignee.

26. Which of the following shall be included in the cost of inventories?

a. selling costs.
b. freight charges on goods acquired FOB Destination.
c. abnormal amounts of wasted materials, labor, or other production costs.
d. storage costs that are necessary to a further production process.

27. Inventories do not encompass

a. merchandise purchased by a retailer and held for resale.
b. land and other property held for sale by a real estate developer.
c. finished goods produced.
d. abnormal amounts of wasted materials, labor and other production costs.

28. Under these shipping terms, the buyer pays for the freight, which legally must be
borne by the seller.
a. FOB shipping point, freight prepaid.
b. FOB shipping point, freight collect.
c. FOB destination, freight prepaid.
d. FOB destination, freight collect.

29. 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 (purchase) discounts taken during the period.
c. Purchase returns and allowances of merchandise during the period.
d. Cost of transportation-in for merchandise purchases during the period.

30. How should the following costs effect a retailer’s inventory?

Freight-in Interest on inventory loan
a. Increase No effect
b. Increase Increase
c. No effect Increase
d. No effect No effect

31. Which of the following is not true of the perpetual inventory method?
a. Purchases are recorded as debits to inventory account.
b. The entry to record a sale includes a debit to cost of goods sold and a credit to
inventory.
c. After a physical inventory count, inventory is credited for any missing inventory.
d. Purchase returns are recorded by debiting accounts payable and crediting
purchase returns and allowances.

32. Which costing method is appropriate for inventories that are segregated for a
specific project and inventories that are not ordinarily interchangeable?
a. specific identification c. weighted average
b. standard cost d. moving average.

33. Which of the following inventory costing methods reports most closely the current
cost of inventory on the statement of financial position?
a. FIFO c. Specific identification
b. LIFO d. Weighted average method

34. During periods of rising prices, 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.

35. In a period of rising prices, the inventory cost formula that tends to result in the
highest reported profit is
a. FIFO c. moving average
b. specific identification d. LIFO

36. When using the moving average method of inventory valuation, a new cost must be
computed after each
a. purchase c. purchase and issuance from inventory
b. issuance from inventory d. month-end.

37. In periodic inventory system that the weighted average cost flow method, the
beginning inventory is
a. net purchases minus the ending inventory.
b. net purchases minus the cost of goods sold.
c. total goods available for sale minus the net purchases.
d. total goods available for sale minus the cost of goods sold.
38. The gross profit method of estimating inventory would not be useful when
a. a periodic system is in use and inventories are required for interim
statements.
b. inventories have been destroyed or lost by fire, theft, or other casualty, and the
specific data required for inventory valuation are not available.
c. there is a significant change in the mix of the products being sold.
d. there is significant unmonitored change in the relationship between gross profit
and the selling price of goods being sold.

39.The retail inventory method would include which of the following in the calculation of
the goods available for sale at both cost and retail?
a. purchase returns c. markdowns
b. sales returns d. markups

40.The use of the goods profit method assumes that

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 year.
c. inventory values have not increased from previous years.
d. the relationship between sales price and cost of goods sold is similar in prior
years.

41. The average retail method is based on the assumption that the
a. ratio of gross margin to sales is approximately the same each period.
b. ratio of cost to retail changes at a constant rate.
c. beginning inventory and the cost of goods sold contain in the same
proportion of high-cost and low-cost ratio goods.
d. gross margin percentage applicable to ending inventory and to the goods sold
during the period is the same.

42. Which statement is accurate about calculating the cost ratio to be used with the
average retail inventory method under IAS 2 inventories?
a. The beginning inventory is excluded and markdowns are not deducted.
b. The beginning inventory is included and markdowns are not deducted.
c. The beginning inventory is included and markdowns are deducted.
d. The beginning inventory is excluded and markdowns are deducted.

43. A company is using a periodic inventory system neglected to record a purchase of

merchandise on account at year-end. This merchandise was omitted from the year-end
physical count. How will these errors affect inventory at year-end and profit for the year?
Inventory Profit
a. No effect understated
b. No effect overstated
c. Understated Understated
d. Understated No effect.

44. Toby’s Sportwear, Inc. regularly buys sweaters from Waley Company and is allowed
a trade discount of 20% and 10% from the list price. Toby made a purchase on March
20, 2016 and received an invoice with a list price of Php90,000, a freight charge of
Php5,000, and payment terms of net 30 days. What is the total cost of the inventory
purchase?
a. Php63,000 c. Php69,000
b. Php64,000 d. Php69,800.

45. Camil Company purchased an item of merchandise quoted and listed at

Php150,000 under the following terms: Trade discount 15%,10%,5%, 2/10, n/30.
What was the invoice price of the merchandise?
a. Php100,900 c. Php109,012.50
b. Php105,000 d. Php106,832.25.
46. Mari Manufacturing Company has the following account balances at year end:
Office supplies Php 4,000
Raw materials 27,000
Work-in-process 59,000
Finished goods 72,000
Prepaid insurance 6,000
What amount should Morgan report as inventories in its statement of financial position?
a. Php72,000 c. Php158,000
b. Php76,000 d. Php162,000
47. Lawson Manufacturing Company has the following account balances at year end:
Office supplies Php 4,000
Raw materials 27,000
Work-in-process 59,000
Finished goods 92,000
Prepaid insurance 6,000
What amount should Lawson report as inventories in its statement of financial position?
a. Php92,000 c. Php178,000
b. Php96,000 d. Php182,000

48. Elen Corporation uses the perpetual inventory method. On March 1, it purchased
Php10,000 of inventory, terms 2/10, n/30. On March 3, Elkins returned goods that cost
Php1,000. On March 9, Elkins paid the supplier. On March 9, Elkins should credit
a. purchase discounts for Php200.
b. inventory for Php200.
c. purchase discounts for Php180.
d. inventory for Php180.

49. Mae Corporation uses the perpetual inventory method. On March 1, it purchased
Php30,000 of inventory, terms 2/10, n/30. On March 3, Malone returned goods that cost
Php3,000. On March 9, Malone paid the supplier. On March 9, Malone should credit
a. purchase discounts for Php600.
b. inventory for Php600.
c. purchase discounts for Php540.
d. inventory for Php540.

50. Bear Inc. took a physical inventory at the end of the year and determined that
Php650,000 of goods were on hand. In addition, Bell, Inc. determined that Php50,000 of
goods that were in transit that were shipped f.o.b. shipping were actually received two
days after the inventory count and that the company had Php75,000 of goods out on
consignment. What amount should Bell report as inventory at the end of the year?
a. Php650,000 c. Php725,000
b. Php700,000 d. Php775,000

51. Bear Inc. took a physical inventory at the end of the year and determined that
Php475,000 of goods were on hand. In addition, the following items were not included in
the physical count. Bell, Inc. determined that Php60,000 of goods were in transit that
were shipped f.o.b. destination (goods were actually received by the company three
days after the inventory count).The company sold Php25,000 worth of inventory f.o.b.
destination. What amount should Bell report as inventory at the end of the year?
a. Php475,000 c. Php500,000
b. Php535,000 d. Php560,000

52. Rose Inc. reported total assets of Php1,200,000 and net income of Php135,000 for
the current year. Risers determined that inventory was overstated by Php10,000 at the
beginning of the year (this was not corrected). What is the corrected amount for total
assets and net income for the year?
a. Php1,200,000 and Php135,000.
b. Php1,200,000 and Php145,000.
c. Php1,190,000 and Php125,000.
d. Php1,210,000 and Php145,000.

53. Rose Inc. reported total assets of Php1,600,000 and net income of Php85,000 for
the current year. Risers determined that inventory was understated by Php23,000 at the
beginning of the year and Php10,000 at the end of the year. What is the corrected
amount for total assets and net income for the year?
a. Php1,610,000 and Php95,000.
b. Php1,590,000 and Php98,000.
c. Php1,610,000 and Php72,000.
d. Php1,600,000 and Php85,000.

Use the following information for questions 54 through 56.

Hudson, Inc. is a calendar-year corporation. Its financial statements for the years 2016
and 2015 contained errors as follows:

2016 2015
Ending inventory Php 3,0000 over Php 8,000 over
Depreciation expense 2,000 under 6,000 over

54. Assume that the proper correcting entries were made at December 31, 2015. By how
much will 2016 income before taxes be overstated or understated?
a. Php1,000 understated c. Php2,000 overstated
b. Php1,000 overstated d. Php5,000 overstated.

55. Assume that no correcting entries were made at December 31, 2015. Ignoring
income taxes, by how much will retained earnings at December 31, 2016 be overstated
or understated?
a. Php1,000 understated c. Php5,000 understated
b. Php5,000 overstated d. Php9,000 understated

56. Assume that no correcting entries were made at December 31, 2015, or December
31, 2016 and that no additional errors occurred in 2017. Ignoring income taxes, by how
much will working capital at December 31, 2017 be overstated or understated?
a. Php0 c. Php2,000 understated
b. Php2,000 overstated d. Php5,000 understated

57. The following information is available for Nero Company for 2016:
Freight-in Php 30,000
Purchase returns 75,000
Selling expenses 150,000
Ending inventory 260,000
The cost of goods sold is equal to 400% of selling expenses. What is the cost of
goods available for sale?
a. Php600,000. c. Php815,000
b. Php890,000. d. Php860,000.

Use the following information for questions 58 and 59.

Waulin Co. records purchases at net amounts. On May 5 Winsor purchased

merchandise on account, Php16,000, terms 2/10, n/30. Winsor returned Php1,200 of the
May 5 purchase and received credit on account. At May 31 the balance had not been
paid.

58. The amount to be recorded as a purchase return is

a. Php1,080. c. Php1,200
b. Php1,224 d. Php1,176

59. By how much should the account payable be adjusted on May 31?
a. Php0 c. Php320
b. Php344 d. Php296.

Use the following information for questions 60 and 61.

The following information was available from the inventory records of Pretty Pau
Company for January:
Units Unit Cost Total Cost
Balance at January 1 3,000 Php 9.77 Php 29,310
Purchases:
January 6 2,000 10.30 20,600
 January 26 2,700 10.71 28,917

Sales:
January 7 (2,500)
January 31 (4,000)
Balance at January 31 1,200

60. Assuming that Pretty Pau does not maintain perpetual inventory records, what
should be the inventory at January 31, using the weighted-average inventory method,
rounded to the nearest peso?
a. Php12,606 c. Php12,312
b. Php12,284. d. Php12,432

61. Assuming that Pretty Pau maintains perpetual inventory records, what should be the
inventory at January 31, using the moving-average inventory method, rounded to the
nearest peso?
a. Php12,606 c. Php12,312
b. Php12,284 d. Php12,432
.
Beautiful Mil Co. has the following data related to an item of inventory:
Inventory, March 1 100 units @ Php4.20
Purchase, March 7 350 units @ Php4.40
Purchase, March 16 70 units @ Php4.50
Inventory, March 31 130 units

62. The value assigned to cost of goods sold if Beautiful Mil uses FIFO is
a. Php579 c. Php1,723
b. Php552 d. Php1,696.

63. Pretty Mari Company has been using the average cost method of inventory valuation
for 10 years, since it began operations. Its 2015 ending inventory was Php40,000, but it
would have been Php60,000 if FIFO had been used. Thus, if FIFO had been used,
Pretty Mari's income before income taxes would have been
a. Php20,000 greater over the 10-year period.
b. Php20,000 less over the 10-year period.
c. Php20,000 greater in 2015.
d. Php20,000 less in 201.

64. June Corp. sells one product and uses a perpetual inventory system. The beginning
inventory consisted of 10 units that cost Php20 per unit. During the current month, the
company purchased 60 units at Php20 each. Sales during the month totaled 45 units for
Php43 each. What is the number of units in the ending inventory?
a. 10 units c. 25 units
b. 15 units. d. 70 units

65. June Corp. sells one product and uses a perpetual inventory system. The beginning
inventory consisted of 10 units that cost Php20 per unit. During the current month, the
company purchased 60 units at Php20 each. Sales during the month totaled 45 units for
Php43 each. What is the cost of goods sold using the FIFO method?
a. Php200 c. Php1,200
b. Php900 d. Php1,935

66. Checkers uses the periodic inventory system. For the current month, the beginning
inventory consisted of 1,200 units that cost Php12 each. During the month, the company
made two purchases: 500 units at Php13 each and 2,000 units at Php13.50 each.
Checkers also sold 2,150 units during the month. Using the average cost method, what
is the amount of cost of goods sold for the month?
a. Php27,843 c. Php26,975
b. Php28,950 d. Php27,950

67. Chessy uses the periodic inventory system. For the current month, the beginning
inventory consisted of 200 units that cost Php65 each. During the month, the company
made two purchases: 300 units at Php68 each and 150 units at Php70 each. Chessy
also sold 500 units during the month. Using the average cost method, what is the
amount of ending inventory?
a. Php10,500 c. Php33,400
b. Php33,770 d. Php10,131.
68. Checkers uses the periodic inventory system. For the current month, the beginning
inventory consisted of 1,200 units that cost Php12 each. During the month, the
Phpcompany made two purchases: 500 units at Php13 each and 2,000 units at
Php13.50 each. Checkers also sold 2,150 units during the month. Using the FIFO
method, what is the ending inventory?
a. Php20,073 c. Php20,925
b. Php18,600 d. Php18,950

69. Chessy uses the periodic inventory system. For the current month, the beginning
inventory consisted of 200 units that cost Php65 each. During the month, the company
made two purchases: 300 units at Php68 each and 150 units at Php70 each. Chessy
also sold 500 units during the month. Using the FIFO method, what is the amount of cost
of goods sold for the month?
a. Php33,770 c. Php34,150
b. Php32,500 d. Php33,400.

70. Dole Corp.'s accounts payable at December 31, 2016, totaled Php800,000 before
any necessary year-end adjustments relating to the following transactions:
On December 27, 2016, Dole wrote and recorded checks to creditors totaling
Php350,000 causing an overdraft of Php100,000 in Dole's bank account at December
31, 2016. The checks were mailed out on January 10, 2017.
On December 28, 2016, Dole purchased and received goods for Php150,000, terms
2/10, n/30. Dole records purchases and accounts payable at net amounts. The invoice
was recorded and paid January 3, 2017.
Goods shipped f.o.b. destination on December 20, 2016 from a vendor to Dole were
received January 2, 2017. The invoice cost was Php65,000.
At December 31, 2016, what amount should Dole report as total accounts payable?
a. Php1,362,000 c. Php1,050,000
b. Php1,297,000 d. Php950,000

71.The balance in Pretty Mom Co.'s accounts payable account at December 31, 2016
was Php700,000 before any necessary year-end adjustments relating to the following:
Goods were in transit to Pretty Mom from a vendor on December 31, 2016. The invoice
cost was Php40,000. The goods were shipped f.o.b. shipping point on December 29,
2016 and were received on January 4, 2017.
Goods shipped f.o.b. destination on December 21, 2016 from a vendor to Pretty Mom
were received on January 6, 2017. The invoice cost was Php25,000.
On December 27, 2016, Pretty Mom wrote and recorded checks to creditors totaling
Php30,000 that were mailed on January 10, 2017.
In Pretty Mom's December 31, 2016 statement of financial position, the accounts
payable should be
a. Php730,000 c. Php765,000
b. Php740,000 d. Php770,000.

72. Keri Co.'s accounts payable balance at December 31, 2016 was Php1,500,000
before considering the following transactions:
Goods were in transit from a vendor to Keri on December 31, 2016. The invoice price
was Php70,000, and the goods were shipped f.o.b. shipping point on December 29,
2016. The goods were received on January 4, 2017.
Goods shipped to Keri, f.o.b. shipping point on December 20, 2016, from a vendor were
lost in transit. The invoice price was Php50,000. On January 5, 2017, Keri filed a
Php50,000 claim against the common carrier.
In its December 31, 2016 statement of financial position, Kerr should report accounts
payable of
a. Php1,620,000 c. Php1,550,000
b. Php1,570,000 d. Php1,500,000

73. Waley Retailers purchased merchandise with a list price of Php50,000, subject to
trade discounts of 20% and 10%, with no cash discounts allowable. Walsh should record
the cost of this merchandise as
a. Php35,000 c. Php39,000
b. Php36,000 d. Php50,000

74. Keck Co. had 450 units of product A on hand at January 1, 2016, costing Php42
each. Purchases of product A during January were as follows:
Date Units Unit Cost
Jan. 10 600 Php 44
 18 750 46
28 300 48
A physical count on January 31, 2016 shows 600 units of product A on hand. The cost of
the inventory at January 31, 2016 under the FIFO method is
a. Php25,500 c. Php28,200
b. Php26,700 d. Php24,600