PAS 2 INVENTORY

1. Inventory should be stated at

a. Lower of cost and fair value.
b. Lower of cost and net realizable value.
c. Lower of cost and nominal value.
d. Lower of cost and net selling price.
b
2. Which of the following costs of conversion cannot be included in cost of inventory?
a. Cost of direct labor.
b. Factory rent and utilities.
c. Salaries of sales staff (sales department shares the building with factory supervisor).
d. Factory overheads based on normal capacity.
c
3. Inventories are assets not
a. Used in the production or supply of goods and services for administrative purposes.
b. Held for sale in the ordinary course of business.
c. In the process of production for such sale.
d. In the form of materials or supplies to be consumed in the production process or the rendering of
services.
a
4. The cost of inventory should not include
I. Purchase price.
II. Import duties and other taxes.
III. Abnormal amounts of wasted materials.
IV. Administrative overhead.
V. Fixed and variable production overhead.
VI. Selling costs.

a. I, II, V b. III, IV, VI c. I, II, III, IV, V d. III, IV, V, VI

b
5. Assero Co. manufactures and sells paper envelopes. The stock of envelopes was included in the
closing inventory as of December 31, 2015, at a cost of P50 each per pack. During the final audit, the
auditors noted that the subsequent sale price for the inventory at January 15, 2016, was P40 each per
pack. Furthermore, inquiry reveals that during the physical stock taking, a water leakage has created
damages to the paper and the glue. Accordingly, in the following week, ABC LLC spent a total of P15
per pack for repairing and reapplying glue to the envelopes. The net realizable value and inventory
write-down (loss) amount to
a. P40 and P10 respectively.
b. P45 and P10 respectively.
c. P25 and P25 respectively.
d. P50 and P 0 respectively.
Answer: (c) The net realizable value is the subsequent sale price, P40, less any cost incurred to
bring the good to its salable condition, P15. Thus, NRV= P40 – P15 = P25 per pack. The loss
(inventory write-down) per pack is the difference between cost and net realizable value: P50 – P25=
P25 per pack.

6. Which of the following items should be excluded from a company’s inventory at the end of reporting
period?
a. Goods lost while in transit, which were purchased FOB shipping point.
b. Goods held by customers on approval or on trial
c. Goods out on consignment
d. Goods purchased FOB destination
d*
7. The cost of inventories shall comprise all costs of purchase, cost of conversion and other costs
incurred in bringing the inventories to their present location and condition. Which of the following cost
shall be included in the cost of inventories?
a. Import duties and other taxes, transport, handling and other costs directly attributable to the
acquisition of finished goods, materials and services
 b. Abnormal amounts of wasted materials, labor or other production costs.
c. Storage costs unnecessary in its production process.
d. Administrative overheads that do not contribute to bringing inventories to their present location
and condition.
a
8. The valuation of inventories on prime cost basis
a. Is always achieved when standard costing is adopted
b. Would achieve the same results as direct costing
c. Would exclude all overhead from reported inventory costs.
d. Is always achieved when the LIFO flow assumption is adopted
c
9. A major advantage of the retail inventory method is that it
a. Permits companies which use it avoid taking annual inventory
b. Hides costs from customers and employees
c. Provides a method for inventory control and facilitates determination of the periodic inventory.
d. Gives a more accurate statement of inventory cost than other methods
c
10. Technically, the weighted average inventory cost flow method is applicable to which of the following
inventory system?
I. Perpetual II. Periodic
a. Both I and II b. I only c. II only d. Neither I nor II
c
11. The measurement basis ‘net realizable value’ is best described as:
a. unamortized historical cost;
b. an asset’s selling price or a liability’s settlement amount;
c. unadjusted initial cost;
d. time adjusted cash flow.
b
12. Net realizable value is
a. estimated selling price in the ordinary course of business
b. estimated selling price in the ordinary course of business less the estimated costs of completion in
the case of finished goods and estimated costs necessary to make the sale in the case of work in
process
c. estimated selling price in the ordinary course of business less the estimated costs of completion of
work in process inventories and estimated costs necessary to make the sale.
d. is the amount for which an asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm’s length transaction.
c
13. The weighted average inventory costing method is particularly suitable to inventory where:
a. dissimilar products are stored in separate locations;
b. the entity carries stocks of raw materials, work-in-progress and finished goods;
c. goods have distinct use-by dates and the goods produced first must be sold earliest;
d. homogeneous products are mixed together.
d
14. When an inventory costing formula is changed, the change is required to be applied:
a. prospectively and the adjustment taken through the current profit or loss;
b. retrospectively and the adjustment taken through the opening balance of accumulated profits;
c. prospectively and the current period adjustment recognized directly in equity;
d. retrospectively and the adjustment recognized as an extraordinary gain or loss.
b
15. ‘Net realizable value’ of inventory is defined as the net amount that an enterprise expects to realize
from the sale of the inventory:
a. in the ordinary course of operations less estimated costs of completion and costs necessary to
make the sale;
b. plus the estimated costs of completion plus the estimated costs necessary to make the sale;
c. in a forced sale;
d. plus the estimated costs of completion.
a
16. Net realizable value of inventories may fall below cost for a number of reasons including:
I. Product obsolescence.
II. Physical deterioration of inventories.
III. An increase in the expected replacement costs of the inventory,
IV. An increase in the estimated costs of completion.

a. I, II and IV only; b. I, III and IV only; c. II, III and IV only; d. I and II only.
a
17. When determining the net realizable value of inventory, estimates must be made of the following:
I. Estimated costs of completion.
II. Expected replacement cost.
III. Expected selling price.
IV. Estimated selling price.

a. I, II, III and IV; b. I, II and III only; c. II and IV only; d. I, III and IV only.
d
18. IAS 2 Inventories requires that when inventories are written down to net realizable value, they are
written-down:
a. on a class-by-class basis;
b. on the basis of industry segment;
c. on an item-by-item basis;
d. according to geographical segment within the entity.
c
19. Ming Company had the following items of inventory at reporting date:
Item Quantity Cost/unit P NRV/unit
Refrigerators 10 100 95
Stoves 20 80 85
The adjustment necessary at reporting date is:
a. DR Inventory P 50; c. CR Inventory P 50;
b. DR Inventory P100; d. CR Inventory P0.
c
20. If the selling price of inventory that has been written down to net realizable value in a prior period,
subsequently recovers, the:
a. previous amount of the write-down can be reversed;
b. carrying amount of the inventory cannot be adjusted;
c. value adjustment can be recognized immediately in equity;
d. adjustment must be recognized in a ‘provision for future inventory write-downs’ account.
a
21. Under IAS 2 Inventories, items of inventory that are used by business enterprise as components in a
self-constructed property asset are required to be:
a. aggregated into the ‘cost of goods sold’ expense in the period in which the items are used;
b. expensed directly into equity in the period in which the items are used;
c. capitalized and depreciated;
d. added to a ‘property construction’ provision account.
c
22. All of the following are common classifications for the disclosure of inventories in a set of financial
statements:
I. Raw materials
II. Finished goods
III. Work in progress
IV. Assets held for resale

a. I and II only b. I, II, III and IV c. II and III only d. II and IV only
b
23. Where the net realizable value of inventory falls below cost, IAS 2 Inventories, requires that:
a. the inventory continue to be carried in the balance sheet at cost;
b. the inventory be written down to net realizable value;
 c. no adjustment be made, but the difference between net realizable value and cost be disclosed in
the notes to the financial statements;
d. the difference be added to the carrying amount of the inventory.
b
24. Which of the following items are comprised (added or deducted) in the cost of inventories according to
IAS 2, Inventories?
I. Storage costs for work in progress
II. Fixed administration overheads
III. Trade discount
IV. Storage costs relating to finished goods
V. Fixed production overheads

a. I, II and V only b. I and V only c. I, III and V only d. all of the above
C. Storage costs for work in progress and fixed production overheads are added in determining the cost of
inventories while trade discounts are deducted in arriving at the cost of inventories.
25. IAS 2 should be applied in financial statements prepared in accounting for inventories other than
which of the following?
a. Biological assets related to agricultural activity
b. Finished goods assets held for sale in a retail business
c. Raw material assets in the manufacturing process
d. Materials or supplies assets to be consumed in the rendering of services
a
26. The costs that comprises the purchase price, import duties and other taxes (other than those
subsequently recoverable by the entity from the taxing authorities), and transport, handling and other
costs directly attributable to the acquisition of finished goods, materials and services
a. Costs of conversion b. Costs of purchase c. Other costs d. All of these
b
27. Good Luck Company produces gaskets. From the cost accounting records, the following information is
available: Direct material and labor cost per unit: 100; indirect material and labor cost per unit: 20;
production overheads per unit: 15; general administration overheads per unit: 10; selling costs per
unit: 20. Determine the cost of inventory per unit according to IAS 2, Inventories
a. 100 b. 120 c. 135 d. 165
c
28. An entity produces piston rings. The selling price of a piston ring amounts to 100. The cost of direct
and indirect material per unit is 100, general administration cost per unit is 15, and selling costs per
unit are 5. At which amount should each piston ring be accounted for in the statement of financial
position at December 31, 2012 according to IAS 2?
a. 95 b. 100 c. 115 d. 120
a
29. Which of the following types of inventories are excluded under the scope of IAS 2?
I. Commodities such as soybeans
II. Purchased subcomponents
III. Work in progress arising under construction contracts
IV. Copper that has been extracted
V. Stationary for administrative use
VI. Forest product produce after the point of harvest

a. I, IV and V only c. I, III, IV, V and VI only

b. I, IV, V and VI only d. All of these
C
 IAS 2 inventory includes:
1. Raw material assets in the manufacturing process
2. Purchased subcomponents
3. Work in process
4. Finished goods assets held for sale in a retail business
5. Unaltered goods held by a trader for resale
6. Materials or supplies assets to be consumed in the rendering of services
 IAS 2’s exclusions are fairly limited and relate mostly to particular industries. IAS 2 does not apply to:
 Work in progress arising under construction contracts, including directly related service
contracts. This type of inventory is covered by IAS 11.
 Financial instruments. These are covered by IAS 32, Financial Instruments: Disclosure and
Presentation, and IAS 39, Financial Instruments: Recognition and Measurement.
 Biological assets. Biological assets related to agricultural activity and agricultural produce at the
point of harvest are addressed by IAS 41.

 IAS 2 also excludes certain other inventories from its measurement rules, although it includes them for
the other requirements of the standard. These exemptions relate to inventories that, in accordance
with accepted practices in particular industries, are “marked to market.” In other words, all movements
in their value (both up and down) while the inventories are held are taken straight to income, even
though they are not realized by a sale. These inventories, referred to in paragraph 3(a) of IAS 2, are
measured at net realisable value at certain stages of production. Examples include:
 Agricultural and forest products
 Agricultural produce at the point of harvest
 Commodities held by commodity brokers/traders are excluded from IAS 2 in certain circumstances.
Broker-traders buy or sell commodities for others or on their own account. These inventories are
generally acquired with the purpose of selling in the near future and generating a profit from price
fluctuations or broker-traders’ margins. They are excluded from the measurement requirements of IAS
2 when they are measured at fair value less costs to sell. The changes in this value are recognised in
profit or loss in the period of change.
 Examples of commodities typically held by traders include:
1. Oil
2. Natural gas
3. Gold
4. Coffee
5. Wheat
6. Feedstuffs

30. What methods are used to measure cost under IAS 2?

I. Standard costing system
II. Retail method
III. Specific identification method
IV. FIFO
V. Weighted average method

a. IV and V only b. III, IV and V only c. II, III, IV and V only d. all of these
d
31. At Pacquiao Company, there are many items that compose inventories and are made up of various
subcomponent parts, some purchased from outside vendors and some manufactured in-house. It is
difficult to trace the items sold, and the items remaining in inventory to the specific purchased items.
Which technique for measuring inventories should Pacquiao use?
a. Standard costing b. Retail method c. FIFO d. LIFO
c
32. IAS 2 provides practical guidance in the case of a service provider. Inventories include the costs of the
service, as described in paragraph 16 of IAS 2, but exclude which of the following?
I. Labor and other costs relating to sales
II. Attributable overheads
III. Supervisory personnel costs
IV. General administrative personnel

a. I and II only b. III and IV only c. I and IV only d. all of these

c
33. You are a manufacturer whose finished product normally sells for 100. It costs you 150 to build plus 20
to make the sale. For purposes of inventory definitions under IAS 2, which amount would you account
for?
 a. 80 b. 100 c. 150 d. 120
a
34. The costs of conversion of inventories include all of the following, except
a. Costs directly related 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
d
35. When agricultural crops have been harvested or mineral ores have been extracted and a sale is
assured under a forward contract or government guarantee, such inventories are measured at
a. Net realizable value b. Cost c. Standard cost d. Relative sales price
a
36. This is defined as “those who buys or sell commodities for others or on their own account”
a. Brokers b. Traders c. Commission agents d. Broker-traders
d
37. Commodities of broker-traders are measured at
a. Fair value c. Cost
b. Fair value less cost to sell d. Net realizable value
b
38. Which of the items listed below are comprised in determining the cost of inventories according to IAS
2?
a. General administrative overheads, trade discounts, and recoverable purchase taxes
b. Variable production overheads, fixed production overheads, and general administrative overheads
c. Storage costs of work in progress, variable production overheads, and fixed production overheads
d. Import duties on shipping of inventory inwards, trade discounts received on purchase of inventory,
and recoverable purchase taxes
c
39. In measuring the costs of purchase, you have noted that an entity bought inventory on deferred credit
terms, thus paying a price higher than it would have been under normal credit terms. How is the
excess amount treated under IAS 2?
a. The excess is included in the cost of the inventory
b. The excess is recognized as finance cost over the period of the financing
c. A percentage of the excess is recognized as directly attributable to the acquisition of the inventory
d. The excess is recognized directly to equity
b
40. When measuring fixed production overheads, if an entity has abnormally high production in excess of
normal capacity, it is necessary to:
a. Expense unallocated overheads in the period
b. Increase the amount of overheads allocated to each unit of production
c. Reduce the rate of overhead absorption in order to avoid carrying the inventory at more than
actual cost
d. Allocated to units produced on the basis of actual use of the production facilities
c
41. The use of a Discounts Lost account implies that the recorded cost of a purchased inventory item is its
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
d
42. Valuing assets at their liquidation values rather than their cost is inconsistent with the
a. Periodicity assumption c. Materiality constraint
b. Matching constraint d. Historical cost principle
d
43. If the inventory account at the end of the year is understated, the effect will be to
a. Overstate the gross profit on sales
b. Understate the net purchases
c. Overstate the cost of goods sold
d. Overstate the goods available for sale
c
44. Heroes Co. received merchandise on consignment. As of March 31, Heroes had recorded the
transaction as a purchase and included the goods in inventory. The effect of this on its financial
statements for March 31 would be
a. No effect
b. Net income was correct and current assets and current liabilities were overstated
c. Net income, current assets, and current liabilities were overstated
d. Net income and current liabilities were overstated
b
45. A large manufacturer of cosmetics sells merchandise to a retailer, which in turns sells the goods to the
public at large through its chain of retail outlets. The retailer purchases merchandise from the
manufacturer under a consignment contract. When should revenue from the sale of merchandise to
the retailer be recognized by the manufacturer?
a. When goods are delivered to the retailer.
b. When goods are sold by the retailer
c. It will depend on the terms of delivery of the merchandise by (i.e., CIF cost, insurance, and freight
or FOR).
d. It will depend on the terms of payment (i.e., cash or credit).
b
46. When using the installment sales method
a. Gross profit is deferred until all cash is received, but revenue and costs are recognized in
proportion to the cash collected from the sale
b. Gross profit is recognized only after the amount of cash collected exceeds the cost of the item
sold.
c. Revenue, costs, and gross profit are recognized proportionally as the cash is received from the
sale of product.
d. Total revenue and costs are recognized at the point of sale, but gross profit is deferred in
proportion to the cash that is uncollected from the sale.
d
47. The gross profit method of inventory valuation is not valid when
a. There is substantial increase in the quantity of inventory during the year.
b. There is substantial increase in the cost of inventory during the year
c. The gross margin percentage changes significantly during the year
d. All ending inventory is destroyed by fire before it can be counted
c
48. An example of an inventory accounting policy that should be disclosed is the
a. Effect of inventory profit caused by inflation
b. Classification of inventory into raw materials, work in process and finished goods
c. Identification of major suppliers.
d. Method used for inventory costing.
d
49. Merchandise shipped FOB shipping point on the last day of the year should ordinarily be included in
a. The buyer’s inventory balance
b. The seller’s inventory balance
c. Neither the buyer’s nor seller’s inventory balance
d. Both the buyer’s and the seller’s inventory balances
a
50. An entry debiting inventory and crediting cost of goods sold would be made when
a. Merchandise is sold and the periodic inventory method is used
b. Merchandise is sold and the perpetual inventory method is used
c. Merchandise is returned and the perpetual inventory method is used
d. Merchandise is returned and the periodic inventory method is used
c
51. An entity uses a periodic inventory system and 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 the entity’s assets, liabilities, and shareholders’ equity at year-end and
net earnings from the year?
 Assets Liabilities Equity Net earnings
a. Understate Understate No effect No effect
b. Understate No effect Understate Understate
c. No effect Understate Overstate Overstate
d. No effect Overstate Understate Understate
52. Factory overhead includes
a. All manufacturing costs
b. All manufacturing costs which may be variable or fixed, except direct materials and direct labor
c. Indirect materials but not indirect labor
d. Indirect labor but not indirect materials
b