PAS 2 INVENTORY
Would exclude all overhead from reported
1. Which of the following items should be
excluded from a company’s inventory at the
balance sheet date?
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
2. 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 brining inventories to their
present location and
condition.
3. 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.
inventory costs.
d. Is always achieved when the LIFO flow
assumption is adopted
4. 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
5. 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
6. The measurement basis ‘net realizable value’
is best described as:
a. unamortised historical cost;
b. an asset’s selling price or a liability’s
settlement amount;
c. unadjusted initial cost;
d. time adjusted cash flow.
7. Inventories are assets
I. held for sale in the ordinary course of
business
II. in the process of production for such sale
III. in the form of materials or supplies to be
consumed in the production process or in the
rendering of
services
a. I and II only b. I only c. I, II and III d. II and III
only
8. 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 in the
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.
9. 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.
10. 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.
11. The measurement rule for inventories,
mandated by IAS 2 Inventories, is:
a. lower of fair value and selling price;
b. lower of cost and net realizable value;
c. higher of initial cost and realizable value;
d. higher of completion costs and replacement
costs.
12. ‘Net realisable value’ of inventory is defined
as the net amount that an enterprise expects to
realise
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.
13. Net realisable 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 subsequently recovers, the:
completion.
a. previous amount of the write-down can be
a. I, II and IV only; b. I, III and IV only; c. II, III and reversed;
IV only; d. I and II only.
b. carrying amount of the inventory cannot be
14. When determining the net realisable value adjusted;
of inventory, estimates must be made of the
c. value adjustment can be recognised
following:
immediately in equity;
I. Estimated costs of completion.
d. adjustment must be recognised in a
II. Expected replacement cost. ‘provision for future inventory write-downs’
account.
III. Expected selling price.
18. Under IAS 2 Inventories, items of inventory
IV. Estimated selling price.
that are used by business enterprise as
a. I, II, III and IV; b. I, II and III only; c. II and IV components in a
only; d. I, III and IV only.
self-constructed property asset are required to
15. IAS 2 Inventories requires that when be:
inventories are written down to net realisable
a. aggregated into the ‘cost of goods sold’
value, they are
expense in the period in which the items are
written-down: used;

a. on a class-by-class basis; b. expensed directly into equity in the period in

which the items are used;
b. on the basis of industry segment;
c. capitalised and depreciated;
c. on an item-by-item basis;
d. added to a ‘property construction’ provision
d. according to geographical segment within the account.
entity.
19. All of the following are common
16. Ming Company had the following items of classifications for the disclosure of inventories
inventory at reporting date: in a set of financial
Item Quantity Cost/unit P NRV/unit statements:
Refrigerators 10 100 95 I. Raw materials
Stoves 20 80 85 II. Finished goods
The adjustment necessary at reporting date is: III. Work in progress
a. DR Inventory P 50; c. CR Inventory P 50; IV.Assets held for resale
b. DR Inventory P100; d. CR Inventory P0. a. I and II only b. I, II, III and IV c. II and III only d.
17. If the selling price of inventory that has been II and IV only
written down to net realisable value in a prior
period,
20. Where the net realisable 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
realisable value;
c. no adjustment be made, but the difference
between net realisable value and cost be
disclosed in the
notes to the financial statements;
d. the difference be added to the carrying
amount of the inventory.
21. 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
22. 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
23. Which of the terms listed below has this
definition: The estimated selling price in the
ordinary course
of business less the estimated costs of
completion and the estimated costs necessary
to make the sale
according to this Standard?
a. Write-down value b. Net realisable value c.
Actual cost value d. Delayed inventory value
24. 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 c. Costs of purchase
b. Other costs d. All of these
25. Good Luck Company. produces gaskets.
From the cost accounting, the following
information is
available:
Direct material and labour cost per unit: 100;
indirect material and labour 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
26. 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 balance sheet at 31
December
2007 according to IAS 2?
a. 95 b. 100 c. 115 d. 120
27. 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 b. I, IV, V and VI only c. I, III,
IV, V and VI only d. All of these
28. 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
29. Read the situation below and then decide
which technique you should use for measuring
cost.
At Pacquiao Company, the many items that
compose inventories 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
30. 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. Labour and other costs relating to sales
II. Attributable overheads
III. Supervisory personnel costs
IV. General administrative personnel
a. I and II onlyb. III and IV only c. I and IV only d.
all of these
31. 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
32. 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
33. 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
34. 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
35. Commodities of broker-traders are
measured at
a. Fair value b. Fair value less cost to sell c. Cost
d. Net realizable value
36. 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
37. 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 recognised as interest expense
over the period of the financing
c. A percentage of the excess is recognised as
directly attributable to the acquisition of the
inventory
d. The excess is recognsed directly to equity
38. Complete the following statement 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
39. In valuing raw materials inventory at lower
of cost or market, what is the meaning of the
term
“market”?
a. Net realizable value
b. Net realizable value less a normal profit
margin
c. Current replacement cost
d. Discounted present value
40. 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
41. 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
42. 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
43. 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
44. 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).
45. 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.
46. 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
47. 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.
48. 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
49. 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
50. 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
51. 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 23. B Net realisable value is the estimated
selling price in the ordinary course of business
ANSWER KEY:
less the
1. A
estimated costs of completion and the
2. A estimated costs necessary to make the sale.

3. A 24. C

4. A 25. C The cost of inventories shall comprise all

cost of purchase, costs of conversion, and other
5. A costs
6. B incurred in bringing the inventories to their
7. C present location and condition, i.e., direct costs
of material and
8. C
labour, indirect material and labour cost, and
9. D production related overhead. General
10. B administration

11. B overhead and selling costs are excluded from

the cost of inventories
12. A
26. A Inventories should be measured at the
13. A lower of cost and net realisable value. Net
realisable value
14. D
per unit is determined as selling price per unit
15. C
(100) minus selling costs per unit (5), i.e., 95.
16. C The cost of

17. A inventories per unit is 100. General

administration costs are not included in the cost
18. C
of inventories.
19. B
IAS 2 inventory includes:
20. B
I. Raw material assets in the manufacturing
21. C Storage costs for work in progress and process
fixed production overheads are added in
II. Purchased subcomponents
determining the
III. Work in process
cost of inventories and trade discounts are
deducted IV. Finished goods assets held for sale in a retail
business
22. A Biological assets related to agricultural
activity are considered out of scope for IAS 2 V. Unaltered goods held by a trader for resale
VI. 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 and will be discussed later in this course.
 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 realised 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 harvest
The detailed conditions that apply for these
types of excluded inventories are discussed in
paragraphs 3–5
of IAS 2.
Commodities held by commodity
brokers/traders are excluded from IAS 2 in
certain circumstances. Brokertraders 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:
 Oil
 Natural gas
 Gold
 Coffee
 Wheat
 Feedstuffs
27. C These items are excluded inventories
according to IAS 2
28. D
There are a number of possible causes of the
inventory cost becoming not recoverable:
a. Physical damage expected to be sold at or above cost.

b. Obsolescence 4. As with raw materials, it is not necessary to

consider the net realisable value of work in
c. Fall in selling price
progress in its
d. Rise in completion costs
existing state, but rather to look at the eventual
1. In principle, the lower of cost and net selling price of the completed product less the
realisable value test should generally be applied conversion
on an item-byitem basis, unless items are sold
cost to complete it and the estimated costs to
only in combination with other items, in which
sell it.
case they should be
5. If a decline in the price of materials indicates
considered together.
that the cost of the finished products will
2. In some circumstances, however, it may be exceed net
appropriate to group similar or related items.
realisable value, the finished products are
This may be
written down.
the case with items of inventory relating to the
A new assessment is made of net realisable
same product line that have similar purposes or
value in each subsequent period. When the
end uses,
circumstances that
are produced and marketed in the same
previously caused inventories to be written
geographical area, and cannot be practicably
down below cost no longer exist or when there
evaluated
is clear
separately from other items in that product line.
evidence of an increase in net realisable value
A broad-brush approach that looks at
because of changed economic circumstances,
inventories in large
the amount
categories would not meet the requirements of
of the write-down is reversed (i.e., the reversal
IAS 2, because losses in value of individual items
is limited to the amount of the original write-
of
down) so that
inventory would be masked by unrealised gains
the new carrying amount is the lower of the
on others.
cost and the revised net realisable value. Any
3. In applying the cost vs. net realisable value write-down to
test, it is relevant to consider the form in which
net realisable value is reversible; the lower of
the
cost and net realisable value test should be
inventories will be sold. This means that recalculated at
materials and other supplies held for use in the
each balance sheet date.
production of
Disclosure requirements:
inventories are not written down below cost if
the finished products in which they will be a. The financial statements shall disclose the
incorporated are accounting policies adopted in measuring
inventories,
including the cost formula used
b. The financial statements shall disclose the
total carrying amount of inventories, analysed
into
appropriate categories
For a manufacturing entity, appropriate
categories for the classification of inventories
could be:
● Raw materials
● Production supplies and merchandise
● Work in progress
● Finished goods
However, each entity should determine what is
relevant to its own business.
c. the amount of inventories recognised as an
expense in the period. To achieve this, cost of
sales needs to
be disclosed.
d. Other important disclosures are the amount
of any write-down of inventories recognised as
an expense
in the period,
e. the amount of any reversal of any write-down
that is recognised as a reduction in the amount
of
inventories recognised as expense in the period,
f. the circumstances or events that led to the
reversal of a writedown of inventories.
In either of these situations, we assume that the
entity can easily determine (1) exactly what
inventory has
been written down to net realisable value, and
(2) at the next balance sheet date, which of the
items that
were previously written down are still held and
are now stated at a higher amount. However, it
may not
always be possible to do this in practice.
g. An entity shall also disclose the carrying
amount of inventories pledged as security for
liabilities.
h. And finally, entities must disclose the carrying
amount of inventories carried at fair value less
costs to
sell. But this applies only to certain agricultural
produce and commodities as referred to in
paragraphs 3–5
of IAS 2.
29. C Because both the items sold and those in
Pacquiao’s inventory are difficult to trace to the
specific
purchased items, the FIFO method is an
appropriate way to measure the cost of
inventories. Weighted
averages would also be a method allowed
under IAS 2.
30. C The cost of inventories of a service
provider consists primarily of the direct labour
and other direct
costs, costs of supervisory personnel, and
attributable overheads. Labour and other costs
relating to sales
and general administrative personnel are not
included but are recognised as expenses in the
period in
which they are incurred.
31. A
32. D
33. A
34. D

35. B

36. C

37. B

38. C

39. A

40. D

41. D

42. C

43. B

44. B

45. D

46. C

47. D

48. A

49. C

50. A

51. B

52.