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UNIVERSITY OF THE EAST – Caloocan

College of Business Administration
Department of Accountancy, Business Law and Taxation
Financial Accounting & Reporting, Part 1 (BAC 213)
Quiz 4

Name: ___________________________________Yr. and Section: _______ Prof. J. C. MINORCA, CPA

Instructions: In the following questions, provide the answer that best corresponds to the problem. Show
your solutions in good form.

I – Theories

1. Which of the following items should be included in a company’s inventory at the balance sheet date?
a. Goods in transit which were purchased FOB destination.
b. Goods received from another company for sale on consignment.
c. Goods sold to a customer which are being held for the customer to call for at the customer’s
convenience.
d. Goods in transit which were purchased FOB shipping point.

2. Which statement is incorrect with respect to inventories under PAS No. 2?

a. Inventories should be measured at the lower of cost and net realizable value.
b. The cost of inventories should comprise all costs of purchase, costs of conversion and other costs
incurred in bringing the inventories to their present location and condition.
c. The cost of inventories of a service provider consists primarily of labor and other costs of personnel
directly engaged in providing the service, including supervising personnel and attributable
overhead.
d. The costs of conversion of inventories include costs directly related to the units of production such
as direct labor, and a systematic allocation of variable production overhead.

3. Reporting inventory at the LCM is a departure from the accounting principle of

a. Historical cost b. Conservatism c. Consistency d. Full disclosure

4. Which statement is not valid in relation to the LCM rule for inventories?
I. Inventories are usually written down to net realizable value on an item by item basis.
II. It is appropriate to write down inventories based on a classification of inventory, for example,
finished goods or all inventories in a particular industry or geographical segment.
a. I only b. II only c. Both I and II d. Neither I nor II

5. The original cost of an inventory item is below both replacement cost and net realizable value. The net
realizable value less normal profit margin is below the original cost. Under LCM method, the inventory
item should be valued at
a. Replacement cost
b. Net realizable value
c. Net realizable value less normal profit margin
d. Original cost

6. 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 c. Standard cost
b. Cost d. Relative sales price

7. The cost of inventories may not be recoverable under all of the following conditions, except
a. The estimated costs of completion or the estimated costs to be incurred to make the sale have
increased.
b. The inventories have become wholly or partially obsolete.
c. The inventories are damaged
d. The selling prices of the inventories have increased.
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8. Which of the following is not an acceptable basis for valuation of inventories in published financial
statements?
a. Historical cost
b. Standard cost
c. Prime cost
d. Current selling price less cost to complete and cost to sell

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

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

a. The consignor but not the consignee c. Both the consignor and the consignee
b. The consignee but not the consignor d. Neither the consignor nor the consignee

11. All of the following costs should be charged against revenue in the period, except
a. Manufacturing overhead costs for a product manufactured and sold in the same accounting period.
b. Costs which will not benefit any future period.
c. Costs from idle manufacturing capacity resulting from an unexpected plant shutdown.
d. Costs of normal shrinkage and scrap incurred for the manufacture of a product in ending inventory.

12. When a portion of inventories has been pledged as security on a loan

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

13. If a material amount of inventory has been ordered through a formal purchase contract at balance
sheet date for future delivery at firm prices
a. This fact must be disclosed
b. Disclosure is required only if prices have declined since the date of the order
c. Disclosure is required only if prices have since risen substantially.
d. An appropriation of retained earnings is necessary.

14. The credit balance that arises when a net loss in a purchase commitment is recognized should be
a. Presented as a current liability
b. Subtracted from ending inventory
c. Presented as an appropriation of retained earnings
d. Presented in the income statement

15. When using a perpetual inventory system

I. No purchases account is used.
II. A cost of goods sold account is used.
III. Two entries are required to record a sale.
a. I and II only b. II only c. II and III only d. I, II and III

16. During periods of arising 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 system inventory system
c. Result in the same ending inventory as a periodic system
d. Result in a lower ending inventory than a periodic inventory system

17. To produce an inventory valuation which approximates the lower of average cost or market using the
conservative retail inventory method, the computation of the ratio of cost to retail should
a. Include markups but not markdowns c. Include markups and markdowns
b. Ignore both markups and markdowns d. Include markdowns but not markups
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18. The gross margin method of estimating ending inventory may be used for all of the following except
a. Internal as well as external interim reports
b. Internal as well as external year-end reports
c. Estimate of inventory destroyed by fire or other casualty
d. Rough test of the validity of an inventory cost determined under either periodic or perpetual
system.

19. The gross profit method of inventory valuation is invalid when

a. A portion of the inventory is destroyed.
b. There is substantial increase in inventory during the year.
c. There is no beginning inventory because it is the first year of operation.
d. The gross profit percentage applicable to goods in the ending inventory is different from the
percentage applicable to goods sold during the period.

20. The use of the gross profit method assumes that

a. The amount of gross profit is the same as in prior years.
b. Sales and cost of sales have not changed from previous year.
c. Inventory values have not increased from previous years.
d. The relationship between sales and cost of sales are similar in prior years.

II – Problems

The work-in-process inventories of Parañaque Company were completely destroyed by fire on June 1,
2012. You were able to establish physical inventory figures as follows:

January 1, 2012 June 1, 2012

Raw materials P60,000 P120,000
Work-in-process 200,000 -
Finished goods 280,000 240,000

Sales from January 1 to May 31, were P546,750. Purchases of raw materials were P200,000 and freight
on purchases, P30,000. Direct labor during the period was P160,000. It was agreed with insurance
adjusters than an average gross profit rate of 35% based on cost be used and that direct labor cost was
160% of factory overhead.
REQUIRED:
Based on the above, you are to determine:
1. Raw materials used
a. P290,000 b. P140,000 c. P260,000 d. P170,000
2. The total value of goods put in process
a. P786,000 b. P600,000 c. P630,000 d. P430,000
3. The value of goods manufactured and completed as of June 1, 2012
a. P365,000 b. P315,388 c. P445,000 d. P420,000
4. The work in process inventory destroyed as computed by the adjuster
a. P314,612 b. P185,000 c. P366,000 d. P265,000

Solutions:
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Raw materials, 1/1/12 60,000
5. Purchases 200,000
Aparri Company included the following items in its inventory on December 31, 2014:
Freight-in 30,000
Raw materials available for use 290,000
Less raw materials, 6/1/12 120,000
Raw materials used 170,000 1) D
Direct labor 160,000
Factory overhead (P160,000/160%) 100,000
Total manufacturing cost 430,000
Work-in-process, 1/1/12 200,000
Total cost placed in process 630,000 2) C
Less work-in-process, 6/1/12 (squeeze) 265,000 4) D
Cost of goods manufactured 365,000 3) A
Finished goods, 1/1/12 280,000
Total goods available for sale 645,000
Less finished goods, 6/1/12 240,000
Cost of goods sold (P546,750/1.35) 405,000
Note: Work back from cost of goods sold.
Merchandise out on consignment, at sales price,
including 25% markup on cost P4,000,000
Goods purchased in transit, FOB destination 2,000,000
Goods held on consignment by Aparri Company 1,000,000

By what amount should the inventory at December 31, 2014 be reduced?

a. P3,800,000 c. P1,800,000
b. P2,000,000 d. P1,000,000

6. Allapacan Company had the following consignment transactions during 2014:

Inventory shipped on consignment to Benguet Company, consignee P600,000
Freight paid by Allapacan 50,000
Inventory received on consignment from Ifugao, consignor 800,000
Freight paid by Ifugao 50,000

No sales of consigned goods were made through December 31, 2014. In its December 31, 2014
balance sheet, Allapacan should include consigned inventory of
a. P600,000 c. P 650,000
b. P700,000 d. P1,500,000

7. On June 1, 2014 Amulung Company sold merchandise with a list price of P5,000,000 to ABC.
Amulung allowed trade discounts of 20% and 10%. Credit terms were 5/10, n/30 and the sale was
made FOB shipping point. Amulung prepaid P200,000 of delivery cost for ABC as an
accommodation. On June 11, 2014, Amulung received from ABC full remittance of
a. P3,420,000 c. P3,600,000
b. P3,620,000 d. P3,800,000

8. Baggao Company’s accounts payable balance at December 31, 2014 was P8,000,000 before
considering the following data:

 Goods shipped to Baggao FOB shipping point on December 15, 2014 were lost in transit. The
invoice cost of P500,000 was not recorded by Baggao. On January 15, 2015, Baggao filed a
P500,000 claim against the common carrier.

 On December 30, 2014, a vendor authorized Baggao to return for full credit goods shipped and
billed at P200,000 on December 15, 2014. The returned goods were shipped by Baggao on
December 31, 2014. A P200,000 credit memo was received and recorded on January 5, 2015.

What should Baggao report as accounts payable on December 31, 2014?

a. P8,300,000 c. P7,800,000
b. P8,500,000 d. P7,500,000
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9. Ballesteros Company began operations late in 2013. For the first quarter ended March 31, 2014,
Ballesteros made available the following information:

Total merchandise purchased through March 15, recorded at net P4,900,000

Merchandise inventory at December 31, 2013, at selling price 1,500,000

All merchandise was acquired on credit and no payments have been made on accounts payable since
the inception of the company. All merchandise is marked to sell at 50% above invoice cost before time
discounts of 2/10, n/30. No sales were made in 2014.

How much cash is required to eliminate the current balance in accounts payable?
a. P6,000,000 c. P6,400,000
b. P5,900,000 d. P5,750,000

10. Calayan Company has determined its December 31, 2014 inventory on a FIFO basis at P9,500,000.
Information pertaining to that inventory follows:

Estimated selling price P14,000,000

Estimated cost to complete and cost of disposal 5,000,000
Normal profit margin 2,000,000
Current replacement cost 8,000,000

Calayan records losses that result from applying the lower of cost or market rule. At December 31,
2014, Calayan should report inventory at
a. P9,500,000 c. P9,000,000
b. P8,000,000 d. P7,000,000

11. Tublay uses the retail inventory method to approximate the lower of average cost or market. The
following information is available for the current year:
Cost Retail
Beginning inventory P 1,300,000 P 2,600,000
Purchases 18,000,000 29,200,000
Freight in 400,000
Purchase returns 600,000 1,000,000
Purchase allowances 300,000
Departmental transfer in 400,000 600,000
Net markups 600,000
Net markdowns 2,000,000
Sales 24,400,000
Sales discounts 200,000
Employee discounts 600,000

What should be reported as the estimated cost of inventory at the end of the current year?
a. P3,120,000 c. P3,000,000
b. P3,200,000 d. P3,840,000

12. Trinidad Company uses the average cost retail method to estimate its inventory. Data relating to the
inventory at December 31, 2014 are:
Cost Retail
Inventory, January 1 P 2,000,000 P3,000,000
Purchases 10,600,000 14,000,000
Net markups 1,600,000
Net markdowns 600,000
Sales 12,000,000
Estimated normal shoplifting losses 400,000
Estimated normal shrinkage is 5% of sales

Trinidad’s cost of goods sold for the year ended December 31, 2014 is
a. P9,100,000 c. P8,400,000
b. P8,680,000 d. P7,700,000
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13. Mankayan Company uses the first-in, first-out retail method of inventory valuation. The following
information is available:
Cost Retail
Beginning inventory P 2,500,000 4,000,000
Purchases 13,500,000 16,000,000
Net markups 3,000,000
Net markdowns 1,000,000
Sales 15,000,000

What would be the estimated cost of the ending inventory?

a. P7,000,000 c. P5,110,000
b. P5,250,000 d. P4,750,000

“That in all things, GOD maybe glorified”

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saved. Believe in Christ, and you will be saved, you and your entire household” Acts 4:12; 16:31

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John 3:27