FAR EASTERN UNIVERSITY - MAKATI

FINANCIAL ACCOUNTING AND REPORTING R. R. OCAMPO

nd
P1.2302-Estimating Inventories 2 SEM 2017-2018

DISCUSSION PROBLEMS
1. Techniques for the measurement of the cost of Assuming gross profit rate in 2017 to be the same as
inventories may be used for convenience if the results in the previous year, the estimated merchandise
approximate cost. The following are acceptable for destroyed by the flood was
year-end financial reporting purposes, except a. P80,000 c. P50,000
a. Standard cost method b. P66,000 d. P46,000
b. Retail method
c. Gross profit method 6. The Bayambang Corporation was organized on January
d. None of the above. 1, 2016. On December 31, 2017, the corporation lost
most of its inventory in a warehouse fire just before
2. The use of the gross profit method assumes the year-end count of inventory was to take place.
a. The amount of gross profit is the same as in prior Data from the records disclosed the following:
years. 2016 2017
b. Sales and cost of goods sold have not changed Goods available for sale 4,069,400 4,157,000
from previous years. Sales 3,940,000 4,180,000
c. Inventory values have not increased from Sales returns and
previous years. allowances 80,000 100,000
d. The relationship between selling price and cost of

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Gross profit rate 21% ?

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goods sold is similar to prior years.
On January 1, 2017, the Corporation’s pricing policy

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3. The gross profit method of estimating inventory would
eH w was changed so that the gross profit rate would be
NOT be useful when three percentage points higher than the one earned in
a. Inventories have been destroyed or lost by fire, 2016.

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theft, or other casualty, and the specific data
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required for inventory valuation are not available. Salvaged undamaged merchandise was marked to sell
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b. A periodic system is in use and inventories are at P120,000 while damaged merchandise was marked
required for interim statements. to sell at P80,000 had an estimated realizable value of
c. The relationship between gross profit and sales P18,000.
remains stable over time.
How much is the inventory loss due to fire?
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d. There is a significant change in the mix of products

a. P918,200 c. P856,200
being sold.
aC s

b. P947,000 d. P824,600
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4. The gross profit method assumes

7. Luna Manufacturing began operations 5 years ago. On
a. The beginning inventory plus purchases equal total
August 13, 2017, a fire broke out in the warehouse
goods to be accounted for.
destroying all inventory and many accounting records
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b. Goods not sold must be on hand.

relating to the inventory. The information available is
c. If sales, reduced to cost, are deducted from the
ed d

presented below. All sales and purchases are on

sum of the opening inventory plus purchases, the
account.
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result is the ending inventory.

January 1, August 13,
d. All of these.
2017 2017
Inventory P143,850
5. On May 6, 2017 a flash flood caused damage to the
Accounts Receivable 130,590 P128,890
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merchandise stored in the warehouse of Cabanatuan

Accounts Payable 88,140 122,850
Co. You were asked to submit an estimate of the
Collections on accounts rec.,
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merchandise destroyed in the warehouse. The

Jan. 1- Aug. 13 753,800
following data were established:
Payments to suppliers,
a. Net sales for 2016 were P800,000, matched
Jan. 1- Aug. 13 487,500
against cost of P560,000.
Goods out on consignment
b. Merchandise inventory, Jan. 1, 2017 was
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at Aug. 13, at cost 52,900

P200,000, 90% of which was in the warehouse and
10% in downtown showrooms. Summary on previous years’ sales:
c. For Jan. 1, 2017 to date of flood, you ascertained 2014 2015 2016
invoice value of purchases (all stored in the Sales P626,000 P705,000 P680,000
warehouse), P100,000; freight inward, P4,000; Gross Profit 187,800 183,300 231,200
purchases returned, P6,000. GPR 30% 26% 34%
d. Cost of merchandise transferred from the
warehouse to show-rooms was P8,000, and net Determine the inventory loss suffered as a result of the
sales from January 1 to May 6, 2017 (all fire.
warehouse stock) were P320,000. a. P139,590 c. P86,690
b. P102,560 d. P86,310

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8. The work-in-process inventory of Burp Company were Use the following information for the next five questions.
completely destroyed by fire on June 1, 2017. You
Pugo uses the retail inventory method. The following
were able to establish physical inventory figures as
information is available for the current year:
follows:
January 1, 2017 June 1, 2017 Cost Retail
Raw materials P 60,000 P120,000 Beginning inventory P 1,300,000 P 2,600,000
Work-in-process 200,000 - Purchases 18,000,000 29,200,000
Finished goods 280,000 240,000 Freight in 400,000
Purchase returns 600,000 1,000,000
Sales from January 1 to May 31, were P546,750. Purchase allowances 300,000
Purchases of raw materials were P200,000 and freight Departmental transfer in 400,000 600,000
on purchases, P30,000. Direct labor during the period Net markups 600,000
was P160,000. It was agreed with insurance adjusters Net markdowns 2,000,000
that an average gross profit rate of 35% based on cost Sales 24,700,000
be used and that direct labor cost was 160% of factory Sales returns 350,000
overhead. Sales discounts 200,000
The work in process inventory destroyed by fire is Employee discounts 600,000
a. P366,000 c. P265,000 Loss from breakage 50,000
b. P314,612 d. P185,000
10. Assume that the loss from breakage is abnormal. In
computing cost-to-retail ratio, the loss should be
SOLUTION GUIDE: a. Added to the total goods available for sale at cost
and retail
Raw materials, 1/1 P 60,000 b. Added from the total goods available for sale at
Purchases 200,000 cost and retail

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Freight in 30,000 c. Deducted to the total goods available for sale at

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RM available for use 290,000 cost and retail
Raw materials, 6/1 ( 120,000) d. Deducted from the total goods available for sale at

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Raw materials used eH w 170,000 cost and retail
Direct labor 160,000
Factory overhead ? 11. The estimated cost of inventory at the end of the

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Total manufacturing costs ? current year using the conventional (lower of cost or
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WIP, 1/1 200,000 market) retail inventory method is
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Total costs placed in process ? a. P3,200,000 c. P3,250,000

WIP, 6/1 ? b. P3,000,000 d. P3,360,000
Cost of goods manufactured ?
Finished goods, 1/1 280,000 12. The estimated cost of inventory at the end of the
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TGAS ? current year using the average retail inventory method

aC s

Finished goods, 6/1 (240,000) is

COGS P ? a. P3,200,000 c. P3,250,000
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b. P3,000,000 d. P3,584,000

9. The retail method is often used in the retail industry 13. The estimated cost of inventory at the end of the
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for measuring inventories of large numbers of rapidly current year using the FIFO retail inventory method is
ed d

changing items with similar margins for which it is a. P3,200,000 c. P3,250,000

impracticable to use other costing methods. Which b. P3,000,000 d. P3,658,480
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statement is incorrect regarding the retail inventory

method? 14. Which method results in highest cost of sales?
a. The cost of the inventory is determined by a. Conventional
reducing the sales value of the inventory by the b. Average
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appropriate percentage gross margin. c. FIFO

b. The percentage used takes into consideration d. Cannot be determined from the information given.
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inventory that has been marked down to below its

original selling price.
c. An average percentage for each retail department SOLUTION GUIDE:
is often used.
d. All the statements are correct. Conventional Average FIFO
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GAS at
cost

GAS at
retail

Cost ratio

EI at cost

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LECTURE NOTES: SOLUTION GUIDE:

Differences in applying retail method: Cost Retail
Beginning inventory
Conventional Average FIFO Purchases
Purchase returns
Net Exclude Include Include Freight in
markdown (Deduct) (Deduct) Additional mark up
Inventory, Include Include Exclude Mark up cancellations
beginning Mark down
Mark down cancellations
GAS

15. In calculating the cost-to-retail percentage for the

retail method, the retail column will not include: 17. Yumul Company provided the following data:
a. Purchases
b. Purchase returns Cost Retail
c. Abnormal shortages Beginning inventory P 160,000 P 400,000
d. Freight-in Purchases 2,800,000 3,200,000
Freight in 40,000
16. The records of Binmaley’s Department Store report the Markup 300,000
following data for the month of January: Markup cancellation 30,000
Markdown 160,000
Beginning inventory at cost P 440,000 Markdown
Beginning inventory at sales price 800,000 cancellation 40,000
Purchases at cost 4,500,000 Sales 3,000,000
Initial markup on purchases 2,900,000 Physical inventory at

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Purchase returns at cost 240,000 year end 500,000

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Purchase returns at sales price 350,000 Estimated normal
Freight on purchases 100,000

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shrinkage is 4% of
Additional mark up
Mark up cancellations
eH w 250,000
100,000
sales
Assuming the company uses the average retail

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Mark down 600,000
inventory method, the estimated inventory shortage is
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Mark down cancellations 100,000
Net sales 6,500,000 a. P104,000 c. P200,000
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Sales allowance 100,000 b. P130,000 d. P 4,000

Sales returns 500,000
Employee discounts 200,000
18. The retail inventory method is characterized by
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Theft and other losses 100,000

a. The recording of sales at cost.
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Using the average retail inventory method, Binmaley’s b. The reporting of year-end inventory at retail in
ending inventory is
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the financial statements.

a. P360,000 c. P420,000 c. The recording of markups at retail and
b. P384,000 d. P448,000 markdowns at cost.
d. The recording of purchases at selling price.
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ed d

J - end of P1.2302 - J
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