CHAPTER 7

PROBLEM 7-1: TRUE OR FALSE

False 1. According to the GAM for NGAs, inventories of government entities are
subsequently measured at net realizable value or current replacement cost
depending on whether the inventory is classified as held for sale or held for
distribution.
False 2. According to the GAM for NGAs, purchases of machinery, equipment,
furniture and fixtures and similar items below the Ᵽ10,000 capitalization
threshold for PPE are recorded as inventories.
False 3. Relief goods, office supplies, equipment and furniture and fixture are items
that may appropriately be recorded as inventories by a government entity.
False 4. The GAM for NGAs allows government entities to use the FIFO cost flow
formula.
False 5. The GAM for NGAs allows government entities to use a periodic inventory
system.
False 6. The specific identification cost formula is not available for use by government
entities, according to the GAM for NGAs.
False 7. The Purchase Request (PR) form is prepared when end users request for the
issuance of items of inventory that are available on stock.
True 8. If the beginning balance of inventory is P50, the net purchases are P100 and
the cost of goods sold is P30, the ending inventory must be P120.

Fact pattern
Entity A, a government entity, sells eggs. At the start of the period, Entity A’s inventory
consisted of (1) red egg with a carrying amount of P2. During the period, Entity A acquired
one (1) brown egg for P3 and one (1) blue egg for P4. Entity A sold the brown egg during the
period.
9. Under the Specific identification cost formula, Entity A’s cost of sale is P2.
10. If the eggs are ordinarily interchangeable, Entity A’s cost of sale is P2.5,
assuming the sale occurred only after all the purchases were made.
 

PROBLEM 7-2: MULTIPLE CHOICE

1. Entity A, a government entity, purchases inventories. To record a purchase, Entity A would
likely debit the (an).
a. Inventory account
b. Purchases Account
c. Expense Account
d. a or b 
 
2. Entity A, a government hospital, acquires medicines to be sold in its pharmacy. Entity A
would record the medicines acquired as
a. Semi-Expendable Property
b. Inventory Held for Consumption
c. Inventory Held for Distribution
d. Inventory Held for Sale
 
3. Entity A, a government entity, purchases relief goods which are to be held on standby, ready
to be distributed when a calamity strikes. Entity A would most likely classify the goods
purchased as
a. Inventory Held for Consumption
b. Inventory Held for Distribution
c. Purchases
d. None of these, only a note disclosure shall be made

4. According to the GAM for NGAs, this shall be used for large numbers of items of inventory
that are ordinarily interchangeable.
a. Specific identification
b. FIFO
c. Weighted average cost applied in a period inventory system
d. Weighted average cost applied in a perpetual inventory system
e. Any of these as a matter of accounting policy choice

5. This refers to the cost an entity would incur to acquire an asset on the reporting date.
a. Net realizable value
b. Fair value
c. Current replacement cost
d. Present value

6. Which of the following inventories of a government entity would be subsequently measured

at the lower of cost and current replacement cost?
a. Inventories of rice that are held for sale
b. Medicines being sold by a government-owned pharmacy
c. Books to be distributed to students in public schools
d. Forest products held for sale

7. Which of the following events or transactions would not lead to the recognition of the cost of
inventory as expense?
a. The inventory is written down.
b. The inventory is distributed for free.
c. The inventory is exchanged for dissimilar inventory.
d. The inventory is consumed in the manufacturing process.

8. The accounting division of a government entity uses this record and monitor the movements
and balances inventories.
a. Stock Card
b. Stock Ledger Card
c. Journal Entry
d. Special Journal
 
9. Which of the following statements correctly differentiates the Stock Card from the Stock
Ledger Card?
a. The Stock Ledger Card is maintained by the Budget Division while the Stock Card is
maintained by the Accounting Division.
b. The Stock Card is subject to audit by the COA while the Stock Ledger Card is not.
c. The Stock Card shows quantities only while the Stock Ledger Card shows monetary
balances only.
d. The stock Card shows quantities only while the Stock Ledger Card shows
quantities as well as monetary amounts.

10. This document is prepared when end users request for the issuance of inventories that are
available on stock.
a. Purchase Requisition Form
b. Custodian Inventory Slip
c. Purchase Order
d. Requisition and Issue Slip
 

PROBLEM 7-3: MULTIPLE CHOICE

1. Entity A, a government entity, purchases inventory to be held for sale in the ordinary course
of activities. Which of the following is the correct entry, to record the purchase?
a. Merchandise Inventory xxx
Account Payable xxx
b. Purchase xxx
Accounts Payable xxx
c. a or b depending on the accounting policy being used
d. none, a government entity cannot hold inventories for sale; only for consumption.

2. Entity A, a government entity, distributed welfare goods to the intended recipients. The entry
to recognize the event is
a. Cost of sales xxx
Welfare Goods for Distribution xxx
b. Welfare Goods Expense xxx
Welfare Goods for Distribution xxx
c. Distribution costs xxx
Welfare Goods for Distribution xxx
d. None. The expense is recognized at the end of the period when a physical count is
performed. The expense is closed to the Income Summary account.
3. At year-end, Entity A, a government entity, determines the following information:
 Carrying amount of goods held for distribution — P100,000.
 Net realizable value — P80,000.
 Current replacement cost — P90,000.

How much of the carrying amount of the inventory is recognized as expense?

a. 10,000
b. 20,000
c. 90,000
d. None of these

Use the following information for the next two questions:

Entity A, a government entity, determines the following information regarding the inventory of
Goods A, a non-unique item:

4. How much is ending inventory?

a. 116,382
b. 117,300
c. 116,495
d. Any of these.

5. How much is the cost of sale?

a. 207,805
b. 207,918
c. 207,000
d. Any of these.

PROBLEM 7-4: FOR CLASSROOM DISCUSSION

1. Entity A, a government entity, purchases furniture and fixtures amounting to P14,000. Entity
A would most likely record the purchase as
a. Property, Plant and Equipment
b. Inventory Held for Consumption
c. Inventory Held for Manufacturing
d. Semi-Expendable Property
2. Accountable forms such as pre-printed forms used in government transactions are most
likely to be classified by a government entity as
a. Inventory Held for Consumption
b. Inventory Held for Sale
c. Semi-Expendable Property
d. Not considered inventory, according to the GAM for NGAs

3. Inventories are initially measured at cost and subsequently measured at

a. The Lower of Cost and Net realizable value for good s held for sale
b. The Lower of Cost and Current replacement cost for goods held for distribution.
c. a and b
d. cost

4. Which of the following cost formulas is not available for use by government entities?
a. Specific identification
b. FIFO
c. Weighted Average
d. All of these are available

5. The GAM for NGAs requires the use of which of the following inventory systems?
a. Perpetual inventory system
b. Periodic inventory system
c. a or b
d. none of these

6. Government entities record purchases of inventories

a. in an inventory account
b. in the Purchases account
c. a orb
d. as expenses

7. Which of the following may be included as cost of inventory?

a. freight-in under a freight collect, FOB destination sale term
b. trade discounts
c. cost of insurance while the goods are in transit
d. advertisement cost that resulted to the resale of inventory purchased
8. Arrange the following in the sequence they are used in the requisition and receipt of
inventories by a government entity
I. Inspection and Acceptance Report (IAR)
II. Disbursement Voucher (DV)
III. Purchase Request (PR)
IV. Journal entry
V. Purchase Order (PO).
VI. Stock Card (SC)

a. III, V, I, VI, IV and II

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

9. This is maintained in the Property/Supply Division to record the movements of inventories.

a. Stock Card (SC)
b. Property/Supply Card (PSC)
c. Supplies Ledger Card (SLC)
d. Magic Card (MC)

10. This is used to report wasted materials, such as destroyed spare parts and other spoilages.
a. Wasted Stocks Card (WSC)
b. Waste Materials Report
c. Report on the Physical Count of Inventories
d. Inventory Custodian Slip