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Since 1977

FAR OCAMPO/OCAMPO
FAR.3403-Estimating Inventories MAY 2023

DISCUSSION PROBLEMS
1. Techniques for the measurement of the cost of 6. The Bayambang Corp. was organized on Jan. 1 of the
inventories may be used for convenience if the results prior year. On Dec. 31 of the current year, the entity
approximate cost. Examples of techniques to estimate lost most of its inventory in a warehouse fire just
cost of inventories mentioned in PAS 2 include before the year-end count of inventory was to take
place. Data from the records disclosed the following:
I. Gross profit method
II. Retail inventory method Prior year Current year
III. Standard cost method Goods available for sale 4,069,400 4,157,000
IV. Most recent purchase price method Sales 3,940,000 4,180,000
Sales returns and
a. I, II, III and IV c. I and II only allowances 80,000 100,000
b. II, III and IV only d. II and III only Gross profit rate 21% ?

2. The gross profit method is useful On Jan. 1 of the current year, the entity’s pricing policy
a. When interim financial statements are prepared. was changed so that the gross profit rate would be
b. When inventory is destroyed by fire or flashfloods. three percentage points higher than the one earned in
c. When testing of the validity of an inventory cost prior year.
determined under either periodic or perpetual Salvaged undamaged merchandise was marked to sell
system. at P120,000 while damaged merchandise was marked
d. In all of these. to sell at P80,000 had an estimated realizable value of
P18,000.
3. The use of the gross profit method assumes
a. The amount of gross profit is the same as in prior How much is the inventory loss due to fire?
years. a. P918,200 c. P856,200
b. Sales and cost of goods sold have not changed b. P947,000 d. P824,600
from previous years.
c. Inventory values have not increased from 7. Luna Manufacturing began operations 5 years ago. On
previous years. Aug. 13 of the current year, a fire broke out in the
d. The relationship between gross profit and sales warehouse destroying all inventory and many
remains stable over time. accounting records relating to the inventory. The
information available is presented below. All sales and
4. The gross profit method assumes purchases are on account.
a. The beginning inventory plus purchases equal total Jan. 1 Aug. 13
goods to be accounted for. Inventory P143,850 ?
b. Goods not sold must be on hand. Accounts Receivable 130,590 P128,890
c. If sales, reduced to cost, are deducted from the Accounts Payable 88,140 122,850
sum of the opening inventory plus purchases, the Collections on accounts rec.,
result is the ending inventory. Jan. 1- Aug. 13 753,800
d. All of these. Payments to suppliers,
Jan. 1- Aug. 13 487,500
5. On May 6 of the current year, a flash flood caused Goods out on consignment
damage to the merchandise stored in the warehouse of at Aug. 13, at cost 52,900
Cabanatuan Co. You were asked to submit an estimate
Summary on previous years’ sales:
of the merchandise destroyed in the warehouse. The
following data were established: Three-year Two-year
a. Net sales for the prior year were P800,000, prior prior Prior year
matched against cost of P560,000. Sales P626,000 P705,000 P680,000
b. Merchandise inventory at Jan. 1 was P200,000, Gross Profit 187,800 183,300 231,200
90% of which was in the warehouse and 10% in GPR 30% 26% 34%
downtown showrooms. Determine the inventory loss suffered as a result of the
c. For Jan. 1 to date of flood, you ascertained invoice fire.
value of purchases (all stored in the warehouse), a. P139,590 c. P86,690
P100,000; freight inward, P4,000; purchases b. P102,560 d. P86,310
returned, P6,000.
d. Cost of merchandise transferred from the
warehouse to show-rooms was P8,000, and net 8. The work-in-process inventory of Burp Corp. were
sales from Jan. 1 to May 6 (all warehouse stock) completely destroyed by fire on June 1 of the current
were P320,000. year. You were able to establish physical inventory
Assuming gross profit rate in the current year to be the figures as follows:
same as in the previous year, the estimated Jan. 1 June 1
merchandise destroyed by the flood was Raw materials P 60,000 P120,000
a. P80,000 c. P50,000 Work-in-process 200,000 -
b. P66,000 d. P46,000 Finished goods 280,000 240,000

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Sales from Jan. 1 to May 31, were P546,750. 10. The estimated cost of inventory at the end of the
Purchases of raw materials were P200,000 and freight current year using the conventional (lower of cost or
on purchases, P30,000. Direct labor during the period market) retail inventory method is
was P160,000. It was agreed with insurance adjusters a. P3,200,000 c. P3,250,000
that an average gross profit rate of 35% based on cost b. P3,000,000 d. P3,360,000
be used and that direct labor cost was 160% of factory
overhead. 11. The estimated cost of inventory at the end of the
current year using the average retail inventory method
The work in process inventory destroyed by fire is
is
a. P366,000 c. P265,000
a. P3,200,000 c. P3,250,000
b. P314,612 d. P185,000
b. P3,000,000 d. P3,584,000

12. The estimated cost of inventory at the end of the

SOLUTION GUIDE:
current year using the FIFO retail inventory method is
Raw materials, 1/1 P 60,000 a. P3,200,000 c. P3,250,000
Purchases 200,000 b. P3,000,000 d. P3,658,480
Freight in 30,000
RM available for use 290,000 13. Which method results in highest cost of sales?
Raw materials, 6/1 ( 120,000) a. Conventional
Raw materials used 170,000 b. Average
Direct labor 160,000 c. FIFO
Factory overhead ? d. Cannot be determined from the information given
Total manufacturing costs ?
WIP, 1/1 200,000
Total costs placed in process ? SOLUTION GUIDE:
WIP, 6/1 ?
Cost of goods manufactured ? Conventional Average FIFO
Finished goods, 1/1 280,000 GAS at
TGAS ? cost
Finished goods, 6/1 (240,000)
COGS P ? GAS at
retail
9. Which statement is incorrect regarding the retail
inventory method? Cost ratio
a. The retail method is often used in the retail
EI at cost
industry for measuring inventories of large
numbers of rapidly changing items with similar
margins for which it is impracticable to use other
costing methods. LECTURE NOTES:
b. The cost of the inventory is determined by Differences in applying retail method:
reducing the sales value of the inventory by the
appropriate percentage gross margin. Markdown Beg. Inventory
c. The percentage used takes into consideration
inventory that has been marked down to below its Conventional Exclude Include
original selling price.
Average Include (Deduct) Include
d. A percentage computed using the conventional
retail is required for each retail department. FIFO Include (Deduct) Exclude

Use the following information for the next four questions.

14. In calculating the cost-to-retail percentage for the
Pugo uses the retail inventory method. The following retail method, the cost column will include:
information is available for the current year: a. Markup cancellations
b. Markdown cancellations
Cost Retail
c. Sales returns
Beginning inventory P 1,300,000 P 2,600,000
d. Purchase allowances
Purchases 18,000,000 29,200,000
Freight in 400,000
15. In calculating the cost-to-retail percentage for the
Purchase returns 600,000 1,000,000
retail method, the retail column will include:
Purchase allowances 300,000
a. Sales discounts
Departmental transfer in 400,000 600,000
b. Employee discounts
Net markups 600,000
c. Sales allowances
Net markdowns 2,000,000
d. Purchase returns
Sales 24,700,000
Sales returns 350,000
16. In calculating the cost-to-retail percentage for the
Sales discounts 200,000
retail method, the retail column will not include:
Employee discounts 600,000
a. Purchases
Loss from breakage 50,000
b. Purchase returns
c. Abnormal shortages
d. Freight-in

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17. The records of Binmaley’s Department Store report the 18. Yumul Company provided the following data:
following data for the month of January: Cost Retail
Beginning inventory at cost P 440,000 Beginning inventory P 160,000 P 400,000
Beginning inventory at sales price 800,000 Purchases 2,800,000 3,200,000
Purchases at cost 4,500,000 Freight in 40,000
Initial markup on purchases 2,900,000 Markup 300,000
Purchase returns at cost 240,000 Markup cancellation 30,000
Purchase returns at sales price 350,000 Markdown 160,000
Freight on purchases 100,000 Markdown
Additional markup 250,000 cancellation 40,000
Markup cancellations 100,000 Sales 3,000,000
Markdown 600,000 Physical inventory at
Markdown cancellations 100,000 year end 500,000
Net sales 6,500,000 Estimated normal
Sales allowances 100,000 shrinkage is 4% of
Sales returns 500,000 sales
Employee discounts 200,000
Assuming the company uses the average retail
Theft and other losses 100,000
inventory method, the estimated inventory shortage is
Using the average retail inventory method, Binmaley’s a. P104,000 c. P200,000
ending inventory at cost is b. P130,000 d. P 4,000
a. P360,000 c. P420,000
b. P384,000 d. P448,000
19. The retail inventory method is characterized by
SOLUTION GUIDE: a. The recording of sales at cost.
b. The reporting of year-end inventory at retail in
Cost Retail
the financial statements.
Beginning inventory
c. The recording of markups at retail and
Purchases
markdowns at cost.
Purchase returns
d. The recording of purchases at selling price.
Freight in
Additional mark up
Mark up cancellations
Mark down
Mark down cancellations
- done -
GAS

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ILLUSTRATIVE PROBLEM
Average Retail Method

A fire destroyed the New Jersey Company’s warehouse causing damage to its inventories stored in the warehouse. The
company uses average retail inventory method in inventory estimation. In connection with this, the company’s
accountant gathered the following information relating its inventories:
Cost Retail Price
Inventory, Beginning 190,000 300,000
Purchase Price 2,900,000 4,000,000
Purchase Discount 50,000 100,000
Purchase Allowance 90,000 150,000
Purchase returns 60,000 120,000
Freight In 20,000 30,000
Net Mark-up 60,000
Net Mark Down 80,000
Departmental Transfer – in (Debit) 386,800 430,000
Departmental Transfer – Out (Credit) 400,000 550,000
Abnormal Wastages 80,000 120,000
Normal Wastages 100,000 120,000
Employee Discounts 6,000 9,500
Sales Discount 5,000 8,200
Sales Allowances 21,000 32,150
Sales Returns 5,000 6,780

The company’s policy is to record sales adjustments directly to sales account. The sales account showed ending balance
of P2,908,000 on the date of fire. Physical inventory conducted after the fire disclosed usable damaged goods which the
company estimates can be sold at P100,000. Also, it is estimated that the company will incur P4,000 to sell the goods.
The original cost of this goods amounted to P50,000.

QUESTION:

How much should the company recognize as loss on inventory fire?

SOLUTION:

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