INVENTORIES QUIZ NOTES

When using a perpetual inventory system,

 no Purchases account is used.

 two entries are required to record a sale.
 a Cost of Goods Sold account is used.

Valuation of inventories requires the determination of all of the following;

 the cost flow assumption to be adopted.

 the costs to be included in inventory.
 the physical goods to be included in inventory.

Not included in valuation of inventories;

 the cost of goods held on consignment from other companies.

Which of the following items should be included in a company's inventory at the balance sheet date?

 Goods sold to a customer which are being held for the customer to call for at his or her convenience.
 Goods in transit which were purchased f.o.b. destination.
 Goods received from another company for sale on consignment.
 None of the choices ( Correct Answer )

The failure to record a purchase of merchandise on account even though the goods are properly included in the physical
inventory results in;

 an understatement of liabilities and an overstatement of owners' equity.

On June 15, 2004, Stilley Corporation accepted delivery of merchandise which it purchased on account. As of June 30, Stilley had
not recorded the transaction or included the merchandise in its inventory. Stilley uses the periodic inventory system. The effect
of the error on Stilley’s balance sheet on June 30, 2004 would be

 stockholders' equity was the only item affected by the omission.

 assets and stockholders' equity were overstated but liabilities were not affected.
 assets, liabilities, and stockholders' equity were understated.
 none of the choices ( Correct Answer )

Losses which are expected to arise from firm and non-cancellable commitments for the future purchase of inventory items, if
material should be;

 Recognized in the accounts by debiting loss on purchase commitments and crediting estimated liability for loss on
purchase commitments

Goods in transit which are shipped f.o.b. shipping point should be

 included in the inventory of the buyer.

The following is not considered as inventory under PAS 2;

 Abnormal amount of waste materials, labor and other production costs.

The following is considered as inventory under PAS 2;

 Supplies and materials awaiting use in the production process.

 Materials or supplies to be used in rendering of services.
 Land and other property purchased and held for resale.

Eller Co. received merchandise on consignment. As of January 31, Eller included the goods in inventory, but did not record the
transaction. The effect of this on its financial statements for January 31 would be

 net income, current assets, and retained earnings were overstated.

Dane Co. received merchandise on consignment. As of March 31, Dane had recorded the transaction as a purchase and included
the goods in inventory. None of the consigned goods have been sold during the period. The effect of this on its financial
statements for March 31 would be

 net income was correct and current assets and current liabilities were overstated.

PROBLEMS

[Q-1]

Barbie Manufacturing Corporation has the following account balances at year end:
Office Supplies - P4,000;
Factory Supplies - P4,000;
Raw materials - P27,000;
Work in process - P59,000;
Finished goods - P72,000;
Prepaid insurance - P6,000;
Prepaid rent - P6,000.

What amount should Barbie company report as inventories in its balance sheet? Inventories = P 162,000

Computation:

Factory Supplies: 4,000 + Raw Materials: 27,000 + Work in Process: 59,000 + Finished Goods: 72,000 = 162,000

[Q-2]

Your audit of Red Velvet Company’s inventory and related records revealed the following information:

Merchandise inventory, January 1, 2019                                                        670,000

Purchases for the year 2019                                                                           4,280,000
Sales for the year 2019                                                                                   5,250,000

You conducted a physical inventory on December 31, 2019 and determined P850,000 was in the company’s warehouse. The
company’s president suspects some new employees may have pilfered a portion of the merchandise inventory.

Determined the estimated cost of the missing inventory, assuming Red Velvet Company’s gross profit remained constant at
30% of cost of sales. Estimated Cost of missing inventory at 30% cost of sales = 61,538

Computation:

Merchandise Inventory; 670,000 + Purchases; 4,280,000 = 4,950,000

Sales; 5,250,000 / 130% = 4,038,461.538

4,950,000 – 4,038,461.538 = 911,538.462 – Physicial Inventory; 850,00 = 61,538.462

Determined the estimated cost of the missing inventory, assuming Red Velvet Company’s gross profit remained constant at
30% of sales. Estimated Cost of missing inventory at 30% of sales = 425,000

Computation:

670,000 + 4,280,000 = 4,950,000

5,250,000 * 70% = 3,675,000

4,950,000 – 3,675,000 = 1,275,000 – 850,000 = 425,000

[Q-3]

Based on physical inventory at year-end, Cherry Company determined the chocolate inventory on a FIFO basis at P2,600,000
with a replacement cost of P2,500,000. Cherry Company estimated that, after further processing costs of P1,200,000, the
chocolate could be sold as finished candy bars for P4,000,000. The normal profit margin is 10% of sales. What amount should be
reported as chocolate inventory at year-end? Chocolate Inventory at year End = P 2,600,000

Computation:

FIFO basis cost = 2,600,000

Net Realizable Value = 4,000,000 – 1,200,000 = 2,800,000

Lower of cost and net realizable value = P 2,600,000

[Q-4]

The following information appears on the Kimchi Jjigae Company’s records for the year ended December 31: Inventory, January
1- P325,000; Purchases- P1,150,000; Purchase returns- P40,000; Freight-in- P30,000; Sales- P1,700,000; Sales returns- P25,000.
On December 31, a physical inventory revealed that the ending inventory was only P210,000. Kimchi Jjigae’s gross profit on net
sales has remained constant at 30% in recent years. Kimchi Jjigae suspects that some inventory may have been pilfered by one
of the company’s employees. At December 31, what is the estimated cost of inventory? Estimated cost of inventory = P 82,500

Computation:

325,000 + 1,150,000 – 40,000 + 30,000 = 1,465,000

1,700,000 – 25,000 = 1,675,000 * 70% = 1,172,500

1,172,500 – 1,465,000 = 292,500 – 210,000 = 82,500

[Q-5]

Based on a physical inventory taken on December 31, 2020, SM Entertainment Company determined its inventory on a FIFO
basis at P55,000. SM Entertainment estimated that, after further processing costs of P15,000, the inventory could be sold as
finished goods for P65,000. SM Entertainment normal profit margin is 10% of cost of sales. Under the lower of cost and net
realizable value rule, what amount should SM Entertainment Company report as inventory on its December 31, 2020 statement
of Financial Position?

Possible Answers: Computation:

- 50,000
- 55,000
- 65,000
- 40,000

[Q-6]

The Physical inventory on October 31, 2019 of Ji Chang Wook (JCW) Company showed merchandise at P205,000. As an
accountant you checked the inventories and found out that the following items were excluded from this amount.

 Merchandise costing P40,500 shipped by a vendor FOB Shipping point on December 31, 2019 and received by JCW
Company on November 5, 2019. ( Entry Error: The date should have been October 31 and not December )
 Merchandise costing P45,000 shipped by a vendor FOB destination on October 30, 2019 and received by JCW Company
on November 4, 2019.
 Merchandise costing P15,800 which was shipped FOB destination to a customer on October 29, 2019. The customer
expected to receive the merchandise on November 6, 2019.
 Merchandise costing P40,900 which was shipped FOB shipping point to a customer on October 29, 2019. The goods are
scheduled to arrive at the destination point on November 2, 2019.
  Merchandise in transit to customers shipped to customer October 28, 2019, FOB Shipping point, at selling price of
P56,000, which includes 40% markup on selling price.
 Merchandise sold October 30, 2019, in transit, FOB origin, with selling price of P39,000 and cost of P28,000.

What is the correct amount of inventory that should appear on JCW’s October, 2019 statement of financial position? P
261,300

Computation:

Physical Inventory 205,000

Merchandise shipped by a vendor, FOB shipping point 40, 500

Merchandise shipped, FOB destination 15,800

Total 261,300

[Q-7]

What would be the estimated cost of ending inventory, using average cost retail? P 121, 153

Computation:

What is the cost to retail ratio of KHN Company? Answer: 75.53%

Computation:

Cost = 180,000 + 291,090 = 471,090

Retail = 175,000 + 463,900 + 25,200 – 9,200 – 38,100 + 6,900 = 623,700

Cost to retail ratio = 471,090 / 623,700 = 0.755315055

[Q-8]

James Co. has the following data related to an item of inventory:

 Inventory, March 1 200 units @ P4.20

 Purchase, March 7 700 units @ P4.40
 Purchase, March 16 140 units @ P4.50
 Inventory, March 31 300 units

The value assigned to cost of goods sold if James uses FIFO is

Possible answers: Computation:

- 3,216.
- 1,280.
- 1,334.
- 3,270.

[Q-9)

How much is the total cost available for sale for the month of January? P 3,061,900

Computation:

Sales; 250,800 * 15 = 3,762,000 – Gross Profit; 1,200,800 = 2,561,200 Cost of Goods Sold

Ending Inventory;

49,000 x 8.40 = 411,600

11,000 x 8.10 = 89,100

Total Cost Available For Sale = 2,561,200 + 411,600 + 89,100 = 3,061,900

How much is the total cost of sales for the month of January? P 2,561,200

Computation:

Sales; 250,800 * 15 = 3,762,000 – Gross Profit; 1,200,800 = 2,561,200 Cost of Goods Sold

What was the total cost and the unit average cost of the January 1 inventory? Answer = 11.98

Computation:

49,000 x 8.40 = 411,600

11,000 x 8.10 = 89,100

Ending inventory = 411,600 + 89,100 = 500,700

Total cost and the unit average cost of January 1 inventory = 60,000 units on hand / 500,700 = 0.11982234

[Q-10]

Samgyeopsal Inc. is a calendar-year corporation. Its financial statements for the years 2020 and 2019 contained errors as
follows: Ending inventory: 2020- P3,000 understated; 2019- P8,000 overstated. Assume that the proper correcting entries were
made at December 31, 2019. By how much will 2020 income before taxes be overstated or understated?

Answer: P 3,000 understated

[Q-11]

Seolleongtang Company has the following: Inventory, January 1- 8,000 units @ P11; Purchases, June 19- 13,000 units @ P12;
Purchases, November 15- 5,000 units @ P13. If Seolleongtang Company has 9,000 units on hand on December 31, the cost of
ending inventory under FIFO is: Answer: P 113,000

Computation:

Beginning Inventory, January 01 8,000 * 11 = 88,000 ( 17,000 – 8,000 = 9,000 ) no units remained for January
inventory

Purchases, June 19 13,000 * 12 = 156,000 ( 13,000 – 9,000 = 4,000 units remained )

Purchases, November 15 5,000 * 13 = 65,000

( Total units = 8,000 + 13,000 + 5,000 = 26,000 – 9,000 units on hand = 17,000 units are sold )

Cost of ending inventory:

Purchases, June 19 4,000 * 12 = 48,000

Purchases, November 15 5,000 * 13 = 65,000

Cost of ending inventory under FIFO = 48,000 + 65,000 = 113,000

[Q-12]

As a result of a thorough physical inventory, Railway Company determined that it had inventory worth P180,000 at December
31, 2020. This count did not take into consideration the following facts: Rogers Consignment store currently has goods worth
P35,000 on its sales floor that belong to Railway but are being sold on consignment by Rogers. The selling price of these goods is
P50,000. Railway purchased P13,000 of goods that were shipped on December 27, FOB destination, that will be received by
Railway on January 3. How much is the correct amount of inventory to be reported in Railway Company’s statement of financial
position?

Correct amount of inventory = P 215,000

Computation:

Inventory; 180,000 + Rogers Consignment goods held belonging to Railway; 35,000 = P 215,000

[Q-13]

YG Hardware Inc. uses the retail method of inventory. At the end of June, the records of the company provided the following
information:

Purchases during June: at cost, P3,800,000; at retail, P5,200,000.

Sales during June: P4,800,000.

Inventory June 1: at cost, P550,000; at retail, P820,000.

Estimate the cost of goods sold under average weighted cost basis. (Round off cost ratios to two decimals)

Answer: P 3,468,439 Cost of Goods Sold under Average Weighted Cost

Computation:

Cost = 550,000 + 3,800,000 = 4,350,000 Total cost available for sale

Retail = 820,000 + 5,200,000 = 6,020,000 Total retail available for sale – 4,800,000 Sales = 1,220,000

Cost of Goods Sold = 6,020,000 – 1,220,000 = 4,800,000

Cost to retail percentage = 4,350,000 / 6,020,000 = 0.722591362 * 4,800,000 = 3,468,438.537

Estimate the ending inventory for June under FIFO cost basis. Answer: 891,538

Computation:

Cost = 550,000 + 3,800,000 = 4,350,000

Retail = 820,000 + 5,200,000 = 6,020,000 – 4,800,000 Sales = 1,220,000

Purchases percentage = 3,800,000 / 5,200,000 = 0.73076923

Estimated ending inventory = 1,220,000 * 73.08% = 891,538.4606

[Q-14]

The Budae jjigae Department Store uses the retail inventory method to approximate ending inventory. The following
information is available for the month of June:

Cost Retail

Cost of goods available for sale P 720,000 P 900,000

Net markup (not included above) - 100,000

Net markdowns 40,000

Sales 680,000

What was the approximate inventory using average retail inventory? P 210,000

Computation:

Retail = 900,000 + 100,000 – 40,000 = 960,000 – 680,000 Sales = 280,000

Cost to retail percentage = 720,000 / 960,000 = 0.75

Approximate inventory = 280,000 * 75% = 210,000

[Q-15]

The following information is available for Kerr Company for 2004:

Freight-in 60,000

Purchase returns 150,000

Selling expenses 300,000

Ending inventory 520,000

The cost of goods sold is equal to 300% of selling expenses. What is the cost of goods available for sale?

Answer: 1,420,000 Cost of Goods available for sale

Computation:

Cost of goods sold = 300,000 selling expense * 300% = 900,000

Cogs; 900,000 + End, Inventory; 520,000 = 1,420,000