FINANCIAL ACCOUNTING
THEORY & PRACTICE
INVENTORIES
(Cost Flow & Valuation)
QUIZZER
Inventory – Cost Flow & Valuation
INVENTORIES
Essay Questions
Basic Concepts
1. Define "inventories".
PAS 2, paragraph 6, defines inventories as "assets which are held for sale in the ordinary
course of business, in the process of production for such sale or in the form of materials or
supplies to be consumed in the production process or in the rendering of services".
2.
What are the two classes of inventories?
Inventories are broadly classified into two, namely inventories of a trading entity and
inventories of manufacturing entity.
A trading entity is one that buys and sells goods in the same form purchased.
The term "merchandise inventory" is generally applied to goods held by a trading entity.
A manufacturing entity is one that buys goods which are altered or converted into another
form before they are made available for sale.
The terms "finished goods", "goods in process," "raw materials", and "factory or
manufacturing supplies" refer to inventories of a manufacturing entity.
3.
What is the general rule as to "what goods shall be included in inventory"?
The general rule is that "all goods to which the entity has title shall be included in inventory,
regardless of location."
In other words, it is ownership that determines inventory inclusion or inventory exclusion.
As long as the entity is the owner of the goods to be inventoried, the goods shall be included
in inventory.
4.
Explain the following terms in connection with purchase of inventory.
1. FOB destination
2. FOB shipping point
3. Freight collect
4. Freight prepaid
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FOB destination - means that the ownership of the goods purchased is vested in the buyer
upon receipt thereof.
Accordingly, the seller is still the owner of the goods in transit and shall legally be responsible
for freight charges and other expenses up to the point of destination.
FOB shipping point - means that the ownership of the goods purchased is vested in the buyer
upon the shipment thereof.
Accordingly, the buyer is already, the owner of the goods in transit and shall legally be
responsible for freight charges and other expenses from the point of shipment to the point of
destination.
Freight collect - means that the freight charge on the goods shipped is not yet paid. The
common carrier shall collect the same from the buyer. Thus, under this, the freight charge is
actually paid by the buyerFreight prepaid - means that the freight charge on the goods shipped is already paid by the
seller.
The terms "FOB destination" and "FOB shipping point" determine ownership of the goods in
transit and the party who is supposed to pay the freight charge and other expenses from the
point of shipment to the point of destination.
The terms "freight collect" and "freight prepaid" determine the party who actually paid the
freight charge but not the party who is supposed to legally pay the freight charge.
5.
Explain fully FAS, CIF and Ex-ship in relation to maritime shipping.
FAS or free alongside - A seller who ships FAS must bear all expenses and risk involved in
delivering the goods up to the dock next to or alongside the vessel on which the goods are
to be shipped.
The buyer bears the cost of loading and shipment and thus, title passes to the buyer when
the carrier takes possession of the goods.
CIF or cost, insurance and freight - Under this shipping contract, the buyer agrees to pay in
a lump sum the cost of the goods, insurance cost and freight charge.
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Inventory – Cost Flow & Valuation
The shipping contract may be modified as CF which means that the buyer agrees to pay in a
lump sum the cost of the goods and freight charge only.
In either case, the seller must pay for the cost of loading. Thus, title and risk of loss shall pass
to the buyer upon delivery of the goods to the carrier.
Ex-ship - A seller who delivers the goods ex-ship bears all expenses and risk of loss until the
goods are unloaded at which time title and risk of loss shall pass to the buyer.
6.
Who is the owner of "consigned goods"?
A consignment is a method of marketing goods in which the owner known as the consignor
transfers physical possession of certain goods to an agent known as the consignee who sells
the goods on the owner's behalf.
Goods on consignment shall be included in the consignor's inventory and excluded from the
consignee's inventory.
Freight and other handling charges are part of the cost of the inventory of consigned goods.
7.
Explain the classification and presentation of inventories in the statement of financial position.
Since inventories are acquired for production, sale or consumption and acquisitions normally
approximate the entity's need for the current operating cycle, these are generally classified
as current assets.
The inventories shall be presented as one line item in the statement of financial position but
the details of the inventories shall be disclosed in the notes to financial statements.
For example, the note shall disclose the composition of the inventories of a manufacturing
entity as finished goods, goods in process, raw materials and manufacturing supplies.
8.
Explain the two systems of accounting for inventories.
1. Periodic or physical system
The periodic system calls for the physical counting of goods on hand at the end of the
accounting period to determine quantities.
The quantities are then multiplied by the recorded unit costs to get the inventory value.
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This approach gives actual or physical inventory.
Thus, under this approach, the cost of goods sold is computed only at the end of the
period by deducting the physical inventory from the total cost of goods available for sale.
The periodic inventory procedure is generally used when the individual inventory items
have small peso investment, such as groceries, hardware and auto parts.
2. Perpetual system
The perpetual system requires the keeping of stock cards that summarize inventory
inflow and outflow.
Inventory increases and decreases are reflected in the stock cards and the resulting
balance represents the inventory. This approach gives book or perpetual inventory.
Under this approach, the cost of goods sold is computed at the time of every sale.
The perpetual inventory procedure is commonly used when the inventory items treated
individually have large peso investment such as jewelry and cars.
When the perpetual system is used, a physical count of the units on hand should at least
be made once a year or at frequent intervals to confirm the balances appearing on the
stock cards.
9.
Distinguish cash discounts and trade discounts.
1. Cash discounts are reductions in the invoice price allowed only when payment is made
within the discount period.
Cash discounts are called purchase discount on the part of the buyer and sales discount
on the part of seller.
Trade discounts are reductions in the list price or catalog price in order to get the invoice
price or the amount actually charged to the buyer.
2. Cash discounts are recorded but trade discounts are not recorded.
3. The' purpose of cash discounts is to encourage prompt payment. The purpose of trade
discounts is to encourage trading or promote sales.
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10. What are the two methods of recording purchases?
1. Gross method
As the title suggests, the purchases are recorded at the gross amount of the invoice.
Cash discounts taken are recorded in a purchases discount account at the time of
payment.
The purchases discount is deducted from purchases when measuring cost of goods sold.
2. Net method
The purchases are recorded at net amount, meaning, the cost of purchases is measured
net of cash discounts allowable whether taken or not taken.
11. What is "cost" of an inventory?
The cost of an inventory comprises:
a. Cost of purchase
b. Cost of conversion
c. Other cost incurred in bringing the inventory to its present location and condition
12. Explain the "cost of purchase" of an inventory.
The cost of purchase of inventory comprises the purchase price, import duties and
irrecoverable taxes, freight, handling and other costs directly attributable to the acquisition of
finished goods, materials and services.
Trade discounts, rebates and other similar items are deducted in determining the cost of
purchase.
The cost of purchase shall not include foreign exchange differences which arise directly from
the recent acquisition of inventories.
Moreover, when inventories are purchased with deferred settlement terms, the difference
between the purchase price for normal credit terms and the amount paid is recognized as
interest expense over the period of financing.
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13. Explain the "cost of conversion" of an inventory.
The cost of conversion of inventory includes cost directly related to the units of production
such as direct labor.
The cost of conversion also includes a systematic allocation of fixed and variable production
overhead that is incurred in converting materials into finished goods.
The allocation of fixed production overhead to the cost of conversion is based on the normal
capacity of the production facilities.
The amount of fixed overhead allocated to each unit of production is not increased as
consequence of low production or idle plant.
Unallocated overhead is recognized as expense in the period in which it is incurred.
Variable production overhead is allocated to each unit of production on the basis of the actual
use of the production facilities.
14. What is the treatment of the following costs in connection with inventory?
a. Abnormal amounts of wasted materials, labor and other production costs
b. Storage costs
c. Administrative overheads that do not contribute to bringing inventories to their present
location and condition
d. Distribution costs
Such costs are excluded from the cost of inventory and recognized as expenses in the period
in which they are incurred.
The reason is that these costs are not necessary in bringing the inventory to the present
location and condition.
However, storage costs related to goods.in process or part-finished goods are inventoriable.
15. Explain the cost of inventory of a service provider.
The cost of inventory of a service provider consists primarily of the labor and other costs of
personnel directly engaged in providing the service, including supervisory personnel and
attributable overhead.
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Inventory – Cost Flow & Valuation
The inventory of a service provider may simply be described as work in progress.
Labor and other costs relating to sales and general administrative personnel are not included
but are recognized as expenses in the period in which they are incurred.
Measurement
16. Explain fully the measurement of inventory in the statement of financial position.
PAS 2 provides the following clear-cut principles concerning measurement of inventory:
a. Paragraph 9 provides that inventories shall be measured at the lower of cost and net
realizable value or now known as LCNRV.
b. Paragraph 25 provides that the cost of inventories shall be determined by using either
the FIFO method or weighted average method. PAS 2 prohibits the use of LIFO costing.
c. Paragraph 23 provides that the cost of inventories that are not ordinarily interchangeable
and inventories that are segregated for specific projects shall be determined by using
specific identification method.
17. Explain the "first in, first out" (FIFO) method of inventory valuation.
The FIFO method assumes that "the goods first purchased are first sold" and consequently
the goods remaining in the inventory at the end of the period are those most recently
purchased or produced.
In other words, the FIFO is in accordance with the ordinary merchandising procedure that the
goods are sold in the order they are purchased. The rule is "first come, first sold".
The inventory is thus expressed in terms of recent or new prices while the cost of goods sold
is representative of earlier or old prices.
This method favors the statement of financial position in that the inventory is stated at current
replacement cost.
The objection to the method is that there is improper matching of cost against revenue
because the goods sold are stated at earlier or older prices resulting in understatement of
cost of sales.
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18. Explain the weighted average method of inventory valuation.
The periodic weighted average method means that cost of the beginning inventory plus the
total cost of purchases during the period is divided by the total units purchased plus those in
the beginning inventory to get a weighted average unit cost.
Such weighted average unit cost is then multiplied by the units on hand to derive the inventory
value.
The average unit cost is computed by dividing the total cost of goods available for sale by the
total number of units available for sale.
When used in conjunction with the perpetual system, the weighted average method is
popularly known as the moving average method.
PAS 2, paragraph 27, provides that the weighted average may be calculated on a periodic
basis or as each additional shipment is received depending upon the circumstances of the
entity.
Under moving average method, a new weighted average unit costjnust be computed after
every purchase and purchase return.
Thus, the total cost of goods available after every purchase and purchase return is divided
by the total units available for sale at this time to get a new weighted average unit cost.
Such new weighted average unit cost is then multiplied by the units on hand to get the
inventory cost.
This method requires the keeping of inventory stock cards in order to monitor the "moving"
unit cost after every purchase.
19. Explain the "last in, first out" or LIFO method of inventory valuation.
THE LIFO method assumes that "the goods last purchased are first sold" and consequently
the goods remaining in the inventory at the end of the period are those first purchased or
produced.
The inventory is thus expressed in terms of earlier or old prices and the cost of goods sold is
representative of recent or new prices.
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Inventory – Cost Flow & Valuation
The LIFO favors the income statement because there id proper matching of current cost
against revenue, the cost of goods sold being expressed in terms of current or recent cost.
The objection to the LIFO is that the inventory is stated at earlier or older prices and therefore
there may be a significant lag between inventory valuation and current replacement cost.
Moreover, the use of LIFO permits income manipulation, such as by making year-end
purchases designed to preserve existing inventory layers. At times these purchases may not
even be in the best economic interest of the entity.
20. Explain the "specific identification" method of inventory valuation?
Specific identification means that specific costs are attributed to identified items of inventory.
The cost of the inventory is determined by simply multiplying the units on hand by their actual
unit cost.
This requires records which will clearly determine the actual costs of goods on hand.
PAS 2, paragraph 23, provides that this method is appropriate for inventories that are
segregated for a specific project and inventories that are not ordinarily interchangeable.
The specific identification method may be used in either periodic or perpetual inventory
system.
The major argument for this method is that the flow of the inventory cost corresponds with
the actual physical flow of goods.
With specific identification, there is an actual determination of cost of units sold and on hand.
The major argument against this method is that it is very costly to implement even with highspeed electronic computers.
21. What is "net realizable value"?
Net realizable value or NRV is the' estimated selling price in the ordinary course of business
less the estimated cost of completion and the estimated cost of disposal.
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The cost of inventories may not be recoverable if those inventories are damaged, if they have
become wholly or partially obsolete, or if their selling prices have declined:
The cost of inventories may also not be recoverable if the estimated cost of completion or the
estimated cost of disposal has increased.
The practice of writing inventories down below cost to the net reahzable value is consistent
with the view that assets should not be carried in excess of amounts expected to be realized
from their sale or use.
22. Explain the measurement of inventories at the "lower of cost and net realizable value".
Inventories are usually written down to net realizable value on an item by item or individual
basis.
It is not 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.
If the cost is lower than net realizable value, the inventory is stated at cost and the increase
in value is not recognized.
If the net realizable value is lower than cost, the inventory is measured at net realizable value
and the decrease in value is recognized as expense.
23. Explain the direct and allowance method of accounting for inventory writedown to net
realizable value.
Direct method
The inventory is recorded at the lower of cost or net reahzable value. This method is also
known as "cost of goods sold" method because any loss on inventory writedown is not
accounted for separately but "buried" in the cost of goods sold.
Allowance method
The inventory is recorded at cost and any loss on inventory writedown is accounted for
separately. This method is also known as "loss method" because a loss account, "loss on
inventory writedown" is debited and a valuation account "allowance for inventory writedown"
is credited for the inventory writedown.
The loss on inventory writedown is included in the computation of cost of goods sold.
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Inventory – Cost Flow & Valuation
In subsequent years, this allowance account is adjusted upward or downward depending on
the difference between the cost and net realizable value of the inventory at year-end.
If the required allowance increases, an additional loss is recognized.
If the required allowance decreases, a gain on reversal of inventory writedown is recorded.
However, the gain is limited only to the extent of the allowance balance.
The gain on reversal of inventory writedown is also included in the computation of cost of
goods sold as a deduction.
Preferably, the allowance method is used in order that the effects of writedown and reversal
of writedown can be clearly identified.
As a matter of fact, PAS 2, paragraph 36, requires disclosure of the amount of any inventory
writedown and the amount of any reversal of inventory writedown.
Agricultural, Mineral & Forest Products
24. Explain the measurement of agricultural, mineral and forest products.
PAS 2, paragraph 4, provides that inventories of agricultural, forest and mineral products are
measured at net realizable value at certain stages of production.
This occurs when agricultural crops have been harvested or mineral ores have been
extracted and a sale is assured under a forward contract or a government guarantee, or when
a homogenous market exists and there is a negligible risk of failure to sell.
Commodities of Broker-Traders
25. Explain the measurement of commodities of broker-traders.
PAS 2, paragraph 3, provides that commodities of broker-traders are measured at fair value
less cost of disposal.
PFRS 13, paragraph 9, defines fair value as "the price that would be received to sell the asset
or paid to transfer a liability in an orderly transaction between market participants at the
measurement date".
Broker-traders are those who buy and sell commodities for others or on their own account.
The inventories of broker-traders are principally acquired with the purpose of selling them in
the near future and generating a profit from fluctuations in price or broker-traders' margin.
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Standard Costs
26. Explain the measurement of inventory at "standard costs".
Standard costs are "predetermined product costs established on the basis of normal levels
of materials and supplies, labor, efficiency and capacity utilization".
A standard cost is predetermined and, once determined, is applied to all inventory
movements - inventories, goods available for sale, purchases and goods sold or placed in
production.
PAS 2, paragraph 21, states that the standard cost method may be used for convenience if
the results approximate cost.
However, the standards set should be realistically attainable and are reviewed and revised
regularly in the fight of current conditions.
Relative Sales Price Method
27. What is the meaning of the "relative sales price" method of inventory measurement?
When different commodities are purchased at a lump sum, the single cost is apportioned
among the commodities based on then respective sales price.
The relative sales price method is based on the philosophy that cost is proportionate to selling
price.
Purchase Commitments
28. What are purchase commitments? How are purchase commitments accounted for?
Purchase commitments are obligations of an entity to acquire certain goods sometime in the
future at a fixed price and fixed quantity.
Actually, a purchase order has already been made for future delivery of goods fixed in price
and fixed in quantity.
Where the purchase commitments are significant or unusual, disclosure is required in the
accompanying notes to financial statements.
Any losses which are expected to arise from firm and noncancelable purchase commitments
shall be recognized.
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Inventory – Cost Flow & Valuation
If there is a decline in purchase price after a noncancelable purchase commitment has been
made, a loss is recorded in the period of the price decline.
Note that a purchase commitment must be noncancelable in order that a loss on purchase
commitment can be recognized.
Thus, if at the end of the reporting period, the purchase price falls below the agreed price the
difference is accounted for as a debit to loss on purchase commitment and a credit to an
estimated liability.
Actually, the recognition of a loss on purchase commitment is an adaptation of the
measurement at the lower of cost and net realizable value.
Accordingly, if the market price rises by the time the entity makes the purchase, a gain on
purchase commitment would be recorded.
However, the amount of gain to be recognized is limited to the loss on purchase commitment
previously recorded.
Disclosures
29. What are necessary disclosures with respect to inventories?
With respect to inventories, the financial statements shall disclose the following:
a. The accounting policy adopted in measuring inventories, including the cost formula used.
b. The total carrying amount of inventories and the carrying amount in classifications
appropriate to the entity. Common classifications of inventories are merchandise
inventory, raw materials, goods in process, finished goods and production supplies.
c. The carrying amount of inventories carried at fair value less cost to sell.
d. The amount of inventories recognized as an expense during the period.
e. The amount of any writedown of inventories recognized as an expense during the period.
f. The amount of reversal of writedown that is recognized as income.
g. The circumstances or events that led to reversal of a writedown of inventories.
h. The carrying amount of inventories pledged as security for liabilities.
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Multiple Choice - Theory
Basic concepts
1. Inventories are defined as
A. Assets used in the production or supply of goods and services for administrative
purposes.
B. Assets held for sale, in the process of production, or in the form of materials or supplies
to be consumed in the production process.
C. Assets held for sale in the ordinary course of business, in the process of production for
such sale, or in the form of materials or supplies to be consumed in the production
process or in the rendering of services.
D. Tangible assets held for sale in the ordinary course of business, in the process of
production, or in the form of materials or supplies to be consumed in the production
process or in the rendering of services.
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2.
Inventories are assets defined by all of the following, except
A. In the process of production for such sale
B. Held for sale in the ordinary course of business.
C. Used in the production or supply of goods and services for administrative purposes.
D. In the form of materials or supplies to be consumed in the production process or the
rendering of services
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3.
An entity that purchased inventory for resale to customers should charge what account for
the purchase?
A. Finished goods inventory
C. Work in process inventory
B. Merchandise inventory
D. All of the choices are correct FA © 2014
4.
Which of the following inventories carried by a manufacturer is similar to the merchandise
inventory of a retailer?
A. Finished goods
C. Supplies
B. Raw materials
D. Work in process
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5.
Which of the following should be included in inventory at the end of reporting period?
A. Goods received from another entity on consignment
B. Goods in transit which were purchased FOB destination
C. Goods in transit which were purchased FOB shipping point
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D. Goods in transit to a customer which were sold to the customer FOB shipping point
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Inventory – Cost Flow & Valuation
6.
Inventories include all of the following assets, except
A. In the process of production for sale.
B. Held for sale in the ordinary course of business.
C. Held for use in the production or supply of goods or services.
D. In the form of materials or supplies to be consumed in the production process or in the
rendering of services.
TOA © 2013
7.
Inventories encompass all of the following, except
A. Finished goods produced
B. Merchandise purchased by a retailer
C. Land and other property not held for sale
D. Materials and supplies awaiting use in the production process
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Which of the following accounts is not reported in inventory?
A. Equipment
C. Raw materials
B. Finished goods
D. Supplies
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8.
9.
Which of the following should not be reported as inventory?
A. Land acquired for resale by a real estate firm
B. Shares and bonds held for resale by a brokerage firm
C. Partially completed goods held by a manufacturing entity
D. Machinery acquired by a manufacturing entity for use in the production process FA
2014
©
10. Which of the following should be included in inventory?
A. Goods received from another entity for sale on consignment.
B. Goods in transit which were purchased FOB destination.
C. Goods sold to a customer which are being held for the customer to call for at the
customer convenience.
D. None of these should be included.
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Product costs & period costs
11. The cost of inventory is the sum of
A. Direct cost, indirect cost and other cost.
B. Cost of purchase and cost of conversion.
C. Cost of conversion and other cost incurred in bringing
the inventory to the
present location and condition.
D. Cost of purchase, cost of conversion and other cost incurred in bringing the inventory to
the present location and condition.
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12. The cost of purchase of inventory does not include
A. Purchase price
B. Import duties and irrecoverable taxes
C. Trade discounts, rebates and other similar items
D. Freight, handling and other cost directly attributable to the acquisition of goods FA
2014
©
13. Costs that are incurred in bringing the inventories to their present location and condition are
capitalized as cost of inventories and these include
A. Distribution cost
B. Cost of designing products for specific customers
C. Abnormal amount of wasted material, labor and production cost
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D. Storage cost not necessary in the production process before a further production stage
14. Variable production overheads are allocated to each unit of production on the basis of
A. Actual use of the production facilities
B. Normal capacity of the production facilities
C. Neither the normal capacity nor the actual use of production facilities
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D. Either the normal capacity or the actual use of production facilities, whichever is
appropriate
15. Which of the following costs should be included in inventory valuation?
A. Administrative costs
C. Fixed production overhead FA © 2014
B. Abnormal material usage
D. Storage costs relating to finished goods
16. Fixed production overheads include all of the following, except
A. Depreciation of factory building
B. Maintenance of factory equipment
C. Indirect materials and indirect labor
D. Cost of factory management and administration
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17. The allocation of fixed factory overhead to the cost of conversion is based on
A. Relative sales value method
B. Actual use of the production facilities
C. Normal capacity of the production facilities
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D. Either the normal capacity or actual use of the production facilities, whichever is
appropriate
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18. What is considered normal capacity of production facilities?
A. Actual production
B. The average production over a five-year period
C. Actual production plus loss of capacity for planned maintenance
D. A range that may vary based on business and industry-specific factors
19. How should unallocated fixed overhead costs be treated?
A. Recognized as an expense in the period incurred.
B. Allocated to finished goods and cost of goods sold.
C. Allocated to raw materials, goods in process and finished goods.
D. Allocated to goods in process, finished goods and cost of goods sold.
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FA © 2014
20. Which of the following should be taken into account when determining the cost of inventory?
A. Abnormal freight in
C. Recoverable purchase tax FA © 2014
B. Interest on inventory loan
D. Storage cost of part-finished goods
21. The inventories of a service provider may simply be described as
A. Billed services
C. Unbilled services
B. Services inventory
D. Work in progress
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22. The costs of inventory of a service provider include which of the following?
I. Labor and other cost of personnel directly engaged in providing the service.
II. Compensation of supervisor directly engaged in providing the service.
III. Attributable overhead incurred in providing the service.
A. I only
C. I and III only
B. I and II only
D. I, II and III
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23. The costs of inventory of a service provider include which of the following?
A. Attributable overhead incurred in providing the service.
B. Compensation of supervisor directly engaged in providing the service.
C. Labor and other costs of personnel directly engaged in providing the service.
D. All of these are included.
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24. Costs which are inventoriable include all of the following, except
A. Selling costs of a sales department.
B. Buying costs of a purchasing department.
C. Costs that are directly connected with the converting of goods to a salable condition.
D. Costs that are directly connected with the bringing of goods to the place of business of
the buyer.
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25. The costs of conversion of inventory include all of the following, except
A. Systematic allocation of administrative overhead
B. Systematic allocation of fixed production overhead
C. Systematic allocation of variable production overhead
D. Costs directly related to the units of production, such as direct labor
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26. Which of the following costs of conversion cannot be included in cost of inventory?
A. Cost of direct labor
B. Factory rent and utilities
C. Factory overhead based on normal capacity
D. Salaries of sales staff (sales department shares the building with factory) FA © 2014
27. Which of the following should not be taken into account when determining the cost of
inventories?
A. Trade discounts
B. Recoverable purchase taxes
C. Storage costs of part-finished goods
D. Import duties on shipping of inventory inward
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28. The cost of inventories does not include
A. Salaries of factory staff.
B. Irrecoverable purchase taxes.
C. Abnormal amounts of wasted materials and distribution costs.
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D. Storage costs necessary in the production process before a further production stage.
29. Which of the following costs should not be included as part of the cost of inventory?
A. Abnormal freight
C. Import duties
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B. Conversion costs
D. All of these are included in inventory
30. When determining the unit cost of an inventory, which of the following should not be included?
A. Commission paid when inventory is purchased
B. Labor cost of the inventory when manufactured
C. Interest on loan obtained to purchase the inventory
D. Depreciation of plant equipment used in manufacturing
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31. Which of the following statements in relation to measurement of inventory is true?
I. Cost of factory management shall be included in the cost of inventory.
II. Maintenance expenses for an item of equipment used in the manufacturing process
shall be included in the cost of inventory.
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A. I only
B. II only
C. Both I and II
D. Neither I nor II
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32. Theoretically, how should warehousing cost and interest on inventory loan affect the cost of
inventory, respectively?
A. Increase and Increase
C. No effect and Increase
B. Increase and No effect
D. No effect and No effect
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33. An exception to the general rule that costs should be charged to expense in the period
incurred is
A. Sales commission and salary costs incurred in connection with the sale of inventory.
B. General and administrative fixed costs incurred in connection with the purchase of
inventory.
C. Interest costs for financing of inventories that are routinely manufactured in large
quantities on a repetitive basis.
D. Factory overhead costs incurred on a product manufactured but not sold during the
current accounting period.
FA © 2014
Freight Terms
34. Goods shipped FOB shipping point on the last day of the year should ordinarily be included
in
A. The buyer's inventory balance
B. The seller's inventory balance
C. Neither the buyer's nor seller's inventory balance
D. Both the buyer's and the seller's inventory balance
TOA © 2013
35. Goods shipped FOB destination that are in transit at the end of the year should be included
in the inventory of
A. Bank
C. Common carrier
B. Buyer
D. Seller
TOA © 2013
36. Which of the following should be included in inventory at the end of reporting period?
A. Goods received from another entity on consignment
B. Goods in transit which were purchased FOB destination
C. Goods in transit which were purchased FOB shipping point
TOA © 2013
D. Goods in transit to a customer which were sold to the customer FOB shipping point
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FINANCIAL ACCOUNTING
Trade discount, purchase discount, freight-in, purchase returns & allowances
37. A discount given to a customer for purchasing a large volume of merchandise is typically
referred to as
A. Cash discount
C. Size discount
B. Quantity discount
D. Trade discount
FA © 2014
38. Which of the following terms represents the deduction from the invoice price of purchased
goods granted by suppliers for early payment?
A. Purchase discount
C. Sales discount
B. Purchase return and allowance
D. Trade discount
FA © 2014
39. What is the treatment for abnormal freight in?
A. Charge to expense for the period.
B. Charge to raw materials inventory.
C. Charge to finished goods inventory.
D. Allocate to raw materials, work in process and finished goods.
TOA © 2013
40. Which of the following generally would not be separately accounted for in the computation of
cost of goods sold?
A. Cash discounts taken during the period
B. Trade discounts applicable to purchases
C. Cost of transportation for merchandise purchased
D. Purchase returns and allowances during the period
TOA © 2013
Gross method & net method
41. Which method may be used to record cash discounts received for paying suppliers promptly?
A. Average method
C. Net method
FA © 2014
B. Gross method
D. Net method and gross method
42. Theoretically, cash discounts permitted on purchased raw materials should be
A. Added to other income, only if taken
B. Deducted from inventory, only if taken
C. Added to other income, whether taken or not
D. Deducted from inventory, whether taken or not
FA © 2014
43. The use of purchase discount account implies that the recorded cost of a purchased inventory
item is
A. Invoice price
B. Invoice price plus any purchase discount lost
MCQ - Theory
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Inventory – Cost Flow & Valuation
C. Invoice price less the purchase discount taken
D. Invoice price less the purchase discount allowable whether taken or not
FA © 2014
44. The use of a discount lost account implies that cost of a purchased inventory item is
A. List price
B. Invoice price
C. Invoice price less the purchase discount taken
D. Invoice price less the purchase discount allowable whether or not taken
FA © 2014
Periodic & perpetual inventory system
45. In a periodic system, the beginning inventory is
A. Net purchases minus ending inventory
B. Net purchases minus cost of goods sold
C. Total goods available for sale minus net purchases
D. Total goods available for sale minus cost of goods sold
FA © 2014
46. When using the periodic system, which of the following generally would not be separately
accounted for in the computation of cost of goods sold?
A. Cash discounts taken during the period
B. Trade discounts applicable to purchases
C. Purchase returns and allowances during the period
D. Cost of transportation in for merchandise purchased during the period
FA © 2014
47. What is the method of accounting for inventory in which the cost of goods sold is recorded
each time a sale is made?
A. Periodic inventory system
C. Planned inventory system TOA © 2013
B. Perpetual inventory system
D. Professional inventory system
48. Which of the following is a characteristic of a perpetual inventory system?
A. Inventory records are not kept for every item.
B. Cost of goods sold is recorded with each sale.
C. Inventory purchases are debited to a purchases account.
FA © 2014
D. Cost of goods sold is determined as the amount of purchases less the change in
inventory.
49. Which of the following is not true of the perpetual inventory method?
A. Purchases are recorded as debit to the inventory account.
B. After a physical inventory count, inventory is credited for any missing inventory.
C. The entry to record a sale includes a debit to cost of goods sold and a credit to inventory.
MCQ - Theory
Page 21
FINANCIAL ACCOUNTING
D. Purchase returns are recorded by debiting accounts payable and crediting purchase
returns and allowances.
FA © 2014
50. An entry debiting inventory and crediting cost of goods sold would be made when
A. Merchandise is sold and the periodic inventory method is used.
B. Merchandise is sold and the perpetual inventory method is used.
C. Merchandise is returned and the periodic inventory method is used.
D. Merchandise is returned and the perpetual inventory method is used.
FA © 2014
Consigned inventory
51. What is consigned inventory?
A. Goods that are shipped but title remains with the shipper.
B. Goods that are shipped and title transfers to the receiver.
C. Goods that have been segregated for shipment to a customer.
D. Goods that are sold but payment is not required until the goods are sold.
FA © 2014
52. Goods on consignment are included in the inventory of
A. The consignor but not the consignee
B. The consignee but not the consignor
C. Both the consignor and the consignee
D. Neither the consignor nor the consignee
FA © 2014
53. Freight and other handling charges incurred in the transfer of goods from the consignor to
consignee are
FA © 2014
A. Inventoriable by the consignee
C. Expense on the part of the consignee
B. Inventoriable by the consignor
D. Expense on the part of the consignor
54. How is a significant amount of consignment inventory reported?
A. Reported separately by the consignee.
B. Combined with other inventory of the consignor.
C. Combined with other inventory of the consignee.
D. Reported separately in the consignor's statement of financial position.
FA © 2014
Types of Inventories
55. Which of the following describes the flow of product costs through the inventory accounts of
a manufacturer?
A. Raw materials, direct labor, factory overhead
B. Raw materials, goods in process, finished goods
C. Raw materials, direct labor, factory overhead, finished goods
D. Raw materials, goods in process, factory overhead, finished goods
TOA © 2013
MCQ - Theory
Page 22
Inventory – Cost Flow & Valuation
56. Which of the following would not be included in the cost of work in process inventory?
A. Depreciation on factory equipment
B. Maintenance cost of factory equipment
C. Cost of electricity to operate factory equipment
D. Depreciation on equipment in the sales manager's office
TOA © 2013
57. Which of the following inventories carried by a manufacturer is similar to the merchandise
inventory of a retailer?
A. Finished goods
C. Supplies
B. Raw materials
D. Work in process
TOA © 2013
Cost Flow Assumption
58. The cost of inventory shall be measured using
A. Average method
C. LIFO .
TOA © 2013
B. FIFO
D. Either FIFO or average method
59. This cost formula assumes that the items of the inventory that were purchased or produced
first are sold first and consequently the items remaining in inventory at the end of the period
are those most recently purchased or produced.
A. FIFO
C. Moving average
B. LIFO
D. Weighted average
TOA © 2013
60. Which of the following inventory method reports most closely the current cost of inventory?
A. FIFO
C. Specific identification
B. LIFO
D. Weighted average
TOA © 2013
61. Which of the following is the reason why the specific identification method may be considered
ideal for assigning cost to inventory and cost of goods sold?
A. There is no arbitrary allocation of cost.
B. It is applicable to all types of inventory.
C. The cost flow matches the physical flow.
D. The potential for manipulation of net income is reduced.
TOA © 2013
62. The costing of inventory must be deferred until the end of reporting period under which of the
following method of inventory valuation9
A. FIFO perpetual
C. Moving average
B. LIFO perpetual
D. Weighted average
TOA © 2013
MCQ - Theory
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FINANCIAL ACCOUNTING
63. The weighted average method may be calculated
I. On a periodic basis.
II. As each shipment is received depending upon the circumstances of the entity.
A. I only
C. Either I or II
B. II only
D. Neither I nor II
TOA © 2013
Sensitivity analysis
64. In a period of falling prices, the use of which inventory cost flow method would typically result
in the highest cost of goods sold?
A. FIFO
C. Specific identification
B. LIFO
D. Weighted average
TOA © 2013
65. Which inventory cost flow assumption provides the best measure of earnings, where "best"
means most appropriate for predicting future earnings, when prices have been declining?
A. Average cost
C. LIFO
B. FIFO
D. Specific identification
TOA © 2013
66. Which inventory cost flow assumption would consistently result in the highest income in a
period of sustained inflation?
A. FIFO
C. Specific identification
B. LIFO
D. Weighted average
TOA © 2013
67. In a period of rising prices, the inventory cost allocation method that tends to result in the
lowest reported net income is
A. FIFO
C. Moving average
B. LIFO
D. Weighted average
TOA © 2013
68. During periods of rising prices, when the FIFO inventory cost flow method is used, a perpetual
inventory system would
A. Not be permitted.
B. Result in the same ending inventory as a periodic inventory system.
C. Result in a lower ending inventory than a periodic inventory system.
D. Result in a higher ending inventory than a periodic inventory system.
TOA © 2013
69. The inventory cost was lower using FIFO than LIFO. If there is no beginning inventory, what
direction did the cost of purchases move during the period?
A. Cannot be determined
C. Steady
B. Down
D. Up
TOA © 2013
MCQ - Theory
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Inventory – Cost Flow & Valuation
Measurement & Valuation
70. Why is inventory included in the computation of net income?
A. To determine sales revenue
B. To determine cost of goods sold
C. To determine merchandise returns
D. Inventory is not included in the computation of net income
FA © 2014
71. Valuation of inventory requires the determination of all, except
A. The cost flow assumption.
B. The costs to be included in inventory.
C. The cost of goods held on consignment.
D. The physical goods to be included in inventory.
FA © 2014
Fair value less cost of disposal
72. Commodity broker-traders
A. Measure inventories at LCNRV.
B. All of the choices are correct regarding broker-traders.
C. Produce commodities such as rice, corn or precious metals.
FA © 2014
D. Hold inventory primarily to sell in the near term and generate a profit from price
fluctuation.
73. Commodities of broker-traders are measured at
A. Cost
C. Fair value less cost of disposal
B. Fair value
D. Net realizable value
FA © 2014
Net realizable value
74. Situation in which net realizable value is used to measure inventory includes
A. Agricultural inventory
C. Minerals
FA © 2014
B. Commodities held by broker-traders
D. All of these are measured at NRV
75. Net realizable value is the general rule for valuing which inventory?
A. Commodities held by broker-traders
B. Inventories priced on an item by item basis
C. Computer components held for sale to manufacturers
D. All of these are measured at NRV
FA © 2014
76. 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
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FINANCIAL ACCOUNTING
A. Cost
B. Net realizable value
C. Relative sales price
D. Standard cost
FA © 2014
77. Net realizable value is
A. Estimated selling price
B. Current replacement cost
C. Estimated selling price less estimated cost to complete
FA © 2014
D. Estimated selling price less estimated cost to complete and estimated cost of disposal
Lower of cost and net realizable value
78. Inventories shall be measured at
A. Cost
B. Higher of cost and net realizable value
C. Lower of cost and net realizable value
D. Net realizable value
FA © 2014
79. Reporting inventory at the lower of cost and net realizable value is a departure from
A. Conservatism
C. Full disclosure
B. Consistency
D. Historical cost
FA © 2014
80. Lower of cost and net realizable value as it applies to inventory is best described as the
A. Assumption to determine inventory flow.
B. Method of determining cost of goods sold.
C. Change in inventory value to net realizable value.
FA © 2014
D. Reporting of a loss when there is a decrease in the future utility below the original cost.
81. Inventories are usually written down to net realizable value
A. By classification
C. By total
B. By segment
D. Item by item
FA © 2014
82. Which of the following is not an acceptable method of applying the LCNRV?
A. Individual item
C. Inventory location
B. Inventory group
D. Total of the inventory
FA © 2014
83. Lower of cost and net realizable value
A. Must be applied to major group.
B. Gives the lowest valuation if applied to the total inventory.
C. Gives the lowest valuation if applied to major group of inventory.
D. Gives the lowest valuation if applied to individual item of inventory.
FA © 2014
MCQ - Theory
Page 26
Inventory – Cost Flow & Valuation
84. LCNRV of inventory
A. Should always be equal to net realizable value.
B. Is always either the net realizable value or cost.
C. May sometimes be less than net realizable value.
D. Should always be equal to estimated selling price less cost to complete.
FA © 2014
85. When inventory declines in value below original cost, what is the maximum amount of the
inventory value?
A. Sales price
B. Historical cost
C. Net realizable value
D. Sales price reduced by estimated cost of disposal
FA © 2014
86. How should import duties be dealt with when valuing inventory at LCNRV?
A. Ignored
B. Added to cost
C. Deducted from cost
D. Deducted in arriving at net realizable value
FA © 2014
87. How should trade discounts be dealt with when valuing inventories at the lower of cost and
net realizable value?
A. Added to cost
C. Deducted in arriving at NRV
B. Deducted from cost
D. Ignored
FA © 2014
88. How should prompt payment discount be dealt with when valuing inventories at the lower of
cost and net realizable value?
A. Added to cost
C. Deducted in arriving at NRV
B. Deducted from cost
D. Ignored
FA © 2014
89. How should sales staff commission be dealt with when valuing inventories at the lower of
cost and net realizable value?
A. Added to cost
C. Deducted in arriving at NRV
B. Deducted from cost
D. Ignored
FA © 2014
90. The amount of any writedown Of inventory to net realizable value and all losses of inventory
shall be
A. Deferred until the related inventory is sold.
B. Recognized as other expense in the period the writedown or loss occurs.
C. Recognized as operating expense in the period the writedown or loss occurs.
D. Recognized as component of cost of goods sold in the period the writedown or loss
occurs.
FA © 2014
MCQ - Theory
Page 27
FINANCIAL ACCOUNTING
91. Which method may be used to record a loss due to a price decline in the value of inventory?
A. Loss method
B. Sales method
C. Cost of goods sold method
D. Loss method and cost of goods sold method
FA © 2014
92. When the cost of goods sold method is used to record inventory at net realizable value
A. There is a direct reduction in the selling price.
B. A loss is recorded directly in the inventory account by debiting loss.
C. Only the portion of the loss attributable to inventory sold is recorded.
D. The net realizable value for ending inventory is substituted for cost and the loss is buried
in cost of goods sold.
FA © 2014
93. Which of the following statements is true regarding inventory writedown and reversal of
writedown?
A. Reversal of inventory writedown is prohibited.
B. Separate reporting of reversal of inventory writedown is required.
C. Entities are required to record writedown in a separate loss account.
D. All of the choices are correct.
FA © 2014
94. Which of the following statements is incorrect regarding LCNRV?
A. In most situations, entities price inventory on a total inventory basis.
B. Entities use an allowance account to reduce inventory to net realizable value.
C. Net realizable value is the selling price less estimated cost to complete and estimated
cost of disposal.
D. One of two methods may be used to record the income effect of valuing inventory at net
realizable value.
FA © 2014
Not an acceptable basis
95. Which of the following financial attributes would not be used to measure inventory?
A. Current replacement cost
C. Net realizable value
FA © 2014
B. Historical cost
D. Present value of future cash flows
96. Which is not an acceptable basis in measuring inventory?
A. Fair value less cost of disposal
C. Net realizable value
B. Historical cost
D. Prime cost
FA © 2014
97. Which of the following is not an acceptable basis for valuation of inventory?
A. Current replacement cost
C. Historical cost
B. Current selling price less cost of disposal D. Prime cost
MCQ - Theory
FA © 2014
Page 28
Inventory – Cost Flow & Valuation
98. The valuation of inventory on a prime cost basis
A. Is always achieved when the FIFO is adopted
B. Would achieve the same results as direct costing
C. Is always achieved when standard costing is adopted
D. Would exclude all overhead from reported inventory cost
FA © 2014
Cost of goods available for sale & cost of goods sold
99. Entities must allocate the cost of all goods available for sale between
A. The income statement and the statement of financial position.
B. The cost of goods on hand at the end and the cost of goods acquired or produced during
the period.
C. The cost goods on hand at the beginning and the cost of goods acquired or produced
during the period.
D. All of the choices are correct.
FA © 2014
100. Cost of goods sold is equal to
A. The cost of inventory at the beginning of a period plus net sales minus the cost of
inventory at the end of a period.
B. The cost of inventory at the beginning of a period minus net purchases plus the cost of
inventory at the end of a period.
C. The cost of inventory at the beginning of a period plus net purchases minus the cost of
inventory at the end of a period.
D. The cost of inventory at the end of a period plus net purchases minus the cost of
inventory at the beginning of a period.
TOA © 2013
101. If an entity ended a period with a larger inventory that it had at the beginning of the period,
which of the following statements is true?
A. Net income was greater than gross profit
B. The cost of goods sold v/as greater than net purchases
C. The cost of goods sold was smaller than net purchases
D. The cost of goods available for sale was smaller than cost of goods sold TOA © 2013
Accounting error
102. When the current year's ending inventory is overstated
A. The next year's income is overstated.
B. The current year's net income is overstated.
C. The current year's total assets are understated.
D. The current year's cost of goods sold is overstated.
MCQ - Theory
TOA © 2013
Page 29
FINANCIAL ACCOUNTING
103. An overstatement of ending inventory in the current period would result in income of the next
period being
A. Overstated
C. Correctly stated
TOA © 2013
B. Understated
D. Either overstated or understated
104. If an entity incorrectly includes goods held on consignment in the ending inventory, the effect
on the next period's cost of goods sold and net income respectively is
TOA © 2013
A. Overstatement and overstatement
C. Understatement and overstatement
B. Overstatement and understatement
D. Understatement and understatement
105. Goods in transit at year-end purchased FOB shipping point were appropriately recorded in
the purchases account but were incorrectly excluded from the ending inventory. What effect
will this omission have on assets, liabilities and retained earnings at year-end? TOA © 2013
A. No effect, no effect, overstated
C. Understated, no effect, overstated
B. No effect, no effect, understated
D. Understated, no effect, understated
Journal entries
106. An entry debiting inventory and crediting cost of goods sold would be made when
A. Merchandise is sold and the periodic inventory method is used.
B. Merchandise is sold and the perpetual inventory method is used.
C. Merchandise is returned and the periodic inventory method is used.
D. Merchandise is returned and the perpetual inventory method is used.
FA © 2014
Presentation & disclosure
107. A property developer must classify properties that it holds for sale in the ordinary course of
business as
A. Financial asset
C. Investment property
FA © 2014
B. Inventory
D. Property, plant and equipment
108. Consumable stores or supplies to be consumed in the production process are reported as
A. Intangible assets
C. Investment property
FA © 2014
B. Inventories
D. Property, plant and equipment
109. Where should goods in transit recently purchased FOB destination be included in the
statement of financial position?
A. Inventory
B. Equipment
C. Accounts payable
D. Not in the statement of financial position
FA © 2014
MCQ - Theory
Page 30
Inventory – Cost Flow & Valuation
110. When inventory is misstated, the presentation lacks
A. Comparability
C. Relevance
FA © 2014
B. Faithful representation
D. All of the choices are correct
111. The credit balance that arises when a loss on a purchase commitment is recognized shall be
A. Presented as a current liability
B. Subtracted from ending inventory
C. Presented in the income statement
D. Presented as an appropriation of retained earnings
FA © 2014
112. If a material amount of inventory has been ordered through a formal purchase contract at the
end of reporting period for future delivery at firm prices
A. This fact must be disclosed.
B. An appropriation of retained earnings is necessary.
C. Disclosure is required only if prices have since risen substantially.
FA © 2014
D. Disclosure is required only if prices have declined since the date of the order.
113. An example of an inventory accounting policy that should be disclosed is
A. Identification of major suppliers.
B. Method used for inventory costing.
C. Effect of inventory profit caused by inflation.
FA © 2014
D. Classification of inventory into raw materials, work in process and finished goods.
114. When a portion of inventory has been pledged as security for a loan
A. An equal amount of retained earnings should be appropriated.
B. The value of the inventory pledged should be deducted from the debt.
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 asset to noncurrent
asset
FA © 2014
115. Which is not a mandated disclosure in relation to inventory?
A. The carrying amount of each item of inventories
B. The amount of inventories recognized as expense during the period.
FA © 2014
C. The carrying amount of inventories carried at fair value less cost of disposal
D. Accounting policy adopted in measuring inventories, including the cost formula used
116. Which is not a required disclosure in relation to inventory?
A. The amount of any reversal of writedown of inventories
B. The amount of any writedown of inventories recognized as expense
FA © 2014
C. The circumstances or events that led to the reversal of a writedown of inventories
D. The fair value less cost of disposal of inventories pledged as security for liabilities
MCQ - Theory
Page 31
FINANCIAL ACCOUNTING
MCQ - Problems
Statement of Cost of Goods Sold
Ending inventory
1. Fairy Company provided the following information:
2013
Sales
7,500,000
Beginning inventory
1,260,000
Purchases
6,450,000
Freight in
350,000
Purchase discounts
90,000
Purchase returns
120,000
Purchase allowances
20,000
Ending inventory
2,355,000
What is the inventory on December 31, 2014?
A. 2,025,000
C. 2,505,000
B. 2,370,000
D. 3,285,000
2014
4,500,000
3,180,000
220,000
45,000
40,000
15,000
?
FA © 2014
Cost of goods available for sale
2. Tonette Company provided the following information for the current year:
Net sales
3,600,000
Freight in
90,000
Purchase discounts
50,000
Ending inventory
240,000
The gross margin is 40% of sales. What is the cost of goods available for sale? "
A. 1,680,000
C. 2,400,000
B. 1,920,000
D. 2,440,000
FA © 2014
Gross profit rate
3. Illusive Company provided the following data for the current year:
Sales
Sales return
Inventory, January 1
Purchases
Freight in
Purchase return
Purchase allowance
Purchase discount
Inventory, December 31
MCQ - Problems
6,200,000
200,000
1,000,000
5,500,000
250,000
100,000
30,000
20,000
2,100,000
Page 32
Inventory – Cost Flow & Valuation
What is the gross profit rate on cost for the current year?
A. 25 percent
C. 75 percent
B. 33 1/3 percent
D. 66 2/3 percent
FA © 2014
Reconstruction of Accounts
Accounts receivable
4. Steven Company began operations in 2014. For the year ended
December 31,2014, the entity provided the following information:
Total merchandise purchases for the year
7,000,000
Merchandise inventory on December 31
1,400,000
Collection from customers
4,000,000
All merchandise was marked to sell at 40% above cost. All sales are on a credit basis and all
receivables are collectible. What is the balance of accounts receivable on December
31,2014?
A. 1,000,000
C. 5,000,000
B. 3,840,000
D. 5,800,000
FA © 2014
5.
Greenhorn Company provided the following information for the current year:
Accounts receivable, January 1
800,000
Accounts receivable collected
2,600,000
Cash sales
500,000
Inventory, January 1
1,200,000
Inventory, December 31
1,100,000
Purchases
2,000,000
Gross profit on sales
900,000
What is the balance of accounts receivable on December 31?
A. 700,000
C. 1,300,000
B. 1,200,000
D. 1,700,000
FA © 2014
Inventory
6. Hectic Company provided the following data for the current year:
Accounts receivable, January 1
Accounts receivable, December 31
Turnover of accounts receivable
Inventory, January 1
Purchases
Gross profit rate
'
Hint: Net sales = Average accounts receivable x turnover
MCQ - Problems
1,100,000
1,300,000
5 to 1
1,800,000
4,500,000
40%
Page 33
FINANCIAL ACCOUNTING
What is the estimated inventory on December 31?
A. 300,000
C. 3,900,000
B. 2,700,000
D. 6,000,000
7.
Quench Company provided the following information:
Cash sales
Cash collected on accounts receivable
Accounts receivable, January 1
Accounts receivable, December 31
Bad debts written off
Purchases
Inventory, December 31
Gross profit on sales
What is the inventory on January 1?
A. 640,000
C. 1,350,000
B. 805,000
D. 1,485,000
Gross Margin
8. Vigor Company provided the following information for the current year:
Accounts receivable, January 1
Accounts receivable, December 31
Accounts receivable turnover
Inventory, January 1
Inventory, December 31
Inventory turnover
Hint: Cost of sales = Average inventory x turnover
What is the gross margin for the current year?
A. 3,000,000
C. 4,600,000
B. 3,400,000
D. 7,600.000
FA © 2014
640,000
4,400,000
1,100,000
950,000
60,000
3,500,000
840,000
30%
FA © 2014
900,000
1,000,000
8 to 1
. 1,100,000
1,200,000
4 to 1
FA © 2014
Purchases
9. Brilliant Company purchased motorcycles from various countries for export to other countries.
The entity has incurred the following costs during the current year:
Cost of purchases based on vendors' invoices
5,000,000
Trade discounts on purchases already deducted from vendors' invoices
500,000
Import duties
400,000
Freight and insurance on purchases
1,000,000
Other handling costs relating to imports
100,000
Salaries of accounting department
600,000
MCQ - Problems
Page 34
Inventory – Cost Flow & Valuation
Brokerage commission paid to agents for arranging imports
Sales commission paid to sales agents
After-sales warranty costs
What is the total cost of the purchases?
A. 5,700,000
C. 6,500,000
B. 6,100,000
D. 6,700,000
200,000
300,000
250,000
FA © 2014
Accounts payable
10. Wine Company recorded purchases at net amount. On December 10, the entity purchased
merchandise on account, P4,000,000, terms 2/10, n/30. The entity returned P300,000 of the
December 10 purchase and received credit on account. The account had not been paid on
December 31. At what amount should the account payable be adjusted on December 31?
A. 0
C. 80,000
B. 74,000
D. 86,000
P1 © 2014
11. Kindness Company regularly buys sweaters and is allowed a trade discount of 20%
and 10%. The entity made a purchase on March 20 and received an invoice with a
list price of P900,000, a freight charge of P50,000, and payment terms of net 30 days.
The entity should record the purchase at what amount?
A. 630,000
C. 680,000
B. 648,000
D. 698,000
FA © 2014
12. Quest Company reported accounts payable on December 31, 2014 at P2,000,000
before considering the following transactions:


Goods shipped to Quest Company, FOB shipping point on December 20, 2014, from a
vendor were lost in transit. The invoice price was P100,000. On January 5, 2015, Quest
Company filed at P100,000 claim against the common carrier.
On December 27, 2014, a vendor authorized Quest Company to return, for full credit,
goods shipped and billed at P50,000 on December 2, 2014. The returned goods were
shipped by Quest Company on December 27, 2014. A P50,000 credit memo was
received and recorded by Quest Company on January 6, 2015.
On December 31, 2014, what amount should be reported as accounts payable?
A. 2,050,000
C. 2,250,000
B. 2,150,000
D. 2,300,000
FA © 2014
MCQ - Problems
Page 35
FINANCIAL ACCOUNTING
13. Black Company reported accounts payable on December 31,2014 at P4,500,000 before any
necessary year-end adjustments relating to the following transactions:
• On December 27,2014, Black wrote and recorded checks to creditors totaling
P2,000,000 causing an overdraft of P500,000 in Black's bank account on December 31,
2014. The checks were mailed on January 10,2015.
• On December 28, 2014, Black purchased and received goods for P750,000, terms 2/10,
n/30. Black records purchases and accounts payable at net amount. The invoice was
recorded and paid January 3,2015.
• Goods shipped F.O.B. destination on December 20,2014 from a vendor to Black were
received January 2,2015. The invoice cost was P325,000.
On December 31, 2014, what amount should be reported as accounts payable?
A. 7,235,000
C. 7,553,500
B. 7,250,000
D. 7,575,000
P1 © 2014
14. Kew Company reported accounts payable on December 31,2014 at P2,200,000 before
considering the following data:
• Goods shipped to Kew F.O.B. shipping point on December 22, 2014, were lost in transit.
The invoice cost of P40,000 was not recorded by Kew. On January 7,2015, Kew filed a
P40,000 claim against the common carrier.
• On December 27, 2014, a vendor authorized Kew to return, for full credit, goods shipped
and billed at P70,000 on December 3,2014. The returned goods were shipped by Kew
on December 28,2014. A P70,000 credit memo was received and recorded by Kew on
January 5, 2015.
• On December 31,2014, Kew has a P500,000 debit balance in accounts payable to Ross,
a supplier, resulting from a P500,000 advance payment for goods to be manufactured.
What amount should be reported as accounts payable on December 31,2014?
A. 2,170,000
C. 2,680,000
B. 2,670,000
D. 2,730,000
P1 © 2014
15. Bakun Company began operations late in 2013. For the first quarter ended March 31,2014,
the entity provided the following information:
Total merchandise purchased through March 15, 2014 recorded at net
4,900,000
Merchandise inventory on 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 entity. 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. What amount
of cash is required to eliminate the current balance in accounts payable?
A. 5,750,000
C. 6,000,000
B. 5,900,000
D. 6,400,000
P1 © 2014
MCQ - Problems
Page 36
Inventory – Cost Flow & Valuation
16. Black Company reported accounts payable on December 31, 2014 at P900.000
before any necessary year-end adjustments relating to the following transactions:



On December 27, 2014, Black Company wrote and recorded checks to creditors totaling
P400,000 causing an overdraft of P100,000 in Black Company's bank account on
December 31, 2014. The checks were mailed out on January 10, 2015.
On December 28, 2014, Black Company purchased and received goods for P150,000
terms 2 /10, n /30. Black Company records purchases and accounts payable at net
amount. The invoice was recorded and paid January 3, 2015.
Goods shipped FOB shipping point, 5/10, n/30 on December 20, 2014 from a vendor to
Black Company were received January 2, 2015. The invoice cost was P200,000.
On December 31, 2014, what amount should be reported as accounts payable?
A. 1,447,000
C. 1,637,000
B. 1,450,000
D. 1,650,000
FA © 2014
Payment for purchases
17. On June 1,2014, Pitt Company sold merchandise with a list price of P5,000,000 to Burr on
account. Pitt allowed trade discounts of 30% and 20%. Credit terms were 2/10, n/30 and the
sale was made FOB shipping point. Pitt prepaid P200,000 of delivery costs for Burr as an
accommodation. On June 11, 2014, what amount was received by Pitt from Burr as
remittance in full?
A. 2,744,000
C. 2,944,000
B. 2,940,000
D. 3,140,000
P1 © 2014
18. Cognac Company used the perpetual inventory and gross method of recording purchases.
On December 1, the entity purchased P1,500,000 of inventory, terms 2/10, n/30. On
December 5, the entity returned goods that cost P150,000. On December 11, the entity paid
the supplier. On December 11, what account should be credited?
FA © 2014
A. Inventory for P27,000
C. Purchase discount for P27,000
B. Inventory for P30,000
D. Purchase discount for P30,000
Net method vs. gross method
19. Rabb Company records purchases at gross amount but wishes to change to recording
purchases net of purchase discounts. Discount available on purchases for the current year
totaled P100,000. Of this amount, P10,000 is still available in the accounts payable balance.
The balances in the accounts as of and for the year ended December 31, before conversion
are:
MCQ - Problems
Page 37
FINANCIAL ACCOUNTING
Purchases
5,000,000
Purchase discounts taken
40,000
Accounts payable
1,500,000
What is the balance of accounts payable on December 31 after the conversion?
A. 1,410,000
C. 1,460,000
B. 1,440,000
D. 1,490,000
P1 © 2014
20. Duke Company specializes in the sale of IBM compatibles and software packages and had
the following transactions:
Purchases of IBM compatibles
1,700,000
Purchases of commercial software packages
1,200,000
Returns and allowances
50,000
Purchase discounts taken
17,000
Terms on all purchases were 2/10, n/30. All returns and allowances took place within 5 days
of purchase and prior to any payment. What was the amount of discount lost?
A. 17,000
C. 41,000
B. 40,000
D. 57,000
FA © 2014
21. On August 1 of the current year, Stella Company recorded purchases of inventory of
P800,000 and P 1,000,000 under credit terms of 2/15, net 30. The payment due on the
P800,000 purchase was remitted on August 16. The payment due on the P1,000,000
purchase was remitted on August 31. Under the net method and the gross method, these
purchases should be included at what respective amounts in the determination of cost of
goods available for sale?
FA © 2014
A.
B.
C.
D.
Net method
1,784,000
1,764,000
1,764,000
1,800,000
Gross method
1,764,000
1,800,000
1,784,000
1,764,000
Questions 22 & 23 are based on the following information.
FA © 2014
Wine Company recorded purchases at net amount. On December 10, the entity purchased
merchandise on account, P4,000,000, terms 2/10, n/30. The entity returned P300,000 of the
December 10 purchase and received credit on account. The account had not been paid on
December 31.
22. What amount should be recorded as purchase return?
A. 270,000
C. 300,000
B. 294,000
D. 306,000
MCQ - Problems
Page 38
Inventory – Cost Flow & Valuation
23. By how much should the account payable be adjusted on December 31?
A. 0
C. 80,000
B. 74,000
D. 86,000
Inventoriable cost
24. Dean Sportswear regularly buys sweaters from Mill Company and is allowed trade discounts
of 20% and 10% from the list price. Dean made a purchase during the year, and received an
invoice with a list price of P600,000, a freight charge of P15,000 and payment terms of 2/10,
n/30. What is the cost of the purchase?
A. 432,000
C. 438,360
B. 435,000
D. 447,000
P1 © 2014
25. On December 26, 2014, Branigan Company purchased goods costing PI,000,000. The terms
were FOB shipping point. The goods were received on December 28,2014. Costs incurred
by the entity in connection with the purchase and delivery of the goods were normal freight
charge P30,000, handling cost P20,000, insurance on shipment P5,000 and abnormal freight
charge for express shipping P12,000. What is the total cost of the inventory?
A. 1,030,000
C. 1,055,000
B. 1,050,000
D. 1,067,000
FA © 2014
26. Eagle Company incurred the following costs in relation to a certain product:
Direct materials and labor
Variable production overhead
Factory administrative costs
Fixed production costs
What is the correct measurement of the product?
A. 195,000
C. 225,000
B. 205,000
D. 240,000
27. Parrot Company provided the following inventory data:
Materials
Production labor cost
Production overhead
General administration cost
Marketing cost
What is the value of the completed inventory?
A. 630,000
C. 850,000
B. 750,000
D. 900,000
MCQ - Problems
180,000
25,000
15,000
20,000
FA © 2014
300,000
330,000
120,000
100,000
50,000
FA © 2014
Page 39
FINANCIAL ACCOUNTING
28. On December 28, 2014, Kerr Company purchased goods costing P500,000. The terms were
FOB destination. The costs incurred in connection with the sale and delivery of the goods
were:
Packaging for shipment
10,000
Shipping
15,000
Special handling charges
25,000
These goods were received on December 31,2014. On December 31, 2014, what total cost
should be included in inventory?
A. 500,000
C. 535,000
B. 520,000
D. 545,000
FA © 2014
29. Stone Company had the following transactions during December 2014:
Inventory shipped on consignment to Beta Company
1,800,000
Freight paid by Stone
90,000
Inventory received on consignment from Alpha Company
1,200,000
Freight paid by Alpha
50,000
No sales of consigned goods were made in December 2014. What amount should be
included in inventory on December 31,2014?
A. 1,200,000
C. 1,800,000
B. 1,250,000
D. 1,890,000
P1 © 2014
30. Fenn Company provided the following information for the current year:
Merchandise purchased for resale
Freight in
Freight out
Purchase returns
Interest on inventory loan
What is the inventoriable cost of the purchase?
A. 4,030,000
C. 4,130,000
B. 4,080,000
D. 4,280,000
4,000,000
100,000
50,000
20,000
200,000
31. Brilliant Company has incurred the following costs during the current year:
Cost of purchases based on vendors' invoices
Trade discounts on purchases already deducted from vendors' invoices
Import duties
Freight and insurance on purchases
Other handling costs relating to imports
Salaries of accounting department
Brokerage commission paid to agents for arranging imports
MCQ - Problems
FA © 2014
5,000,000
500,000
400,000
1,000,000
100,000
600,000
200,000
Page 40
Inventory – Cost Flow & Valuation
Sales commission paid to sales agents
After-sales warranty costs
What is the total cost of purchases?
A. 5,700,000
B. 6,100,000
300,000
250,000
C 6,500,000
D. 6,700,000
FA © 2014
Inventories
32. Tequila Company had at year-end P200,000 office supplies, P1,350,000 raw materials,
P2,950,000 goods in process, P3,600,000 finished goods and P300,000 prepaid insurance.
What total amount should be reported as inventories in the statement of financial position at
year-end?
A. 3,600,000
C. 7,900,000
B. 3,800,000
D. 8,100,000
FA © 2014
33. Corolla Company incurred the following costs:
Materials
700,000
Storage costs of finished goods
180,000
Delivery to customers
40,000
Irrecoverable purchase taxes
60,000
At what amount should the inventory be measured?
A. 760,000
C. 940,000
B. 880,000
D. 980,000
FA © 2014
34. Aman Company provided the following data:
Items counted in the bodega
Items included in the count specifically segregated per sale contract
Items in receiving department, returned by customer, in good condition
Items ordered and in the receiving department
Items ordered, invoice received but goods not
received. Freight is on account of seller.
Items shipped today, invoice mailed, FOB shipping point
Items shipped today, invoice mailed, FOB destination
Items currently being used for window display
Items on counter for sale
Items in receiving department, refused because of damage
Items included in count, damaged and unsalable
Items in the shipping department
What is the correct amount of inventory?
A. 5,150,000
C. 5,800,000
B. 5,700,000
D. 6,000,000
MCQ - Problems
4,000,000
100,000
50,000
400,000
300,000
250,000
150,000
200,000
800,000
180,000
50,000
250,000
P1 © 2014
Page 41
FINANCIAL ACCOUNTING
35. Lunar Company included the following items under inventory:
Materials
Advance for materials ordered
Goods in process
Unexpired insurance on inventory
Advertising catalogs and shipping cartons
Finished goods in factory
Finished goods in entity-owned retail store, including 50% profit on cost
Finished goods in hands of consignees including 40% profit on sales
Finished goods in transit to customers, shipped FOB destination at cost
Finished goods out on approval, at cost
Unsalable finished goods, at cost
Office supplies
Materials in transit, shipped FOB shipping point,
excluding freight of P30,000
Goods held on consignment, at sales price, cost P150,000
What is the correct amount of inventory?
A. 5,375,000
C. 5,500,000
B. 5,250,000
D. 5,540,000
36. Ram Company provided the following information at the end of current year.
Finished goods in storeroom, at cost, including overhead
of P400,000 or 20%.
Finished goods in transit, including freight charge of
P20,000, FOB shipping point
Finished goods held by salesmen, at selling price, cost, P100,000
Goods in process, at cost of materials and direct labor
Materials
Materials in transit, FOB destination
Defective materials returned to suppliers
Shipping supplies
Gasoline and oil for testing finished goods
Machine lubricants
What is the correct amount of inventory?
A. 4,000,000
C. 4,170,000
B. 4,090,000
D. 4,270,000
MCQ - Problems
1,400,000
200,000
650,000
60,000
150,000
2,000,000
750,000
400,000
250,000
100,000
50,000
40,000
330,000
200,000
P1 © 2014
2,000,000
250,000
140,000
720,000
1,000,000
50,000
100,000
20,000
110,000
60,000
P1 © 2014
Page 42
Inventory – Cost Flow & Valuation
Adjusted inventory balance
37. Brandy Company took a physical inventory at the end of the year and determined that
P2,600,000 of goods were on hand. In addition, the entity determined that P200,000 of goods
purchased in transit shipped FOB shipping point were actually received two days after the
physical count and that the entity had P300,000 of goods out on consignment. What amount
should be reported as inventory at year-end?
A. 2,600,000
C. 2,900,000
B. 2,800,000
D. 3,100,000
FA © 2014
38. Scotch Company took a physical inventory at the end of the year and determined that
P1,900,000 of goods were on hand. In addition, the entity determined that P240,000 of goods
purchased were in transit shipped FOB destination. The goods were actually received three
days after the inventory count. The entity sold P100,000 worth of inventory FOB destination.
Such inventory is in transit at year-end. What amount should be reported as inventory at yearend?
A. 1,900,000
C. 2,140,000
B. 2,000,000
D. 2,240,000
FA © 2014
39. The audit of Joust Company revealed a physical inventory on December 31, 2014 with a cost
of P4,000,000. The following items were excluded from the count:
* A special machine, fabricated to order for a customer costing P400,000, was finished
and specifically segregated on December 31, 2014. The customer was billed on that
date and the machine excluded from inventory although it was shipped on January 4,
2015.
• Merchandise costing P50,000 shipped by a vendor FOB seller on December 28, 2014
and received b3? Joust Company on January 10, 2015.
What is the correct inventory on December 31, 2014?
A. 4,000,000
C. 4,400,000
B. 4,050,000
D. 4,450,000
FA © 2014
40. Honor Company reported inventory on December 31, 2014 at P1,500,000 based on a
physical count of goods priced at cost, and before any necessary year-end adjustment
relating to the following:
 Included in the physical count were goods billed to a customer FOB shipping point on
December 31, 2014. These goods had a cost of P30,000 and were picked up by the
carrier on January 10,2015.
 Goods shipped FOB destination on December 28, 2014 from a vendor to Honor
Company were received on January 4, 2015. The invoice cost was P50,000.
MCQ - Problems
Page 43
FINANCIAL ACCOUNTING
What amount should be reported as inventory on December 31, 2014?
A. 1,470,000
C. 1,500,000
B. 1,480,000
D. 1,550,000
FA © 2014
41. Empty Company reported inventory on December 31, 2014 at P2,500,000 based on physical
count priced at cost and before any necessary adjustment for the following:
 Merchandise costing P100,000, shipped FOB shipping point from a vendor on December
30, 2014 was received and recorded on January 5, 2015.
 Goods in the shipping area were excluded from inventory although shipment was not
made until January 4, 2015. The goods billed to the customer FOB shipping point on
December 30, 2014, had a cost of P400,000.
What amount should be reported as inventory on December 31,2014?
A. 2,500,000
C. 2,900,000
B. 2,600,000
D. 3,000,000
FA © 2014
42. Brandy Company took a physical inventory at the end of the year and determined that
P2,600,000 of goods were on hand. In addition, the entity determined that P200,000 of goods
purchased in transit shipped FOB shipping point were actually received two days after the
inventory count and that the entity had P300,000 of goods out on consignment. What amount
should be reported as inventory at the end of the year?
A. 2,600,000
C. 2,900,000
B. 2,800,000
D. 3,100,000
FA © 2014
43. Hero Company reported inventory on December 31, 2014 at P6,000,000 based on a physical
count of goods priced at cost and before any necessary year-end adjustments relating to the
following:
• Included in the physical count were goods billed to a customer FOB shipping point on
December 30,2014. These goods had a cost of PI 25,000 and were picked up by the
carrier on January 7, 2015.
• Goods shipped FOB shipping point on December 28, 2014, from a vendor to Hero were
received on January 4,2015. The invoice cost was P300,000.
What amount should be reported as inventory on December 31, 2014?
A. 5,875,000
C. 6,175,000
B. 6,000,000
D. 6,300,000
P1 © 2014
44. The physical count conducted in the warehouse of Lenient Company on December 31, 2014
revealed total cost of P3,600,000. However, the following items were excluded from the
count:
MCQ - Problems
Page 44
Inventory – Cost Flow & Valuation

Goods sold to a customer, which are being held for the customer to call for at the
customer's convenience with a cost of P200,000.
 A packing case containing a product costing P80,000 was standing in the shipping room
when the physical inventory was taken. It was not included in the inventory because it
was marked "hold for shipping instructions". Goods in process costing P300,000 held by
an outside processor for further processing.
What is the correct inventory on December 31, 2014?
A. 3,880,000
C. 4,100,000
B. 3,980,000
D. 4,180,000
FA © 2014
45. Reverend Company conducted a physical count on December 31, 2014 which revealed
merchandise with a total cost of P5,000,000. However, further investigation revealed that
the following items were excluded from the count.
* Goods sold to a customer, which are being held for the customer to call at the customer's
convenience with a cost of P200,000.
* A packing case containing a product costing P500,000 was standing in the shipping room
when the physical inventory was taken. It was not included in the inventory because it
was marked "hold for shipping instructions". The investigation revealed that the
customer's order was dated December 28,2014, but that the case was shipped and the
customer billed on January 4, 2015.
* A special machine costing P250,000, fabricated to order for a customer, was finished
and specifically segregated at the back part of the shipping room on December 31,2014.
The customer was billed on that date and the machine was excluded from inventory
although it was shipped on January 2, 2015.
What is the correct amount of inventory that should be reported on December 31,2014?
A. 5,500,000
C. 5,750,000
B. 5,700,000
D. 5,950,000
P1 © 2014
46. Fair Company reported inventory on hand on December 31,2014 valued at a cost of
P950,000. The following items were not included in this inventory amount:
Item:
Purchased goods in transit, shipped FOB destination, invoice price P30,000 which
includes freight charge of P1,500.
Item 2: Goods held on consignment by Fair Company at a sales price of P28,000, including
sales commission of 20% of the sales price.
Item 3: Goods sold to Grace Company, under terms FOB destination, invoiced for P18,500
which includes P1,000 freight charge to deliver the goods. Goods are in transit.
The entity's selling price is 140%o of cost.
Item 4: Purchased goods in transit, terms FOB shipping point, invoice price P50,000,
MCQ - Problems
Page 45
FINANCIAL ACCOUNTING
freight cost, P2,500.
Goods out on consignment to Manila Company, sales price P35,000, shipping cost
of P2,000.
What is the adjusted cost of the inventory on December 31,2014?
A. 1,040,000
C. 1,043,000
B. 1,042,000
D. 1,073,500
P1 © 2014
Item 5:
47. Baritone Company counted and reported the ending inventory on December 31, 2014 at
P2,000,000. None of the following items were included when the total amount of the ending
inventory was computed:
• P150,000 in goods located in the entity's warehouse that are on consignment from
another entity.
• P200,000 in goods that were sold by the entity and shipped on December 30 and were
in transit on December 31,2014. The goods were received by the customer on January
2,2015. Terms were FOB destination.
• P300,000 in goods that were purchased by the entity and shipped on December 30 and
were in transit on December 31, 2014. The goods were received by the entity on January
2,2015. Terms were FOB shipping point.
• P400,000 in goods that were sold by the entity and shipped on December 30 and were
in transit on December 31,2014. The goods were received by the customer on January
2, 2015. Terms were FOB shipping point.
What is the correct amount of inventory on December 31,2014?
A. 2,350,000
C. 2,750,000
B. 2,500,000
D. 2,900,000
FA © 2014
48. Sterling Company reported the 2014 year-end inventory at P7,600,000 before the following
adjustments:
* Goods valued at PI,000,000 are on consignment with a customer. These goods are not
included in the year-end inventory.
* Goods costing P250,000 were received from a vendor on January 5,2015. The related
invoice was received and recorded on January 12, 2015. The goods were shipped on
December 31, 2014, terms FOB shipping point.
* Goods costing P850,000 were shipped on December 31,2014, and were delivered to the
customer on January 2,2015. The terms of the invoice were FOB shipping point. The
goods were included in ending inventory for 2014 even though the sale was recorded in
2014.
* A P350,000 shipment of goods to a customer on December 31, 2014, FOB destination,
was not included in the year-end inventory. The goods cost P260,000 and were delivered
to the customer on January 8,2015. The sale was properly recorded in2015.
MCQ - Problems
Page 46
Inventory – Cost Flow & Valuation
*
An invoice for goods costing P350,000 was received and recorded as a purchase on
December 31, 2014. The related goods, shipped FOB destination, were received on
January 2, 2015, and thus were not included in the physical inventory. * Goods valued
at P650,000 are on consignment from a vendor. These goods are not included in the
year-end inventory.
* A P1,050,000 shipment of goods to a customer on December 30, 2014, terms FOB
destination, was recorded as a sale in 2014. The goods, costing P840,000 and delivered
to the customer on January 6,2015, were not included in 2014 ending inventory.
What is the correct inventory on December 31,2014?
A. 8,100,000
C. 9,450,000
B. 9,100,000
D. 9,950,000
P1 © 2014
49. Joy Company conducted a physical count on December 31,2014 which revealed inventory
with a cost of P4,410,000. The audit identified that the following items were excluded from
this amount:
* Merchandise of P610,000 is held by Joy on consignment.
* Merchandise costing P380,000 was shipped by Joy FOB destination to a customer on
December 31,2014. The customer was expected to receive the goods on Janaury
5,2015.
* Merchandise costing P460,000 was shipped by Joy FOB shipping point to a customer
on December 29, 2014. The customer was expected to receive the goods on January 5,
2015.
* Merchandise costing P830,000 shipped by a vendor FOB destination on December 31,
2014 was received by Joy on January 5,2015.
* Merchandise costing P510,000 purchased FOB shipping point was shipped by the
supplier on December 31, 2014 and received by Joy on January 5,2015.
What is the correct amount of inventory on December 31,2014?
A. 3,800,000
C. 4,920,000
B. 4,690,000
D. 5,300,000
FA © 2014
50. Mia Company submitted an inventory list on December 31,2014 which showed a total of
P5,000,000.
• Excluded from the inventory was merchandise costing P80,000 because it was
transferred to the delivery department for packaging on December 28,2014 and for
shipping on January 2,2015. • The bill of lading and other import documents on a
merchandise were delivered by the bank and the trust receipt accepted by the entity on
December 26,2014. Taxes and duties have been paid on this shipment but the broker
did not deliver the merchandise until January 7, 2015. Cost of the shipment totaled
P800.000. This shipment was not included in the inventory on December 31,2014.
MCQ - Problems
Page 47
FINANCIAL ACCOUNTING
•
A review of the entity's purchase orders showed a commitment to buy P100,000 worth
of merchandise from Myrose Company. This was not included in the inventory because
the goods were received on January 3, 2015. Supplier's invoice for P300,000 worth of
merchandise dated December 28,2014 was received through the mail on December 30,
2014 although the goods arrived only on January 4? 2015. Shipment terms are FOB
shipping point. This item was included in the December 31,2014 inventory by the entity.
• Goods valued at P20,000 were received from Darlyn Company on December 28,2014
for approval by Mia. The inventory team included this merchandise in the list but did not
place any value on it. On January 4,2015, the entity informed the supplier by long
distance telephone of the acceptance of the goods and the supplier's invoice was
received on January 7,2015.
• On December 27, 2014, an order for P25,000 worth of merchandise was placed. This
was included in the year-end inventory although it was received only on January 5,2015.
The seller shipped the goods FOB destination.
What is the correct inventory on December 31, 2014?
A. 5,055,000
C. 5,830,000
B. 5,555,000
D. 5,855,000
P1 © 2014
51. Leila Company conducted a physical count on December 31,2014 which revealed total cost
of P3,600,000. However, the following items were excluded from the count:
• Goods sold to a customer which are being held for the customer to call for at the
customer's convenience with a cost of P200,000.
• A packing case containing a product costing P80,000 was standing in the shipping room
when the physical inventory was taken. It was not included in the inventory because it
was marked "hold for shipping instructions".
• Goods in process costing P300,000 held by an outside processor for further processing.
• Goods costing P50,000 shipped by a vendor FOB seller on December 28,2014 and
received by Leila Company on January 10, 2015.
What is the correct inventory on December 31, 2014?
A. 3,980,000
C. 4,180,000
B. 4,030,000
D. 4,230,000
P1 © 2014
Inventory adjustments
52. An analysis of the ending inventory of Lilac Company on December 31,2014 disclosed the
inclusion of the following items:
Merchandise in transit purchased on terms:
FOB shipping point
FOB destination
MCQ - Problems
165,000
100,000
Page 48
Inventory – Cost Flow & Valuation
Merchandise out on consignment at sales price (including
markup of 30% on cost)
Merchandise sent to customer for approval (cost of goods, P30,000)
Merchandise held on consignment
What is the reduction of the inventory on December 31,2014?
A. 190,000
C. 222,000
B. 203,500
D. 355,000
195,000
40,000
35,000
P1 © 2014
Cost of goods sold
53. Brooke Company used a perpetual inventory system. At the end of 2013, the inventory
account was P360,000 and P30,000 of those goods included in ending inventory were
purchased FOB shipping point and did not arrive until 2014. Purchases in 2014 were
P3,000,000. The perpetual inventory records showed an ending inventory of P420,000 for
2014. A physical count at the end of 2014 showed an inventory of P3 80,000. Inventory
shortages are included in cost of goods sold. What amount should be reported as cost of
goods sold for 2014?
A. 2,940,000
C. 3,000,000
B. 2,980,000
D. 3,010,000
FA © 2014
54. Clem Company provided the following for the current year:
Central warehouse
Beginning inventory
1,100,000
Purchases
4,800,000
Freight in
100,000
Transportation to consignees
50,000
Freight out
300,000
Ending inventory
1,450,000
What is the cost of goods sold for the current year?
A. 4,550,000
C. 5,070,000
B. 4,850,000
D. 5,120,000
Held by consignees
120,000
600,000
80,000
200,000
FA © 2014
Consignment sales revenue
55. On October 1, 2014, Grimm Company consigned 40 freezers to Holden Company costing
P14,000 each for sale at P20,000 each and paid PI 6,000 in transportation costs. On
December 30, 2014, Holden Company reported the sale of 10 freezers and remitted
P170,000. The remittance was net of the agreed 15% commission. What amount should be
recorded as consignment sales revenue for 2014?
MCQ - Problems
Page 49
FINANCIAL ACCOUNTING
A. 154,000
B. 170,000
C. 196,000
D. 200,000
P1 © 2014
Payable for consigned goods
56. On December 1,2014, Alt Department Store received 505 sweaters on consignment from
Todd. Todd's cost for the sweaters was P800 each, and they were priced to sell at PI,000.
Alt's commission on consigned goods is 10%>. On December 31, 2014, 5 sweaters
remained. In the December 31,2014 statement of financial position, what amount should be
reported as payable for consigned goods?
A. 404,000
C. 454,000
B. 450,000
D. 490,000
P1 © 2014
FIFO method
57. Marsh Company had 150,000 units of product A on hand at January 1, costing P21 each.
Purchases of product A during the month of January were as follows:
Units
Unit cost
January 10
200,000
22
18
250,000
23
28
100,000
24
A physical count on January 31 shows 250,000 units of product A on hand.
What is the cost of the inventory on January 31 under the FIFO method?
A. 5,250,000
C. 5,550,000
B. 5,350,000
D. 5,850,000
P1 © 2014
58. Mildred Company is a wholesaler of office supplies. The FIFO periodic inventory is used. The
activity for inventory of calculators during August is as follows:
August 1
7
12
21
22
29
Inventory
Purchase
Sale
Purchase
Sale
Purchase
Units
20,000
30,000
36,000
48,000
38,000
16,000
What is the ending inventory on August 31 ?
A. 1,500,800
C. 1,522,880
B. 1,501,600
D. 1,529,600
MCQ - Problems
Cost
36.00
37.20
38.00
38.60
P1 © 2014
Page 50
Inventory – Cost Flow & Valuation
59. Jayson Company used the perpetual system. The following information has been extracted
from the records about one product:
Units
Unit cost
Total cost
Jan. 1 Beginning balance
8,000
70.00
560,000
6
Purchase
3,000
70.50
211,500
Feb. 5 Sale
10,000
Mar. 5 Purchase
11,000
73.50
808,500
Mar. 8 Purchase return
800
73.50
58,800
Apr. 10 Sale
7,000
Apr. 30 Sale return
300
If the FIFO cost flow method is used, what is the cost of the inventory on April 30?
A. 315,000
C. 330,750
B. 329,360
D. 433,876
P1 © 2014
60. Hilltop Company sells a new product. During a move to a new location, the inventory records
for the product were misplaced. The entity has been able to gather some information from
the purchases and sales records. The July purchases are as follows:
Quantity
Unit cost
Total cost
July 5
10,000
65
650,000
9
12,000
63
756,000
12
15,000
60
900,000
25
14,000
62
868,000
51,000
3,174,000
On July 31,15,000 units were on hand. The sales for July amount to P6,000,000, or 60,000
units at P100 per unit. The entity has always used a periodic FIFO inventory costing system.
Gross profit on sales for July was P2,400,000. What is the cost of inventory on July 1 ?
A. 426,000
C. 2,400,000
B. 1,354,000
D. 2,826,000
P1 © 2014
61. Rona Company used the perpetual inventory system. The inventory transactions for August
of the current year were as follows:
Units
Unit cost
Total cost
Aug. 1 Beginning
20,000
4.00
80,000
7
Purchase
10,000
4.20
42,000
10
Purchase
20,000
4.30
86,000
12
Sale
15,000
?
?
16
Purchase
20,000
4.60
92,000
20
Sale
40,000
?
?
28
Sale return
3,000
?
?
MCQ - Problems
Page 51
FINANCIAL ACCOUNTING
The sale return relates to the August 20 sale. If the FIFO cost flow method is used, the sale
return would be costed back into inventory at what unit cost?
A. 4.00
C. 4.30
B. 4.20
D. 4.60
P1 © 2014
62. On April 1,2014, Toronto Company had 6,000 units of merchandise on hand that cost P120
per unit. During the month, the entity had the following transactions with regard to the
merchandise:
April 5
Purchased on account 15,000 units at P140 per unit
8
Returned 1,000 units from the April 5 purchase.
29
Sold on account 16,000 units at P200 per unit.
The entity used a perpetual inventory system and a FIFO cost flow. What is the cost of goods
sold for April?
A. 2,080,000
C. 2,144,000
B. 2,120,000
D. 2,200,000
P1 © 2014
63. Lagoon Company accumulated the following data for the current year.
Raw materials - beginning inventory
90,000 units @ P7.00
Purchases
75,000 units @ P8.00
120,000 units @ P8.50
The entity transferred 195,000 units of raw materials to work in process during the year.
Work in process - beginning inventory
50,000 units @ P 14.00
Direct labor
3,100,000
Manufacturing overhead
2,950,000
Work in process - ending inventory
48,000 units @ P15.00
The entity used the FIFO method for valuing inventory. What is the cost of goods
manufactured for the current year?
A. 7,515,000
C. 8,235,000
B. 7,535,000
D. 8,280,000
P1 © 2014
FIFO & LIFO
64. ABC Company provided the following net income and inventory:
2014
Net income using LIFO
2,750,000
Year-end inventory - FIFO
1,400,000
Year-end inventory - LIFO
900,000
What is the net income for 2015 using the FIFO cost flow?
A. 2,600,000
C. 3,100,000
B. 2,900,000
D. 3,500,000
MCQ - Problems
2015
3,000,000
2,000,000
1,600,000
P1 © 2014
Page 52
Inventory – Cost Flow & Valuation
Weighted-average method
65. Lane Company provided the following inventory card during February:
Purchase
Units
Balance
Price
Units
Used
Units
Jan. 10
100
20,000
20,000
31
10,000
10,000
Feb. 8
110
30,000
40,000
9
Returns from factory (Jan. 10 lot)
(1,000)
41,000
28
11,000
30,000
Using the weighted average method, what is the cost of inventory on February 28?
A. 3,120,000
C. 3,180,000
B. 3,150,000
D. 3,300,000
P1 © 2014
66. Stephanie Company is a wholesaler of photography equipment. The entity used the periodic
average cost method to account for inventory. The activity for the inventory of cameras during
July is shown below:
Units
Unit cost
July 1
Inventory
20,000
36.00
7
Purchase
30,000
37.00
12
Sale
36,000
21
Purchase
50,000
37.88
22
Sale
38,000
29
Purchase
16,000
38.11
What is the ending inventory on July 31 ?
A. 1,534,000
C. 1,587,360
B. 1,569,120
D. 1,594,640
P1 © 2014
Moving-average method
67. Frey Company recorded the following data pertaining to raw material Y during January of the
current year.
Units
.
Date
Received
Cost
Issued
On hand
1/1
Inventory
200
8,000
1/8
Issue
4,000
4,000
1/20 Purchase
12,000
240
16,000
What is the moving average unit cost of the inventory on January 31?
A. 220
C. 230
B. 224
D. 240
P1 © 2014
MCQ - Problems
Page 53
FINANCIAL ACCOUNTING
68. Celine Company provided the following data relating to an inventory item.
Units
Unit cost
Total cost
Jan. 1 Beginning balance
5,000
200
1,000,000
10
Purchase
5,000
250
1,250,000
15
Sale
7,000
16
Sale return
1,000
30
Purchase
16,000
150
2,400,000
31
Purchase return
2,000
150
300,000
Under the perpetual system, what is the moving average unit cost on January 31?
A. 165
C. 181
B. 167
D. 225
P1 © 2014
69. Anders Company used the moving average method to determine the cost of the inventory.
During January of the current year, the entity recorded the following information pertaining to
its inventory:
Units
Unit cost
Total cost
Balance on January 1
40,000
50
2,000,000
Sold on January 17
35,000
Purchased on January 28
20,000
80
1,600,000
What amount of inventory should be reported on January 31 ?
A. 1,500,000
C. 1,850,000
B. 1,625,000
D. 2,000,000
P1 © 2014
Comprehensive
Questions 1 & 2 are based on the following information.
P1 © 2014
During January of the current year, Metro Company which maintains a perpetual inventory system,
recorded the following information pertaining to its inventory:
Units Unit cost Total cost Units on hand
Balance on 1/1
10,000 100
1,000,000
10,000
Purchased on 1/7 6,000 300
1,800,000
16,000
Sold on 1/20
9,000 7,000
Purchased 1/25
4,000 500
2,000,000
11,000
70. Under the moving average method, what amount should Metro report as inventory on
January 31 ?
A. 2,640,000
C. 3,300,000
B. 3,225,000
D. 3,900,000
MCQ - Problems
Page 54
Inventory – Cost Flow & Valuation
71. Under the FIFO method, what amount should Metro report as inventory on January 31 ?
A. 1,300,000
C. 3,900,000
B. 2,700,000
D. 4,100,000
Questions 1 thru 3 are based on the following information.
P1 © 2014
Yakal Company reported that a flood recently destroyed many of the financial records. The entity
used an average cost inventory valuation system. The entity made a physical count at the end of
each month in order to determine monthly ending inventory value. By examining various
documents, the following data are gathered:
Ending inventory at July 31
60,000 units
Total cost of units available for sale in July
1,452,100
Cost of goods sold during July
1,164,100
Cost of beginning inventory, July 1
4.00 per unit
Gross profit on sales for July
935,900
Units
Unit cost
Total cost
July 5
55,000
5.10
280,500
11
53,000
5.00
265,000
15
45,000
5.50
247,500
16
47,000
5.30
249,100
Total purchases
200,000
1,042,100
72. What is the number of units on July 1 ?
A. 60,000
B. 76,500
C. 102,500
D. 140,000
73. How many units were sold during the month of July?
A. 140,000
C. 260,000
B. 242,500
D. 302,500
74. What is the cost of the inventory on July 31 ?
A. 240,000
C. 312,600
B. 288,000
D. 410,000
Relative Sales Value Method
75. Casa Company purchased a tract of land for P12,000,000. The entity incurred additional cost
of P3,000,000 during the remainder of the year in preparing the land for sale. The tract was
subdivided into residential lots as follows:
MCQ - Problems
Page 55
FINANCIAL ACCOUNTING
Lot class
Number of lots
Sales price per lot
A
100
240,000
B
100
160,000
C
200
100,000
Using the relative sales value method, what amount of cost should be allocated to Class A
lots?
A. 3,000,000
C. 6,000,000
B. 3,750,000
D. 7,200,000
FA © 2014
76. Solid Company purchased a plot of ground for P18,000,000. The entity also paid an
independent appraiser for the land the amount of P500,000. The land was developed as
residential lots at a total cost of P41,500,000. The lots were classified as follows:
Number of lots
Sales price per lot
Highland
20
1,000,000
Midland
40
750,000
Lowland
100
500,000
What total cost should be allocated to Highland lots?
A. 8,300,000
C. 11,900,000
B. 8,400,000
D. 12,000,000
P1 © 2014
77. Elixir Company bought a 10-hectare land in Novaliches to be improved, subdivided into lots
and eventually sold. Purchase price of the land was P5,800,000. Taxes and documentation
expenses on the transfer of the property amounted to P80,000. The lots were classified as
follows:
Lot class Number of lots
Selling price per lot
Total clearing cost
A
10
100,000
None
B
20
80,000
100,000
C
40
70,000
300,000
D
50
60,000
800,000
What amount should be allocated as total cost of Class B lots under the relative sales price
method?
A. 1,176,000
C. 1,276,000
B. 1,220,000
D. 1,700,000
P1 © 2014
78. Apitong Company manufactures bath towels. The production comprises 60% of "Class A"
which sells for P500 per dozen and 40% of "Class B" which sells for P250 a dozen. During
the current year, 60,000 dozens were produced at an average cost of P360 a dozen. The
inventory at the end of the current year was as follows:
MCQ - Problems
Page 56
Inventory – Cost Flow & Valuation
2,200 dozens "Class A" @ P360
792,000
3,000 dozens "Class B" @ P360
1,080,000
Total inventory
1,872,000
Using the relative sales value method which management considers as a more equitable
basis of cost distribution, what is the measurement of the inventory?
A. 1,170,000
C. 1,872,000
B. 1,665,000
D. 2,340,000
P1 © 2014
Questions 1 thru 3 are based on the following information.
P1 © 2014
Julius Company, a conglomerate, has three subsidiaries, Aye, Bee and Cee. Aye Company is in
commodity business. Inventory on January 1, 2014 totaled P240,000. Aye Company used the
weighted average method.
Quantities on hand were 8,000 and 10,000 on January 1 and December 31,2014 respectively. Aye
Company made purchases of 25,000 units in 2014 at a total cost of P816,000.
Bee Company buys and sells land. On January 1,2014, a tract of land was bought for P 10,000,000.
Costs of leveling the land amounted to P2,500,000. The lots were subdivided as follows:
25 Class A to sell for P400,000 each'
30 Class B to sell for P300,000 each
10 Class C to sell for P100,000 each
On December 31,2014, the unsold lots consisted of 15 Class A, 6 Class B and 3 Class C.
Cee Company sells beds. The perpetual inventory was stated at P1,960,000 on December 31,
2014. At the close of the year, a new approach for compiling inventory was used and apparently
a satisfactory cutoff was not made.
Some events that occurred are as follows:
* Beds shipped FOB shipping point to a customer on January 5, 2015 costing P200,000 were
included in inventory on December 31, 2014.
* Beds costing P900,000 received December 30, 2014 were recorded on January 2, 2015.
* Beds received costing P190,000 were recorded twice.
* Beds shipped FOB shipping point to a customer on December 28, 2014 per date shipping
invoice which cost P700,000 were not recorded as delivered until January 2015.
* Beds on hand which cost P23 0,000 were not recorded.
79. What is the ending inventory of Aye Company?
A. 300,000
C. 320,000
B. 313,200
D. 326,400
MCQ - Problems
Page 57
FINANCIAL ACCOUNTING
80. What is the ending inventory of Bee Company?
A. 3,900,000
C. 4,875,000
B. 4,050,000
D. 5,062,500
81. What is the ending inventory of Cee Company?
A. 2,200,000
C. 2,900,000
B. 2,390,000
D. 3,090,000
Lower of cost or NRV
82. Based on a physical inventory taken on December 31,2014, Chewy Company determined
the chocolate inventory on a FIFO basis at P5,200,000 with a replacement cost of
P4,000,000. The entity estimated that, after further processing costs of P2,400,000, the
chocolate could be sold as finished candy bars for P8,000,000. The normal profit margin is
10% of sales. Using the measurement at the lower of cost and net realizable value, what
amount should be reported as chocolate inventory on December 31,2014?
A. 4,000,000
C. 5,200,000
B. 4,800,000
D. 5,600,000
P1 © 2014
83. Winter Company provided the following inventory data at year-end:
Cost
Skis
2,200,000
Boots
1,700,000
Ski equipment
700,000
Ski apparel
400,000
What amount should be reported as inventory at year-end?
A. 4,800,000
C. 5,200,000
B 5,000,000
D. 5,300,000
NRV
2,500,000
1,500,000
800,000
500,000
P1 © 2014
84. Chicago Company has two products in the inventory.
Product X
Product Y
Selling price
2,000,000
3,000,000
Materials and conversion costs
1,500,000
1,800,000
General administration costs
300,000
800,000
Estimated selling costs
600,000
700,000
At the year-end, the manufacture of items of inventory has been completed but no selling
costs have yet been incurred. What is the
measurement of Product X and Y,
respectively?
A. 1,400,000 and 1,800,000
C. 1,500,000 and 1,800,000
B. 1,400,000 and 2,300,000
D. 1,500,000 and 2,300,000
P1 © 2014
MCQ - Problems
Page 58
Inventory – Cost Flow & Valuation
85. Greece Company provided the following data for the current year:
Inventory - January 1:
Cost
Net realizable value
Net purchases
Inventory - December 31:
Cost
Net realizable value
What amount should be reported as cost of goods sold?
A. 7,000,000
C. 7,200,000
B. 7,100,000
D. 7,300,000
3,000,000
2,800,000
8,000,000
4,000,000
3,700,000
P1 © 2014
86. Gracia Company used the lower of cost or net realizable value method to value inventory.
Data regarding the items in work in process inventory are presented below:
Markers
Pens Highlight
ers
Historical cost
240,000
188,000 300,000
Selling price
360,000
250,000 360,000
Estimated cost to complete
48,000
50,000 68,000
Replacement cost
208,000
168,000 318,000
Normal profit margin as a percentage of selling price
25%
25%
10%
What is the measurement of the work in process inventory?
A. 676,000
C. 720,000
B. 694,000
D. 728,000
P1 © 2014
87. On December 31,2014, Julie Company reported ending inventory at P3,000,000, and the
allowance for inventory writedown before any adjustment at P150,000. Relevant information
on December 31,2014 follows:
Product 1
Product 2
Product 2
Product 3
Historical cost
800,000
1,000,000
700,000
500,000
Replacement cost
900,000
1,200,000
1,000,000
600,000
Sales price
1,200,000
1,300,000
1,250,000
1,000,000
Net realizable value 550,000
1,100,000
950,000
350,000
Normal profit
250,000
150,000
300,000
300,000
What amount of loss on inventory writedown should be included in cost of goods sold?
A. 100,000
C. 250,000
B. 200,000
D. 400,000
P1 © 2014
MCQ - Problems
Page 59
FINANCIAL ACCOUNTING
88. Uptown Company used the perpetual method to record inventory transactions for 2014.
Inventory
1,900,000
Sales
6,500,000
Sales return
150,000
Cost of goods sold
4,600,000
Inventory losses
120,000
On December 24,2014, the entity recorded a P150,000 credit sale of goods costing
P100,000. These goods were sold on FOB destination terms and were in transit on December
31,2014. The goods were included in the physical count. The inventory on December 31,2014
determined by physical count had a cost of P2,000,000 and a net realizable value of
P1,700,000. Any inventory writedown is not yet recorded. What amount should be reported
as cost of goods sold for 2014?
A. 4,500,000
C. 4,920,000
B. 4,720,000
D. 5,020,000
P1 © 2014
89. Altis Company reported the following information for the current year:
Sales (100,000 units at P150)
15,000,000
Sales discount
1,000,000
Purchases
9,300,000
Purchase discount
400,000
The inventory purchases during the year were as follows:
Units
Unit cost
Total cost
Beginning inventory, January 1
20,000
60
1,200,000
Purchases, quarter ended March 31
30,000
65
1,950,000
Purchases, quarter ended June 30
40,000
70
2,800,000
Purchases, quarter ended Sept. 30
50,000
75
3,750,000
Purchases, quarter ended Dec. 31
10,000
80
800,000
150,000
10,500,000
The accounting policy is to report inventory in the financial statements at the lower of cost
and net realizable value. Cost is determined under the first-in, first-out method. The entity
has determined that, on December 31,2014, the replacement cost of inventory was P70 per
unit and the net realizable value was P72 per unit. The normal profit margin is P10 per unit.
What amount should be reported as cost of goods sold for the current year?
A. 6,300,000
C. 6,700,000
B. 6,500,000
D. 6,900,000
P1 © 2014
90. In 2014, North Company experienced a decline in the value of inventory resulting in a
writedown from P3,600,000 to P3,000,000. The entity used the allowance method to record
the necessary adjustment. In 2015, market conditions have improved dramatically. On
MCQ - Problems
Page 60
Inventory – Cost Flow & Valuation
December 31,2015, the inventory had a cost of P5,000,000 and net realizable value of
P4,600,000. What is included in the adjusting entry on December 31, 2015?
A. Debit allowance for inventory writedown P200,000
B. Credit allowance for inventory writedown P400,000
C. Debit gain on reversal of inventory writedown P200,000
D. Credit gain on reversal of inventory writedown P400,000
P1 © 2014
Questions 91 thru 93 are based on the following information.
P1 © 2014
White Company carried four items in inventory. The following per-unit data relate to these items at
the end of first year of operations:
Category 1:
A
B
Category 2:
C
D
Units
Cost
Sale price
Selling cost
Normal profit
25,000
20,000
105
85
130
90
15
10
20
10
40,000
30,000
50
65
45
75
5
15
5
10
91. What is the measurement of inventory under LCNRV applied to individual item?
A. 7,625,000
C. 7,875,000
B. 7,725,000
D. 8,275,000
92. What is the measurement of inventory under LCNRV applied to inventory category?
A. 7,625,000
C. 7,875,000
B. 7,725,000
D. 8,275,000
93. What is the measurement of inventory under LCNRV applied to inventory as a whole?
A. 7,625,000
C. 7,875,000
B. 7,725,000
D. 8,275,000
Purchase commitment
94. On December 31, 2014, Dos Company has outstanding purchase commitments for 50,000
gallons at P20 per gallon of raw material. It is determined that the market price of the raw
material has declined to P17 per gallon on December 31,2014 and it is expected to decline
further to P15 in the first quarter of 2015. What is the loss on purchase commitment that
should be recognized in 2014?
A. 0
C. 250,000
B 150,000
D. 850,000
P1 © 2014
MCQ - Problems
Page 61
FINANCIAL ACCOUNTING
95. On October 1, 2014, Gorgeous Company entered into a 6-month, P5,200,000 purchase
commitment for a supply of a special product. On December 31,2014, the market value of
this material had fallen to P5,000,000.On March 31, 2015, the market value of the purchase
commitment is P4,900,000. What is the loss on purchase commitment to be recognized on
March 31,2015?
A. 0
C. 200,000
B. 100,000
D. 300,000
P1 © 2014
96. On November 15, 2014, Diamond Company entered into a commitment to purchase 10,000
ounces of gold on February 15,2015 at a price of P310 per ounce. On December 31, 2014,
the market price of gold is P270 per ounce. On February 15,2015, the price of gold is P300
per ounce. What is the gain on purchase commitment to be recognized on February 15,2015?
A. 0
C. 300,000
B. 100,000
D. 400,000
P1 © 2014
97. On November 15, 2014, Damascus Company entered into a commitment to purchase
100,000 barrels of aviation fuel for P55 per barrel on March 31, 2015. The entity entered into
this purchase commitment to protect itself against the volatility in the aviation fuel market. By
December 31,2014 the purchase price of aviation fuel had fallen to P40 per barrel. However,
by March 31, 2015, when the entity took delivery of the 100,000 barrels the price of aviation
fuel had risen to P60 per barrel. What amount should be recognized as gain on purchase
commitment for 2015?
A. 0
C. 1,500,000
B. 500,000
D. 2,000,000
P1 © 2014
98. On January 1,2014, Card Company signed a three-year, noncancelable purchase contract,
which allows Card to purchase up to 5,000 units of a computer part annually from Hart
Company at P100 per unit and guarantees a minimum annual purchase of 1,000 units. During
2014, the part unexpectedly became obsolete. Card had 2,500 units of this inventory on
December 31,2014, and believed these parts can be sold as scrap for P20 per unit. What
amount of loss from the purchase commitment should be reported in the 2014 income
statement?
A. 160,000
C. 240,000
B. 200,000
D. 360,000
P1 © 2014
MCQ - Problems
Page 62
Inventory – Cost Flow & Valuation
ANSWER KEY – Theory
1.C
26.D
2.C
27.B
3.B
28.C
4.A
29.A
5.C
30.C
6.C
31.C
7.C
32.B
8.A
33.D
9.D
34.A
10.D
35.D
11.D
36.C
12.C
37.D
13.B
38.A
14.A
39.A
15.C
40.B
16.C
41.D
17.C
42.D
18.D
43.A
19.A
44.D
20.D
45.C
21.D
46.B
22.D
47.B
23.D
48.B
24.A
49.D
25.A
50.D
Answer Key
51.A
52.A
53.B
54.D
55.B
56.D
57.A
58.D
59.A
60.A
61.C
62.D
63.C
64.A
65.C
66.A
67.B
68.B
69.B
70.B
71.C
72.D
73.C
74.D
75.A
76.B
77.D
78.C
79.D
80.D
81.D
82.C
83.D
84.B
85.C
86.B
87.B
88.D
89.C
90.D
91.D
92.D
93.B
94.A
95.D
96.D
97.D
98.D
99.A
100.C
101.C
102.B
103.B
104.B
105.D
106.D
107.B
108.B
109.D
110.B
111.A
112.A
113.B
114.C
115.A
116.D
Page 63
FINANCIAL ACCOUNTING
ANSWER KEY – PROBLEMS
1.B
26.D
2.C
27.B
3.B
28.A
4.B
29.D
5.A
30.B
6.B
31.D
7.B
32.C
8.A
33.A
9.D
34.B
10.B
35.C
11.D
36.C
12.A
37.D
13.A
38.B
14.B
39.B
15.C
40.C
16.C
41.D
17.C
42.D
18.A
43.D
19.D
44.B
20.B
45.A
21.C
46.B
22.B
47.B
23.B
48.B
24.D
49.D
25.C
50.D
Answer Key
51.B
52.A
53.B
54.D
55.D
56.B
57.D
58.D
59.C
60.B
61.D
62.B
63.A
64.B
65.C
66.B
67.C
68.B
69.C
70.B
71.C
72.C
73.B
74.B
75.C
76.D
77.B
78.B
79.C
80.D
81.A
82.C
83.A
84.A
85.B
86.C
87.C
88.C
89.B
90.A
91.A
92.B
93.C
94.B
95.B
96.C
97.C
98.A
Page 64
Inventory – Cost Flow & Valuation
ANSWER EXPLANATION
1.
Answer is (B).
Beginning inventory - 2015
Purchases
Freight in
Purchase discounts
Purchase returns
Purchase allowances
Goods available for sale
Cost of sales- 2015
Ending inventory - 2015
(4,500,000 x 73%)
2,355,000
3,180,000
220,000
( 45,000)
(40,000)
(15,000)
5,655,000
3,285,000
2,370,000
Sales
Cost of sales
Gross profit rate
100%
73%
27%
2.
Answer is (C).
Cost of goods sold
Ending inventory
Cost of goods available for sale
3.
Answer is (B).
Sales
Less: Sales returns
Net sales
Cost of sales:
Inventory – January
Purchases
5,500,000
Freight-in
250,000
Total
5,750,000
Less: Purchase returns, allow. & discounts
150,000
Goods available for sale
Less: Inventory – December 31
Gross income
Gross profit rate
(1,500,000 / 4,500,000)
Answer Explanations & Solutions
(60% x 3,600,000)
2,160,000
240,000
2,400,000
6,200,000
200,000
6,000,000
1,000,000
5,600,000
6,600,000
2,100,000
4,500,000
1,500,000
33 1/3%
Page 65
FINANCIAL ACCOUNTING
4.
Answer is (B).
Purchases
Inventory-December 31
Cost of goods sold
Markup on cost (40% x 5,600,000)
Sales (140% x 5,600,000)
Collections from customers
Accounts receivable - December 31
7,000,000
(1,400,000)
5,600,000
2,240,000
7,840,000
(4,000,000)
3,840,000
5.
Answer is (A).
Inventory – January 1
Purchases
Goods available for sale
Less: Inventory – December 31
Cost of goods sold
Gross profit
Total sales
Less: Cash sales
Sales on account
Accounts receivable – January 1
Total
Less: Collections
Accounts receivable – December 31
1,200,000
2,000,000
3,200,000
1,100,000
2,100,000
900,000
3,000,000
500,000
2,500,000
800,000
3,300,000
2,600,000
700,000
6.
Answer is (B).
Net sales
Inventory
Purchases
Goods available for sale
Less: Cost of sales
Inventory – December 31
7.
Answer is (B).
Credit sales
Cash sales
Total sales
Gross profit
Cost of sales
Beginning inventory
Answer Explanations & Solutions
(1,200,000 x 5)
(6,000,000 x 60%)
6,000,000
1,800,000
4,500,000
6,300,000
3,600,000
2,700,000
950,000 + 60,000 + 4,400,000 – 1,100,000
4,310,000
640,000
4,950,000
30%
(1,485,000)
3,465,000
840,000 + 3,465,000 – 3,500,000
805,000
Page 66
Inventory – Cost Flow & Valuation
8.
Answer is (A).
Sales
Cost of sales
Gross margin
9.
Answer is (D).
Cost of purchases
Import duties
Freight and insurance
Other handling costs
Brokerage commission
Total cost of purchases
10. Answer is (B).
Gross invoice
Purchase return
Balance
Purchase discount lost
11. Answer is (D).
Invoice price
(950,000 x 8)
(1,150,000 x 4)
5,000,000
400,000
1,000,000
100,000
200,000
6,700,000
(2% x 3,700,000)
4,000,000
( 300,000)
3,700,000
74,000
(900,000 x .80 x .90)
648,000
12. Answer is (A).
Accounts payable per book
Goods lost in transit, FOB shipping point
Purchase return
Adjusted balance
13. Answer is (A).
Accounts payable per book
Undelivered entity checks
Goods purchased and received on Dec. 28, 2014
Purchase discount
(2% x 750,000)
Total accounts payable
The undelivered checks should be adjusted as follows:
Cash
2,000,000
Accounts payable
Answer Explanations & Solutions
7,600,000
4,600,000
3,000,000
2,000,000
100,000
(50,000)
2,050,000
750,000
(15,000)
4,500,000
2,000,000
735,000
7,235,000
2,000,000
Page 67
FINANCIAL ACCOUNTING
14. Answer is (B).
Accounts payable per book
2,200,000
Goods shipped FOB shipping point
on December 22, 2014 and lost in transit
40,000
Purchase returns
(70,000)
Advance payment erroneously debited to accounts payable
500,000
Adjusted accounts payable
2,670,000
Kew Company shall suffer the loss of the goods in transit because the goods are shipped
FOB shipping point. Appropriately, Kew Company must file a claim against the common
carrier.
15. Answer is (C).
Purchases through March 15, 2014 (4,900,000 / 98%)
Inventory-12/31/2013, at cost (1,500,000/ 150%)
Total gross amount to be paid
16. Answer is (C).
Accounts payable per book
Undelivered checks
Unrecorded purchases on Dec. 28
Purchase on December 20
Adjusted accounts payable
17. Answer is (C).
List price
Trade discounts:
Invoice price
Cash discount (2% x 2,800,000)
Net amount
Add: Reimbursement of delivery cost
Total remittance from Burr
18. Answer is (A).
Accounts payable
Cash
Inventory
Answer Explanations & Solutions
5,000,000
1,000,000
6,000,000
(150,000 x 98%)
(200,000 x 95%)
30% x 5,000,000
20% x 3,500,000
1,350,000
900,000
400,000
147,000
190,000
1,637,000
5,000,000
(1,500,000)
3,500,000
( 700,000)
2,800,000
( 56,000)
2,744,000
200,000
2,944,000
1,323,000
27,000
Page 68
Inventory – Cost Flow & Valuation
19. Answer is (D).
Accounts payable at gross
Discounts available in the accounts payable balance
Accounts payable at net
1,500,000
(10,000)
1,490,000
20. Answer is (B).
Purchases of IBM compatibles
Purchases of commercial software packages
Returns and allowances
Net purchases
Discounts available on purchases (2% x 2,850,000)
Purchase discounts taken
Discount lost
1,700,000
1,200,000
(50,000)
2,850,000
57,000
(17,000)
40,000
21. Answer is (C).
Net method
Purchases (800,000 + 1,000,000)
1,800,000
Purchase discount taken (2% x 800,000)
(16,000)
Purchase discount not taken (2% x 1,000,000)
(20,000)
Net amount
1,764,000
Under the net method, the purchase discount is deducted from purchases regardless of
whether taken or not taken.
Gross method
Purchases
1,800,000
Purchase discount taken
(16,000)
Net purchases
1,784,000
Under the gross method, the purchases are recorded at gross and only the purchase discount
taken is deducted from purchases in determining cost of goods available for sale.
22. Answer is (B).
Purchase return, gross
Purchase discount
Net purchases
23. Answer is (B).
Purchase discount
Answer Explanations & Solutions
300,000 x 2%
300,000
(6,000)
294,000
(4,000,000 – 300,000) x 2%
74,000
Page 69
FINANCIAL ACCOUNTING
24. Answer is (D).
List price
600,000
Trade discount
(20% x 600,000)
(120,000)
Balance
480,000
Trade discount
(10% x 480,000)
( 48,000)
Invoice price
432,000
Freight charge
15,000
Total cost of purchase
447,000
Purchases are normally recorded at gross. Thus, the cash discount is ignored.
25. Answer is (C). All costs incurred except abnormal freight
26. Answer is (D). All costs are inventoriable.
27. Answer is (B).
Materials
Production labor cost
Production overhead
Value of completed inventory
300,000
330,000
120,000
750,000
28. Answer is (A). When the shipping terms are FOB destination, the seller is
responsible for costs incurred in transporting the goods to the buyer.
29. Answer is (D).
Inventory shipped on consignment to Beta
Freight paid by Stone
Total cost of consigned inventory
1,800,000
90,000
1,890,000
30. Answer is (B).
Merchandise purchased
Freight in
Purchase returns
Inventoriable cost
4,000,000
100,000
(20,000)
4,080,000
31. Answer is (D).
Cost of purchases
Import duties
5,000,000
400,000
Answer Explanations & Solutions
Page 70
Inventory – Cost Flow & Valuation
Freight and insurance
Other handling costs
Brokerage commission
Total cost of purchases
32. Answer is (C).
Raw materials
Goods in process
Finished goods
Total
1,000,000
100,000
200,000
6,700,000
1,350,000
2,950,000
3,600,000
7,900,000
33. Answer is (A).
Materials
Irrecoverable purchase taxes
Total cost of inventory
34. Answer is (B).
Items counted in the bodega
Items included in count specifically segregated
Items returned by customer
Items ordered and in receiving department
Items shipped today, FOB destination
Items for display
Items on counter for sale
Damaged and unsalable items included in count
Items in the shipping department
35. Answer is (C).
Materials
Goods in process
Finished goods in factory
Finished goods in entity-owned retail store
Finished goods in the hands of consignees
Finished goods in transit
Finished goods out on approval
Materials in transit
Correct inventory
Answer Explanations & Solutions
700,000
60,000
760,000
4,000,000
( 100,000)
50,000
400,000
150,000
200,000
800,000
( 50,000)
250,000
5,700,000
(750,000/150%)
(400,000 x 60%)
(330,000 + 30,000)
1,400,000
650,000
2,000,000
500,000
240,000
250,000
100,000
360,000
5,500,000
Page 71
FINANCIAL ACCOUNTING
36. Answer is (C).
Finished goods
Finished goods held by salesmen
Goods in process (720,000/80%)
Materials
Factory supplies
Correct inventory
(110,000 + 60,000)
2,000,000
100,000
900,000
1,000,000
170,000
4,170,000
37. Answer is (D).
Goods on hand
Goods purchased in transit
Goods out on consignment
Total inventory
2,600,000
200,000
300,000
3,100,000
38. Answer is (B).
Goods on hand
Goods sold in transit
Total inventory
1,900,000
100,000
2,000,000
39. Answer is (B).
Physical inventory
Merchandise shipped FOB seller
Correct inventory
4,000,000
50,000
4,050,000
40. Answer is (C). Physical count = 1,500,000
41. Answer is (D).
Physical count
2,500,000
Merchandise shipped FOB shipping point on Dec. 30. 2014 from a vendor 100,000
Goods shipped FOB shipping point to a customer on January 4, 2015
400,000
Correct inventory
3,000,000
42. Answer is (D).
Goods on hand
Goods purchased in transit
Goods out on consignment
Total inventory
Answer Explanations & Solutions
2,600,000
200,000
300,000
3,100,000
Page 72
Inventory – Cost Flow & Valuation
43. Answer is (D).
Physical count
6,000,000
Goods shipped FOB shipping point on December 30, 2014
to Hero and received January 4, 2015
300,000
Inventory, December 31,2014
6,300,000
The goods costing P125,000 are properly included in the December 31,2014 physical count
because the goods are shipped FOB shipping point only on January 7,2015 (picked up by
common carrier).
44. Answer is (B).
Physical count
Inventory marked “hold for shipping instruction”
Goods in process
Correct inventory
3,600,000
80,000
300,000
3,980,000
45. Answer is (A).
Physical count
Inventory marked "hold for shipping instructions"
Correct amount of inventory
5,000,000
500,000
5,500,000
46. Answer is (B).
Inventory per book
Item 3
Item 4
Item 5
Adjusted inventory
950,000
12,500
52,500
27,000
1,042,000
(18,500-1,000/140%)
(50,000 + 2,500)
(35,000 /140% = 25,000 + 2,000)
47. Answer is (B).
Reported inventory
Goods sold in transit, FOB destination
Goods purchased in transit, FOB shipping point
Correct amount of inventory
48. Answer is (B).
Inventory before adjustment
Goods out on consignment
Goods purchased, FOB shipping point
Goods sold, FOB shipping point
Answer Explanations & Solutions
2,000,000
200,000
300,000
2,500,000
7,600,000
1,000,000
250,000
( 850,000)
Page 73
FINANCIAL ACCOUNTING
Goods sold, FOB destination
Goods sold, FOB destination
Correct inventory
49. Answer is (D).
Physical count
Goods sold in transit, FOB destination
Goods purchased in transit, FOB shipping point
Adjusted inventory
50. Answer is (D).
Inventory per book
Inventory transferred to delivery department
Shipment covered by bill of lading
Goods in transit, purchased FOB destination
Correct inventory
51. Answer is (B).
Inventory per physical count
Inventory marked "hold for shipping instructions"
Goods in process inventory
Goods shipped FOB seller or FOB shipping point
Correct inventory
260,000
840,000
9,100,000
4,410,000
380,000
510,000
5,300,000
5,000,000
80,000
800,000
( 25,000)
5,855,000
3,600,000
80,000
300,000
50,000
4,030,000
52. Answer is (A).
Merchandise in transit purchased FOB destination
Markup on goods out on consignment
(195,000-150,000)
Markup on merchandise for approval
Merchandise held on consignment
Total reduction
53. Answer is (B).
Inventory - December 31,2013
Purchases-2014
Goods available for sale
Inventory - December 31,2014
Cost of goods sold
Answer Explanations & Solutions
100,000
45,000
10,000
35,000
190,000
360,000
3,000,000
3,360,000
( 380,000)
2,980,000
Page 74
Inventory – Cost Flow & Valuation
54. Answer is (D).
Beginning inventory
Purchases
Freightin (100,000+ 50,000)
Goods available for sale
Ending inventory
Cost of goods sold
1,220,000
5,400,000
150,000
6,770,000
(1,650,000)
5,120,000
55. Answer is (D). Freezers sold (10 x P20,000) = 200,000
56. Answer is (D). Payable for consigned goods (500,000 - 50,000) 450,000
57. Answer is (D).
January 18
28
Total FIFO cost
Units
150,000
100,000
250,000
Unit cost
23
24
58. Answer is (D).
Beginning inventory
Purchases
(30,000 + 48,000 + 16,000)
Total units available
Sales
(36,000+ 38,000)
Ending inventory in units
From August 21 purchase
(24,000 x 38.00)
From August 29 purchase
(16,000 x 38.60)
Total cost of inventory, August 31
Total cost
3,450,000
2,400,000
5,850,000
20,000
94,000
114,000
( 74,000)
40,000
912,000
617,600
1,529,600
59. Answer is (C).
From March 5 purchase (4,500 units x 73.50)
330,750
Whether periodic or perpetual system, the FIFO inventory is the same.
60. Answer is (B).
Sales
Gross profit
Cost of goods sold
Inventory - July 31 (see below)
Cost of goods available for sale
Purchases for July
Answer Explanations & Solutions
6,000,000
(2,400,000)
3,600,000
928,000
4,528,000
(3,174,000)
Page 75
FINANCIAL ACCOUNTING
Inventory - July 1
July 12
25
FIFO inventory - 7/31
1,354,000
Quantity
1,000
14,000
15,000
Unit cost
60
62
Total cost
60,000
868,000
928,000
61. Answer is (D). Under the perpetual FIFO cost flow, the sale return is costed back
into inventory at the latest unit purchase cost of P4.60.
62. Answer is (B).
April 1
5
Total goods sold
Units sold
6,000
10,000
16,000
Unit cost
120
140
Total cost
720,000
1,400,000
2,120,000
63. Answer is (A).
Beginning raw materials (90,000 x 7)
630,000
Purchases (75,000 x 8 + 120,000 x 8.50)
1,620,000
Raw materials available for use
2,250,000
Ending raw materials (90,000 x 8.50)
(765,000)
Raw materials used
1,485,000
Direct labor
3,100,000
Manufacturing overhead
2,950,000
Total manufacturing cost
7,535,000
Beginning work in process (50,000 x 14)
700,000
Total work in process
8,235,000
Ending work in process (48,000 x 15)
( 720,000)
Cost of goods manufactured
7,515,000
Beginning raw materials of 90,000 units plus purchases of 75,000 and 120,000 minus
195,000 units transferred equals 90,000 ending raw materials.
64. Answer is (B).
Net income - LIFO
Understatement inventory2014'( 1,400,000- 900,000)
2015
(2,000,000-1,600,000)
Net income - FIFO
Answer Explanations & Solutions
2014
2,750,000
500,000
3,250,000
2015
3,000,000
( 500,000)
400,000
2,900,000
Page 76
Inventory – Cost Flow & Valuation
65. Answer is (C).
Unit cost
Total cost
20,000
100
30,000
110
50,000
Weighted average unit cost (5,300,000/50,000)
Cost of inventory (30,000 x 106)
January
February
Units
10
8
2,000,000
3,300,000
5,300,000
106
3,180,000
66. Answer is (B).
July 1 Inventory
7 Purchase
21 Purchase
29 Purchase
Total goods available
(4,333,760/116,000)
Sales (36,000+ 38,000)
Ending inventory
67. Answer is (C).
January 1
8
4,000
20
(3,680,000/16,000 = 230)
68.
Answer is (B).
Jan. 1
10
15
16
30
31
Beginning balance
Purchase
Balance
Sale
Balance
Sale return
Balance
Purchase
Balance
Purchase return
Balance
Answer Explanations & Solutions
Units
20,000
30,000
50,000
16,000
Unit cost
36.00
37.00
37.88
38.11
Total cost
720,000
1,110,000
1,894,000
609,760
116,000
( 74,000)
42,000
37.36
4,333,760
37.36
1,569,120
Units
8,000
(4,000)
200
12,000
16,000
Unit cost
200
200
240
230
Total cost
1,600,000
(800,000)
800,000
2,880,000
3,680,000
Units
5,000
5,000
10,000
(7,000)
3,000
1,000
4,000
16,000
20,000
(2,000)
18,000
Unit cost
200
250
225
225
225
225
225
150
165
150
167
Total cost
1,000,000
1,250,000
2,250,000
(1,575,000)
675,000
225,000
900,000
2,400,000
3,300,000
( 300,000)
3,000,000
Page 77
FINANCIAL ACCOUNTING
Observe that the moving average unit cost changes every time there is a new purchase or a
purchase return. The moving average unit cost is not affected by a sale or a sale return.
69. Answer is (C).
January 1
January 17
Balance
January 28
Balance
70. Answer is (C).
January 1
January 7
Balance (2,800,000/16,000)
January 20 sale
Balance
January 25
Balance (3,225,000/11,000)
Units
40,000
(35,000)
5,000
20,000
25,000
Units
10,000
6,000
16,000
( 9,000)
7,000
4,000
11,000
Unit cost
50
50
50
80
74
Unit cost
100
300
175
175
175
500
293
Total cost
2,000,000
(1,750,000)
250,000
1,600,000
1,850,000
Total cost
1,000,000
1,800,000
2,800,000
(1,575,000)
1,225,000
2,000,000
3,225,000
71. Answer is (C).
Units
Unit cost
Total cost
January 1
1,000
100
100,000
January 7
6,000
300
1,800,000
January 25
4,000
500
2,000,000
Total FIFO cost
11,000
3,900,000
Note again that the FIFO cost will be the same whether periodic system or perpetual
system.
72. Answer is (B).
Cost of units available for sale for July
Purchases for July
Cost of inventory - July 1
Number of units - July 1 (410,000/P4)
Answer Explanations & Solutions
1,452,100
(1,042,100)
410,000
102,500
Page 78
Inventory – Cost Flow & Valuation
73. Answer is (B).
July 1 inventory
Purchases for July
Total units available for sale for July
July 31 inventory
Units sold during the month of July
74. Answer is (B).
Average unit cost
Inventory - July 31
102,500
200,000
302,500
(60,000)
242,500
(1,452,100/ 302,500)
(60,000 x 4.80)
Another approach
Cost of units available for sale for July
Cost of goods sold for July
Inventory - July 31
4.80
288,000
1,452,100
(1,164,100)
288,000
75. Answer is (C).
Sales price
Fraction Allocated cost
24,000,000
24/60
6,000,000
16,000,000
16/60
4,000,000
20,000,000
20/60
5,000,000
60,000,000
15,000,000
Incidentally, the cost of each class A lot is P6,000,000 divided by 100 lots or P60,000.
A
B
C
(100 x 240,000)
(100 x 160,000)
(200 x 100,000)
76. Answer is (D).
Highland
Midland
Lowland
( 20 x 1,000,000)
(40 x 750,000)
(100 x 500,000)
Sales price
20,000,000
30,000,000
50,000,000
100,000,000
Fraction
20/100
30/100
50/100
Total cost
12,000,000
18,000,000
30,000,000
60,000,000
77. Answer is (B).
A
B
C
D
(10x100,000)
(20x80,000)
(40x70,000)
(50x60,000)
Answer Explanations & Solutions
Sales price
1,000,000
1,600,000
2,800,000
3,000,000
8,400,000
Fraction
10/84
16/84
28/84
30/84
Allocated cost
700,000
1,120,000
1,960,000
2,100,000
5,880,000
Page 79
FINANCIAL ACCOUNTING
Allocated cost of Class B
Clearing cost of Class B
Total cost
1,120,000
100,000
1,220,000
78. Answer is (A).
Class A
Class B
(60% x 60,000)
(40% x 60,000)
Units
36,000
24,000
60,000
Sales price
500
250
Total average cost (60,000 x 360)
Allocated cost:
Class A
(18/24 x 21,600,000)
Class B
( 6/24 x 21,600,000)
Total average cost
Unit cost:
Class A
(16,200,000/36,000)
Class B
( 5,400,000/24,000)
Inventory cost:
Class A (2,200x450)
Class B
(3,000 x 225)
Total inventory
16,200,000
5,400,000
21,600,000
450
225
990,000
675,000
1,665,000
79. Answer is (C).
Units
January 1
8,000
Purchases
25,000
Goods available for sale
33,000
Inventory - December 31 (1,056,000 / 33,000 = 32 x 10,000)
80. Answer is (D).
Class A (25x400,000)
Class B (30 x 300,000)
Class C (10x100,000)
Class A (6,250,000/25)
Class B (5,625,000/30)
Answer Explanations & Solutions
Total
18,000,000
6,000,000
24,000,000
21,600,000
Cost
240,000
816,000
1,056,000
320,000
Sales price
10,000,000
9,000,000
1,000,000
20,000,000
Fraction
10/20
9/20
1/20
Cost
6,250,000
5,625,000
625,000
12,500,000
Cost per lot
250,000
187,500
Unsold
15
6
Cost
3,750,000
1,125,000
Page 80
Inventory – Cost Flow & Valuation
Class C ( 625,000/10)
Total inventory
62,500
3
81. Answer is (A).
Inventory per book
Beds received December 30, 2014 recorded January 2, 2015
Beds received recorded twice
Beds shipped FOB shipping point on
December 30, 2014 recorded January 2015
Beds on hand unrecorded
Correct inventory
187,500
5,062,500
1,960,000
900,000
( 190,000)
( 700,000)
230,000
2,200,000
82. Answer is (C).
Estimated sales price
Cost to complete - processing cost
Net realizable value
8,000,000
(2,400,000)
5,600,000
FIFO cost
5,200,000
Nee realizable value
5,600,000
LCNRV
5,200,000
The FIFO cost of P5,200,000 is the inventory valuation because it is lower than the net
realizable value.
83. Answer is (A).
Cost
NRV
2,200,000
2,500,000
1,700,000
1,500,000
700,000
800,000
400,000
500,000
5,000,000
5,300,000
Inventories shall be measured at the lower of cost and net realizable value
individual item.
Skis
Boots
Ski equipment
Ski apparel
LCNRV
2,200,000
1,500,000
700,000
400,000
4,800,000
applied by
84. Answer is (A).
Inventories shall be measured at the lower of cost and net realizable value applied by
individual item. Net realizable value is the estimated selling price less the estimated cost to
complete and the estimated cost of disposal.
Answer Explanations & Solutions
Page 81
FINANCIAL ACCOUNTING
Product X
1,500,000
2,000,000
( 600,000)
1,400,000
1,400,000
Materials and conversion costs
Selling price
Selling costs
Net realizable value
Measurement at lower amount
Product Y
1,800,000
3,000,000
( 700,000)
2,300,000
1,800,000
85. Answer is (B).
Inventory - January 1, at cost
3,000,000
Net purchases
8,000,000
Goods available for sale
11,000,000
Inventory - December 31, at cost
(4,000,000)
Cost of goods sold before inventory writedown
7,000,000
Loss on inventory writedown
100,000
Cost of goods sold after inventory writedown
7,100,000
Required allowance - December 31
(4,000,000 - 3,700,000)
300,000
Allowance for inventory writedown - January 1 (3,000,000-2,800,000)
200,000
Loss on inventory writedown
100,000
The amount of any inventory writedown to net realizable value and all losses on inventory
shall be included in cost of goods sold. The amount of any reversal of inventory writedown
shall be deducted from cost of goods sold.
86. Answer is (C).
Value
Markers
240,000
Pens
188,000
Highlighters
292,000
720,000
The measurement at the lower of cost or net realizable value shall be applied on an individual
basis or item by item.
87. Answer is (C).
Historical cost
240,000
188,000
300,000
LCNRV
550,000
1,000,000
700,000
350,000
2,600,000
Note that under LCNRV, replacement cost and normal profit are not taken into consideration.
Product 1
Product 2
Product 3
Product 4
Answer Explanations & Solutions
Cost
800,000
1,000,000
700,000
500,000
NRV
312,000
200,000
292,000
NRV
550,000
1,100,000
950,000
350,000
Page 82
Inventory – Cost Flow & Valuation
Total cost
3,000,000
LCNRV
2,600,000
Required allowance for inventory writedown
Allowance before adjustment
Increase in allowance
Loss inventory writedown
Allowance for inventory writedown
400,000
(150,000)
250,000
250,000
250,000
88. Answer is (C).
Physical inventory
Net realizable value
Inventory writedown
2,000,000
1,700,000
300,000
Cost of goods sold per book
Cost of goods incorrectly recorded as sold
Inventory losses
Loss on inventory writedown
Adjusted cost of goods sold
89. Answer is (B).
September 30 (40,000 x 75)
December 31(10,000 x 80)
FIFO cost
Net realizable value (50,000 x 72)
Inventory writedown
Inventory - January 1 at cost
Purchases
Purchase discount
Goods available for sale
Inventory - December 31 at cost
Cost of goods sold before inventory writedown
Loss on inventory writedown
Cost of goods sold after inventory Writedown
90. Answer is (A).
2014
Loss on inventory writedown
Allowance for inventory writedown
Answer Explanations & Solutions
4,600,000
(100,000)
120,000
300,000
4,920,000
3,000,000
800,000
3,800,000
3,600,000
200,000
1,200,000
9,300,000
( 400,000)
10,100,000
( 3,800,000)
6,300,000
200,000
6,500,000
600,000
600,000
Page 83
FINANCIAL ACCOUNTING
2015
Allowance for inventory writedown
200,000
Gain on reversal of inventory writedown (600,000-400,000)
200,000
91. Answer is (C).
Category 1:
A
B
Category 2:
C
D
Category 1:
A
B
Subtotal
Category 2:
C
D
Subtotal
Grand total
LCNRV - by individual item
92. Answer is (B).
(a)
Units
(b)
Unit cost
(c)
NRV
25,000
20,000
105
85
115
80
40,000
30,000
50
65
40
60
(a x b)
Total cost
(a x c)
NRV
LCNRV
2,625,000
1,700,000
4,325,000
2,875,000
1,600,000
4,475,000
2,625,000
1,600,000
2,000,000
1,950,000
3,950,000
8,275,000
1,600,000
1,800,000
3,400,000
7,875,000
1,600,000
1,800,000
.
7,625,000
7,625,000
Total cost
4,325,000
3,950,000
NRV
4,475,000
3,400,000
Lower
4,325,000
3,400,000
7,725,000
LCNRV - by category
Category 1
Category 2
93. Answer is (B).
Total cost
Total NRV
LCNRV - by total
94. Answer is (B). Loss on purchase commitment (50,000 x 3)
Answer Explanations & Solutions
8,275,000
7,875,000
7,875,000
150,000
Page 84
Inventory – Cost Flow & Valuation
95. Answer is (B).
Market value - December 31, 2014
Market value - March 31, 2015
Additional loss on purchase commitment in 2015
5,000,000
4,900,000
100,000
96. Answer is (C).
Estimated liability for purchase commitment on 12/31/2014(10,000
x
40)
400,000
Entry on February 15, 2015
Purchases (10,000x300)
3,000,000
Estimated liability for purchase commitment
400,000
Accounts payable (10,000 x 310)
3,100,000
Gain on purchase commitment
300,000
97. Answer is (C).
Estimated
liability
for
purchase
commitment
on
12/31/2014
(100,000x15) 1,500,
000
To record the actual purchase on March 31,2015:
Purchases (100,000x55)
5,500,000
Estimated liability for purchase commitment
1,500,000
Accounts payable
5,500,000
Gain on purchase commitment
1,500,000
The gain to be recognized is limited to the loss on purchase commitment previously recorded.
98. Answer is (A).
Remaining contract -1,000 units each year
2015
(1,000 x P100)
100,000
2016
(1,000 x P100)
100,000
Total
200,000
Estimated realizable value (2,000 x P20)
40,000
Loss on purchase commitment
160,000
A loss on inventory write-down should also be recognized on December 31,2014 in the
amount of P200,000 (2,500" units x P80).
Answer Explanations & Solutions
Page 85