INVENTORIES
PAS 2 provides guidance for
1. determining the cost of inventories
2. subsequent recognition of the cost as an expense
3. write-down to net realizable value.
4. guidance on the cost formulas that are used to assign costs to inventories
Scope
Inventories include
1. assets held for sale in the ordinary course of business (finished goods
2. assets in the production process for sale in the ordinary course of business (work in process)
3. materials and supplies that are consumed in production (raw materials).
Initial Measurement
The cost of inventories includes all
1. costs of purchase - (including taxes, transport, and handling) net of trade discounts received
2. costs of conversion - direct labor and including fixed and variable manufacturing overheads
3. other costs incurred in bringing the inventories to their present location and condition
TRY THIS. ABC regularly buys shirts from XYZ and is allowed trade discounts of 20% and 10% from the list
price. ABC purchased shirts on May 9, 2014 and received an invoice with a list price amount to P50,000 and
payment terms of 2/10, n/30. ABC uses the net method of recording purchases. At what amount should ABC
record the purchase? 35,280
General requirements for other costs
PAS 2 allows costs other than purchase or conversion cost to be included in the carrying amount of inventories,
but they must be incurred in bringing the inventories to their present location and condition. Examples of such
costs are non-production overheads or costs of design for specific customers.
However, paragraph PAS 2 provides a specific list of costs that are excluded from the cost of inventories:
1. abnormal amounts of wasted materials, labor or other production costs
2. storage costs, unless those costs are necessary in the production process before a further production
stage;
3. administrative overheads that do not contribute to bringing inventories to their present location and
condition;
4. selling costs.
In addition,
5. foreign exchange differences arising directly on the recent acquisition of inventories invoiced in a foreign
currency
6. interest cost when inventories are purchased with deferred settlement terms
Borrowing Costs identifies some limited circumstances where borrowing costs (interest) can be included
in cost of inventories that meet the definition of a qualifying asset.
The standard cost and retail methods may be used for the measurement of cost, provided that the results
approximate actual cost.
Quick Test (A)
Inventories are, (choose the incorrect one)
A. held for use in the production or supply of goods or services, for rental to others, or for administration
purposes
B. materials to be used in the production for sale.
C. in the process of production for sale
D. held for sale in the ordinary course of business
E. supplies to be consumed in the production for sale
The cost of inventories is assigned by:
1. specific identification of cost for items of inventory that are not ordinarily interchangeable;
2. the first-in, first-out or weighted average cost formula for items that are ordinarily interchangeable
(generally large quantities of individually insignificant items)
3. weighted average cost
TRUE or FALSE: The cost of inventories shall be assigned by using the first-in, first-out (FIFO) or weighted
average cost formula. An entity shall use the same cost formula for all inventories even not having a similar
nature and use to the entity. FALSE
TRUE or FALSE: For items like furs, jewelry, or cars, the most appropriate and applicable valuation method is
FIFO. FALSE
Subsequent measurement
Inventories are measured at the lower of cost and net realizable value.
Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of
completion and the estimated costs necessary to make the sale. (NRV = ESP – ECC – ECS)
Subsequent recognition of the cost as an expense
When inventories are sold, the carrying amount of those inventories is recognized as an expense in the period
in which the related revenue is recognized. (Matching Principle – Cause and Effect)
Quick Test (A)
All of the following costs should be charged against revenue in the period in which costs are incurred except for
A. manufacturing overhead costs for a product manufactured and sold in the same accounting period.
B. costs which will not benefit any future period.
C. costs from idle manufacturing capacity resulting from an unexpected plant shutdown.
D. costs of normal shrinkage and scrap incurred for the manufacture of a product in ending inventory.
The amount of any write-down of inventories to net realizable value and all losses of inventories are recognized
as an expense in the period the write-down or loss occurs. (Cost < NRV = Loss on Inventory Write down)
Loss on inventory write down (COS)
Allowance for Inventory Write-down
xx
xx
Any reversal should be recognized in the income statement in the period in which the reversal occurs.
TRUE or FALSE: The amount of any write-down of inventories to net realizable value and all losses of inventories
shall be recognized as an expense in the period the write-down or loss occurs. The amount of loss shall be
presented as other operating expense. FALSE
Classification
PAS 1 indicates that an entity must normally present a classified statement of financial position, separating
current and non-current assets and liabilities, unless presentation based on liquidity provides information that is
reliable. In either case, if an asset (liability) category combines amounts that will be received (settled) after 12
months with assets (liabilities) that will be received (settled) within 12 months, note disclosure is required that
separates the longer-term amounts from the 12-month amounts. Current assets are assets that are:
1. expected to be realized in the entity's normal operating cycle
2. held primarily for the purpose of trading
3. expected to be realized within 12 months after the reporting period
4. cash and cash equivalents (unless restricted).
Line items
The line items to be included on the face of the statement of financial position include INVENTORIES. Further
sub-classifications of line items presented are made in the statement or in the notes, for disaggregation of
inventories in accordance with PAS 2 Inventories
Required disclosures:
•
•
•
•
•
•
•
•
accounting policy for inventories
carrying amount, generally classified as merchandise, supplies, materials, work in progress, and finished
goods. The classifications depend on what is appropriate for the entity carrying
amount of any inventories carried at fair value less costs to sell
the amount of inventories recognised as an expense during the period
amount of any write-down of inventories recognized as an expense in the period
amount of any reversal of a write-down to NRV and the circumstances that led to such reversal
carrying amount of inventories pledged as security for liabilities
cost of inventories recognized as expense (cost of goods sold)
PAS 2 acknowledges that some enterprises classify income statement expenses by nature (materials, labor, and
so on) rather than by function (cost of goods sold, selling expense, and so on). Accordingly, as an alternative to
disclosing cost of goods sold expense, PAS 2 allows an entity to disclose operating costs recognized during the
period by nature of the cost (raw materials and consumables, labor costs, other operating costs) and the amount
of the net change in inventories for the period).
Inventory Estimation
RETAIL METHOD:
Points to Remembers!
1. Lower of average cost or market retail method – combine beg. Inventory and net purchases; markups
are included in the computation of cost percentage but markdowns are excluded
Cost ratio = TGAS at cost
TGAS at retail =beg. Inventory+ net purchases + markups
2. Average – combine beg. Inventory and net purchases; include markups and markdowns in the
computation of cost percentage
Cost ratio = TGAS at cost
TGAS at retail = beg. Inventory +markups - markdowns
3. FIFO retail inventory method - exclude beg. Inventory in the computation of cost ratio
Cost ratio = TGAS at cost =net purchases
TGAS at retail = net purchases + markups –net markdowns
4. Conventional retail inventory method or conservative approach = same as lower of average cost or
market method
NOTE: IF THE METHOD USED IS NOT SPECIFIED, USE THE LOWER OF AVERAGE COST OR MARKET
ASSESSMENT
1. Cost for production storage process for wines and cheeses shall be capitalized as component of the products’
cost. TRUE
2. Storing bricks before they are moved to construction site is a capitalizable cost. FALSE
3. Goods held by customers on approval should be excluded from the seller's inventory. FALSE
4. The gross method of accounting for purchase discounts reflects the fact that discounts not taken are in effect
credit-related expenditures incurred for failure to pay within the discount period. FALSE
5. Transporting materials and work-in-progress to production facility can be included in the cost of finished
goods. TRUE
6. Transporting inventory between retail points to match the local demand, or transporting them from retail points
to customer premises should be expensed in profit or loss as incurred. TRUE
7. When inventories are purchased on credit that is significantly longer when compared to industry average, the
cost of inventories is recognized based on the purchase price for normal credit terms. TRUE
8. In consignment sale, title does not pass from the consignor to the consignee so the consigned merchandise
remains on the consignor’s balance sheet until it is sold. When goods are sold, only then the title passes to
the consignee. FALSE
9. Overstating ending inventory will affect the balance sheet, but not the income statement. FALSE
10. Overstating ending inventory in Period 1 will cause ending inventory in Period 2 to be understated by the
same amount. FALSE
11. Which of the following would not be included in the cost of work in process inventory? C
A. Cost of electricity to operate factory equipment.
B. Maintenance cost of factory equipment.
C. Depreciation on office equipment in the sales manager’s office
D. Depreciation on factory equipment
12. Which of the following would not be reported as inventory? D
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
13. A new entity manufacturing and selling consumable products has come out with an offer to refund the
cost of purchase within one month after the sale if the customer is not satisfied with the product. When should
the entity recognize the revenue? A
A. When goods are sold to the customers.
B. After one month of sale.
C. Only if goods are not returned by the customers after the period of one month.
D. At the time of sale along with an offset to revenue of the liability of the same amount for the possibility of
the return.
14. A computer chip manufacturing entity sells its product to its distributors for onward sales to the ultimate
customers. Due to frequent fluctuations in the market prices for these goods, the entity has a “price protection”
clause in the distributor agreement that entitles it to raise additional billings in case of upward price movement.
Another clause in the distributor agreement is that the entity can at any time reduce its inventory by buying
back goods at the cost at which it sold the goods to the distributors. Distributors pay for the goods within 60
days from the sale of the goods to them. When should the entity recognize revenue on sale of goods to the
distributors? A
A. When the goods are sold to the distributors.
B. When the distributors pay the entity the cost of the goods
C. When goods are sold to the distributors provided estimated additional revenue is also booked under the
“protection clause” based on past experience.
D. When the distributors sell goods to the ultimate customers and there is no uncertainty with respect to the
“price protection” clause or the buy-back period
15. “Bill and hold” sales, in which delivery is delayed at the buyer’s request but the buyer assumes title and
accepts invoicing, shall be recognized when D
A. The buyer makes an order.
B. The seller starts manufacturing the goods.
C. The title has been transferred but the goods are kept on the seller’s premises.
D. It is probable that the delivery will be made, payment terms have been established and the buyer has
acknowledged the delivery instructions.
16. An entity is a large manufacturer of machines. A major customer has placed an order for a special machine
for which it has given a deposit to the entity. The parties have agreed on a price for the machine. As per
the terms of the sale agreement, it is FOB or free on board contract and the title passes to the buyer when
goods are loaded into the ship at the port. When the revenue should be recognized by the entity C
A. When the customer orders the machine.
B. When the deposit is received.
C. When the machine is loaded at the port.
D. When the machine has been received by thecustomer.8.
ITEMS OF INVENTORY/ CUT-OFF
17. Presented below is a list of items that may or may not reported as inventory in ABC’s December 31
statement of financial position.
Goods out on consignment at another company’s store
P800,000
Goods sold on installment basis
100,000
Goods purchased f.o.b. shipping point that are in transit at December 31
120,000
Goods purchased f.o.b. destination that are in transit at December 31
200,000
Goods sold to another company, for which our company has signed an agreement to repurchase
at a set price that covers all costs related to the inventory
300,000
Goods sold where large returns are predictable
280,000
Goods sold f.o.b. shipping point that are in transit December 31
120,000
Freight charges on goods purchased
80,000
Factory labor costs incurred on goods still unsold
50,000
Interest cost incurred for inventories that are routinely manufactured
40,000
Costs incurred to advertise goods held for resale
20,000
Materials on hand not yet placed into production
350,000
Office supplies
10,000
Raw materials on which the company has started production, but which are not completely processed 280,000
Factory supplies
20,000
Goods held on consignment from another company
450,000
Costs identified with units completed but not yet sold
260,000
Goods sold f.o.b. destination that are in transit at December 31
40,000
Temporary investment in stocks and bonds that will be resold in the near future
500,000
How much of these items would typically be reported as inventory in the financial statements? P2,300,000
18. The inventory on hand at December 31, 2019 for ABC Company is valued at a cost of P947,800. The following
items were not included in this inventory amount:
A. Purchased goods in transit, shipped FOB destination. Invoice price- P32,000, which includes freight
charges of P1,600.
B. Goods held on consignment by ABC at a sales price of P28,000, including sales commission of 20% of
the sales price.
C. Goods sold to UB Company, under terms FOB destination, invoiced for P24,400 which includes P1,000
freight charges to deliver the goods. The goods are in transit.
D. Purchased goods in transit, terms FOB shipping point. Invoice price-P48,000. Freight costs, P3,000.
E. Goods out on consignment to NC Company, sales price, P36,400. Shipping cost of P2,000.
Mark-up on cost for all sales is 30%. What is the correct cost of inventory to be reported in ABC’s financial
statements? 1,046,800
19. ABC Company reviewed its year-end inventory and found the following items:
A. A package containing a product costing P81,600 was standing in the shipping area when the physical
inventory was conducted. This was not included in the inventory because it was marked “Hold for shipping
instructions”. The purchase order was dated December 19, but the package was shipped and the
customer was billed January 2, 2020.
B. A special machine, fabricated to order for a particular customer was finished and in the shipping room on
Dec. 30, 2019. The customer was billed on that date and the machine was excluded in the inventory.
The machine costing P230,000 was shipped January 2, 2020
C. Merchandise costing P23,500 was received on January 3, 2020 and the related purchase invoice was
recorded January 5, 2020. The invoice showed the shipment was made Dec. 29, 2019, FOB destination.
D. Goods costing P150,000 were sold and delivered on December 20, 2019. The sale was accompanied
by a repurchase agreement that Power will “buyback” the inventory in Feb. 2020.
How much is the inventory adjustment on Dec. 31, 2019? Increased by 231,600
20. ABC Company has the following information pertaining to its merchandise inventory as of December 31, 2019:
Inventory on hand (including merchandise received on consignment of P20,000)…
P200,000
Inventory purchased with buyback agreement
100,000
Merchandise in transit, FOB shipping point, including P5,000 freight cost
155,000
Merchandise in transit, Free alongside, including delivery cost alongside the vessel
of P6,000 but excluding the cost of shipment of P3,000
250,000
Merchandise in transit, CIF (including insurance costs and freight of P8,000)
175,000
What amount should ABC Company report as value of its inventory in its 2019 statement of financial position?
757,000
21. The accounting staff of ABC Co. submitted an inventor list at December 31, 2020 which showed a total of
P1,500,000. The following information which may or may not be relevant to the inventory value submitted,
are given below:
A. Excluded from the inventory were merchandise costing P24,000 because they were transferred to
the delivery department for packaging on December 28 to be shipped on January 2, 2021.
B. The bill of lading and other import documents on a merchandise were delivered by the bank and
the trust receipt accepted by the company on December 26, 2020. Taxes and duties have been paid
on this shipment but the customs broker has not delivered the merchandise until January 7, 2021.
Delivered cost of the shipment totaled P240,000. This shipment was not included in the inventory in
December 2020.
C. A review of the company’s purchase orders shows a commitment to buy P30,000 worth of merchandise.
This was not included in the inventory because the goods were received on January 3, 2021.
D. Suppliers invoice for P9,000 worth of merchandise dated December 28, 2020 was received through the
mails on December 30, 2020 although the goods arrived only on January 4, 2021. Shipment term
is f.o.b. shipping point. This item was included in the December 31, 2020 inventory by the company.
E. Goods valued at P6,000 were received on December 28, 2020 for approval by ABC Co. The inventory
team included this merchandise in the list but did not place any value on it. On January 4, 2021
the company informed the supplier by long distance telephone of the acceptance of the goods and the
supplier’s invoice was received on January 7, 2021.
F. On December 27, 2020, an order for P7,500 worth of merchandise was placed. This was included in
the year-end inventory although it was received only on January 5, 2021. Seller shipped the goods f.o.b.
destination.
The correct merchandise inventory at December 31, 2020 of ABC Co. is P1,756,500
COST FLOW ASSUMPTIONS
22. ABC Company is a wholesaler of selected merchandise items. The activity for item number 1234 during June
is presented below:
Date
Transaction
Units
Cost
June 01
Inventory balance
6,000
P20.00
04
Purchases
9,000
24.00
12
Sales
10,800
19
Purchases
14,400
26.00
22
Sales
11,400
29
Purchases
4,800
27.00
Under the FIFO periodic inventory system, how much is the ending inventory of item # 1234 at June 30?
P316,800
23. Under the weighted average cost periodic inventory system, how much is the ending inventory of item # 1234
at June 30? P294,720
24. During January 2019, ABC 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 01/01/19
1,000
P40
P40,000
1,000
Purchased on 01/04/19
600
P120
P72,000
1,600
Sold on 01/20/19
900
700
Purchased on 01/25/19
400
P200
P80,000
1,100
Under the moving-average method, what amount should ABC Company report as inventory at January 31,
2019? P129,000
25. The ABC Company Sells Product A. During the year, the company moved to a new location, the inventory
records for Product A were misplaced. The bookkeeper has been able to gather some information from the
sales records and gives you the data shown below:
July sales : 57,200 units at P100
July purchases:
Date
Quantity
Unit Cost
July 5
10,000
P65.00
9
12,500
62.50
12
15,000
60.00
23
14,000
62.00
On July 31, 16,000 units were on hand with a total value of P988,000. ABC has always used a periodic FIFO
inventory costing system. Gross profit on sales for July was P2,058,750. What is the total cost and unit cost,
respectively, of the beginning inventory? 1,450,000 & 66.82
COST OF SALES & NET INCOME
26. The accounting records of ABC Company show the following information for 2019:
In store
Inventory, December 31
P290,000
Inventory, January 1
220,000
Purchases
960,000
Freight in
20,000
Freight out
60,000
Out on consignment
Inventory, December 31
P40,000
Inventory, January 1
24,000
Shipment from consignor
120,000
Freight-out to consignees
10,000
Freight out
16,000
What would be the cost of sales of ABC Company for 2019? 904,000
27. ABC Company reported the following balances at December 31, 2019 and 2018:
Dec. 31, 2019
Dec. 31, 2018
Inventory
P2,600,000
P2,900,000
Accounts payable
750,000
500,000
The company paid its suppliers P4,900,000 during the year ended December 31, 2019. How much should
ABC Company report as cost of goods sold in its Dec. 31, 2019 statement of comprehensive income?
5,450,000
28. ABC Company maintains a markup of 60% based on cost. The company’s selling and administrative
expenses average 30% of sales. Annual sales were P1,440,000. How much should the company record as
its cost of sales and operating profit for the year? 900,000 & 108,000
29. ABC Company, organized in 2017 has used the Average method of inventory valuation. Net income reported
under this method is shown below:
2017
2018
2019
Net income
P180,000
P250,000
P350,000
Inventory, end:Average
600,000
750,000
1,000,000
FIFO
620,000
1,000,000
1,200,000
If the FIFO method of inventory valuation was used, how much would be the total net income for the three
years? 980,000
RELATIVE SALES VALUE/ PURCHASE COMMITMENT/ NET REALIZABLE VALUE
30. A chain of candy stores purchases its candy in bulk from its suppliers. For a recent shipment, the company
paid P3,000 and received 8,500 pieces of candy that are allocated among three groups. Group 1 consists of
2,500 pieces that are expected to sell for P0.25 each. Group 2 consists of 5,500 pieces that are expected to
sell for P0.60 each. Group 3 consists of 500 pieces that are expected to sell for P1.20 each. Using the relative
sales value method, what is the cost per item in group 1? 0.166
31. During 2019, ABC Company signed a non-cancellable contract to purchase 1,000 sacks of rice at P900 per
sack with delivery to be made in 2020. On December 31, 2019, the price of rice had fallen to P850 per sack.
On May 9, 2020, the company accepts delivery of rice when the price is P880 per sack. In the Dec. 31, 2019
statement of comprehensive income, what amount of loss on purchase commitment should be included?
P50,000
32. At 12/31/23, the end of ABC Company's first year of business, inventory was P4,100 and P2,800 at cost and
at net realizable value, respectively. The following is data relative to the 12/31/24 inventory of ABC:
Item
Cost Per Unit
A
P .65
B
.45
C
.70
D
.75
E
.90
The estimated selling price is P1.00/unit for all items. Disposal costs amount to 10% of selling price and cost
of completion of 20% of the selling price. There are 1,000 units of each item in the 12/31/24 inventory.
Inventory balance at the end of 2024 shall be 3200. Prepare the entry(ies) necessary at 12/31/14 based on
the data above. Dr. MI 3,450; Cr. IS; A4IW 1,050; Cr. Gain on Recovery of IWD
INVENTORY ESTIMATION – GROSS PROFIT RATIO & RETAIL METHOD
33. ABC Company prepares monthly income statements. A physical inventory is taken only at yea-end; hence,
month-end inventories must be estimated. All sales are made on account. The rate of markup on cost is
50%. The following information relates to the month of June:
Accounts receivable, June 1
P102,000
Accounts receivable, June 30
153,000
Collection of accounts receivable during June
255,000
Inventory, June 1
183,600
Purchases of inventory during June
163,200
How much is the estimated cost of June 30, inventory? 142,800
34. On September 30, 2019, a flood at ABC Company’s warehouse caused severe damage to its entire inventory.
Based on recent history, ABC had a gross profit of 25% of net sales. The following data were gathered for
the nine months ended September 30: Inventory, January 1, P520,000; Purchases 4,120,000; Purchase
returns 60,000Sales 5,600,000Sales discounts 400,000A physical inventory disclosed usable damaged items
which ABC estimates can be sold to a jobber for P70,000. The company uses the gross profit method.How
much is the estimated cost of inventory loss on September 30, 2019? P310,000
35. On the eve of June 15, 2019, a fire destroyed the entire merchandise inventory of ABC Corporation. The
merchandise was not insured with any insurance company. The following data were gathered: Inventory,
January 1 P250,000; Purchases, January 1 to June 15 1,500,000; Sales, January 1 to June 15 2,000,000;
Markup percentage on cost 25%. What is the approximate inventory loss as a result of the fire? P150,000
36. The following information appears in ABC Company’s records for the year ended December 31, 2019:
Inventory, January 1
P325,000
Purchases
1,150,000
Purchase returns
40,000
Freight in
30,000
Sales
1,700,000
Sales discounts
10,000
Sales returns
15,000
On December 31, the company conducted a physical inventory which revealed that the ending inventory was
only P210,000. ABC’s gross profit on net sales has remained constant at 30% in recent years. ABC suspects
that some inventory may have been pilfered by one of the company’s employees. How much is the estimated
cost of missing inventory on December 31? P75,500
37. ABC Company uses the retail inventory method to estimate its inventory for interim statement purposes. Data
relating to the inventory computation at June 30, 2019 are as follows:
Cost
Retail
Inventory, January 1
P820,000
P1,262,800
Net purchases
2,280,000
3,607,200
Net mark-ups
450,000
Net markdowns
320,000
Sales
4,350,000
Sales returns
300,000
Employee discounts
100,000
Sales discounts
80,000
Normal shrinkage
50,000
What is the estimated cost of June 30, 2019 inventory using the average approach? P496,000
38. The ABC Department store uses a calendar year and the FIFO retail inventory method (assuming stable
prices). Information relating to the computation of the inventory at December 31, is as follows:
Cost
Retail
Inventory, January 1
P320,000
P800,000
Sales
5,800,000
Purchases
2,100,000
6,000,000
Freight-in
70,000
Net markups
400,000
Net markdowns
200,000
What is the ending inventory at cost at December 31 using the FIFO retail inventory method? P420,000
39. Presented below is information related to ABC Corporation:
Cost
Retail
Inventory, January 1, 2019
P250,000
P390,000
Purchases
914,500
1,460,000
Purchase returns
60,000
80,000
Purchase discounts
18,000
Gross sales (after employee discounts)
1,260,000
Sales returns
97,500
Markups
120,000
Markup cancellations
40,000
Markdowns
45,000
Markdown cancellations
20,000
Freight-in
79,000
Employee discounts granted
8,000
Loss from breakage
2,500
Assuming that ABC Corp. uses the conventional retail inventory method, how much would be the cost of its
ending inventory at Dec. 31, 2019? 410,760
40. ABC inventory shows the following information at December 31, 2019:
Inventory beginning:
Cost
P560,000
Retail
1,400,000
Purchases:
Cost
4,960,000
Retail
10,320,000
Freight-in
150,000
Markup
1,000,000
Markup cancellation
120,000
Markdown
500,000
Markdown cancellation
100,000
Sales
10,000,000
Estimated normal shrinkage
2.5% of sales
ABC uses the retail inventory method of valuing its inventory. How much is the estimated cost of inventory in
2019? 877,500
41. ABC Company uses the retail inventory method to estimate inventory. The following data are available for
the year ended December 31, 2019:
Cost
Retail
Inventory, January 1
61,700
105,700
Purchases
128,100
215,800
Purchase returns
2,100
3,500
Sales
236,500
Sales returns
6,200
Freight-in
3,100
How much would be the inventory pilferage if the physical count revealed an ending inventory retail of
P78,000? 5,820
42. The ABC Department uses a calendar year and the FIFO retail inventory method. Information relating to the
computation of the inventory at December 31 is as follows:
COST
RETAIL
Beginning inventory
P320,000
P800,000
Sales
5,800,000
Purchases
2,100,000
6,000,000
Freight in
70,000
Net mark ups
400,000
Net markdowns
200,000
Using the FIFO retail inventory method, determine the gross profit? 3,730,000
HOMEWORK
1. ABC Company sells TVs. The perpetual inventory was stated as P28,500 on the books at December 31,
2023. At the close of the year, a new approach for compiling inventory was used and apparently a satisfactory
cut-off for preparation of financial statements was not made. Some events that occurred are as follows.
A. TVs shipped to a customer January 2, 2024, costing P5,000 were included in inventory at December
31, 2023. The sale was recorded in 2024.
B. TVs costing P12,000 received December 30, 2023, were recorded as received on January 2, 2024.
C. TVs received during 2023 costing P 4,600 were recorded twice in the inventory account.
D. TVs shipped to a customer December 28, 2023, f.o.b. shipping point, which cost P10,000, were not
received by the customer until January, 2024. The TVs were included in the ending inventory.
E. TVs on hand that cost P6,100 were never recorded on the books.
Compute the correct inventory at December 31, 2023. 32,000
2. The following information was available from the inventory records of ABC Company for January:
Units
Unit Cost
Total Cost
Balance at January 1
3,000
P9.77
P29,310
Purchases:
January 6
2,000
10.30
20,600
January 26
2,700
10.71
28,917
Sales:
January 7
January 31
Balance at January 31
(2,500)
(3,200)
2,000
Assuming that ABC does not maintain perpetual inventory records, what should be the inventory at January
31, using the weighted-average inventory method, rounded to the nearest peso? P20,474
3. On December 24, 2024, a fire destroyed totally the raw materials warehouse of ABC Manufacturing
Company. There were no purchases from the time of the fire until December 31, 2024.
Inventories
January 1, 2024
December 31, 2024
Raw materials
P180,000
?
Factory supplies
12,000
P10,000
Goods in process
370,000
420,000
Finished goods
440,000
450,000
The accounting records show the following data:
Sales
P2,400,000
Purchases of raw materials
800,000
Purchases of factory supplies
60,000
Freight in for raw materials
30,000
Direct labor
440,000
The manufacturing overhead rate is 75% of direct labor and the gross profit rate on sales is 35%. Determine
the total manufacturing cost. P1,620,000
4. The following information pertains to ABC Company for the current year:
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 was the cost of goods sold for the current year? P4,270,000
750,000
4,800,000
400,000
850,000
100,000
4,000,000
620,000
30%
5. When you undertook the preparation of the financial statements for ABC Company at January 31, 2024, the
following data were available:
At Cost
At Retail
Inventory, February 1, 2023
P70,800
P 98,500
Markdowns
35,000
Markups
63,000
Markdown cancellations
20,000
Markup cancellations
10,000
Purchases
219,500
294,000
Sales
345,000
Purchases returns and allowances
4,300
5,500
Sales returns and allowances
10,000
Compute the ending inventory at cost as of January 31, 2024, using the retail method – conservative. 58,500
6. ABC Realty Company purchased a plot of ground for P800,000 and spent P2,100,000 in developing it for
building lots. The lots were classified into Highland, Midland, and Lowland grades, to sell at P100,000,
P75,000, and P50,000 each, respectively. No. of lots are 20, 40 and 100 for Highland, Midland, and Lowland,
respectively. Determine the apportioned cost per lot to Midland. 21,750 per lot or P870,000
7. ABC sells one product which it purchases from various suppliers. ABC trial balance at December 2025
included the following items:
Sales (33,000 units)
P528,000
Sales discounts
Purchases
Purchase discounts
Freight in
Freight out
ABC’s inventory purchases during 2025 were as follows:
Units sold
Beginning inventory, January 1
8,000
Purchases, quarter ended, March 31
12,000
Purchases, quarter ended, June 30
15,000
Purchases, quarter ended, September 30
13,000
Purchases, quarter ended, December 31
7,000
7,500
368,900
18,000
4,800
11,000
Cost per unit
P8.20
8.25
7.90
7.50
7.70
Total cost
P65,600
99,000
118,500
97,500
53,900
Additional information:
ABC’s accounting policy is to report inventory in its financial statements at a lower of cost or net realizable
value, applied to total inventory. Cost is determined under the weighted average method.
ABC had determined that at December 31, 2025, the replacement cost of its inventory was P8.20 per unit
and the net realizable value was P8 per unit. ABC’s normal profit margin is P1.05 per unit. The company
uses the direct method of reporting losses from market decline of inventory, what is the total cost of sales
for the year 2025? P252,780