Page 1 of 10 | FAR Handouts No. 05
INVENTORIES
KARIM G. ABITAGO, CPA
INVENTORIES
KARIM G. ABITAGO, CPA
BASIC CONCEPTS
Definition
According to PAS 2, Inventories are assets:
(a)
Held for sale in the ordinary course of business.
(b)
In the process of production for such sale
(c)
In the form of materials or supplies to be consumed in the production process or in the rendering of services.
Classes of Inventories
Classes of inventories vary in accordance with the entity’s nature of business.
(1)
Merchandising business – Merchandise Inventories (definition (a) above).
(2)
Manufacturing business – Finished Goods Inventories (definition (a) above); Work in Process Inventories (definition
(b) above); Raw Materials Inventories and Factory Supplies (definition (c) above).
(3)
Service business – Work in Progress Inventories (definition (b) above).
RECOGNITION
Inventories are recorded as assets and are reported on the balance sheet when the following conditions are met:
(a)
It is probable that the future economic benefits associated with the inventories will flow to the enterprise.
(b)
The inventories have cost or value that can be measured reliably.
But the real question is what goods shall be included in inventory?
"all goods to which the entity has title shall be included in inventory, regardless of location."
GENERAL RULE: The one who has POSSESSION has LEGAL TITLE.
EXCEPTIONS:
(1)
Goods in transit
Shipping Terms
Point of Transfer of Ownership
(a)
FOB Shipping Point
Shipping Point
(b)
FOB Destination
Buyer’s Location
(c)
Free Alongside (FAS)
Upon delivering the goods up to the dock next to
or alongside the vessel on which the goods
are to be shipped.
(d)
Cost, Insurance, Freight (CIF)
Upon loading of the goods to the vessel
(e)
Ex-ship
When the goods are unloaded at the other side
NOTE: As a rule, the entity who owns the goods should pay its related costs.
(2)
Consignment Goods
NOTE:
(a)
Inventoriable Costs:
•
Freight cost and other handling costs of goods out on consignment
(b)
Non-inventoriable Costs:
•
Freight costs if the consigned goods are returned to the consignor
•
The original freight cost of returned consigned goods
•
Storage cost and other reimbursable costs charged to consignor
•
Freight cost to final customer
(3)
Inventory Financing Agreements
(a)
Sales with a Repurchase Agreement
(b)
Pledge of Inventories
(c)
Loan of Inventory
(4)
(5)
(6)
(7)
(8)
(9)
Sale or Return
Sale on Trial or Approval
Installment Sale
Bill and Hold Sale
Lay-away Sale
Special Order Sale
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KARIM G. ABITAGO, CPA
INVENTORIES
NOTES REGARDING EXCEPTIONS:
(a)
In a sale or return agreement, if the goods are unsalable or the buyer has the intention of returning it, the goods are
not recognized on the books of the buyer.
(b)
In a sale on trial or approval, the goods are not recognized on the books of the seller if the buyer signified approval
or if the goods are not returned within a reasonable time after the allowed period elapse; it is recorded on the books
of the buyer.
MEASUREMENT
Cost of Purchase
INITIAL MEASUREMENT
(COST)
Cost of Conversion
Other Costs
Exclusions from Cost
COST OF PURCHASE
INCLUSIONS:
(1)
Purchase Price
Means of Acquisition
Purchase Price
(a)
Regular Purchase
Invoice Price
(b)
Deferred Settlement
Cash Price Equivalent
(c)
Lump-sum Purchase
Allocated Purchase Price using Relative Fair Value
(2)
Import duties
(3)
Irrecoverable taxes
NOTE: VAT, being recoverable is generally NOT CAPITALIZED as cost of inventories UNLESS the entity is NON-VAT
REGISTERED.
(4)
Freight and handling costs
(5)
Insurance while the inventories are in transit
(6)
Broker’s commission
EXCLUSIONS:
(1)
Trade discounts, rebates and other similar items (deducted to arrive at invoice price)
(2)
Foreign exchange differences
(3)
Interest expense (unless inventories are categorized as qualifying assets)
COST OF CONVERSION
(1)
Direct Labor
(2)
Factory Overhead
(a)
Variable FOH
(b)
Fixed FOH
NOTE: Unallocated fixed FOH are expensed and not capitalized.
Allocation Basis
Actual Capacity
Normal Capacity
OTHER COSTS
These are costs necessary in bringing inventories to their present location and condition. (e.g. cost of design for specific
customers.
EXCLUSION FROM COSTS
(1)
(2)
(3)
(4)
Capitalized if
Normal Losses
Traceable
Related to Raw Materials or WIP
N/A, always expensed
Abnormal Losses
Administrative Expenses
Storage Costs of Finished Goods
Selling Costs
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Page 3 of 10 | FAR Handouts No. 05
KARIM G. ABITAGO, CPA
INVENTORIES
ACCOUNTING FOR INVENTORIES
Inventories are accounted for either through (a) periodic inventory system or (b) perpetual inventory system. Let us
elaborate them by comparing the two inventory systems:
(1)
(2)
(3)
(4)
(5)
Points of Comparison
When to update inventories?
Periodic
Upon physical count
Treatment on inventory counts
Necessary procedure
With running balance of COGS?
NO
Inventory account treatment
Residual account
When to use?
When inventories are
HIGH VOLUME but LOW VALUE
Summary of journal entries
Periodic
Purchases
xx
AP
(1)
Purchase of inventories
(2)
Payment of freight cost
Freight-in
Cash
xx
(3)
Returned purchased goods
AP
xx
(4)
Sold goods on account
AR
(5)
Sales returns
Purchase Returns
Sales
NO ENTRY
Sales returns
AR
NO ENTRY
xx
xx
Perpetual
Each movement
through stock cards
For records accuracy
YES
Maintained account
When inventories are
LOW VOLUME but HIGH VALUE
Perpetual
xx
xx
Inventory
AP
xx
Inventory
Cash
xx
AP
xx
xx
xx
xx
Inventory
AR
Sales
COGS
Inventory
Sales returns
AR
Inventory
COGS
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
COST FORMULAS
(1)
First in, First out Method – this method assume that the items of inventory which are purchased first are sold first
and the ending inventory are represented by the most recent purchases.
FIFO costing method may be used with PERPETUAL or PERIODIC system and regardless of the system used, the
cost of the ending inventory and cost of goods sold are the same.
(2)
Average Method – under this method, the cost of each item is determined from the average of the cost of similar
items at the beginning of a period and the cost of similar items purchased or produced during the period.
Average method may be used with PERIODIC SYSTEM and most commonly known as WEIGHTED AVERAGE
METHOD
Average method may be used with PERPETUAL SYSTEM and most commonly known as MOVING AVERAGE
METHOD
NET REALIZABLE VALUE (NRV)
Concept of NRV
Measuring inventories at the lower of cost or NRV is in line with the basic accounting concept that an asset shall not be
carried at an amount in excess of amounts it is expected to be realized (recoverable amount).
So if:
Cost > NRV = There is inventory write-down
Cost < NRV = There is reversal of inventory write-down if there is a previous inventory write-down
How to compute NRV?
Net Realizable Value (NRV)
(a)
Finished Goods / Merchandise Inventories
ESP - ECTS
(b)
Work-in-Process Inventories
ESP – ECTS - ECTC
(c)
Raw Materials and Factory Supplies
Current Replacement Cost
ESP = Estimated Selling Price; ECTS = Estimated Cost to Sell; ECTC = Estimated Cost to Complete
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KARIM G. ABITAGO, CPA
INVENTORIES
Determination of LCNRV
Lower of Cost or NRV (LCNRV) is applied on an ITEM BY ITEM BASIS. This is applied to all types of inventories except
for RAW MATERIALS AND FACTORY SUPPLIES. These items of inventories are tested for possible write-down only if
the related finished goods are to be written down.
Accounting for Inventory Write-down
Direct method
The inventory is recorded at the lower of cost or net realizable value. This method is also known as "cost of goods sold"
method because any loss on inventory write-down 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 write-down is accounted for separately. This method is also
known as "loss method" because a loss account, "loss on inventory write-down" is debited and a valuation account
"allowance for inventory write-down" is credited for the inventory write-down.
Allowance for Inventory Write-down
Beginning Balance
Loss on Inventory WriteReversal of Inventory Write-down xx
down
Ending Balance
xx
xx
xx
NOTES:
(1)
The ending balance of allowance for inventory write-down is the difference between cost and NRV of the current
end of accounting period.
(2)
Loss on inventory write-down is presented as addition to COGS or other losses if immaterial.
(3)
Gain on reversal of inventory write-down is up to the extent of allowance balance only and presented as deduction
against COGS.
OTHER RELATED TOPICS
PURCHASE COMMITTMENTS
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.
Entry to recognize the loss is:
Loss on purchase commitments
xx
Estimated Liability on Purchase Commitments
xx
When prices subsequently increase, the buyer recognizes gain on purchase commitment but up to the extent only of the
loss previously recognized.
INVENTORY ESTIMATION
Why there is a need for inventory estimation?
(1)
Impossibility of Physical Count
(2)
Cost-benefit Constraint
(3)
Proof of the reasonable accuracy of a physical count
Frequently Asked Questions in Inventory Estimation
(1)
Estimated ending inventory (there is a solution guide on how to compute these below and it varies depending on
the method used).
(2)
Loss on casualty (fire, storm or earthquake)
Estimated ending inventory
xx
Less: Undamaged inventories @ cost (e.g. goods in transit)
(xx)
Damaged inventories @ LCNRV
(xx)
Total inventory loss
xx
(3)
Inventory shortage
Estimated ending inventory
xx
Inventory based on count
(xx)
Inventory shortage
xx
Methods used in Inventory Estimation
GROSS PROFIT METHOD - This method is based on the major assumption that the rate of gross profit remains
approximately the same from period to period and therefore the ratio of cost of goods sold to net sales is relatively
constant from period to period.
SOLUTION GUIDE:
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Page 5 of 10 | FAR Handouts No. 05
KARIM G. ABITAGO, CPA
INVENTORIES
The ultimate purpose of this topic is to compute estimated ending inventory.
Cost of Goods Available for Sale
xx
Less: Ending Inventory (SQUEEZE)
xx
Cost of Goods Sold
xx
NOTES:
(1)
COGS is computed as
Net sales x Cost Ratio (if GP is based on sales)
Net sales / Sales Ratio (if GP is based on cost)
(2)
To arrive at net sales, sales returns are the only item to be deducted for inventory estimation purposes only.
(3)
Gross profit method may be used to estimate inventories for INTERIM REPORTING purposes but NOT
ACCEPTABLE for ANNUAL REPORTING.
RETAIL INVENTORY METHOD - The retail inventory method came to its name because the selling price or retail price is
tagged to each item and therefore the ending inventory is stated at selling price. Actually, the gross profit method is a
variation of retail method except that in retail method:
(a)
The cost ratio is computed directly without regard to the gross profit rate.
(b)
Net mark-ups and net mark-downs are considered.
SOLUTION GUIDE:
Beginning Inventory
Purchases
Freight in
Purchase Discounts
Purchase Returns and Allowances
Departmental Transfer-in (debit)
Departmental Transfer-out (credit)
Abnormal Losses
Net Mark-ups
Net Mark-downs
TOTAL GOODS AVAILABLE FOR SALE (TGAS)
ENDING INVENTORY (SQUEEZE)
COST OF GOODS SOLD
Cost
xx
xx
xx
(xx)
(xx)
xx
(xx)
(xx)
xx
xx
xx
Retail
xx
xx
(xx)
xx
(xx)
(xx)
xx
(xx)
xx
xx
xx
NOTES:
(1)
COGS at retail is computed as: Gross sales less sales returns add employees discount and normal losses. As we
can see, only sales returns are deducted.
(2)
COGS at cost is computed as TGAS at cost less ending inventory at cost
(3)
Estimated ending inventory at cost is computed as (Ending inventory at retail x cost ratio)
(4)
Cost ratio varies depending on the retail inventory method used:
Under Average Method: (TGAS @ COST / TGAS @ RETAIL)
Under FIFO Method: (TGAS @ COST – BEG. INVENTORY @ COST) / (TGAS @ RETAIL – BEG. INVENTORY
@ RETAIL)
Under Conservative Method: (TGAS @ COST / TGAS @ RETAIL + NET MARKDOWNS)
(5)
Retail inventory method may be used to estimate inventories for INTERIM REPORTING purposes and
ACCEPTABLE for ANNUAL REPORTING.
FS PRESENTATION OF INVENTORIES
Inventories are reported in the Statement of Financial Position under CURRENT ASSETS section.
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KARIM G. ABITAGO, CPA
INVENTORIES
DISCUSSION EXERCISES
STRAIGHT PROBLEMS
1.
On December 31, 2019, JAPAN CORP. had an inventory balance of P600,000 based on its recently conducted
annual inventory count on its warehouse and other storages within JAPAN’s premises. The following items are
under consideration whether possible adjustments should be made:
•
Goods costing P50,000 were not included on the count since these are located to another entity’s warehouse
and was sent under a consignment arrangement.
•
Goods with an invoice price of P100,000 that were sold by the entity and shipped on December 30 and were
in transit on December 31, 2019. These goods were received by the customer on January 2, 2020 but were
included on the inventory balance. Terms were FOB shipping point.
•
Goods billed at P50,000, not included on the inventory balance, were in transit on December 31, 2019 but
received by the customers on January 3, 2020 under the shipping term FOB destination. The related freight
cost of this transaction is P2,000.
•
Goods costing P30,000 were sold under a bill and hold arrangement included in the stock of inventory in the
warehouse.
•
Goods purchased on an instalment basis with an invoice price of P45,000 were possessed before year-end
and was included on the inventory count. The title over the goods were retained by the seller upon full
payment is made.
•
Inventories were sold at P150,000 to KOREA INC. JAPAN signed an agreement to repurchase the goods
sold at a price that covers all costs related to the inventory. These goods were not included on the inventory
count since it was shipped a day before the count.
•
Inventory pledged to BPI BANK as collateral security for a bank loan costing P40,000 was not included on
the inventory count.
•
Goods purchased under FOB shipping point term costing P60,000 were in transit on December 31, 2019 to
JAPAN CORP. The related freight cost paid by the seller is P5,000.
The gross profit rate of JAPAN CORP. applied constantly throughout 2019 is 30%.
REQUIREMENT: Compute for the adjusted inventory balance as of December 31, 2019.
2.
An excerpt coming from THAILAND CORP.’s trial balance revealed the following unadjusted balances for the year
ended 2019:
Merchandise Inventories (based on physical count)
800,000
Accounts Receivable
1,200,000
Accounts Payable
750,000
The annual inventory count of THAILAND was conducted on December 27, 2019 on the company’s warehouses
only. THAILAND applied constantly a gross profit rate of 40% to its sales transactions during the year.
The following information relates to the Company’s inventory account:
•
Goods costing P100,000 were purchased under FOB Shipping Point, Freight Prepaid term and was received
on December 28, 2019. Upon investigation, the related purchases are already recorded but not the freight
cost. The related freight cost is P5,000.
•
Goods with an invoice price of P250,000 were shipped on December 26, 2019 and sold under a shipping
term, FOB Destination, Freight Prepaid. The goods were received by the customer on December 29, 2019.
The related freight cost is P10,000.
•
Goods sent out of consignment on December 30 to VIETNAM INC. were recorded as sales amounting to
P150,000. The freight cost related to the consignment agreement was paid by VIETNAM in the amount of
P5,000. The said freight cost was debited as a selling cost and credited as cash by THAILAND. It was known
that one-third of the inventories were already sold to the customer of VIETNAM as of December 31.
•
Goods sold at an invoice price of P100,000 were in transit to customers, FOB Destination. These goods were
shipped on December 27, 2019 and received by the customers on January 3, 2020.
•
Goods costing P90,000 had been segregated but not shipped FOB point of shipment on December 31. The
goods were in a delivery truck just outside the factory premises. The related sales were not recorded.
•
Goods costing P40,000 were still in transit to THAILAND. The related invoice was already received by the
Company, thus the accounts payable were credited for such amount. The goods were shipped on an ex-ship
term. The freight and loading cost were paid by the supplier amounting to P4,500.
•
Goods sold to a customer at a billed price of P160,000 were shipped on December 28, 2019 under freealongside term. Upon investigation, the goods were still in transit to the customer since it is still in the seller’s
nearest port. Loading cost and freight cost were paid by THAILAND amounting to P30,000.
•
The company sold goods costing P120,000 to a customers under a sale on trial agreement. The related
goods were shipped on December 30, 2019 but the sale transaction was unrecorded as of year-end.
REQUIREMENTS: Determine the adjusted balances of (a) merchandise inventories; (b) accounts receivable; (c)
accounts payable
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KARIM G. ABITAGO, CPA
INVENTORIES
3.
On January 3, 2019 MALAYSIA CORP. consigned 3,000 units of its inventories costing P400 each to INDONESIA
INC. which will be sold by the latter to its customers on a price of P700. The transportation cost of the goods to the
premises of INDONESIA amounted to P90,000 which were paid by INDONESIA. Based on the agreement,
INDONESIA is entitled for 3% commission based on the selling price of the goods. Advertising cost and other
operating expenses paid by INDONESIA but reimbursable from MALAYSIA amounted to P15,000. On April 30
2019, 300 units of inventories were returned by INDONESIA since the storage capacity of the latter is at its
maximum. The freight cost of the returned goods amounted to P15,000. On December 31, 2019 500 units of
inventories were held by INDONESIA in relation to the consignment agreement
REQUIREMENTS: (1) What is the cost of ending inventory of MALAYSIA CORP. as of December 31, 2019? (2)
What is the net income from the consignment arrangement earned by MALAYSIA during 2019?
4.
CHINA CORP. (a NON-VAT registered) incurred the following in relation to PRODUCT A, one of its inventories:
(a)
Inventories bought from HONGKONG CORP. amounted to P112,000, VAT inclusive.
(b)
Invoice price of PRODUCT A purchased from another supplier is P150,000. Quantity discounts of 20, 10 are
allowed by supplier.
(c)
Goods acquired from PHILIPPINES CORP., entity’s major supplier, under an extended credit term amounted
to P100,000. The selling price to be paid under normal credit term is P80,000.
(d)
Abnormal amounts of wasted materials is P30,000 (150% of normal amounts).
(e)
Fixed production overheads amounting to P300,000. The entity’s normal capacity is 100,000 machine hours
but the company only used 80,000 machine hours.
(f)
Transportation cost from supplier to CHINA amounted to P10,000; Trasportation cost from CHINA to its
customers amounted to P15,000.
(g)
CHINA CORP. purchased two inventory items at a lump-sum price of P125,000 including freight cost P10,000
but before deducting trade discount of P5,000. The acquisition included 3,000 units of Product A and 6,000
units of Product B. Product A normally sells for P10 per unit and Product B for P15 per unit.
(h)
Storage cost of PRODUCT A, a finished product totalling P15,000.
REQUIREMENT: How much is the total inventory costs of CHINA CORP.?
5.
The following information is available regarding the inventory movements of TAIWAN CORP. for the month of
September:
At the beginning of the month, the company has 2,000 units with a cost of P36.00 per unit.
PURCHASES
SALES
DATE
UNITS
UNIT COST
DATE
UNITS
PRICE
9/3
3,000
37.20
9/6
4,200
45
9/15
4,800
38.00
9/7
(600)
45
9/20
1,900
38.60
9/16
3,800
50
9/23
(300)
38.60
REQUIREMENTS: Compute for (a) ending inventory; (b) cost of goods sold; (c) gross profit under the following cost
formulas:
(1)
First-in, First-out Method (FIFO)
(3)
Average Method - Perpetual
(2)
Average Method - Periodic
6.
INDIA INC. follows PAS 2 in measuring its inventories. It applies the lower of cost or net realizable value (NRV) in
the valuation of its inventories. For its proper application, the following information was provided.
Raw Materials
In-Process
Finished Goods
Marker
Pen
Marker
Pen
Marker
Pen
45,000
140,000
150,000
200,000
250,000
Cost of Purchase 50,000
5,000
8,000
20,000
15,000
10,000
15,000
Freight-in
5,000
5,000
5,000
10,000
Freight-out
40,000
30,000
150,000
200,000
Conversion Cost until Completion
200,000
180,000
500,000
450,000
Selling Price
10,000
5,000
40,000
30,000
Other Selling Costs
Replacement Costs
40,000
43,000
REQUIREMENT: Compute for the amount of inventories to be reported at balance sheet for the year ended,
December 31, 2019?
7.
IRAQ CORP. has the following comparative information regarding its inventories:
2019
2020
Inventories, January 1 at cost
200,000
250,000
Purchases
800,000
850,000
Inventories, December 31 at cost
250,000
300,000
Inventories, December 31 at NRV
180,000
250,000
REQUIREMENT: Compute the adjusted cost of goods sold under direct method and allowance method.
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KARIM G. ABITAGO, CPA
INVENTORIES
8.
On January 1, 2019, IRAN CORP. signed a non-cancellable purchase commitment allowing IRAN to purchase up to
40,000 units of microchip annually from BHUTAN CORP. at P30 per unit, the delivery date of which is on April 1,
2020. On December 31, 2019, the price of microchips had fallen to P20 per unit. On April 1, 2020, the IRAN
accepts delivery of microchips when the price is P28 per unit.
REQUIREMENTS: (1) How much is the loss on purchase commitments for the year 2019, if any? (2) How much is
the gain on purchase commitments for the year 2020, if any?
9.
A fire burned the whole warehouse of CAMBODIA CORP. on November 30, 2019. The following information is
available from CAMBODIA’s records for the eleven months ended November 30, 2019:
Inventory at January 1, 2019
550,000
Total purchases received and recorded from January to date of fire
3,000,000
Total freight cost of goods purchased and received
60,000
Total credit memo received on goods purchased and received
200,000
Total discounts taken on purchases
80,000
Invoice received for goods purchased but still in transit shipped
on November 30, 2019, FOB shipping point
120,000
Total sales delivered and recorded from Jan. to date of fire
3,600,000
Unrecorded sales invoice for goods delivered
300,000
Total sales returns accounted and recorded to date of fire *
200,000
Total sales discounts taken by customers on recorded sales
40,000
* P40,000 of which relates to credit memo issued to customers for merchandise to be returned next year.
A physical inventory disclosed usable damaged goods which CAMBODIA estimates can be sold to a jobber for
P50,000. Based on recent history, CAMBODIA has a gross profit of 30% of net sales.
REQUIREMENT: Using the gross profit method, what amount of impairment loss on its inventory should
CAMBODIA CORP. report in its December 31, 2019 profit or loss?
10.
Presented below is information taken from for the three months ended March 31, 2019 in relation to BRUNEI
CORP.’s application of retail inventory method.
Cost
Retail
Inventory, Jan. 1
P179,600
P200,000
Purchases
475,400
800,000
Purchase discounts
23,000
Purchase returns
50,000
80,000
Purchase allowance
10,000
Freight in
5,000
Mark-ups
200,000
Mark-up cancellations
40,000
Departmental transfer-in
70,000
100,000
Departmental transfer-out
60,000
90,000
Abnormal loss
20,000
40,000
Markdown
115,000
Markdown cancellations
10,000
Sales
800,000
Sales returns
80,000
Sales Allowance and discounts
120,000
Normal shrinkage
100,000
The company conducted its interim inventory count and valued inventory at P50,000.
REQUIREMENTS: Compute (a) estimated ending inventory; (b) cost of goods sold; (c) inventory shortage using:
(1)
Conservative method
(c)
FIFO method
(2)
Average method
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Page 9 of 10 | FAR Handouts No. 05
KARIM G. ABITAGO, CPA
INVENTORIES
MULTIPLE CHOICE (THEORIES)
1.
Which of the following is not a definition of inventories in accordance with PAS 2?
I.
Are assets held for sale not in the ordinary course of business.
II.
Are assets used in the production of goods and services.
A.
I only
C.
Both I and II
B.
II only
D.
Neither I nor II
2.
In relation to PAS 2, determine which of the following classification is correct.
Transaction
Owner of Inventory
I.
Consigned Goods
Shipper to Consignee
II.
Sale on trial
Buyer
III.
Loan of Inventory
Lender
IV.
Bill and Hold Sale
Buyer
A.
I and II
D.
I and IV
B.
I and III
E.
I, III and IV
C.
II, III, and IV
3.
Which of the following forms part as cost of inventories under PAS 2?
I.
Storage cost of unfinished goods
II.
Insurance cost of inventories stored outside entities premises
III.
Salary of accountants in the factory.
IV.
Gas and lubricants to be used by the delivery truck.
A.
I and II
D.
II and IV
B.
II and III
E.
I and IV
C.
I and III
4.
Which of the following is incorrect regarding the accounting for inventories?
A.
Legal title over inventories normally passes when possession over of the goods is transferred.
B.
Transfer of ownership over inventories may precede, coincide with or follow the transfer of physical
possession of the goods.
C.
Ownership over inventories may be transferred to the buyer even when legal title to the goods is retained by
the seller.
D.
Transfer of ownership over inventories may coincide with or follow but never precedes the transfer of physical
possession of the goods
5.
Evaluate whether the following statements are true or false:
I.
Perpetual inventory system should be used when the inventories have a high turnover but low in value.
II.
Under periodic inventory system, cost of goods sold is a residual amount.
III.
Inventory counts are not performed under perpetual inventory system since they have an updated balance of
inventory as well as cost of goods sold.
A.
B.
C.
D.
Statement I
True
False
False
True
Statement II
False
False
True
True
Statement III
True
False
False
True
6.
Evaluate whether the following statements are true or false in relation to PAS 2, Inventories
I.
All inventories are to be written-down to their net realizable value if their cost above their net realizable value.
II.
Entity Y acquires merchandise from Entity Z in an arrangement whereby Entity Z is obligated to repurchase
the merchandise at a future date. Entity Y shall include the merchandise acquired from Entity Z in its
inventory
III.
With FIFO, inventories are reported on the balance sheet at or near their current value.
A.
B.
C.
D.
Statement I
False
True
False
True
Statement II
False
False
True
False
Statement III
True
False
False
True
7.
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
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.
8.
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Page 10 of 10 | FAR Handouts No. 05
KARIM G. ABITAGO, CPA
INVENTORIES
9.
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
10.
In periods of rising prices, FIFO does not result to:
I.
Higher net income than LIFO
II.
Higher cost of goods sold than LIFO
III.
Lower ending inventory than LIFO
A.
I only
B.
II only
C.
III only
D.
E.
II and III
I and II
11.
Gross Profit Method is not useful when:
I.
A periodic system is use and inventories are required for interim statements.
II.
Estimating inventories to be reported in the external financial statements.
A.
I only
C.
Both I and II
B.
II only
D.
Neither I nor II
12.
What is the effect of freight in on the cost-retail ratio when using the conservative retail method?
A.
Increases the cost-retail ratio
B.
Decreases the cost-retail ratio
C.
No effect on the cost-retail ratio
D.
Depends on the amount of the net markup
--- END OF HANDOUTS ---
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REO CPA REVIEW PHILIPPINES
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(074) 665 6774
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REAL EXCELLENCE ONLINE CPA REVIEW
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