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INVENTORY THEORIES 1. Which of the following is not true regarding inventories? a. Held for sale in the ordinary course of business b. In the process of production for sale c. In the form of materials or supplies to be consumed in the production process d. Held for use in the production or supply of goods or services 2. Which of the following would not likely be reported as inventory? a. Land acquired for resale by a real estate firm b. Stocks and bonds held for resale by brokerage firm c. Partially completed goods held by a manufacturing firm d. Machinery acquired by a manufacturing firm for the use in the production process 3. Which of the following describes the flow of product costs through inventory account of the manufacturer? a. Raw materials, goods in process, factory overhead, finished goods b. Raw materials, goods in process, finished goods c. Raw materials, direct labor, factory overhead, finished goods d. Raw materials, direct labor, factory overhead 4. The costs of purchase of inventories comprise all of the following, except a. Purchase price b. Import duties and other taxes c. Transport handling and other costs directly attributable to the acquisition of inventories d. Trade discount, rebates and other similar terms 5. The cost of conversion of inventories include all of the following, except a. Costs directly attributable to the units of production, such as direct labor b. Systematic allocation of fixed production overhead c. Systematic allocation of variable production overhead d. Systematic allocation of administrative overhead 6. Fixed production overheads include all of the following, except a. Indirect materials and indirect labor b. Depreciation of factory building c. Maintenance of factory equipment d. Cost factory management and administration 7. How should unallocated fixed overhead costs be treated? a. Allocated to finished goods and cost of goods based on ending balances in the accounts b. Allocated to raw materials, work in process and finished goods, based on the ending balances of the accounts c. Recognized as an expense in the period in which they are incurred d. Allocated to work in process, finished goods and cost of goods sold based on ending balances of the accounts 8. The credit balance that arises when a net loss in a purchase commitment is recognized should be a. Presented as current liability b. Subtracted from ending inventory c. Presented as an appropriation of retained earnings d. Presented in the income statement 9. Which of the following s not acceptable is not an acceptable basis for valuation of inventories in published financial statements? a. Historical cost b. Standard cost c. Prime cost d. Current selling price less cost to complete and cost to sell 10. The cost of inventories that are not ordinarily interchangeable and goods or services produced and segregated for specific projects shall be measured using a. FIFO method b. Weighted average method c. LIFO method d. Specific identification method 11. The specific identification method of inventory costing
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a. Eliminates all opportunity of profit manipulation b. Matches the flow of recorded cost with physical flow of goods c. Can be used only with perpetual inventory method d. Is in violation of GAAP The cost of inventories shall be measured using a. FIFO method b. Weighted average method c. LIFO method d. Either A or B Net realizable value is a. Current replacement cost b. Estimated selling price c. Estimated selling price less estimated cost to complete d. Estimated selling price less estimated cost to complete and cost to sell What is the maximum amount at which inventory can be valued when the goods have experienced permanent decline in value? a. Historical cost b. Sales price c. Net realizable value d. Net realizable value less normal profit margin Inventories are usually written down to net realizable value a. Item by item b. By classification c. By total d. By segment During periods of rising prices, when FIFO method is used, a perpetual inventory system would a. Not be permitted b. Results in a higher ending inventory than periodic inventory system c. Result in the same ending inventory as the periodic inventory system d. Results in a lower ending inventory than periodic inventory system This method is often used for convenience for measuring inventories of large number or rapidly changing items with similar margins for which it is impracticable to use other costing methods a. Standard costing method b. Retail method c. Gross profit method d. Relative sales price method In applying retail method, the standard requires the use of a. Conservative retail b. Average cost retail c. FIFO retail d. LIFO retail To produce an inventory valuation which approximates the lower of average cost or market using the conservative retail method, the computation of the ratio of cost to retail should a. Include markups but not markdowns b. Include markups and markdowns c. Ignore both markups and markdowns d. Include markdowns but not markups The gross profit method of estimating ending inventory may be used for all of the following, except a. Higher retail prices b. Lower net markups c. More employee discounts given d. Higher freight charges PROBLEMS
1. ACER Company reported P5,000,000 of inventory on December 31, 2015 based on physical count. Additional information is as follows:
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Excluded from the physical count were goods billed to customer, FOB shipping point, on December 31, 2015. The goods had a cost of P200,000 and had been billed at P350,000. The shipment is ready for pick-up by the delivery contractor on January 5, 2016 Goods were in transit from a vendor. The invoice cost was P300,000 and goods were shipped FOB shipping point on December 31, 2015 Work in process costing P400,000 was sent to an outside processor for finishing on December 10, 2015 Goods out on consignment with sales price of P1,000,000 and markup of 25% on cost. Shipping cost amounted to P50,000. What is the correct amount of inventory on December 31, 2015? a. P6,750,000 b. P6,700,000 c. P6,550,000 d. P6,950,000 On June 1, 2015, Hanabishi sold merchandise with a list price of P5,000,000 to a customer. Hanabishi allowed trade discounts of 20% and 10%. Credit terms were 5/10, n/30 and the sale was made FOB shipping point. Hanabishi prepaid P100,000 of delivery cost for the customer as an accommodation. On June 11, 2015 what is the full remittance from the customer? a. P3,600,000 b. P3,420,000 c. P3,700,000 d. P3,520,000 Hogwarts School of Witchcrafts entered into a purchase commitment on November 15, 2015 to purchase 100,000 barrels of aviation fuel for P55 per barrel on March 31, 2016. The entity entered into this purchase commitment to protect itself against the volatility in the aviation fuel market. By December 31, 2015, the purchase price of aviation fuel had fallen to P50 per barrel. However, by March 31, 2016, when the entity took delivery of the 100,000 barrels the price of aviation fuel had risen to P58 per barrel. How much should be recognized as gain on purchase commitment for 2016? a. P500,000 b. P300,000 c. P800,000 d. P0 The following information was derived from the accounting records of Empleo Company for the current year: Myra’s warehouse Goods held by consignees Beginning inventory……………………… P 1,100,000 120,000 Purchases………………………………… 4,800,000 600,000 Freight in………………………………….. 100,000 Transportation to consignee……………. 50,000 Freight out………………………………… 300,000 80,000 Ending inventory…………………………. 1,450,000 200,000 What is the cost of goods sold for the current year? a. P4,550,000 b. P4,850,000 c. P5,070,000 d. P5,120,000 Hannah Company purchases motorcycles from various countries and exports them to Europe. Hannah Company has incurred the following costs during the current year: Cost of purchases based on vendors’ invoice……………………………….. P 5,000,000 Trade discount on purchases, already deducted from invoice…………….. 500,000 Import duties……………………………………………………………………… 400,000 Freight and insurance on purchases………………………………………….. 1,000,000 Other handling costs relating to imports………………………………………. 100,000 Brokerage commission paid to agents for arranging imports………………. 200,000 Sales commission paid to sales agents………………………………………. 300,000
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After sales warranty cost……………………………………………………….. 250,000 Salaries of accounting department…………………………………………….. 600,000 What is the total cost of the purchases? a. P5,700,000 b. P6,100,000 c. P6,700,000 d. P6,500,000 On July 1, 2015, Dreamworks Animation recorded purchases of inventory of P3,000,000 and P2,000,000 under credit terms of 2/15, n/30. The payment due on the P3,000,000 purchase was remitted on July 16, 2015. The payment due on the P2,000,000 purchase was remitted on July 31. Under the net method and gross method, these purchases should be included at what amount in the determination of the cost of goods available for sale? Net Method Gross Method a. P 4,900,000 P4,940,000 b. P4,900,000 P5,000,000 c. P4,940,000 P4,900,000 d. P5,000,000 P4,900,000 The following information has been extracted from the records of Marianne Company about one of its product: Unit Unit Cost Total Jan. 1 Beginning Balance 10,000 150 1,500,000 5 Purchase 10,000 180 1,800,000 15 Sale 15,000 16 Sales Return 1,000 25 Purchase 4,000 200 800,000 26 purchase return 500 200 100,000 Under the FIFO, what should be reported respectively as cost of ending inventory and cost of goods sold? a. 1,780,000 and 2,220,000 b. 1,790,000 and 2,210,000 c. 1,425,000 and 2,575,000 d. 1,900,000 and 2,100,000 Using the same information in no. 7, under the perpetual average method or moving average method, what should be reported respectively as cost of ending inventory and cost of goods sold? a. 1,690,000 and 2,310,000 b. 1,790,000 and 2,210,000 c. 1,700,500 and 2,299,500 d. 1,616,995 and 2,383,005 Using the same information in no. 7, under the periodic average method or weighted average method, what should be reported respectively as cost of ending inventory and cost of goods sold? a. 1,616,995 and 2,383,005 b. 1,790,000 and 2,210,000 c. 1,678,365 and 2,321,635 d. 1,700,000 and 2,300,000 Vista Company provided the following data for 2015 Inventory – January 1 Cost……………………………………………………………………………… P 3,000,000 Net Realizable Value………………………………………………………….. 2,800,000 Net Purchases…………………………………………………………………………… 8,000,000 Inventory – December 31 Cost……………………………………………………………………………... 4,000,000 Net Realizable Value………………………………………………………….. 3,700,000 Under PAS 2, Inventories, what should be reported as cost of goods sold? a. P7,000,000 b. P7,100,000 c. P7,300,000
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d. P7,200,000 11. On December 31, 2015, Neverland Company’s ending inventory was P3,000,000, and the allowance for inventory write down before any adjustment was P150,000. Relevant information on December 31, 2015 follows: Cost Replacement Cost Sales Price NRV Profit Bags 800,000 900,000 1,200,000 550,000 250,000 Shoes 1,000,000 1,200,000 1,300,000 1,100,000 150,000 Clothing 700,000 1,000,000 1,250,000 950,000 300,000 Lingerie 500,000 600,000 1,000,000 350,000 300,000 How much loss on inventory write down is included in 2010 cost of sales? a. P50,000 b. P200,000 c. P400,000 d. P250,000 12. Using the same information in no. 11, at what amount should the inventory be carried in the statement of financial position? a. P3,000,000 b. P2,950,000 c. P2,600,000 d. P3,350,000 13. Globalport’s accounting records indicated the following for 2015: Inventory, January 1………………………………………………………….. P 5,000,000 Purchases……………………………………………………………………… 23,000,000 Sales……………………………………………………………………………. 25,000,000 A physical inventory taken on December 31, 2015 resulted in an ending inventory of P5,000,000. On December 31, 2015, unsold goods on consignment with selling price of P1,500,000 are in the hands of the consignee. The gross profit on cost remained constant at 25% in recent years. Globalport suspects that some inventory may have been taken by a new employee. At December 31, 2015, what is the estimated cost of missing inventory? a. P3,050,000 b. P3,350,000 c. P1,800,000 d. P1,500,000 14. On the night of September 30, 2015, a fire destroyed most of the merchandise inventory of Emerald Corporation. All goods were completely destroyed except for partially damaged goods that normally sell for P100,000 and that had an estimated realizable value of P25,000 and undamaged goods that normally sell for P60,000. The following data are available Inventory – January 1…………………………………………………………. P 600,000 Net purchases, January 1 to September 30……………………………….. 4,300,000 Net sales, January 1 to September 30……………………………………. 5,600,000 Total 2009 2008 2007 Net Sales 9,000,000 5,000,000 3,000,000 1,000,000 Cost of sales 6,750,000 3,840,000 2,200,000 710,000 Gross profit 2,250,000 1,160,000 800,000 290,000 What is the estimated amount of fire loss on September 30, 2015? a. P700,000 b. P615,000 c. P630,000 d. P580,000 15. On December 31, 2015, the Fire Nation attacked and damaged the warehouse and factory of the Earth Kingdom, completely destroying the work in process inventory. There was no damage to either the raw materials or the finished goods inventory. The physical inventory revealed the following: January 1 December 31 Raw Materials………………… P 1,700,000 2,000,000
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Work in Process……………… 4,300,000 0 Finished Goods………………. 6,000,000 4,500,000 The gross profit margin historically approximated 30% of sales. The sales for the year amounted to P20,000,000. Raw material purchases totaled P4,000,000. Direct labor costs for the year amounted to P5,000,000, and manufacturing overhead has been applied at 60% of direct labor. What was the inventory loss on December 31, 2015? a. P3,500,000 b. P3,800,000 c. P2,500,000 d. P1,500,000 Johnson and Johnson’s Company uses the retail inventory method to approximate its ending inventory. The following information is available for the current year: Cost Retail Beginning inventory P 650,000 1,200,000 Purchases 9,000,000 14,700,000 Freight in 200,000 Purchase returns 300,000 500,000 Purchase allowances 150,000 Departmental transfer in 200,000 300,000 Net markups 300,000 Net markdowns 1,000,000 Sales 9,500,000 Sales discount 100,000 Employee discounts 500,000 Estimated normal shoplifting losses 600,000 Estimated normal shrinkage 400,000 What should be reported as the estimated cost of ending inventory using the lower of average cost or market? a. P2,400,000 b. P2,460,000 c. P3,060,000 d. P2,700,000 Using the same information in no. 16, what should be reported as estimated cost of ending inventory using the average cost approach of applying retail method? a. P2,560,000 b. P2,624,000 c. P3,264,000 d. P2,880,000 Blackberry Inc. uses retail method of inventory valuation. The following information is available: Cost Retail Beginning inventory P 1,400,000 2,000,000 Purchases 5,850,000 8,000,000 Net markups 1,500,000 Net markdowns 500,000 Sales 7,500,000 What would be the estimated cost of the ending inventory using FIFO retail? a. P2,275,000 b. P2,375,000 c. P2,310,000 d. P2,205,000 Robinsons Corporation’s usual sales term are n/60. FOB shipping point. Sales, net of returns and allowances, totaled P9,200,000 for the year ended December 31, 2015, before year-end adjustments. Additional data are as follows:
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On December 31, 2015, Robinsons authorized a customer to return, for full credit, goods shipped and billed at P200,000 on December 15, 2015. The returned goods were received by Robinsons on January 15, 2016, and P200,000 credit memo was issued and recorded on the same date. Goods with an invoice amount of P300,000 were billed and recorded on January 15, 2016. The goods were shipped on December 31, 2015 Goods with an invoice amount of P400,000 were billed and recorded on December 31, 2015. The goods were shipped on January 15, 2016 What amount should be reported as net sales for 2015? a. P9,300,000 b. P9,100,000 c. P9,000,000 d. P8,900,000 20. Air21 Express’ accounts payable on December 31, 2015 totaled P4,500,000 before any necessary yearend adjustments relating to the following transactions: On December 31, 2015, Air21 Express wrote and recorded checks to creditors totaling P2,000,000 causing an overdraft of P500,000 in its bank account on December 31, 2015. The checks were mailed on January 15, 2016. On December 31, 2015, Air21 Express purchased and received goods for P750,000, terms 2/10, n/30. It record purchases and accounts payable at net amount. The invoice was recorded and paid January 10, 2016 Goods shipped FOB destination on December 31, 2015 from a vendor to Air21 Express were received January 15, 2016. The invoice cost was P325,000. On December 31, 2015, what amount should Air21 Express report as accounts receivable? a. P7,575,000 c. P7,235,000 b. P7,250,000 d. P7,553,000
