FINANCIAL ACCOUNTING REVIEW

INVENTORIES

Multiple Choice

1. The factor which determines whether or not goods should be included in a physical
count of inventory is
a. physical possession.
b. legal title.
c. management's judgment.
d. whether or not the purchase has been paid for.

2. If goods in transit are shipped FOB destination

a. the seller has legal title to the goods until they are delivered.
b. the buyer has legal title to the goods until they are delivered.
c. the transportation company has legal title to the goods while the goods are in
transit.
d. no one has legal title to the goods until they are delivered.

3. A recommended internal control procedure when undertaking a physical stocktake, is

that the counting should be done by employees who do not have custodial
responsibility for the inventory. This is an example of what type of internal control
procedure?
a. Establishment of responsibility
b. Documentation of procedure
c. Segregation of duties
d. Division of labour

4. Westcoe’s goods in transit at December 31 include:

sales made purchases made
(1) FOB destination (3) FOB destination
(2) FOB delivery point (4) FOB delivery point
Which items should be included in Westcoe's inventory at December 31?
a. (2) and (3)
b. (1) and (4)
c. (1) and (3)
d. (2) and (4)

5. Goods in transit should be included in the inventory of the buyer when the
a. public carrier accepts the goods from the seller.
b. terms of sale are FOB delivery point.
c. terms of sale are FOB destination.
d. none of the above.

6. A firm just starting in business purchased three inventory items at the following
prices. First purchase Php80; second purchase Php95; third purchase Php85. If the
firm sold two units for a total of Php240 and used FIFO costing, the gross profit for
the period would be
a. Php65. c. Php60
b. Php75. d. Php50

Use the following information for questions 7–8.

An entity just starting business made the following four inventory purchases in June:
June 1150 units Php1,500
June 1020 units 1,170
June 1520 units 1,260
June 1320 units 990
Php 4,920
A physical count of inventory on June 30 reveals that there are 200 units on hand.

7. Using the FIFO inventory method the amount allocated to cost of sales for June is
a. Php3,500. c. Php4,770
b. Php4,659. d. Php4,200
c. $4,770

8. Using the weighted average cost method the amount allocated to the ending
inventory on June 30 is
a. Php185. c. Php261
b. Php226. d. Php196.

9. Inventory costs may be thought of as a pool of costs consisting of which two

elements?
a. The cost of beginning inventory and the cost of ending inventory
b. The cost of ending inventory and the cost of goods purchased during the year
c. The cost of beginning inventory and the cost of goods purchased during the
year
d. The difference between the costs of goods purchased and the cost of sales
during the year

10. A problem with the specific identification method of inventory valuation is that
a. inventories can be reported at actual costs.
b. some types of inventory cannot use the method.
c. matching is not achieved.
d. the lower of cost or net realisable value rule cannot be applied.

11. The accounting principle that requires the cost flow assumption be consistent with the
physical movement of goods in the warehouse is
a. called the matching principle.
b. called the consistency principle.
c. nonexistent; that is, there is no such accounting requirement.
d. called the physical flow assumption.

12. Which statement is correct with respect to inventories?

a. The FIFO method assumes that the earliest goods acquired are the last to be
sold.
b. It is generally good business management to sell the most recently acquired
goods first.
c. Under FIFO the ending inventory is based on the latest units purchased.
d. FIFO seldom coincides with the actual physical flow of inventory.

13. If companies have identical inventoriable costs but use different inventory flow
assumptions, when the price at which goods are purchased has not been constant, then
the
a. cost of sales for the companies will be identical.
b. cost of goods available for sale of the companies will be identical.
c. ending inventory of the companies will be identical.
d. profit of the companies will be identical.

14. The specific identification method of inventory costing

a. always maximises an entity's profit.
b. always minimises an entity's profit.
c. has no effect on an entity's profit.
d. cannot predict whether the profit will be higher or lower than with other
methods of inventory valuation.

15. The managers of Teng Enterprises receive performance bonuses based on the profit of
the firm. Which inventory costing method are they likely to favour in periods of
rising prices?
a. FIFO
b. Weighted-average Cost
 c. LIFO
d. Physical inventory method

16. Understating beginning inventory will understate

a. assets.
b. cost of sales.
c. profit.
d. owner's equity.

17. An entity uses the periodic inventory method and beginning inventory is overstated
by Php4,000 in year 2 because the ending inventory in year 1 was overstated by
Php4,000. The position of the statement of financial position at the end of year 2 is
Assets Owner’s Equity
a. Overstated Overstated
b. Correct Correct
c. Understated Understated
d. Overstated Correct

18. The E, S and J partnership made an inventory count on December 31, 2009. During
the count, one of the clerks made the error of counting an inventory item twice. For
the statement of financial position at December 31, 2009, the effects of this error are
Assets Liabilities Owner’s Equity
a. overstated understated overstated
b. understated no effect understated
c. overstated no effect overstated
d. overstated overstated understated

19. The following information is available for Tye Manufacturing at December 31 2009.
Beginning inventory Php80,000; ending inventory Php120,000; cost of sales
Php1,200,000; and sales Php1,600,000. Tye’s inventory turnover ratio in 2009 is
a. 12 times. c. 16times
b. 15 times. d. 10 times

20. The Jansen Company uses the perpetual inventory system and the moving average
method to value inventories. On August 1, there were 10,000 units valued at
Php30,000 in the beginning inventory. On August 10, 20,000 units were purchased
for Php6 per unit. On August 15, 24,000 units were sold for Php12 per unit. The
amount charged to cost of sales on August 15 was
a. Php80,000. c. Php144,000
b. Php120,000. d. Php108,000

21. Under the gross profit method, each of the following items are estimated except for
a. cost of ending inventory.
b. cost of sales.
c. cost of goods purchased.
d. gross profit.

22. The Watson Department Store utilises the retail inventory method to estimate its
inventories. It calculated its cost to retail ratio during the period at 75%. Goods
available for sale at retail amounted to Php200,000 and goods were sold during the
period for Php125,000. The estimated cost of the ending inventory is
a. Php75,000. c. Php56,250
b. Php150,000. d. Php100,000

21. Wiley’s records indicate the following information for the year:
Inventory 1/1 Php 440,000
Purchases 1,800,000
Net Sales 2,400,000
On December 31 a physical inventory determined that ending inventory of
phpPhp480,000 was in the warehouse. Wiley’s gross profit on sales has remained
 constant at 30%. Wiley suspects some of the inventory may have been taken by a new
employee.

At December 31 what is the estimated cost of missing inventory?

a. Php80,000.
b. Php160,000.
c. Php240,000.
d. Php560,000.

22. Which of the following would not be reported as inventory?

a. Land acquired for resale by real estate firm.
b. agricultural produce held by a firm.
c. Partially completed goods held by a manufacturing company.
d. Machinery acquired by a manufacturing company for use in the
production process.

23. Goods on consignment should be included in the inventory of

a. the consignor
b. the consignee
c. both the consignor and the consignee
d. neither the consignor nor the consignee.

23. Which of the following shall be included in the cost of inventories?

a. selling costs.
b. freight charges on goods acquired FOB Destination.
c. abnormal amounts of wasted materials, labor, or other production costs.
d. storage costs that are necessary to a further production process.

24. Inventories do not encompass

a. merchandise purchased by a retailer and held for resale.
b. land and other property held for sale by a real estate developer.
c. finished goods produced.
d. abnormal amounts of wasted materials, labor and other production
costs.

25. Under these shipping terms, the buyer pays for the freight, which legally must be
borne by the seller.
a. FOB shipping point, freight prepaid.
b. FOB shipping point, freight collect.
c. FOB destination, freight prepaid.
d. FOB destination, freight collect.

26. When using the periodic inventory method, which of the following generally would
not be separately accounted for in the computation of cost of goods sold?
a. Trade discounts applicable to purchases during the period.
b. Cash (purchase) discounts taken during the period.
c. Purchase returns and allowances of merchandise during the period.
d. Cost of transportation-in for merchandise purchases during the period.

27. How should the following costs effect a retailer’s inventory?

Freight-in Interest on inventory loan
a. Increase No effect
b. Increase Increase
c. No effect Increase
d. No effect No effect

28. Which of the following is not true of the perpetual inventory method?
a. Purchases are recorded as debits to inventory account.
b. The entry to record a sale includes a debit to cost of goods sold and a credit
to inventory.
 c. After a physical inventory count, inventory is credited for any missing
inventory.
d. Purchase returns are recorded by debiting accounts payable and
crediting purchase returns and allowances.

29. Which costing method is appropriate for inventories that are segregated for a specific
project and inventories that are not ordinarily interchangeable?
a. specific identification c. weighted average
b. standard cost d. moving average.

30. Which of the following inventory costing methods reports most closely the current
cost of inventory on the statement of financial position?
a. FIFO c. Specific identification
b. LIFO d. Weighted average method

31. 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 a higher ending inventory than a periodic inventory system.
c. result in the same ending inventory as a periodic inventory system.
d. result in a lower ending inventory than a periodic inventory system.

32. In a period of rising prices, the inventory cost formula that tends to result in the
highest reported profit is
a. FIFO c. moving average
b. specific identification d. LIFO

33. When using the moving average method of inventory valuation, a new cost must be
computed after each
a. purchase c. purchase and issuance from inventory
b. issuance from inventory d. month-end.

34. In periodic inventory system that the weighted average cost flow method, the
beginning inventory is
a. net purchases minus the ending inventory.
b. net purchases minus the cost of goods sold.
c. total goods available for sale minus the net purchases.
d. total goods available for sale minus the cost of goods sold.

35. The gross profit method of estimating inventory would not be useful when
a. a periodic system is in use and inventories are required for interim
statements.
b. inventories have been destroyed or lost by fire, theft, or other casualty, and
the specific data required for inventory valuation are not available.
c. there is a significant change in the mix of the products being sold.
d. there is significant unmonitored change in the relationship between
gross profit and the selling price of goods being sold.

36. The retail inventory method would include which of the following in the calculation
of the goods available for sale at both cost and retail?
a. purchase returns c. markdowns
b. sales returns d. markups

37. The use of the goods profit method assumes that

a. the amount of gross profit is the same as in prior years.
b. sales and cost of goods sold have not changed from previous year.
c. inventory values have not increased from previous years.
d. the relationship between sales price and cost of goods sold is similar in
prior years.
38. The average retail method is based on the assumption that the
a. ratio of gross margin to sales is approximately the same each period.
b. ratio of cost to retail changes at a constant rate.
c. beginning inventory and the cost of goods sold contain in the same
proportion of high-cost and low-cost ratio goods.
d. gross margin percentage applicable to ending inventory and to the goods
sold during the period is the same.

39. Which statement is accurate about calculating the cost ratio to be used with the
average retail inventory method under IAS 2 inventories?
a. The beginning inventory is excluded and markdowns are not deducted.
b. The beginning inventory is included and markdowns are not deducted.
c. The beginning inventory is included and markdowns are deducted.
d. The beginning inventory is excluded and markdowns are deducted.

40. A company is using a periodic inventory system neglected to record a purchase of

merchandise on account at year-end. This merchandise was omitted from the year-end
physical count. How will these errors affect inventory at year-end and profit for the
year?
Inventory Profit
a. No effect understated
b. No effect overstated
c. Understated Understated
d. Understated No effect.

41. Toby’s Sportwear, Inc. regularly buys sweaters from Waley Company and is allowed
a trade discount of 20% and 10% from the list price. Toby made a purchase on March
20, 2016 and received an invoice with a list price of Php90,000, a freight charge of
Php5,000, and payment terms of net 30 days. What is the total cost of the inventory
purchase?
a. Php63,000 c. Php69,000
b. Php64,000 d. Php69,800.

42. Camil Company purchased an item of merchandise quoted and listed at Php150,000
under the following terms: Trade discount 15%,10%,5%, 2/10, n/30.

What was the invoice price of the merchandise?

a. Php100,900 c. Php109,012.50
b. Php105,000 d. Php106,832.25.

43. Mari Manufacturing Company has the following account balances at year end:
Office supplies Php 4,000
Raw materials 27,000
Work-in-process 59,000
Finished goods 72,000
Prepaid insurance 6,000
What amount should Morgan report as inventories in its statement of financial
position?
a. Php72,000 c. Php158,000
b. Php76,000 d. Php162,000

44. Lawson Manufacturing Company has the following account balances at year end:
Office supplies Php 4,000
Raw materials 27,000
Work-in-process 59,000
Finished goods 92,000
Prepaid insurance 6,000
What amount should Lawson report as inventories in its statement of financial position?
 a. Php92,000 c. Php178,000
b. Php96,000 d. Php182,000

45. Elen Corporation uses the perpetual inventory method. On March 1, it purchased
Php10,000 of inventory, terms 2/10, n/30. On March 3, Elkins returned goods that
cost Php1,000. On March 9, Elkins paid the supplier. On March 9, Elkins should
credit
a. purchase discounts for Php200.
b. inventory for Php200.
c. purchase discounts for Php180.
d. inventory for Php180.

46. Mae Corporation uses the perpetual inventory method. On March 1, it purchased
Php30,000 of inventory, terms 2/10, n/30. On March 3, Malone returned goods that
cost Php3,000. On March 9, Malone paid the supplier. On March 9, Malone should
credit
a. purchase discounts for Php600.
b. inventory for Php600.
c. purchase discounts for Php540.
d. inventory for Php540.

47. Bear Inc. took a physical inventory at the end of the year and determined that
Php650,000 of goods were on hand. In addition, Bell, Inc. determined that Php50,000
of goods that were in transit that were shipped f.o.b. shipping were actually received
two days after the inventory count and that the company had Php75,000 of goods out
on consignment. What amount should Bell report as inventory at the end of the year?
a. Php650,000 c. Php725,000
b. Php700,000 d. Php775,000

48. Bear Inc. took a physical inventory at the end of the year and determined that
Php475,000 of goods were on hand. In addition, the following items were not
included in the physical count. Bell, Inc. determined that Php60,000 of goods were in
transit that were shipped f.o.b. destination (goods were actually received by the
company three days after the inventory count). The company sold Php25,000 worth
of inventory f.o.b. destination. What amount should Bell report as inventory at the
end of the year?
a. Php475,000 c. Php500,000
b. Php535,000 d. Php560,000

48. Rose Inc. reported total assets of Php1,200,000 and net income of Php135,000 for the
current year. Risers determined that inventory was overstated by Php10,000 at the
beginning of the year (this was not corrected). What is the corrected amount for total
assets and net income for the year?
a. Php1,200,000 and Php135,000.
b. Php1,200,000 and Php145,000.
c. Php1,190,000 and Php125,000.
d. Php1,210,000 and Php145,000.

49. Rose Inc. reported total assets of Php1,600,000 and net income of Php85,000 for the
current year. Risers determined that inventory was understated by Php23,000 at the
beginning of the year and Php10,000 at the end of the year. What is the corrected
amount for total assets and net income for the year?
a. Php1,610,000 and Php95,000.
b. Php1,590,000 and Php98,000.
c. Php1,610,000 and Php72,000.
d. Php1,600,000 and Php85,000.

Use the following information for questions 50 through 52.

Hudson, Inc. is a calendar-year corporation. Its financial statements for the years 2016
and 2015 contained errors as follows:
 2016 2015
Ending inventory Php 3,000 over Php 8,000 over
Depreciation expense 2,000 under 6,000 over

50. Assume that the proper correcting entries were made at December 31, 2015. By how
much will 2016 income before taxes be overstated or understated?
a. Php1,000 understated c. Php2,000 overstated
b. Php1,000 overstated d. Php5,000 overstated.

51. Assume that no correcting entries were made at December 31, 2015. Ignoring income
taxes, by how much will retained earnings at December 31, 2016 be overstated or
understated?
a. Php1,000 understated c. Php5,000 understated
b. Php5,000 overstated d. Php9,000 understated

52. Assume that no correcting entries were made at December 31, 2015, or December 31,
2016 and that no additional errors occurred in 2017. Ignoring income taxes, by how
much will working capital at December 31, 2017 be overstated or understated?
a. Php0 c. Php2,000 understated
b. Php2,000 overstated d. Php5,000 understated

53. The following information is available for Nero Company for 2016:
Freight-in Php 30,000
Purchase returns 75,000
Selling expenses 150,000
Ending inventory 260,000
The cost of goods sold is equal to 400% of selling expenses. What is the cost of
goods available for sale?
a. Php600,000. c. Php815,000
b. Php890,000. d. Php860,000.

Use the following information for questions 54 and 55.

Waulin Co. records purchases at net amounts. On May 5 Winsor purchased

merchandise on account, Php16,000, terms 2/10, n/30. Winsor returned Php1,200 of
the May 5 purchase and received credit on account. At May 31 the balance had not
been paid.

54. The amount to be recorded as a purchase return is

a. Php1,080. c. Php1,200
b. Php1,224 d. Php1,176

55. By how much should the account payable be adjusted on May 31?
a. Php0 c. Php320
b. Php344 d. Php296.

Use the following information for questions 56 and 57.

The following information was available from the inventory records of Pretty Pau
Company for January:
Units Unit Cost Total Cost
Balance at January 1 3,000 Php 9.77 Php 29,310
Purchases:
January 6 2,000 10.30 20,600
January 26 2,700 10.71 28,917
Sales:
January 7 (2,500)
January 31 (4,000)
Balance at January 31 1,200
56. Assuming that Pretty Pau 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?
a. Php12,606 c. Php12,312
b. Php12,284. d. Php12,432

57. Assuming that Pretty Pau maintains perpetual inventory records, what should be the
inventory at January 31, using the moving-average inventory method, rounded to the
nearest peso?
a. Php12,606 c. Php12,312
b. Php12,284 d. Php12,432
.
Beautiful Mil Co. has the following data related to an item of inventory:
Inventory, March 1 100 units @ Php4.20
Purchase, March 7 350 units @ Php4.40
Purchase, March 16 70 units @ Php4.50
Inventory, March 31 130 units

58. The value assigned to cost of goods sold if Beautiful Mil uses FIFO is
a. Php579 c. Php1,723
b. Php552 d. Php1,696.

59. Pretty Mari Company has been using the average cost method of inventory valuation
for 10 years, since it began operations. Its 2015 ending inventory was Php40,000, but
it would have been Php60,000 if FIFO had been used. Thus, if FIFO had been used,
Pretty Mari's income before income taxes would have been
a. Php20,000 greater over the 10-year period.
b. Php20,000 less over the 10-year period.
c. Php20,000 greater in 2015.
d. Php20,000 less in 201.

60. June Corp. sells one product and uses a perpetual inventory system. The beginning
inventory consisted of 10 units that cost Php20 per unit. During the current month, the
company purchased 60 units at Php20 each. Sales during the month totaled 45 units
for Php43 each. What is the number of units in the ending inventory?
a. 10 units c. 25 units
b. 15 units. d. 70 units

61. June Corp. sells one product and uses a perpetual inventory system. The beginning
inventory consisted of 10 units that cost Php20 per unit. During the current month, the
company purchased 60 units at Php20 each. Sales during the month totaled 45 units
for Php43 each. What is the cost of goods sold using the FIFO method?
a. Php200 c. Php1,200
b. Php900 d. Php1,935

62. Checkers uses the periodic inventory system. For the current month, the beginning
inventory consisted of 1,200 units that cost Php12 each. During the month, the
company made two purchases: 500 units at Php13 each and 2,000 units at Php13.50
each. Checkers also sold 2,150 units during the month. Using the average cost
method, what is the amount of cost of goods sold for the month?
a. Php27,843 c. Php26,975
b. Php28,950 d. Php27,950

63. Chessy uses the periodic inventory system. For the current month, the beginning
inventory consisted of 200 units that cost Php65 each. During the month, the
company made two purchases: 300 units at Php68 each and 150 units at Php70 each.
Chessy also sold 500 units during the month. Using the average cost method, what is
the amount of ending inventory?
a. Php10,500 c. Php33,400
b. Php33,770 d. Php10,131.
64. Checkers uses the periodic inventory system. For the current month, the beginning
inventory consisted of 1,200 units that cost Php12 each. During the month, the
Phpcompany made two purchases: 500 units at Php13 each and 2,000 units at
Php13.50 each. Checkers also sold 2,150 units during the month. Using the FIFO
method, what is the ending inventory?
a. Php20,073 c. Php20,925
b. Php18,600 d. Php18,950

65. Chessy uses the periodic inventory system. For the current month, the beginning
inventory consisted of 200 units that cost Php65 each. During the month, the
company made two purchases: 300 units at Php68 each and 150 units at Php70 each.
Chessy also sold 500 units during the month. Using the FIFO method, what is the
amount of cost of goods sold for the month?
a. Php33,770 c. Php34,150
b. Php32,500 d. Php33,400.

66. Dole Corp.'s accounts payable at December 31, 2016, totaled Php800,000 before any
necessary year-end adjustments relating to the following transactions:
 On December 27, 2016, Dole wrote and recorded checks to creditors totaling
Php350,000 causing an overdraft of Php100,000 in Dole's bank account at December
31, 2016. The checks were mailed out on January 10, 2017.
 On December 28, 2016, Dole purchased and received goods for Php150,000, terms
2/10, n/30. Dole records purchases and accounts payable at net amounts. The invoice
was recorded and paid January 3, 2017.
 Goods shipped f.o.b. destination on December 20, 2016 from a vendor to Dole were
received January 2, 2017. The invoice cost was Php65,000.
At December 31, 2016, what amount should Dole report as total accounts payable?
a. Php1,362,000 c. Php1,050,000
b. Php1,297,000 d. Php950,000

67. The balance in Pretty Mom Co.'s accounts payable account at December 31, 2016
was Php700,000 before any necessary year-end adjustments relating to the following:
 Goods were in transit to Pretty Mom from a vendor on December 31, 2016. The
invoice cost was Php40,000. The goods were shipped f.o.b. shipping point on
December 29, 2016 and were received on January 4, 2017.
 Goods shipped f.o.b. destination on December 21, 2016 from a vendor to Pretty Mom
were received on January 6, 2017. The invoice cost was Php25,000.
 On December 27, 2016, Pretty Mom wrote and recorded checks to creditors totaling
Php30,000 that were mailed on January 10, 2017.
In Pretty Mom's December 31, 2016 statement of financial position, the accounts
payable should be
a. Php730,000 c. Php765,000
b. Php740,000 d. Php770,000.

68. Keri Co.'s accounts payable balance at December 31, 2016 was Php1,500,000 before
considering the following transactions:
 Goods were in transit from a vendor to Keri on December 31, 2016. The invoice price
was Php70,000, and the goods were shipped f.o.b. shipping point on December 29,
2016. The goods were received on January 4, 2017.
 Goods shipped to Keri, f.o.b. shipping point on December 20, 2016, from a vendor
were lost in transit. The invoice price was Php50,000. On January 5, 2017, Keri filed
a Php50,000 claim against the common carrier.

In its December 31, 2016 statement of financial position, Kerr should report accounts
payable of
a. Php1,620,000 c. Php1,550,000
b. Php1,570,000 d. Php1,500,000

69. Waley Retailers purchased merchandise with a list price of Php50,000, subject to
trade discounts of 20% and 10%, with no cash discounts allowable. Walsh should
record the cost of this merchandise as
a. Php35,000 c. Php39,000
 b. Php36,000 d. Php50,000

70. Keck Co. had 450 units of product A on hand at January 1, 2016, costing Php42 each.
Purchases of product A during January were as follows:
Date Units Unit Cost
Jan. 10 600 Php 44
18 750 46
28 300 48
A physical count on January 31, 2016 shows 600 units of product A on hand. The
cost of the inventory at January 31, 2016 under the FIFO method is
a. Php25,500 c. Php28,200
b. Php26,700 d. Php24,600