HAND-OUT NO.

7: COST FORMULAS, LCNRV, AND PURCHASE COMMITMENTS

Brian Christian S. Villaluz, CPA
FINANCIAL ACCOUNTING AND REPORTING
HAND-OUT NO. 7: Cost Formulas, LCNRV, and Purchase Commitments

COST FORMULAS
1. Inventories that are not ordinarily interchangeable
 Specific identification – this shall be used for inventories that are ordinarily interchangeable (i.e., those
that are individually unique) and those that are segregated for specific projects.

2. Large items of inventories that are ordinarily interchangeable

 First-In, First-Out (FIFO) – under this cost formula, it is assumed that inventories that were purchased
or produced first are sold first, and therefore unsold inventories at the end of the period are those most
recently purchased or produced.
 Average method
 Weighted average – the average method used under periodic system.
 Moving average – the average method used under perpetual system.

IAS 2 does not permit the use of last-in, first-out (LIFO) cost formula.

Problem 1: (Comprehensive: Cost Formulas)

The following information has been extracted from the records about one product:

Date Transaction Units Unit cost Total cost

8/1 Beginning inventory 2,000 36.00 P72,000
8/7 Purchase 3,000 37.20 111,600
8/12 Sales 4,200
8/13 Sales return 600
8/21 Purchase 4,800 38.00 182,400
8/22 Sales 3,800
8/29 Purchase 1,900 38.60 73,340
8/30 Purchase return 300 38.60 11,580

Compute for the (a) ending inventory and (b) cost of sales under the following cost formulas:
1. FIFO – periodic
2. FIFO – perpetual
3. Weighted average
4. Moving average

Problem 2: (FIFO Cost Flow); (Answer: A)

Mallow Company had 150,000 units of Product Z on hand at January 1, costing P21 each.

Purchases of product Z during the month of December were:

Units Unit cost

December 10 200,000 22
18 250,000 23
29 100,000 24

A physical count on December 31 shows 250,000 units of product Z on hand.

What is the cost of the inventory on December 31 under the FIFO method?
A. 5,850,000 B. 5,550,000
C. 5,350,000 D. 5,250,000

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 HAND-OUT NO. 7: COST FORMULAS, LCNRV, AND PURCHASE COMMITMENTS
Brian Christian S. Villaluz, CPA
Problem 3: (FIFO Cost Flow); (Answer: A)
JJ Company used the perpetual system.

The following information has been extracted from the records about one product:

Units Unit cost Total cost

Jan. 1 Beginning balance 8,000 70.00 560,000
Jan. 6 Purchase 3,000 70.50 211,500
Feb. 5 Sale 10,000
Mar. 5 Purchase 11,000 73.50 808,500
Mar. 8 Purchase return 800 73.50 58,800
Apr. 10 Sale 7,000
Apr. 30 Sale return 300

If the FIFO cost flow is used, what is the cost of the inventory on April 30?
A. 330,750 B. 315,000
C. 433,876 D. 329,360

Problem 4: (FIFO Periodic Cost Flow; Weighted Average); (Answer: D; A)

Alyanna Company is a wholesaler of office supplies. The FIFO periodic inventory is used.

The company reported the following activity for inventory of pens during the month of October:

Units Cost
October 1 Inventory 20,000 36.00
7 Purchase 30,000 37.20
12 Sale 36,000
21 Purchase 48,000 38.00
22 Sale 38,000
29 Purchase 16,000 38.60

What is the ending inventory on October 31?

A. 1,500,800 B. 1,501,600
C. 1,522,880 D. 1,529,600

What is the ending inventory on October 31 if the company uses the weighted average method?
A. 1,500,800 B. 1,501,600
C. 1,522,880 D. 1,529,600

Problem 5: (Moving Average); (Answer: B)

During January, Penny Company which used a perpetual inventory system recorded the following information pertaining to
inventory:

Units Unit cost Total cost Units on hand

Balance on 1/1 10,000 100 1,000,000 10,000
Purchased on 1/7 6,000 300 1,800,000 16,000
Sold on 1/20 9,000 7,000
Purchased on 1/25 4,000 500 2,000,000 11,000

Under the moving average method, what amount should Penny report as inventory on January 31?
A. 2,640,000 B. 3,225,000
C. 3,300,000 D. 3,900,000

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 HAND-OUT NO. 7: COST FORMULAS, LCNRV, AND PURCHASE COMMITMENTS
Brian Christian S. Villaluz, CPA
Problem 6: (Moving Average); (Answer: A)
TBH Company provided the following data relating to an inventory item:

Units Unit cost Total cost

Jan. 1 Beginning balance 5,000 200 1,000,000
12 Purchase 5,000 250 1,250,000
15 Sale 7,000
16 Sale return 1,000
29 Purchase 16,000 150 2,400,000
30 Purchase return 2,000 150 300,000

Under the perpetual system, what is the moving average unit cost on January 31?
A. 167 B. 165
C. 181 D. 225

SUBSEQUENT MEASUREMENT
Inventory shall be measured at the lower of cost and net realizable value. IAS 2 par. 29 states that inventories are usually
written down to net realizable value item by item. In some circumstances, however, it may be appropriate to group similar
or related items. It is not appropriate to write inventories down on the basis of a classification of inventory, for example,
finished goods.

Problem 7: (LCNRV)
HQ Company provided the following inventory data at year-end:

Cost NRV
Product A 2,200,000 2,500,000
Product B 1,700,000 1,500,000
Product C 700,000 800,000
Product D 400,000 500,000

What amount should be reported as inventory at year-end?

A. 5,000,000 B. 5,300,000
C. 4,800,000 D. 5,200,000

Problem 8: (Inventory Writedown)

At year-end, JJ Company reported ending inventory at P3,000,000, and the allowance for inventory writedown before any
adjustment at P150,000.

Product A Product B Product C Product D

Historical cost 800,000 1,000,000 700,000 500,000
Replacement cost 900,000 1,200,000 1,000,000 600,000
Sales price 1,200,000 1,300,000 1,250,000 1,000,000
Net realizable value 550,000 1,100,000 950,000 350,000
Normal profit 250,000 150,000 300,000 300,000

What amount of loss on inventory writedown should be included in cost of goods sold?
A. 100,000 B. 200,000
C. 400,000 D. 250,000

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 HAND-OUT NO. 7: COST FORMULAS, LCNRV, AND PURCHASE COMMITMENTS
Brian Christian S. Villaluz, CPA
Problem 9: (LCNRV; Various cases)
Mishima Company carried four items in its inventory. The following per unit data relate to these items at the end of first year
of operations:

Units Cost Sale Selling Normal

price cost profit
1st category
Product A 25,000 105 130 15 20
Product B 20,000 85 90 10 10

2nd category
Product C 40,000 50 45 5 5
Product D 30,000 65 75 15 10

1. What is the measurement of inventory under LCNRV applied to individual item?

A. 7,625,000 B. 8,275,000
C. 7,725,000 D. 7,875,000

2. What is the measurement of inventory under LCNRV applied to inventory category?

A. 7,875,000 B. 7,725,000
C. 8,275,000 D. 7,625,000

3. What is the measurement of inventory under LCNRV applied to inventory as a whole?

A. 8,275,000 B. 7,625,000
C. 7,875,000 D. 7,725,000

Purchase commitments
A purchase commitment is an obligation of the company to acquire certain goods sometime in the future at a fixed price
and fixed quantity.
 Any losses which are expected to arise from non-cancelable commitments shall be recognized.
 A purchase commitment must be non-cancelable in order that a loss on purchase commitment can be
recognized.
 Gain on purchase commitment is limited to the loss on purchase commitment previously recorded.

Problem 10: (Purchase Commitment)

On November 25, 2019, RT Company entered into a commitment to purchase 10,000 units of product G on February 15,
2020 at a price of P310 per unit.

On December 31, 2019, the market price of product G is P270 per unit. On February 15, 2020, the market price of product
G is P300 per unit.

1. What is the loss on purchase commitment to be recognized on December 31, 2019?

A. 400,000 B. 100,000
C. 300,000 D. -0-

2. What is the gain on purchase commitment to be recognized on February 15, 2020?

A. 400,000 B. 300,000
C. 100,000 D. -0-

3. What amount should be debited to purchases on February 15, 2020?

A. 3,000,000 B. 3,100,000
C. 2,700,000 D. 3,500,000

4. What amount should be recognized as accounts payable on February 15, 2020?

A. 2,700,000 B. 3,100,000
C. 3,500,000 D. 3,000,000

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 HAND-OUT NO. 7: COST FORMULAS, LCNRV, AND PURCHASE COMMITMENTS
Brian Christian S. Villaluz, CPA
FINANCIAL ACCOUNTING THEORIES
1. Which of the following inventory method reports most closely the current cost of inventory?
A. FIFO
B. Specific identification
C. Weighted average
D. LIFO

2. In a period of falling prices, the use of which inventory cost flow method would typically result in the highest cost of
goods sold?
A. FIFO
B. LIFO
C. Weighted average
D. Specific identification

3. In a period of rising prices, the inventory cost allocation method that tends to result in the highest reported net
income is
A. FIFO
B. LIFO
C. Moving average
D. Weighted average

4. LUMA NA Co. buys and sells antiques. Each product in unique. If the entity adopts IAS 2 Inventories, the entity
A. Is required to use specific identification.
B. Is required to use FIFO.
C. Is required to use average method
D. Has the option of using either FIFO or specific identification

5. 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 than a periodic inventory system.
D. Result in a lower ending inventory than a periodic inventory system.

6. IFRS prohibits which of the following cost flow assumptions?

A. FIFO
B. LIFO
C. Specific identification
D. Average

7. When applying the LCNRV, inventories are

A. Usually written down to NRV on an item by item basis.
B. Usually not written down below fair value.
C. Usually written down to NRV on per classification basis e.g., as finished goods, work-in-progress, and raw
materials.
D. All of the foregoing are true.

8. According to IAS 2 Inventories, the best evidence of the NRV of raw materials is
A. Estimated selling price less costs to sell
B. Estimated selling price less costs to complete and costs to sell
C. Replacement cost
D. Fair value less costs to sell

9. Raw materials and manufacturing supplies held for use in the production of inventories are
A. Required under IAS 2 Inventories to be separately presented from the other inventories.
B. Not disclosed since they are normally immaterial.
C. Not written down below cost if the finished products in which they will be incorporated are expected to be sold
at or above cost.
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 HAND-OUT NO. 7: COST FORMULAS, LCNRV, AND PURCHASE COMMITMENTS
Brian Christian S. Villaluz, CPA
D. All of these.

10. The credit balance that arises when a loss on a purchase commitment is recognized should be
A. Presented as a current liability.
B. Subtracted from ending inventory.
C. Presented as appropriation of retained earnings.
D. Presented in the income statement.

END OF HANDOUT

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