Inventories

1. A manufacturing company has which three basic types of inventory?

a. Finished goods, work-in-process and ready-to-sell-merchandise
b. Perpetual, periodic, and estimated
c. Perpetual, periodic, and estimated
d. Raw materials, work-in-process and finished goods

2. The seller actually paid the freight charges but is not legally responsible for the same.
a. FOB destination, freight prepaid c. FOB shipping point, freight prepaid
b. FOB destination, freight collect d. FOB shipping point, freight collect

3. Which of the following is not considered as inventory under PAS 2?

a. Land and other property purchased and held for resale
b. Supplies and materials awaiting use in the production process
c. Abnormal amounts of wasted materials, labor and other production costs
d. Costs of service for which a service provider has not yet recognized the related revenue
4. Which of the following conversion costs cannot be included in cost of inventory?
a. Cost of direct labor c. Production rent and utilities
b. Salaries of sales staff d. Factory overhead based on normal capacity

5. Freight and other handling charges incurred in the transfer of goods from consignor to consignee are
a. Inventoriable by the consignor c. Expense on the part of the consignor
b. Inventoriable by the consignee d. Expense on the part of the consignee

6. Ovation Company asks you to review its December31, 2010, inventory values and prepare the necessary
adjustments to the books. The following information is given to you.
a. Ovation uses the periodic method of recording inventory. A physical count reveals P2,348,900 inventory on
hand at December31, 2010.
b. Not included in the physical count of inventory is P134,200 of merchandise purchased on December 15 from
Standing. This merchandise was shipped f.o.b. shipping point on December 29 and arrived in January. The
invoice arrived and was recorded on December31.
c. Included in inventory is merchandise sold to Oval on December 30, f.o.b. destination. This merchandise
was shipped after it was counted. The invoice was prepared and recorded as a sale on account for P128,000 on
December 31. The merchandise cost P73,500, and Oval received it on January 3.
d. Included in inventory was merchandise received from Owl on December 31 with an invoice price of
P156,300. The merchandise was shipped f.o.b destination. The invoice, which has not yet arrived, has not
been recorded.
e. Not included in inventory is P85,400 of merchandise purchased from Oxygen Industries. The merchandise
was received on December 31 after the inventory had been counted. The invoice was received and
recorded on December 30.
f. Included in inventory was P104,380 of inventory held by Ovation on consignment from Ovoid
Industries.
g. Included in inventory is merchandise sold to Kemp f.o.b. shipping point. This merchandise was shipped
after it was counted. The invoice was prepared and recorded as a sale for P189,000 on December 31. The
cost of this merchandise was P105,200, and Kemp received the merchandise on January 5.
h. Excluded from inventory was carton labeled “Please accept for credit.” This carton contains merchandise
costing P15,000 which had been sold to a customer for P25,000. No entry had been made to the books to
reflect the return, but none of the returned merchandise seemed damaged.

The adjusted inventory cost of Ovation Company at December 31, 2010 should be
Ans. P2,373,920

7.Ian Company is a manufacturing entity. The cost of an inventory is shown on its card as follows:
Materials 300,000
Production labor costs 330,000
Production overheads 120,000
General administration costs 100,000
Marketing costs 50,000
What is the value of the inventory in Ian’s balance sheet?
Ans. 750,000

8.The New York Company Mfg. Co. in its Balance sheet as of December 31,2014 has an inventory in the amount of
P176,000 which consists of :
Direct Materials P 99,000
Direct Materials purchases in transit, FOB Destination 21,600
Direct Materials purchases in transit, FOB Shipping Point 16,200
Prepaid insurance on Inventory 3,600
 Work in Process 68,400
Finished Goods 81,000
Goods shipped on consignment, at selling price with 20% profit on sales 27,000

What is the cost of inventory to be shown in the statement of financial position of New York Mfg. as of December
31,2014?
Ans. P286,200

9. The management of Michael, Inc has engaged you to assist in the preparation of year-end financial statements.
You are told that on November 30, the correct inventory level was 145,730 units. During the month of December,
sales totaled 138,630 units including 40,000 units shipped on consignment to Matthew Corp. A letter received from
Matthew indicates that as of December 31, it has sold 15,200 units and was still trying to sell the remainder. A
review of the December purchase orders to various suppliers shows the following:

PO Date Inv. Date Qty in Date Date Terms

units shipped received
12/31/201 1/2/2013 4,200 1/2/2013 1/5/2013 FOB Destination
2
12/5/2012 1/2/2013 3,600 12/17/201 12/22/201 FOB Destination
2 2
12/6/2012 1/3/2013 7,900 1/5/2013 1/7/2013 FOB Shipping point
12/18/201 12/20/12 8,000 12/29/201 1/2/2013 FOB Shipping point
2 2
12/22/201 1/5/2013 4,600 1/4/2013 1/6/2013 FOB Destination
2
12/27/201 1/7/2013 3,500 1/5/2013 1/7/2013 FOB Destination
2
Michael, Inc uses the passing of legal title for inventory recognition.
How many units were sold during December?
Ans. 113,830 units

Inventory Valuation
1. What is the method of accounting for inventory in which the cost of goods sold is recorded each time a sale is
made?
a. Periodic system c. Professional system
b. Perpetual system d. Accounting system

2. A company's inventory cost was lower in FIFO that it would have been using LIFO. Assuming no beginning
inventory, in what direction did the cost of purchases move during the period?
a. Up c. Steady
b. Down d. Cannot be determined

3. During a period of steadily rising prices, which of the following methods of measuring the costs of goods sold
is likely to result in reporting the highest gross profit?
a. FIFO c. Specific identification
b. LIFO d. Average cost
c.
4. Inventories should be measured at
a. Cost or net realizable value, whichever is higher
b. Cost or fair value less costs to sell, whichever is lower
c. Lower of cost or net realizable value (LCNRV), item by time
d. Lower of cost or net realizable value (LCNRV), by total

5. When the periodic inventory system is used

a. Cost of goods sold is a residual amount, rather than an account
b. Ending inventory is treated as expense and beginning inventory is treated as assets
c. Two entries must be made when goods are purchased
d. A 'purchases' account is not used; all inventory purchase entries are debited to the inventory account

Use the following information for the next two questions.

Indiana uses the perpetual inventory system. Indiana’s inventory transactions for August 2014 were as follows:
NO. Unit Cost Total Cost
01 Aug Beg. Inventory 20 P4.00 P80
07 Aug Purchases 10 4.20 42.00
10 Aug Purchases 20 4.30 86.00
12 Aug Sales 15 ? ?
16 Aug Purchases 20 4.60 92.00
20 Aug Sales 40 ? ?
28 Aug Sales Returns 3 ? ?

6. Using the following information, assume that the Indiana uses the FIFO cost flow method and that the sales
returns relate to 20 August sales. The sales return should be costed back into inventory at what unit cost?
a. P4.00 c. P4.07
b. P4.30 d. P4.60
7. Assuming that Indiana uses the weighted average cost flow method, the 12 August sales should be costed at
what unit cost?
a. P4.16 c. P4.07
b. 4.30 d. P4.60
8. The following information pertains to Nando Company, seller of recliners for the year ended December
31,2013
    Units Unit Cost Total Cost
January 1 Inventory on hand 200 3,000 P600,000
April 3 Purchase 300 3,200 960,000
July 1 Purchase 300 3,300 990,000
October 1 Purchase 200 3,400 680,000
December 26 Purchase 200 3,500 700,000
  Total 1,200   P3,930,000

The company sold 400 recliners on June 25 and 500 on December 10. What is the weighted average cost of
the inventory on December 1, 2013?
Ans. 982,500

9. December 31, 2013 included the following accounts:

Sales (100,000 units at P150) 15,000,000
Sales discount 1,000,000
Purchases 9,300,000
Purchase discount 400,000

The inventory purchases during 2013 were as follows:

  Units Unit Cost Total cost
Beginning inventory, Jan 1 20,000 60 1,200,000
Purchases, quarter ended March 31 30,000 65 1,950,000
Purchases, quarter ended June 30 40,000 70 2,800,000
Purchases, quarter ended Sept 30 50,000 75 3,750,000
Purchases, quarter ended Dec 31 10,000 80 800,000
  150,000   10,500,000

Mishiel’ accounting policy is to report inventory in its financial statements at the lower of cost of or net realizable
value. Cost is determined under the FIFO.
Mishiel has determined that, at December 31, 2013, the replacement cost of its inventory was P70 per unit and the
net realizable value was P72 per unit. The normal profit margin is P10 per unit.
What should Mishiel report as cost of goods sold for 2013? Ans. 6,500,000

10. On January 1, 2011, Horse Corp. signed a three-year noncancelable purchase contract, which allows Horse
to purchase up to 500,000 units of a computer part annually from Dark Supply Co. at P10 per unit and
guarantees a minimum annual purchase of 100,000 units. During 2011, the part unexpectedly became
obsolete. Horse had 250,000 units of this inventory at December 31, 2011, and believes these parts can be
sold as scrap for P2 per unit. What amount of probable loss from the purchase commitment should Horse
report in its 2011 profit or loss
Ans. P1,600,000

11.Gillard Enterprises Inc. a retailer of Italian furniture and has five major product lines: sofas, dining
tables, beds, closets, and lounge chairs. At December 31, 2014, quantity on hand, cost per unit, and net
realizable value (NRV) per unit of the product lines are as follows:
 Product line Quantity Cost per unit NRV per unit
Sofas 100 P1000 P1020
Dining Tables 200 500 450
Beds 300 1500 1600
Closets 400 750 770
Lounge Chairs 500 250 200

In Gillard’s December 31,2014 statement of financial position, Inventory should be carried at

1,040,000

BIOLOGICAL ASSETS

1. Generally speaking, biological assets shall be measured using

a. Historical cost
b. Historical cost less depreciation less impairment
c. A fair value approach
d. Net realizable value
e.
2. Which of the following is not dealt with by PAS 41 on 'Agriculture'?
a. The accounting for biological assets.
b. The initial measurement of agricultural produce harvested from the entity's biological assets.
c. The processing of agricultural produce after harvesting.
d. The accounting treatment of government grants in respect to biological assets

3. A gain or loss arising on the initial recognition of a biological asset and from a change in the fair value less
estimated costs to sell of a biological asset should be included in
a. The net profit or loss for the period
b. A capital reserve within equity
c. The statement of recognized gains and losses
d. A separate revaluation reserve

4. An entity cultivates cattle for the beef industry. At 31 December 2014 the entity’s herds included 500 18-
month-old cattle.
At 31 December 2014 the quoted price for live cattle delivered to the local slaughterhouse to which the
entity delivers its livestock is P300 per 18-month-old animal.
The slaughterhouse is located 25 miles from the entity’s farmland where the cattle are raised. Carriers
providing cattle transport services to the entity charge P65 per trip from the entity’s farm to the
slaughterhouse using a 10-cow carrier. No incremental selling costs arise on the sale to the slaughter
house.
At 31 December 2014 the fair value less cost to sell of the herd of cattle (biological assets) is
Ans. P146,750

5. Molina Dairy produces milk to sell to local and national ice cream producers. Molina Dairy began
operations on January 1, 2013 by purchasing 650 milk cows for P780,000. The entity controller had the
following information available at year end relating to the cows:
Carrying amount of milking cows, January 1, 2013 780,000
Change in fair value due to growth and price changes 242,000
Decrease in fair value due to harvest (28,000)
Milk harvested during 2013 but not yet sold 36,200

On Molina Dairy's income statement for the year ending December 31, 2013, what amount of unrealized
gain on biological asset will be reported?
Ans. 214,000

6 . A public limited company, Gatas Pure, produces milk on its farms. It produces 30% of the country’s milk that it
consumed. Gatas owns several farms and has a stock of 210,000 cows and 105,000 heifers.

Additional information:

At December 31, 2011, the herds are:

210,000 cows (3 years old), all purchased on or before December 31, 2010
75,000 heifers, average age 1.5 years, purchased on July 1, 2011
30,000 heifers, average age 2 years, purchased on December 31, 2010
No animals were born or sold in the year.

The unit fair values less estimated costs to sell were

1 - year old animal at Dec. 31, 2011 P32

2 - year old animal at Dec. 31, 2011 45
1.5 - year old animal at Dec. 31, 2011 36
3 - year old animal at Dec. 31, 2011 50
1 - year old animal at Dec. 31, 2011
and July 1, 2011 30
2 - year old animal at January 1, 2011 40

The increase in fair value of biological assets in 2011 due to physical change is
Ans. P1,740,000

The increase in fair value of biological assets in 2011 due to price l change is