INTERMEDIATE ACCOUNTING

Quiz No. 3

THEORY:

1. Where should raw materials be classified on the statement of financial position?

A. Inventory
B. Equipment
C. Prepaid expenses
D. Not on the statement of financial position

2. Which of the following accounts is not reported in inventory?

A. Equipment
B. Finished goods
C. Raw materials
D. Supplies

3. Why are inventories included in the computation of net income?

A. To determine sales revenue
B. To determine cost of goods sold
C. To determine merchandise returns
D. Inventories are not included in the computation of net income

4. Companies must allocate the cost of all the goods available for sale (or use) between
A. The income statement and the statement of financial position.
B. The cost goods on hands at the beginning of the period as reported on the statement of financial position and the cost of
goods acquired or produced during the period.
C. The cost of goods on hand at the end of the period as reported on the statement of financial position and the cost of goods
acquired or produced during the period.
D. All of the choices are correct.

5. How is a significant amount of consignment inventory reported in the statement of financial position?
A. The inventory is reported separately on the consignee's statement of financial position.
B. The inventory is reported separately on the consignor's statement of financial position.
C. The inventory is combined with other inventory on the consignee's statement of financial position.
D. The inventory is combined with other inventory on the consignor's statement of financial position.

6. Where should goods in transit that were recently purchased FOB-Destination be included on the statement of financial
position?
A. Inventory
B. Equipment
C. Accounts payable
D. Not on the statement of financial position

7. When using a perpetual inventory system,

A. No Purchases account is used.
B. A Cost of Goods Sold account is used.
C. Two entries are required to record a sale.
D. All of these are correct.

8. During 2018 Carne Corporation transferred inventory to Nolan Corporation and agreed to repurchase the merchandise early in
2019. Nolan then used the inventory as collateral to borrow from Norwalk Bank, remitting the proceeds to Carne. In 2019
when Carne repurchased the inventory, Nolan used the proceeds to repay its bank loan.
 This transaction is known as a(n)
A. assignment for the benefit of creditors
B. consignment
C. installment sale
D. product financing arrangement.

9. Valuation of inventories requires the determination of all of the following except

A. the costs to be included in inventory.
B. the cost flow assumption to be adopted.
C. the physical goods to be included in inventory.
D. the cost of goods held on consignment from other companies.

10. An inventory pricing procedure in which the oldest costs incurred rarely have an effect on the ending inventory valuation is
A. FIFO
B. LIFO
C. specific identification
D. weighted-average

11. Assuming no beginning inventory, what can be said about the trend of inventory prices if cost of goods sold computed when
inventory is valued using the FIFO method exceeds cost of goods sold when inventory is valued using the average cost
method?
A. Prices increased
B. Prices decreased
C. Prices remained unchanged
D. Price trend cannot be determined from information given

12. Tanner Corporation's inventory cost on its statement of financial position was lower using first-in, first-out than it would have
been using average cost. Assuming no beginning inventory, in what direction did the cost of purchases move during the
period?
A. Down
B. Steady
C. Up
D. Cannot be determined

13. Which of the following statements is incorrect regarding the lower-of-cost-or-net realizable value (LCNRV)?
A. In most situations, companies price inventory on a total-inventory basis.
B. One of two methods may be used to record the income effect of valuing inventory at net realizable value.
C. Companies use an allowance account, the “Allowance to Reduce Inventory to Net Realizable Value.”
D. Net realizable value (NRV) is the selling price less estimated costs to complete and estimated costs to make a sale.

14. When inventory declines in value below original (historical) cost what is the maximum amount that the inventory can be valued
at?
A. Sales price
B. Historical cost
C. Net realizable value
D. Sales price reduced by estimated costs to sell

15. Lower-of-cost-or-net realizable value as it applies to inventory is best described as the

A. assumption to determine inventory flow.
B. method of determining cost of goods sold.
C. change in inventory value to net realizable value.
D. reporting of a loss when there is a decrease in the future utility below the original cost.

16. How is the gross profit method used as it relates to inventory valuation?
A. To estimate cost of goods sold.
 B. Verity the accuracy of the physical inventory.
C. To provide an inventory value of LIFO inventories.
D. Verify the accuracy of the perpetual inventory records.

17. Which of the following is not a basic assumption of the gross profit method?
A. Goods not sold must be on hand.
B. The beginning inventory plus the purchases equal total goods to be accounted for.
C. The total amount of purchases and the total amount of sales remain relatively unchanged from the comparable previous
period.
D. If the sales, reduced to the cost basis, are deducted from the sum of the opening inventory plus purchases, the result is the
amount of inventory on hand.

18. A major advantage of the retail inventory method is that it

A. hides costs from competitors and customers.
B. gives a more accurate statement of inventory costs than other methods.
C. provides a method for inventory control and facilitates determination of the periodic inventory for certain types of
companies.
D. provides reliable results in cases where the distribution of items in the inventory is different from that of items sold during
the period.

19. The retail inventory method assumes that the

A. ratio of cost to retail changes at a constant rate.
B. ratio of gross margin to sales is approximately the same each period.
C. proportions of markups and markdowns to selling price are the same.
D. final inventory and the total of goods available for sale contain the same proportion of high-cost and low-cost ratio goods.

20. To produce an inventory valuation using the FIFO retail inventory method, the computation of the ratio of cost to retail should
A. ignore both markups and markdowns
B. include markdowns but not markups
C. include markups and markdowns
D. exclude the beginning inventory

PROBLEMS:

21. On December 28, 2021, Nord Manufacturing Co. purchased goods costing P50,000. The terms were FOB destination. Some
costs incurred in connection with the sale and delivery of the goods were
Packaging for shipping P1,000
Shipping 1,500
Special handling charges 2,000

These goods were received on December 31, 2021. In Nord’s December 31, 2021 balance sheet, what amount of cost should
be included in inventory?
a. P54,500
b. P53,500
c. P52,000
d. P50,000

22. The following information applied to Fenn, Inc. for 2021:

Merchandise purchased for resale P400,000
Freight-in 10,000
Freight-out 5,000
Purchase return 2,000

Fenn’s 2021 inventoriable cost was

 a. P400,000
b. P403,000
c. P408,000
d. P413,000

23. The following information is available for the Silver Company for the 3 months ended March 31 of this year:
Merchandise inventory, January 1 of this year P 900,000
Purchases 3,400,000
Freight-in 200,000
Freight-out 225,000
Sales 4,800,000

The gross margin recorded was 25% of sales. What should be the merchandise inventory at March 31?
A. P700,000
B. P900,000
C. P1,125,000
D. P1,200,000

24. An enterprise had 500 units of opening inventory that cost 5 per unit. On March 1, the company purchased 300 units at a cost
of 7 each. On September 1, another 300 units were purchased. During the year, 700 units were sold, and the balance of
ending inventory is 2,500. If the enterprise uses the first-in, first-out (FIFO) method of inventory valuation, the per unit cost of
the items purchased on September 1 was
A. 3.67
B. 6.00
C. 6.67
D. 7.58

25. Ashe Co. recorded the following data pertaining to raw material X during January 2021:
Units
Date Received Cost Issued On hand
1/1/21 Inventory P8.00 3,200
1/11/21 Issue 1,600 1,600
1/22/21 Purchase 4,800 P9.60 6,400

The moving-average unit cost of X inventory at January 31, 2021 is

a. P8.80
b. P8.96
c. P9.20
d. P9.60

26. Clarabell Inc. uses the retail method to estimate ending inventory. Cost data for the most recent quarter is shown below:
Cost Retail
Beginning inventory P112,000 P191,000
Net purchases 402,000 703,000
Net markups 43,000
Net markdowns 21,000
Net sales 685,000

The cost-to-retail percentage using FIFO method is:

A. 55.45%
B. 56.11%
C. 53.60%
D. 70.60%
27. Badger Auto Parts uses the FIFO retail method to estimate inventories. Data for the first six months of 2021 include: beginning
inventory at cost and retail were P125,000 and P165,000, net purchases at cost and retail were P725,000 and P1,040,000,
and sales during the first six months totaled P950,000. The estimated inventory at June 30, 2021, would be:
A. P110,000
B. P179,877
C. P177,761
D. P255,000

28. DEF Mdsg. Inventory records show the following information as at December 31, 2021:
Cost Retail
Inventory, January 1 P248,400 P345,000
Sales - 976,500
Purchases P586,080 814,000
Freight-in 16,980 -
Mark-ups - 90,000
Mark-up cancellations 15,000
Mark-down 30,000
Mark-down cancellations 5,000

DEF Mdsg. uses the FIFO retail inventory method in estimating the value of its inventories and costs. Using the above data,
what is the cost-to-retail ratio?
A. 67.4%
B. 69.8%
C. 72.0%
D. 70.4%

29. Willie Nelson’s Boots uses the conventional retail method to estimate ending inventory. Cost data for the most recent quarter
is shown below:
Cost Retail
Beginning inventory P 46,000 P 63,000
Net purchases 154,000 215,000
Net markups 22,000
Net markdowns 36,000
Net sales 220,000

The average cost-to-retail percentage is:

A. 82.6%.
B. 75.8%.
C. 71.9%.
D. 75.8%.

30. Oslo Corporation has two products in its ending inventory, each accounted for at the lower of cost or net realizable value.
Specific data with respect to each product follows:
Product #1 Product #2
Selling price P60 P130
Historical cost 40 70
Cost to sell 10 26
Cost to complete 15 40

In pricing its ending inventory using the lower-of-cost-or-net realizable value, what unit values should Oslo use for products #1
and #2, respectively?
A. P40 and P70.
B. P45 and P90.
C. P50 and P104.
D. P35 and P64.
31. Lexington Company sells product 1976NLC for P50 per unit. The cost of one unit of 1976NLC is P35. The estimated cost to
complete a unit is P16, and the estimated cost to sell is P5.

At what amount per unit should the company report for the loss from inventory writedown for product 1976NLC applying lower-
of-cost-and-net realizable value under the direct method?
A. P6
B. P -0-
C. P1
D. P5

32. Given the historical cost of product Z is P150, the selling price of product Z is P190, costs to sell product Z are P11, and the
cost to complete product Z is P20, how much is the loss from inventory writedown per unit under the lower-of-cost-or-net
realizable value method and using the allowance method?
A. P19
B. P39
C. P-0-
D. P30

33. A store uses the gross profit method to estimate inventory and cost of goods sold for interim reporting purposes. Past
experience indicates that the average gross profit rate is 25% of sales. The following data related to the month of March:
Inventory cost, March 1 P 25,000
Purchases during the month at cost 67,000
Sales 84,000
Sales returns 3,000

Using the date above, what is the estimated ending inventory at March 31?
a. P20,250
b. P21,000
c. P29,000
d. P31,250

34. Norway Co. maintains a markup of 60% based on cost. The company’s selling and administrative expenses average 30% of
sales. Annual sales amounted to P960,000. Norway’s cost of goods sold and operating profit for the year are:
a. b. c. d.
Cost of Goods Sold P576,000 P576,000 P600,000 P600,000
Operating Profit P 96,000 P288,000 P 72,000 P288,000

35. Seller Co. is a calendar-year retailer. Its year-end physical count of inventory on hand did not consider the effects of the
following transactions:
• Goods with a cost of P50,000 were shipped by Seller FOB shipping point on December 30 and were tendered to and
accepted by the buyer on January 4.
• Goods with a cost of P40,000 were shipped FOB destination by a vendor on December 30 and were tendered to and
accepted by Seller on January 4.
• Goods were sold on the installment basis by Seller. Installment receivables representing sales of goods with a cost of
P30,000 were reported at year-end. Seller retains title to such goods until full payment is made.
• Goods with a cost of P20,000 were held on consignment for a vendor. These goods were excluded from the count
although they were sold in January.

If inventory based solely on physical count of items on hand equaled P1 million. Seller should report inventory at year-end of:
a. P1,000,000
b. P1,090,000
c. P1,120,000
d. P1,140,000
36. A firm experienced a flood loss in the current year that destroyed all but P6,000 of inventory (at cost). Data available are
below:
Prior Year Current (to Date of Flood)
Sales P100,000 P40,000
Purchases 70,000 35,000
Cost of goods sold 60,000
Ending inventory 10,000

What is the estimated inventory lost?

a. P10,000
b. P15,000
c. P16,000
d. P21,000

37. Miyata Company sells product WSC for P25 per unit. The cost of one unit of WSC is P18. The estimated cost to complete a
unit is P4, and the estimated cost to sell is P6. At what amount per unit should product WSC be reported, applying lower-of-
cost-or-net realizable value?
A. P15
B. P18
C. P19
D. P20

38. The following information relates to the merchandise inventory of an enterprise.

Units Cost per Unit
Inventory, June 1 1,000 10.00
Purchases, June 1 4,000 12.00
Purchases, June 2 5,000 11.30

Sales during June amounted to 8,000 units. If the enterprise uses a periodic inventory system and the weighted-average
method, the cost of inventory on June 30 is
A. 22,200
B. 22,600
C. 22,000
D. 22,900

39. Information relative to the corporation’s inventory and sales were presented to you by Mr. Lang’s bookkeeper as follows:
Quantity Amount
Inventories:
December 31, 2020 12,000 P14,460
December 31, 2021 18,000
Purchases in 2021:
January 8,000 11,200
March 10,000 12,200
June 15,000 15,000
September 6,000 9,000
December 10,000 15,000
Net Sales in 2021 62,500

If goods were sold to yield a gross profit rate of 20%, what would be the December 31, 2021 inventory using the gross profit
method?
A. P25,600
B. P26,000
C. P26,600
 D. P26,860

40. Dublin Co. uses the average retail inventory method to account for inventory. The following information relates to current-year
operations:
Cost Retail
Beginning inventory and purchases P 600,000 P 920,000
Net markups 40,000
Net markdowns 60,000
Sales P 780,000

What amount should be reported as cost of sales for the year?

a. P480,000
b. P487,500
c. P520,000
d. P525,000