Manila * Cavite * Laguna * Cebu * Cagayan De Oro * Davao

Since 1977

FAR OCAMPO/OCAMPO
FAR.02-Inventories

LECTURE NOTES
References Goods on consignment
• Goods held by the dealer (consignee) for which title
PAS 2 – Inventories
is held by the shipper (consignor).
PIC Q&A 2018-10 – Scope of disclosure of inventory
• Consigned goods are included in the inventory of the
write-downs
consignor.

Repurchase agreements
Scope of PAS 2
Repurchase agreements result in no sale being recorded;
PAS 2 excludes certain inventories from its scope: the inventory is thus not removed from the books, and
• financial instruments (see PFRS 9) instead the “seller” records a liability for the proceeds of
• biological assets related to agricultural activity and the “sale”, which more accurately in substance is a
agricultural produce at the point of harvest (see PAS short-term loan secured by inventory as collateral.
41).

Also, while the following are within the scope of the Recognition of Inventories
standard, PAS 2 does not apply to the measurement of
inventories held by: Not specified in PAS 2.
• producers of agricultural and forest products,
agricultural produce after harvest, and minerals and Conceptual Framework general recognition criteria for
mineral products, to the extent that they are assets:
measured at net realizable value (above or below
cost) in accordance with well-established practices in An asset is recognized only if recognition of that asset
those industries. When such inventories are provides users of financial statements with information
measured at net realizable value, changes in that that is useful, i.e., with:
value are recognized in profit or loss in the period of (a) relevant information about the asset; and
the change. (b) a faithful representation of the asset.
• commodity brokers and dealers who measure their
inventories at fair value less costs to sell. When such
inventories are measured at fair value less costs to Measurement of Inventories
sell, changes in fair value less costs to sell are
recognized in profit or loss in the period of the Inventories are required to be stated at the lower of cost
change. and net realizable value (NRV).

Cost should include all:

Nature of Inventories • costs of purchase (including taxes, transport, and
handling) net of trade discounts received
Inventories are assets: • costs of conversion (including fixed and variable
(a) held for sale in the ordinary course of business; manufacturing overheads) and
(b) in the process of production for such sale; or • other costs incurred in bringing the inventories to
(c) in the form of materials or supplies to be consumed their present location and condition
in the production process or in the rendering of
services. Inventory cost should not include:
• abnormal waste
• storage costs, unless those costs are necessary in the
Whose inventory is it? production process before a further production stage
• administrative overheads unrelated to production
Goods in transit
• selling costs
• Shipping terms determine when title to goods passes • foreign exchange differences arising directly on the
to the purchaser. recent acquisition of inventories invoiced in a foreign
a. FOB (free on board) shipping point—title passes currency
to the buyer with the loading of goods at the • interest cost when inventories are purchased with
point of shipment. deferred settlement terms.
b. FOB destination—legal title does not pass until
the goods are received by the buyer.
• Goods shipped FOB shipping point belong to the Cost Formulas
buyer while they are in transit and should normally
be included in the buyer’s inventory while in transit. For inventory items that are not interchangeable,
• Goods shipped FOB destination belong to the seller specific costs are attributed to the specific individual
while in transit and are normally included in the items of inventory.
seller’s inventory.
For items that are interchangeable, PAS 2 allows the
FIFO or weighted average cost formulas.

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The LIFO formula, which had been allowed prior to the FIFO:
2003 revision of PAS 2, is no longer allowed. • In a period of rising prices, matches oldest low-cost
inventory with rising sales prices, thus expanding
The same cost formula should be used for all inventories the gross profit margin.
with similar characteristics as to their nature and use to • In a period of declining prices, oldest high-cost
the entity. For groups of inventories that have different inventory is matched with declining sales prices,
characteristics, different cost formulas may be justified. thus narrowing the gross profit margin.
• Inventories are reported on the balance sheet at or
Specific identification near current costs.
• The original cost of each item is identified, resulting
Specific identification:
in actual costs being accumulated for the specific
• Can produce any variety of results depending on
items on hand and sold.
which particular units are selected for shipment.
• This method is consistent with the physical flow of
goods (though note, it is not required that one has
to choose a cost-flow method which corresponds to
Computation of the cost of ending inventory
the actual, underlying physical flow of goods).
• Though theoretically attractive and useful when each
Specific identification:
inventory item is unique and has a high cost, it is
frequently not economically feasible (even if taking Units on hand x Specific Unit Cost
into account advances in technology), particularly
where inventory is composed of a great many items First-in, first-out method (FIFO)
or identical items acquired at different times and at Units on hand x Unit Cost of latest purchases
different prices.
• It is subject to manipulation, as seller has the Weighted Average
flexibility of selectively choosing specific items of
Units on hand x Weighted Average Unit Cost (WAUC)
higher/lower-costing inventory depending on
particular income goals at the time of sale. WAUC = Total cost of GAS/Total units available for sale
• It is the least common method observed in practice.

Average cost method Write-down to NRV

• This method assigns the same average cost to each NRV is the estimated selling price in the ordinary course
unit. of business, less the estimated cost of completion and
• Based on the assumption that goods sold should be the estimated costs necessary to make the sale.
charged at an average cost, with the average being
weighted by the number of units acquired at each The cost of inventories may not be recoverable if:
price. • those inventories are damaged
• It provides the same cost for similar items of equal • they have become wholly or partially obsolete
utility. • their selling prices have declined
• It does not permit profit manipulation. • the estimated costs of completion or the estimated
• Its limitation is that inventory values may lag costs to be incurred to make the sale have increased
significantly behind current prices in periods of
rapidly rising or falling prices. Any write-down to NRV should be recognized as an
expense in the period in which the write-down occurs.
First-in, first-out method (FIFO)
Why write down to NRV?
• The first goods purchased are the first goods sold.
• Using the FIFO method, the accountant computes The practice of writing inventories down below cost to
the cost of goods sold and ending inventory as if the net realizable value is consistent with the view that
first items purchased are the first to be sold, leaving assets should not be carried in excess of amounts
the most recently purchased items in inventory. expected to be realized from their sale or use.
• This often matches the physical flow of goods.
• FIFO affords little opportunity for profit How to write down to NRV?
manipulation. Inventories are usually written down to NRV item by
• FIFO best approximates the current replacement value item.
of ending inventory.

Comparison of methods: cost of goods sold and ending Write down to NRV of materials and production supplies
inventory
Materials and other supplies held for use in the
The average cost method: production of inventories are not written down below
• Differs from the other methods in that no cost if the finished products in which they will be
assumption is made about the sale of specific units. incorporated are expected to be sold at or above cost.
• Rather, all sales are assumed to be of the “average” However, when a decline in the price of materials
unit at the average cost per unit. indicates that the cost of the finished products exceeds
• The gross profit margin tends to follow a similar NRV, the materials are written down to NRV. In such
pattern to FIFO in response to changing prices. circumstances, the replacement cost of the materials
• Generally provides inventory values similar to FIFO may be the best available measure of their NRV.
values, since average costs are heavily influenced by
current costs.

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Reversal of inventory write down • Quantities of items sold are determined indirectly by
subtracting the units on hand from the sum of the
When the circumstances that previously caused
units in the beginning inventory and units purchased
inventories to be written down below cost no longer exist
during the year.
or when there is clear evidence of an increase in NRV
because of changed economic circumstances, the
Perpetual inventory system
amount of the write-down is reversed (i.e., the reversal
is limited to the amount of the original write-down) so • An inventory system which provides a continuous
that the new carrying amount is the lower of the cost summary of goods on hand.
and the revised NRV. • Entries for sales, cost of goods sold, and the
reduction of inventory are recorded for each sales
Any reversal should be recognized as a reduction in the transaction.
amount of inventories recognized as an expense in the • A continuous record of quantities in inventory and
period in which the reversal occurs. items sold is maintained.
• Benefits of a perpetual system.
Expense Recognition 1. Provides a continuous check and control
mechanism on inventory.
PFRS 15 addresses revenue recognition. When 2. Facilitates purchasing and production planning
inventories are sold and revenue is recognized, the 3. Ensures adequate on-hand inventories
carrying amount of those inventories is recognized as an 4. Helps identify and measure the magnitude of
expense (often called cost-of-goods-sold). Any write- inventory shrinkage.
down to NRV and any inventory losses are also 5. Advances in, and cost reductions relating to,
recognized as an expense when they occur. technology have made perpetual systems much
more feasible, and it’s a good thing – today’s
Inventories allocated to another asset (for example, fast-paced, competitive business environment
inventory used as a component of self-constructed magnifies the importance of a perpetual
property, plant or equipment) are recognized as an system’s benefits.
expense during the useful life of that asset.
Trade and Cash Discounts
Presentation
Trade Cash
PAS 1 requires inventories to be presented in the
statement of financial position as a separate line item Objective Generate sales Encourage prompt
under current assets. payment

Disclosures Accounting Not recorded Recorded using

separately either Gross or Net
• accounting policy for inventories (Purchases/Sales method
• carrying amount, generally classified as merchandise, net of trade
supplies, materials, work in progress, and finished discount)
goods (the classifications depend on what is
appropriate for the entity) Gross and Net method of recording purchases
• carrying amount of any inventories carried at fair
value less costs to sell
Gross Net
• amount of any write-down of inventories recognized
as an expense in the period Cash Deducted from Deducted from
• amount of any reversal of a write-down to NRV and discounts purchases/cost of purchases/cost of
the circumstances that led to such reversal inventory when inventory whether
• carrying amount of inventories pledged as security taken taken or not
for liabilities
• cost of inventories recognized as expense * Cash Deducted from Not accounted for
* Consistent with PAS 1, which allows presentation of discounts purchases/cost of separately since
expenses by function or nature, as an alternative to taken inventory (purchase already deducted
disclosing cost of goods sold expense, PAS 2 allows discounts) from purchases
an entity to disclose operating costs recognized Cash Included in Reported as other
during the period by nature of the cost (raw materials discounts purchases/cost of expense
and consumables, labor costs, other operating costs) not taken inventory (purchase
and the amount of the net change in inventories for discounts lost)
the period).

Purchase commitments
Other Notes • A lock on the inventory purchase price in advance.
An executory contract (an exchange of promises
Inventory systems about future actions).
Periodic inventory system • No journal entry is required to record an asset and
• An inventory system in which only revenue is liability at the commitment date.
recorded each time a sale occurs; the inventory • However, when price declines take place subsequent
balance is determined by a periodic physical to the commitment and it is outstanding at the end
inventory. of an accounting period, the loss is recorded just as
• Using the periodic system, items must be physically losses with goods on hand are recognized (i.e., as
counted to determine quantities on hand. with lower of cost and NRV, in the period in which
the inventory price decline took place).

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• Loss recognition is not appropriate when: • If, prior to delivery, the market price increases, the
1. commitments can be cancelled; purchase commitment loss account is reduced and a
2. commitments provide for price adjustment; gain is recorded, though such “recovery” can only be
3. hedging transactions prevent losses; or recognized to the extent of the original loss
4. declines do not suggest reductions in sales recorded.
prices.
- done -

ILLUSTRATIVE PROBLEMS
REQUIRED:
PROBLEM NO. 1 - Items considered as inventories
YES OR NO. Write YES if the item is considered as
1. Dogs that a pet shop buys from breeders that it inventories. If not, write NO.
then sells
2. Equipment held for sale in the ordinary course of ANSWERS:
business
3. Equipment held for sale in accordance with PFRS 5 1. YES
4. Lubricants that are consumed by an entity’s 2. YES
machinery in producing goods 3. NO (Non-current asset held-for-sale)
5. Materials on hand 4. YES
6. Materials in transit shipped FOB shipping point 5. YES
7. Materials in transit shipped FOB destination 6. YES
8. Advances for materials ordered 7. NO (Not recognized)
9. Goods in process 8. NO (Advances to suppliers)
10. Finished goods in factory 9. YES
11. Finished goods in company-owned retail stores 10. YES
12. Finished goods in hands of consignees 11. YES
13. Goods held on consignment 12. YES
14. Finished goods in transit to customers, shipped FOB 13. NO (Not recognized)
seller 14. NO (Derecognize)
15. Finished goods in transit to customers, shipped FOB 15. YES
buyer 16. NO (Derecognize if no amount is recoverable)
16. Unsalable finished goods 17. NO (Other current assets)
17. Office supplies 18. NO (Other current assets)
18. Advertising catalogs and shipping boxes 19. YES
19. Land held for sale in the ordinary course of business 20. NO (Investment properties)
20. Land and building for rental to others

PROBLEM NO. 2 - Cost flow assumptions

The following information has been extracted from the records of Praktis Corporation about one of its products.
Date No. of Units Unit Cost Total Cost
January 1 Beginning balance 1,600 P14.00 P22,400
January 6 Purchased 600 14.10 8,460
February 5 Sold @ P24.00 per unit 2,000
March 19 Purchased 2,200 14.70 32,340
March 24 Purchase returns 160 14.70 2,352
April 10 Sold @ P24.20 per unit 1,400
June 22 Purchased 16,800 15.00 252,000
July 31 Sold @ P26.50 per unit 3,600
August 4 Sales returns @ P26.50 per unit 40
September 4 Sold @ P27.00 per unit 7,000
November 15 Purchased 1,000 16.00 16,000
December 28 Sold @ P30.00 per unit 6,200

REQUIRED:
Compute for the closing inventory under each of the following pricing methods. (Round unit costs to two decimal places.)
1. FIFO – Periodic 3. Weighted average - Periodic
2. FIFO – Perpetual 4. Weighted average – Perpetual (Moving average)

SOLUTION:

FIFO – Periodic
From November 15 purchases (1,000 units x P16.00) - P16,000
From June 22 purchases (880 units x P15.00) - 13,200
Total P29,200

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FIFO – Perpetual
Purchases Sales Balance
Unit Unit Unit
Units Cost Total Cost Units Cost Total Cost Units Cost Total Cost
Jan. 1 1,600 14.00 22,400
Jan. 6 600 14.10 8,460 1,600 14.00 22,400
600 14.10 8,460
2,200 30,860
Feb. 5 1,600 14.00 22,400
400 14.10 5,640 200 14.10 2,820
Mar. 19 2,200 14.70 32,340 200 14.10 2,820
2,200 14.70 32,340
2,400 35,160
Mar. 24 (160) 14.70 (2,352) 200 14.10 2,820
2,040 14.70 29,988
2,240 32,808
Apr. 10 200 14.10 2,820
1,200 14.70 17,640 840 14.70 12,348
Jun. 22 16,800 15.00 252,000 840 14.70 12,348
16,800 15.00 252,000
17,640 264,348
Jul. 31 840 14.70 12,348
2,760 15.00 41,400 14,040 15.00 210,600
Aug. 4 (40) 15.00 (600) 14,080 15.00 211,200
Sep. 4 7,000 15.00 105,000 7,080 15.00 106,200
Nov. 15 1,000 16.00 16,000 7,080 15.00 106,200
1,000 16.00 16,000
8,080 122,200
Dec. 28 6,200 15.00 93,000 880 15.00 13,200
1,000 16.00 16,000
1,880 29,200

Average – Periodic
Total cost (1,880 units x P14.92) - P28,050

Weighted average unit cost (P328,848/22,040 units) - P14.92

Average – Perpetual (Moving average)

Purchases Sales Balance
Unit Unit Unit
Units Cost Total Cost Units Cost Total Cost Units Cost Total Cost
Jan. 1 1,600 14.00 22,400
Jan. 6 600 14.10 8,460 1,600 14.00 22,400
600 14.10 8,460
2,200 14.03 30,860
Feb. 5 2,000 14.03 28,060 200 14.03 2,800
Mar. 19 2,200 14.70 32,340 200 14.03 2,800
2,200 14.70 32,340
2,400 14.64 35,140
Mar. 24 (160) 14.70 (2,352) 200 14.03 2,800
2,040 14.70 29,988
2,240 14.64 32,788
Apr. 10 1,400 14.64 20,496 840 14.64 12,292
Jun. 22 16,800 15.00 252,000 840 14.64 12,292
16,800 15.00 252,000
17,640 14.98 264,292
Jul. 31 3,600 14.98 53,928 14,040 14.98 210,364
Aug. 4 (40) 14.98 (599) 14,080 14.98 210,963
Sep. 4 7,000 14.98 104,860 7,080 14.98 106,103
Nov. 16 1,000 16.00 16,000 7,080 14.98 106,103
1,000 16.00 16,000
8,080 15.11 122,103
Dec. 28 6,200 15.11 93,682 1,880 15.11 28,421

- done -

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DISCUSSION PROBLEMS
1. Inventories are assets Assuming that the company's selling price is 140% of
inventory cost, the adjusted cost of Fair Company's
I. Held for sale in the ordinary course of business.
inventory at Dec. 31 should be
II. In the process of production for sale in the ordinary
a. P1,055,700 c. P1,039,300
course of business.
b. P1,039,500 d. P1,037,300
III. In the form of materials or supplies to be
consumed in the production process or in the
5. What is the principle for recognition of inventory?
rendering of services.
b. Inventory is recognized only if recognition provides
IV. That should have physical form.
users of financial statements with information that
is useful.
a. I, II, III and IV c. I and II only
c. Inventory is recognized when, and only when, it is
b. I, II and III only d. I only
probable that future economic benefits will flow to
the entity and the cost or value of the inventory
2. The following can be considered as inventories, except
can be measured reliably.
a. Land and other property of a real estate entity held
d. Inventory is recognized when, and only when, the
for resale.
entity becomes a party to a purchase commitment.
b. Work in progress being produced by the entity.
e. Inventory is recognized when, and only when, the
c. Materials and supplies awaiting use in the
entity obtains the legal ownership of inventory.
production process.
d. Equipment held for sale in accordance with PFRS 5.
6. In accordance with PAS 2, inventories are required to
be measured at
3. La Union Corp. is considering the following items for
a. Cost
inclusion in ‘Inventories’:
b. Net realizable value
Materials on hand P1,200,000 c. Fair value less costs to sell
Materials in transit shipped FOB d. The lower of cost and net realizable value
shipping point 470,000
Materials in transit shipped FOB 7. PAS 2 does not apply to the measurement of
destination 350,000 inventories held by
Advances for materials ordered 200,000 a. Producers of agricultural and forest products,
Goods in process 900,000 agricultural produce after harvest, and minerals
Finished goods in factory 3,000,000 and mineral products, to the extent that they are
Finished goods in company-owned measured at net realizable value in accordance
retail stores, including 50% profit with well-established practices in those industries.
on cost 750,000 b. Commodity broker-traders who measure their
Finished goods in hands of consignees inventories at fair value less costs to sell.
including 40% profit on sales 400,000 c. Both a and b.
Goods held on consignment, at sales d. Neither a nor b.
price, cost P150,000 300,000
Finished goods in transit to customers, 8. Which statement is incorrect regarding costs of
shipped FOB seller, at cost 250,000 inventories?
Finished goods in transit to customers, a. The cost of inventories should comprise all costs of
shipped FOB buyer, at cost 150,000 purchase, costs of conversion and other costs
Unsalable finished goods, at cost 30,000 incurred in bringing the inventories to their present
Office supplies 40,000 location and condition.
Advertising catalogs and shipping b. Trade discounts, rebates and other similar items
boxes 150,000 are deducted in determining the costs of purchase.
c. It may be appropriate to include non-production
Compute the amount to be presented as ‘Inventories’
overheads or the costs of designing products for
under current assets.
specific customers in the cost of inventories.
a. P6,460,000 c. P6,560,000
d. Foreign exchange differences arising directly on
b. P6,510,000 d. P6,610,000
the recent acquisition of inventories invoiced in a
foreign currency are included in cost of inventories.
4. The inventory on hand at Dec. 31 for Fair Company
valued at a cost of P947,800. The following items
9. Costs of purchase do not include
were not included in this inventory amount:
a. Purchase price.
a. Purchased goods, in transit, shipped FOB
b. Import duties and other non-refundable taxes.
destination invoice price P32,000 which included
c. Transport, handling and other costs directly
freight charges of P1,600.
attributable to the acquisition of finished goods,
b. Goods held on consignment by Fair Company at a
materials and services.
sales price of P28,000, including sales commission
d. Fixed and variable manufacturing overheads.
of 20% of the sales price.
c. Goods sold to Garcia Company, under terms FOB
10. Costs of conversion do not include
destination, invoiced for P18,500 which includes
a. Depreciation and maintenance of factory buildings
P1,000 freight charges to deliver the goods.
and equipment used in the production process.
Goods are in transit.
b. Cost of factory management and administration.
d. Purchased goods in transit, terms FOB origin,
c. Indirect labor.
invoice price P48,000, freight cost, P3,000.
d. Direct materials.
e. Goods out on consignment to Manil Company,
sales price P36,400, shipping cost of P2,000.

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11. The following may be included in the cost of 14. The following information pertains to King
inventories, except Corporation’s inventory in units:
a. Administrative overheads. Inventory, beginning 100,000
b. Storage costs. Purchases 900,000
c. Wasted materials, labor and other production Purchase returns 10,000
costs. Received from consignors 220,000
d. Selling costs. Transferred to consignees 160,000
Sales (excluding consignments) 750,000
Sales - received from consignors 80,000
Use the following information for the next two questions: Sales - consignees 42,000
Roweena Corp. began operations in the current year. Sales returns – in good condition 8,000
During the year it incurred the following expenditures in Sales returns - unsalable 5,000
purchasing materials for producing its product: How many units should King Corporation include in its
• Purchase price of raw materials = P3,000,000 inventory at the end of the period?
• Import duty and other non-refundable purchase taxes a. 193,000 c. 206,000
= P800,000 b. 201,000 d. 211,000
• Refundable purchase taxes = P100,000
• Freight costs for bringing the goods from the supplier 15. In accordance with the objective of PAS 2, a primary
to the factory raw material storeroom = P300,000 issue in accounting for inventories is
• Costs of unloading the materials into the raw material a. The amount of cost to be recognized as an asset
storeroom = P2,000 and carried forward until the related revenues are
• Packaging = P200,000 recognized.
The entity received P53,000 volume rebate from a supplier b. The cost formulas to be used to assign costs to
for purchasing more than P1,500,000 from the supplier inventories.
during the year. c. The measurement of inventories held by producers
of agricultural and forest products.
The entity incurred the following additional costs in the d. The measurement of inventories held by
production run: commodity broker-traders.
• Salary of the machine workers in the factory =
P500,000 16. Which statement is incorrect regarding cost formulas?
• Salary of factory supervisor = P300,000 a. An entity shall use the same cost formula for all
• Depreciation of the factory building and equipment inventories having a similar nature and use to the
used for production process = P60,000 entity.
• Consumables used in the production process = b. For inventories with a different nature or use,
P20,000 different cost formulas may be justified.
• Depreciation of vehicle used to transport the goods c. Both a and b.
from the raw materials storeroom to the machine floor d. Neither a nor b.
= P40,000
• Factory electricity usage charges = P30,000 17. Which statement is incorrect regarding cost formulas?
• Factory rental = P100,000 a. Specific identification of cost means that specific
• Depreciation and maintenance of the entity’s vehicle costs are attributed to identified inventory.
used by the factory supervisor (50 per cent for official b. The FIFO formula assumes that the items of
use and 50 per cent for personal use) = P20,000. inventory that were purchased or produced first
Private use of the vehicle is an employee benefit. are sold first, and consequently the items
remaining in inventory at the end of the period are
The entity incurred the following administration expenses: those most recently purchased or produced.
• Depreciation of the administration building = P50,000 c. Under the weighted average cost formula, the cost
• Depreciation and maintenance of vehicles used by the of each item is determined from the weighted
administrative staff = P15,000 average of the cost of similar items at the
• Salaries of the administration personnel = P305,000 beginning of a period and the cost of similar items
purchased or produced during the period.
Of the administration expenses 20 per cent are attributable d. Under the weighted average cost formula, the
to administering the factory. The rest of the administration average is calculated as each additional shipment
expenses are attributable, in equal proportion, to the sales is received, regardless of the circumstances of the
and other non-production operations (e.g. financing, tax entity.
and corporate secretarial functions).
The entity incurred the following selling expenses: 18. When can an entity use last-in, first-out (LIFO)?
• Advertising costs = P30,000 a. For items that are not ordinarily interchangeable.
• Depreciation and maintenance of vehicles used by the b. For goods or services produced and segregated for
sales staff = P10,000 specific projects.
• Salary of the administration personnel = P600,000 c. For items other than those mentioned in a and b.
d. Under no circumstances.
12. The total costs of purchase is
a. P3,747,000 c. P4,100,000 19. Generally, which inventory costing method
b. P4,047,000 d. P4,249,000 approximates most closely the current cost for each of
the following?
13. The total costs of conversion is Cost of goods sold Ending inventory
a. P1,134,000 c. P1,060,000 a. LIFO FIFO
b. P1,144,000 d. P1,070,000 b. LIFO LIFO
c. FIFO FIFO
d. FIFO LIFO

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Use the following information for the next three questions. 24. Maximilian uses the perpetual inventory system.
Maximilian's inventory transactions for the month of
Transactions for the month of June were:
August were as follows:
Purchases Units Unit cost Total cost Total
June 1 (balance) 400 P3.20 P 1,280 No. Unit cost cost
3 1,100 3.10 3,410 01 Aug. Beg. inventory 20 P4.00 P80.00
7 600 3.30 1,980 07 Aug. Purchases 10 4.20 42.00
15 900 3.40 3,060 10 Aug. Purchases 20 4.30 86.00
22 250 3.50 875 12 Aug. Sales 15 ? ?
3,250 P10,605 16 Aug. Purchases 20 4.60 92
20 Aug. Sales 40 ? ?
Sales
28 Aug. Sales returns 3 ? ?
June 2 300 @ P5.50
6 800 @ 5.50
Using the information, assume that the Maximilian
9 500 @ 5.50
uses the FIFO cost flow method and that the sales
10 200 @ 6.00
returns relate to the 20 August sales. The sales return
18 700 @ 6.00
should be costed back into inventory at what unit cost?
25 150 @ 6.00
a. P4.00 c. P4.07
2,650
b. P4.30 d. P4.60
20. The ending inventory on a FIFO basis is
a. P1,900 c. P2,041
25. Which statement is incorrect regarding net realizable
b. P1,956 d. P2,065
value (NRV)?
a. NRV refers to the net amount that an entity
21. Assuming that perpetual inventory records are kept in
expects to realize from the sale of inventory in the
units only, the ending inventory on an average-cost
ordinary course of business.
basis is
b. NRV is an entity-specific value.
a. P1,900 c. P2,041
c. NRV for inventories may not equal fair value less
b. P1,956 d. P2,065
costs to sell.
d. Estimated costs necessary to make the sale are
22. Assuming that perpetual inventory records are kept in
limited to incremental costs when determining
units and pesos, the ending inventory on an average-
NRV.
cost basis is
a. P1,900 c. P2,041
b. P1,956 d. P2,065
26. The cost of inventories may not be recoverable if
I. The inventories are damaged
II. The inventories have become wholly or partially
SOLUTION FOR QUESTION #22:
obsolete
III. The selling prices have declined
IV. The estimated costs of completion or the estimated
costs to be incurred to make the sale have
increased.
a. I, II, III and IV c. I and II only
b. I, II and III only d. I, II and IV only

27. The closing inventory at cost of a company amounted

to P284,700. The following items were included at cost
in the total:
• 400 coats, which had cost P80 each and normally
sold for P150 each. Owing to a defect in
manufacture, they were all sold after the reporting
date at 50% of their normal price. Selling
expenses amounted to 5% of the proceeds.
• 800 skirts, which had cost P20 each. These too
were found to be defective. Remedial work costs
P5 per skirt and selling expenses for the batch
totaled P800. They were sold for P28 each.
What should the inventory value be according to PAS 2
Inventories after considering the above items?
23. Which of the following is not affected by the inventory a. P281,200 c. P282,800
valuation method used by an entity? b. P282,100 d. P329,200
a. Cost of goods sold.
b. Net income of the entity.
c. Amounts owed for income taxes.
d. Amounts paid to acquire merchandise.

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28. The following figures relate to inventory held at Dec. 32. In accordance with PAS 2, an entity should disclose
31: a. The amount of any write-down of inventories
Per Unit recognized as an expense in the period.
Cost P10 b. The amount of any reversal of any write-down that
General selling price 12 is recognized as a reduction in the amount of
Selling price in a binding contract to sell 14 inventories recognized as expense in the period.
Quoted price in an active market for c. The circumstances or events that led to the
similar asset 11 reversal of a write-down of inventories.
Estimated costs to sell 3 d. All of these.

There were 10,000 units (including 2,000 held to satisfy 33. In accordance with PIC Q&A No. 2018-10 PAS 2 –
a binding contract to sell). Scope of disclosure of inventory write-downs, an entity
should disclose
At what amount should the entity report the inventory
a. Write-downs of inventory held at the end of the
on its statement of financial position?
reporting period.
a. P100,000 c. P90,000
b. Write-downs representing sales below cost during
b. P 92,000 d. P84,000
the reporting period.
c. Both a and b.
29. Which is correct regarding write-down of inventory to
d. Neither a nor b.
net realizable value?
a. Materials and other supplies held for use in the
34. Which statement is incorrect regarding reversal of
production of inventories are not written down
inventory write-down to net realizable value?
below cost if the finished products in which they
a. If the selling price of inventory that has been
will be incorporated are expected to be sold at or
written down to net realizable value in a prior
above cost.
period, subsequently recovers, the previous
b. When a decline in the price of materials indicates
amount of the write-down can be reversed.
that the cost of the finished products exceeds net
b. The reversal is limited to the amount of the
realizable value, the materials are written down to
original write-down.
net realizable value. In such circumstances, the
c. The amount of any reversal of any write-down of
best available measure of the net realizable value
inventories, arising from an increase in net
of materials is the replacement cost.
realizable value, shall be recognized as a reduction
c. Both a and b.
in the amount of inventories recognized as an
d. Neither a nor b.
expense in the period in which the reversal occurs.
d. None, all the statements are correct.
30. The following figures relate to inventory of materials
held at Dec. 31:
35. At the end of the reporting period, the balance of
Item X Item Y inventory account of an entity was P502,000. The
balance of the allowance for inventory write-down was
Cost P200,000 P400,000 P33,000. The inventory cost and other data are as
follows: (amounts in thousands)
Replacement cost 180,000 370,000
Replace
Estimated costs to convert ment Sales Normal
materials into finished goods 100,000 200,000 Item Cost Cost Price NRV Profit
Estimated selling price of 320,000 610,000 A P 89 P 86 P 91 P 87 P 5
B 94 92 93 85 7
finished goods
C 125 135 129 111 10
Estimated costs to sell 10,000 15,000 D 194 114 205 197 20
Total P502 P427 P518 P480 P32
The entity should recognize loss on write-down of
inventory of materials of The amount to be recognized as reversal of inventory
a. P50,000 c. P5,000 write down is
b. P30,000 d. Nil a. P33,000 c. P8,000
b. P11,000 d. P 0
31. The Refenjol Corp. included the following in its
unadjusted trial balance as of December 31: 36. Caravana Development Corporation bought a 10-
Inventory, 1/1 P 19,450,000 hectare land in Novaliches, to be improved, subdivided
Purchases 127,850,000 into lots, and eventually sold. Purchase price of the
Available for sale P147,300,000 land was P58,000,000. Taxes and documentation
expenses on the transfer of the property amounted to
The inventory at December 31 was counted at a cost P800,000. The lots were classified as follows:
of P14.5 million. This includes P500,000 of slow- Lot Number Selling price Total
moving inventory that is expected to be sold for a net class of lots per lot clearing costs
amount of P300,000. A 10 P1,000,000 None
B 20 800,000 P1,000,000
The cost of sales for the year is
C 40 700,000 3,000,000
a. P133,100,000 c. P132,800,000
D 50 600,000 8,000,000
b. P133,000,000 d. P132,600,000
The cost per lot of class B lots under the relative sales
value method of inventory valuation is
a. P674,285 c. P602,380
b. P610,000 d. P560,000

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37. Buyer Co. regularly buys shirts from Vendor Company 41. An entity signed a three-year noncancelable purchase
and is allowed trade discounts of 20% and 10% from contract, which allows the entity to purchase up to
the list price. Buyer purchased shirts from Vendor on 500,000 units of a computer part annually from a
May 27 and received an invoice with a list price of supplier at P10 per unit and guarantees a minimum
P100,000 and payment terms 2/10, n/30. If Buyer annual purchase of 100,000 units. During the first year
uses the net method of recording purchases, the of the contract, the part unexpectedly became
journal entry to record the payment on June 7 will obsolete. The entity had 250,000 units of this
include inventory at the end of the first year of the contract.
a. A debit to Accounts payable of P72,000. The entity believes these parts can be sold as scrap for
b. A debit to Purchase Discounts Lost of P1,440. P2 per unit. What amount of probable loss from the
c. A credit to Purchase Discounts of P1,440. purchase commitment should the entity recognize?
d. A credit to Cash of P70,560. a. P 800,000 c. P2,000,000
b. P1,600,000 d. P2,400,000
38. Catapult Corp. purchased merchandise during the year
on credit for P200,000; terms 2/10, n/30. All of the 42. Which is not a required disclosure for inventories in
gross liability except P40,000 was paid within the accordance with PAS 2?
discount period. The remainder was paid within the a. The accounting policies adopted in measuring
30-day term. At the end of the annual accounting inventories.
period, 90% of the merchandise had been sold and b. The carrying amount of inventories carried at fair
10% remained in inventory. The entity has no value less costs to sell.
beginning inventory. The entity uses net method of c. The amount of inventories recognized as an
recording purchases. expense during the period.
d. The fair value of inventories.
If the entity used the gross method of recording
purchases instead of the net method, the reported cost
43. Which is not a required disclosure for inventories in
of goods sold would have been
accordance with PAS 2?
a. The same c. Lower by P720
a. Inventory costing methods employed.
b. Higher by P720 d. P176,400
b. Inventory composition.
c. Inventory financing arrangements.
d. Inventory location.
Use the following information for the next two questions.
An entity entered into a commitment to purchase 200,000 J - end of FAR.02 - J
units of raw material X for P40 per unit to be delivered 3
months after the end of the current period. The contract
cannot be cancelled. The entity entered into this purchase
commitment to protect itself against the volatility in the
price of raw material X. By end of the current period, the
purchase price of material X had fallen to P35 per unit.

39. How much will be recognized as loss on purchase

commitment on the date of delivery if the price of the
material had fallen further to P32 per unit?
a. Nil c. P1,000,000
b. P600,000 d. P1,600,000

40. How much will be recognized as gain on purchase

commitment on the date of delivery if the price of the
material had risen to P42 per unit?
a. Nil c. P1,000,000
b. P400,000 d. P2,000,000

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