ADVANCED REVIEW SOLUTIONS

3RD FLOOR LAPERAL GO BUILDING MORAYTA COR.PAREDES STREET, MANILA CITY 1008 FAR-06
CONTACT # 09989712041 / 09472722534

FINANCIAL ACCOUNTING AND REPORTING FO. MATEOS

INVENTORIES
PART 1: THEORY
1. Inventories are assets defined by all of the following, except
a. Held for sale in the ordinary course of business.
b. In the process of production for such sale
c. In the form of materials or supplies to be consumed in the production process
or the rendering of services
d. Used in the production or supply of goods and services for administrative
purposes.
2. Entities must allocate the cost of all goods available for sale between
a. The cost of goods on hand at the beginning and the cost of goods acquired during
the period.
b. The cost of goods on hand at the end and the cost goods acquired during the
period.
c. The income statement and the statement of financial position.
d. All of the choices are correct.
3. Why are inventories included in the computation of net income?
a. To determine cost of goods sold.
b. To determine sales revenue.
c. To determine merchandise returns.
d. Inventories are not included in the computation of net income.
4. When inventory is misstated, its presentation lacks
a. Relevance c. Comparability
b. Faithful representation d. All of the choices are correct
5. Which of the following costs should not be included as part of the cost inventory?
a. Abnormal freight
b. Import duties
c. Conversion costs
d. All of the choices are included as part of the cost of inventory
6. When allocating costs to inventory produced for the period, fixed overhead should be
based upon
a. The actual use of production facilities.
b. The normal capacity of production facilities.
c. The highest production levels in the last three periods.
d. The lowest production levels in the last three periods.
7. How should unallocated fixed overhead costs be treated?
a. Allocated to finished goods and cost of goods sold.
b. Allocated to raw materials, goods in process and finished goods.
c. Recognized as an expense in the period when incurred.
d. Allocated to goods in process, finished goods and cost of goods sold.
8. Variable production overheads are allocated to each unit of production on the basis of
a. Normal capacity of the production facilities.
b. Actual use of the production facilities.
c. Either the normal capacity or the actual use of production facilities, whichever
is appropriate.
d. Neither the normal capacity nor the actual use of production facilities.
9. Theoretically, cash discounts permitted on purchased raw materials should be
a. Added to other income, whether taken or not.
b. Added to other income, only if taken.
c. Deducted from inventory, whether taken or not.
d. Deducted from inventory, only if taken.
10. 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.
b. Cash discounts taken.
c. Purchase returns and allowances.
d. Cost of transportation for merchandise purchased.
11. The use of purchase discount implies that the recorded cost of a purchased inventory
is
a. Invoice price
b. Invoice price plus discount lost
c. Invoice price less purchase discount taken
d. Invoice price less purchase discount allowable whether taken or not

FINANCIAL ACCOUNTING AND REPORTING REVIEW 1

 ADVANCED REVIEW SOLUTIONS
3RD FLOOR LAPERAL GO BUILDING MORAYTA COR.PAREDES STREET, MANILA CITY 1008 FAR-06
CONTACT # 09989712041 / 09472722534

FINANCIAL ACCOUNTING AND REPORTING FO. MATEOS

12. The use of a discount lost account implies that the recorded cost of an inventory is
a. Invoice price
b. Invoice price plus the purchase discount lost
c. Invoice price less the purchase discount taken
d. invoice price less the purchase discount allowable whether taken or not
13. If a material amount of inventory has been ordered through a formal purchase contract
at the statement of financial position date for future delivery at firm prices
a. This fact must be disclosed
b. Disclosure is required only if prices have declined since the date of the order.
c. Disclosure is required only if prices have since risen substantially.
d. An appropriation of retained earnings is necessary.
14. The credit balance that rises when a loss on purchase commitment is recognized should
be
a. Presented as a current liability.
b. Subtracted from ending inventory.
c. Presented as an appropriation of retained earnings.
d. Presented in the income statement.
15. The cost of inventories that are not ordinarily interchangeable and goods produced
and segregated for specific projects shall be measured specific identification method.
Which is the reason why the specific identification method may be considered ideal?
a. The potential for manipulation of income is reduced.
b. There is no arbitrary allocation of cost.
c. The cost flow matches the physical flow.
d. It is applicable to all types of inventory.
16. Which of the following is likely to be a circumstance where the specific identification
criteria can be met?
a. Unit price is low
b. Inventory turnover is low
c. Inventory quantities are large
d. All of the choices are circumstances where the criteria are likely to be met
17. Which method of inventory pricing best approximates specific identification of the
actual flow of costs and units in most manufacturing situations?
a. Average cost c. Moving average
b. First-in, first-out d. Weighted average
18. In a period rising prices, the inventory method which tends to give the highest net
income is
a. Moving average c. Specific identification
b. First-in, first-out d. Weighted average
19. The pricing of issues from inventory must be deferred until the end of the accounting
period under which of the following method of inventory valuation?
a. Moving average c. Specific identification
b. Weighted average d. FIFO
20. Why are inventories measured at lower of cost and net realizable value?
a. To report a loss when there is a decrease in the future utility.
b. To be conservative
c. To report a loss when there is a decrease in the future utility below the
original cost
d. To permit future profit to be recognized
21. Which statement is true about the LCNRV method of measuring inventory?
a. The LCNRV is always either the net realizable value or cost.
b. The LCNRV gives the lowest valuation if applied to individual items of
inventory.
c. When the cost of goods sold method is used to record inventory at net realizable
value, the NRV is substituted for cost and the loss is buries in the cost of
goods sold.
d. All of these statements are true about LCNRV method.
22. Which statement is true regarding inventory writedown and recovery of writedown?
a. Recovery of inventory writedown is prohibited under IFRS.
b. IFRS requires separate reporting of reversal of inventory writedown.
c. IFRS requires entities to record writedown in a separate loss account.
d. All of the choices are true.

FINANCIAL ACCOUNTING AND REPORTING REVIEW 2

 ADVANCED REVIEW SOLUTIONS
3RD FLOOR LAPERAL GO BUILDING MORAYTA COR.PAREDES STREET, MANILA CITY 1008 FAR-06
CONTACT # 09989712041 / 09472722534

FINANCIAL ACCOUNTING AND REPORTING FO. MATEOS

23. Commodity broker-traders

a. Produce or raise commodities such as rise, corn or precious metals
b. Hold inventory primarily to sell the commodities in the near term and generate
a profit from price fluctuation
c. Value inventories at LCNRV
d. All of the choices are correct regarding broker-traders.
24. Situations in which net realizable value is used to value inventory include
a. Agricultural produce
b. Minerals and mineral products
c. Commodities held by broker-traders
d. All of these are measured at net realizable value
25. Which of the following is a characteristics of a perpetual inventory system?
a. Inventory purchases are debited to purchases accounts
b. Inventory records are not kept for every item
c. Cost of goods sold is recorded each time a sale is made
d. Cost of goods sold is determined as the amount of purchases less the change in
inventory.
26. 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
27. When the conventional retail inventory method is used, markdowns are commonly ignored
in the computation of the cost to retail ratio because
a. There may be no markdowns in a given year.
b. This tends to give a better approximation of the lower of cost and net realizable
value.
c. Markups are also ignored.
d. This tends to result in the showing of a normal profit margin in a period when
no markdown goods have been sold.
28. Which of the following is not a reason the retail inventory method is used widely?
a. As a control measure in determining inventory shortages
b. For insurance information
c. To permit the computation of net income without a physical count of inventory
d. To defer income tax liability
29. What condition is not necessary when using the retail inventory method?
a. A record of total cost of goods sold for the period.
b. A record of total cost and retail value of goods purchased.
c. A record of total cost and retail value of goods available for sale.
d. A record of sales for the period.
30. The use of the gross profit method assumes
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 years.
c. Inventory value has not increased from previous years.
d. The relationship between selling price and cost of goods sold is similar in
prior years.

PART 2: PROBLEM SOLVING

Problem 1
An entity reported inventory on December 31, 2019, at P6,000,000 based on a physical count
of goods priced at cost and before any necessary year-end adjustments relating to the
following:
• Included in the physical count were goods billed to a customer FOB shipping point on
December 31, 2019. These goods had a cost of P125,000 and were picked up by the
carrier on January 15, 2020.
• Goods shipped FOB shipping point on December 31, 2019, which are being held for the
customer to call at the customer’s convenience with a cost of P200,000 were included
in the count.
• Goods with invoice cost of P300,000 shipped FOB shipping point on December 31, 2019,
from a vendor were received on January 15, 2019
31. What amount should be reported as inventory on December 31, 2019?
a. P5,875,000 b. P6,100,000 c. P6,175,000 d. P6,300,000

FINANCIAL ACCOUNTING AND REPORTING REVIEW 3

 ADVANCED REVIEW SOLUTIONS
3RD FLOOR LAPERAL GO BUILDING MORAYTA COR.PAREDES STREET, MANILA CITY 1008 FAR-06
CONTACT # 09989712041 / 09472722534

FINANCIAL ACCOUNTING AND REPORTING FO. MATEOS

Problem 2
An entity incurred the following costs during the current year:
Cost of purchases based on invoices P 5,000,000
Trade discount already deducted from invoices 500,000
Import duties 400,000
Freight and insurance on purchases 600,000
Other handling costs on imports 100,000
Commission paid to agents for arranging imports 200,000
Sales commission paid to sales agents 300,000
Salaries of accounting department 1,000,000
After sales warranty costs 250,000

32. What is the total cost of purchase?

a. P6,300,000 b. P5,800,000 c. P6,100,000 d. P6,600,000

Problem 3
An entity included the following items in inventory at year-end:
Goods out on consignment at sale price, including 40% 1,400,000
markup on cost
Goods purchased in transit, shipped FOB destination 1,200,000
Goods held on consignment by the entity 900,000
33. At what amount should inventory at year-end be reduced?
a. P1,460,000 b. P2,660,000 c. P1,300,000 d. P2,500,000

Problem 4
On June 1, 2019, an entity sold merchandise with a list price of P5,000,000 to a customer.
The entity allowed trade discounts of 20% and 10%. Credit terms were 5/10, n/30 and the
sale was made FOB shipping point. The entity prepaid P100,000 of delivery cost for the
customer as an accommodation.
34. On June 11, 2019, what is the full remittance from the customer?
a. P3,600,000 b. P3,420,000 c. P3,700,000 d. P3,520,000
Problem 5
On July 1, 2019, an entity recorded purchases of P3,000,000 and P2,000,000 under credit
terms of 2/15. Net 30. The payment on the P3,000,000 purchase was remitted on July 16. The
payment on the P2,000,000 purchase was remitted on July 31.
Questions:
35. What amount of purchases should be included in the determination of cost of goods
available for sale under gross method?
a. P5,000,000 b. P4,900,000 c. P4,940,000 d. P4,960,000
36. What amount of purchases should be included in the determination of cost of goods
available for sale under net method?
a. P5,000,000 b. P4,900,000 c. P4,940,000 d. P4,960,000
Problem 6
An entity reported accounts payable of P2,200,000 on December 31, 2019 before considering
the following data:
• Goods shipped to the entity on December 31, 2019 FOB shipping point were lost in
transit. The invoice cost of P40,000 was not recorded. On January 15, 2020, the
entity filed a P40,000 claim against the common carrier.
• On December 31, 2019, a vendor authorized the entity to return for full credit
goods shipped and billed at P70,000 on December 15, 2019. The returned goods were
shipped by the entity on December 31, 2019. A P70,000 credit memo was received and
recorded by the entity on January 15, 2020.
• On December 31, 2019, the entity has a P500,000 debit balance in accounts payable
to a supplier resulting from an advance payment for goods to be manufactured to
the entity’s specifications.
37. What amount should be reported as accounts payable on December 31, 2019?
a. P2,170,000
b. P2,680,000
c. P2,730,000
d. P2,670,000

FINANCIAL ACCOUNTING AND REPORTING REVIEW 4

 ADVANCED REVIEW SOLUTIONS
3RD FLOOR LAPERAL GO BUILDING MORAYTA COR.PAREDES STREET, MANILA CITY 1008 FAR-06
CONTACT # 09989712041 / 09472722534

FINANCIAL ACCOUNTING AND REPORTING FO. MATEOS

Problem 7
An entity had usual sales terms of net 60 days. FOB shipping point. Sales, net of returns
and allowances totaled P2,000,000 for 2019 before year-end adjustment:
• Goods with an invoice of P40,000 were billed to a customer on January 15, 2020. The
goods were shipped on December 31, 2019.
• On January 5, 2020, a customer notified the entity that goods billed and shipped on
December 31, 2019, were lost in transit. The invoice amount was P50,000.
• On December 31, 2019, the entity authorized a customer to return, for full credit
goods shipped and billed at P25,000 on December 15, 2019. The returned goods were
received by the entity on January 15, 2020, and P25,000 credit memo was issued on the
same date.
38. What amount should be reported as net sales for 2019?
a. P1,975,000 b. P2,015,000 c. P1,965,000 d. P1,990,000

Problem 8
On October 1, 2019, an entity sold 100,000 gallons of heating oil at P50 per gallon. Fifty
thousand gallons were delivered on December 15, 2019 and the remaining 50,000 gallons were
delivered on January 15, 2020. Payment terms were 50% due on October 1, 2019, 25% on the
first delivery and the remaining 25% due on the second delivery.
39. What amount of sales revenue should be recognized in 2019?
a. P5,000,000 b. P2,500,000 c. P3,750,000 d. P1,250,000
Problem 9
An entity provided the following information:
Units Unit cost Total cost
Jan. 1 Beginning balance 10,000 150 1,500,000
5 Purchase 10,000 180 1,800,000
15 Sale 15,000
16 Sale return 1,000
25 Purchase 4,000 200 800,000
26 Purchase return 2,000 200 400,000
Questions:
40. Under FIFO, what amount should be reported as cost of goods sold?
a. P2,220,000 b. P2,620,000 c. P2,500,000 d. P2,900,000
41. Under weighted average, what amount should be reported as ending inventory?
a. P1,345,440 b. P1,366,640 c. P1,413,360 d. P1,432,000
42. Under moving average, what amount should be reported as ending inventory?
a. P1,690,000 b. P1,390,000 c. P1,790,000 d. P1,600,000
43. Under moving average, the next sale of inventory would be priced at what cost?
a. P173.75 b. P179.00 c. P200.00 d. P190.00

Problem 10
On December 31, 2019, an entity reported inventory at P3,000,000 cost and P2,900,000 net
realizable value. On December 31, 2020, the inventory was P4,000,000 at cost and P3,700,000
at net realizable value. The entity made net purchases of P9,000,000 during 2019.
44. What amount should be reported as cost of goods sold for 2020?
a. P8,000,000 b. P8,200,000 c. P8,450,000 d. P8,300,000

Problem 11
On December 31, 2019, an entity experienced a decline in the value of inventory resulting
in a writedown from P4,000,000 cost to P3,500,000 net realizable value. The entity used the
allowance method to record the necessary adjustment. In 2020, market conditions have
improved dramatically. On December 31, 2020, the inventory had a cost of P5,000,000 and net
realizable value of P4,800,000. The entity made purchases of P20,000,000 in 2020.
Questions:
45. What amount should be recognized as gain on reversal of inventory writedown in 2020?
a. P200,000 b. P300,000 c. P500,000 d. P0
46. What amount should be re reported as cost of goods sold in 2020?
a. P19,000,000 b. P19,300,000 c. P18,700,000 d. P24,000,000

FINANCIAL ACCOUNTING AND REPORTING REVIEW 5

 ADVANCED REVIEW SOLUTIONS
3RD FLOOR LAPERAL GO BUILDING MORAYTA COR.PAREDES STREET, MANILA CITY 1008 FAR-06
CONTACT # 09989712041 / 09472722534

FINANCIAL ACCOUNTING AND REPORTING FO. MATEOS

Problem 12
An entity reported the following information about inventory:
Cost NRV LCNRV
Catergory 1: 2,625,000 2,875,000 2,625,000
A 1,700,000 1,600,000 1,600,000
B
Category 2:
A 2,000,000 1,600,000 1,600,000
B 1,950,000 1,800,000 1,800,000
Questions:
47. What is the inventory measurement under LCNRV individual approach?
a. P7,625,000 b. P8,275,000 c. P7,725,000 d. P7,875,000
48. What is the inventory measurement under the LCBRV category approach?
a. P7,875,000 b. P7,725,000 c. P8,275,000 d. P7,625,000
49. What is the inventory measurement under the LCNRV total approach?
a. P8,275,000 b. P7,625,000 c. P7,875,000 d. P7,725,000

Problem 13
On December 1, 2019, an entity entered into a commitment to purchase 100,000 barrels of
aviation fuel for P55 per barrel on March 31, 2020. The entity entered into this purchase
commitment to protect itself against the volatility in the aviation fuel market. By December
31, 2019, the purchase price of aviation fuel had fallen to P50 per barrel. However, by
March 31, 2020, when the entity took delivery of the 100,000 barrels the price of aviation
fuel had risen to P53 per barrel.
Questions:
50. What amount should be recognized as loss on purchase commitment in 2019?
a. P500,000 b. P200,000 c. P300,000 d. P0

51. What amount should be recognized as gain on purchase commitment for 2020?
a. P500,000 b. P300,000 c. P200,000 d. P0

52. What amount should be debited to purchase on March 31, 2020?

a. P5,500,000 b. P5,300,000 c. P5,000,000 d. P4,700,000

Problem 14
An entity reported the following information for 2019:
Inventory, January 1 5,000,000
Purchases 26,000,000
Freight in 2,000,000
Purchase returns and allowances 3,500,000
Purchase discounts 1,500,000
Sales 40,000,000
Sales returns 3,000,000
Sales discounts 1,000,000
A physical inventory taken on December 31, 2019 resulted in an ending inventory of
P4,000,000. On December 31, 2019, unsold goods out on consignment with selling price of
P1,000,000 are in the hands of a consignee. The gross profit was 40% on sales.
53. On December 31, 2019, what is the estimated cost of inventory shortage?
a. P1,800,000 b. P1,400,000 c. P1,200,000 d. P800,000

Problem 15
On June 30,2019, a fire at an entity warehouse caused sever damage to the entire inventory.
The entity has a gross profit of 30% on cost. The following data are available for six
months ended June 30, 2019:
Inventory, January 1 1,100,000
Net purchases 6,000,000
Net sales 7,280,000
A physical inventory disclosed usable damaged goods which can be sold for P100,000.
54. What is the estimated amount of fire loss on June 30, 2019?
a. P1,500,000 b. P1,400,000 c. P2,004,000 d. P1,904,000

FINANCIAL ACCOUNTING AND REPORTING REVIEW 6

 ADVANCED REVIEW SOLUTIONS
3RD FLOOR LAPERAL GO BUILDING MORAYTA COR.PAREDES STREET, MANILA CITY 1008 FAR-06
CONTACT # 09989712041 / 09472722534

FINANCIAL ACCOUNTING AND REPORTING FO. MATEOS

Problem 16
On December 31, 2019, a fire destroyed most of the merchandise inventory of an entity. All
goods were completely destroyed except for partially damaged goods that normally sell for
P100,000 and that had an estimated net realizable value of P25,000 and undamaged goods that
normally sell for P60,000.
Inventory, January 1, 2019 600,000
Net purchases for 2019 4,300,000
Net sales for 2019 5,600,000
Total 2018 2017 2016
Net Sales 9,000,000 5,000,000 3,000,000 1,000,000
Cost of Sales 6,750,000 3,840,000 2,200,000 710,000
Gross Profit 2,250,000 1,160,000 800,000 290,000

55. What is the estimated amount of fire loss on December 31, 2019?
a. P700,000 b. P615,000 c. P630,000 d. P580,000

Problem 17
An entity used the retail inventory method to approximate the ending inventory. The following
information is available for the current year:
Cost Retail
Beginning inventory 650,000 1,200,000
Purchases 9,000,000 14,700,000
Freight in 200,000
Purchase returns 300,000 500,000
Purchase allowances 150,000
Departmental transfer in 200,000 300,000
Net markups 300,000
Net markdowns 1,000,000
Sales 9,500,000
Sales discounts 100,000
Employee discounts 500,000
Estimated normal shoplifting losses 600,000
Estimated normal shrinkage 400,000
Questions:
56. What is the estimated cost of ending inventory using the conservative approach?
a. P2,400,000 b. P2,460,000 c. P3,060,000 d. P2,700,000
57. What is the estimated cost of ending inventory using the average approach?
a. P2,560,000 b. P2,624,000 c. P3,264,000 d. P2,880,000
58. What is the estimated cost of ending inventory using the FIFO approach?
a. P2,560,000 b. P2,624,000 c. P3,264,000 d. P2,880,000

****END****
***GODBLESS***

FINANCIAL ACCOUNTING AND REPORTING REVIEW 7