TRUE OR FALSE

1. Work in process inventories include only the costs of direct materials and direct labor. FALSE
2. When a perpetual inventory system is used, physical counts should be made periodically to confirm the inventory
balances on the books. TRUE
3. Abnormal shortages or thefts of inventory should be reported separately as operating expenses. TRUE
4. Normal inventory adjustments for shrinkage and breakage are reported as adjustments to cost of goods sold. TRUE
5. When the terms of a sale are FOB shipping point, goods in transit at year-end should be included in the inventory of
the seller. FALSE
6. Title to goods shipped FOB destination remains with the seller from the shipping point to the destination point. TRUE
7. Goods held by customers on approval should be excluded from the seller's inventory. FALSE
8. Consigned goods are reported by the consignor in inventory at the sum of their cost, handling and shipping costs, and
the estimated gross profit. FALSE
9. The gross method of accounting for purchase discounts reflects the fact that discounts not taken are in effect credit-
related expenditures incurred for failure to pay within the discount period. FALSE
10. The specific identification method is a highly objective approach to matching historical costs with revenues. TRUE
11. With FIFO, inventories are reported on the balance sheet at or near their current value. TRUE
12. Unlike other inventory cost methods, the average cost approach provides the same unit cost for items of equal utility.
TRUE
13. FIFO provides income tax savings during periods of falling prices. TRUE
14. Overstating ending inventory will affect the balance sheet, but not the income statement. FALSE
15. The lower-of-cost-or-market method may be applied to each inventory item, to major classes or categories of
inventory items, or to the inventory as a whole. TRUE
16. Overstating ending inventory in Period 1 will cause ending inventory in Period 2 to be understated by the same
amount. FALSE

17. Under a consignment arrangement, the

A. consignor has ownership until goods are sold to a customer.
B. consignor has ownership until goods are shipped to the consignee.
C. consignee has ownership when the goods are in the consignee's possession.
D. consigned goods are included in the inventory of the consignee.
Answer: A
18. Inventoriable costs include all of the following except the
A. freight costs incurred when buying inventory.
B. costs of the purchasing and warehousing departments.
C. cost of the beginning inventory.
D. cost of goods purchased.
Answer: B
19. Inventoriable costs may be thought of as a pool of costs consisting of which two elements?
A. The cost of beginning inventory and the cost of ending inventory
B. The cost of ending inventory and the cost of goods purchased during the year
C. The cost of beginning inventory and the cost of goods purchased during the year
D. The difference between the costs of goods purchased and the cost of goods sold during the year
Answer: C
20. Of the following companies, which one would not likely employ the specific identification method for inventory costing?
A. Music store specializing in organ sales C. Antique shop
B. Farm implement dealership D. Hardware store
Answer: D
21. Which of the following statements is true regarding inventory cost flow assumptions?
A. A company may use more than one costing method concurrently.
B. A company must comply with the method specified by industry standards.
C. A company must use the same method for domestic and foreign operations.
D. A company may never change its inventory costing method once it has chosen a method.
Answer: A
22. A company uses the periodic inventory method and the beginning inventory is overstated by P4,000 because the
ending inventory in the previous period was overstated by P4,000. The amounts reflected in the current end of the
period balance sheet are
Assets Owner’s Equity
A. Overstated Overstated
B. Correct Correct
C. Understated Understated
D. Overstated Correct
Answer: B
23. Overstating ending inventory will overstate all of the following except
A. assets. C. net income.
B. cost of goods sold. D. owner's equity.
Answer: B

24. All of the following costs should be charged against revenue in the period in which costs are incurred except for
A. manufacturing overhead costs for a product manufactured and sold in the same accounting period.
B. costs which will not benefit any future period.
C. costs from idle manufacturing capacity resulting from an unexpected plant shutdown.
D. costs of normal shrinkage and scrap incurred for the manufacture of a product in ending inventory.
Answer: D

(USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT 2 REQUIREMENTS: )

ABC showed the following information at year-end:
Cost Retail
Beginning inventory 280,000 700,000
Sales 5,000,000
Purchases 2,480,000 5,160,000
Freight in 75,000
Mark up 500,000
Mark up cancellation 60,000
Markdown 250,000
Markdown cancellation 50,000
Estimated normal shrinkage is 2% of sales

The entity used the retail inventory method is estimating the value of inventory.
25. Compute the estimated cost of ending inventory under conservative approach. 450,000
26. Compute the cost of sales under average approach. 2835,000 - 456,000

27. The following information was available from the inventory records of ABC Company for January:
Units Unit Cost Total Cost
Balance at January 1 3,000 P9.77 P29,310
Purchases:
January 6 2,000 10.30 20,600
January 26 2,700 10.71 28,917
Sales:
January 7 (2,500)
January 31 (3,200)
Balance at January 31 2,000
Assuming that ABC does not maintain perpetual inventory records, what should be the inventory at January 31, using
the weighted-average inventory method, rounded to the nearest peso?
A. P21,010. C. P20,520.
B. P20,474. D. P20,720.
Answer: B

28. ABC provided the following information:

2014 2015
Sales 7,500,000 4,500,000
Beginning inventory 1,260,000
Purchases 6,450,000 3,180,000
Freight in 350,000 220,000
Purchase discounts 90,000 45,000
Purchase returns 120,000 40,000
Purchase allowances 20,000 15,000
Ending inventory 2,355,000
Compute the inventory at the end of 2015. 2,370,000

29. A fire destroyed ABC Company’s inventory on October 31. On January 1, the inventory had a cost of P2,500,000.
During the period January 1 to October 31, the entity had net purchases of P7,500,000 and net sales of P15,000,000.
Undamaged inventory at the date of fire had a cost of P150,000. The mark up on cost is 66 2/3%. What is the cost of
inventory destroyed by fire? 850,000

30. ABC Company sells TVs. The perpetual inventory was stated as P28,500 on the books at December 31, 2013. At the
close of the year, a new approach for compiling inventory was used and apparently a satisfactory cut-off for
preparation of financial statements was not made. Some events that occurred are as follows.
A. TVs shipped to a customer January 2, 2014, costing P5,000 were included in inventory at December 31,
2013. The sale was recorded in 2014.
B. TVs costing P12,000 received December 30, 2013, were recorded as received on January 2, 2014.
 C. TVs received during 2013 costing P4,600 were recorded twice in the inventory account.
D. TVs shipped to a customer December 28, 2013, f.o.b. shipping point, which cost P10,000, were not received
by the customer until January, 2014. The TVs were included in the ending inventory.
E. TVs on hand that cost P6,100 were never recorded on the books.
Compute the correct inventory at December 31, 2013. Answer: 32,000

31. ABC Realty Company purchased a plot of ground for P800,000 and spent P2,100,000 in developing it for building lots.
The lots were classified into Highland, Midland, and Lowland grades, to sell at P100,000, P75,000, and P50,000 each,
respectively. No. of lots are 20, 40 and 100 for Highland, Midland, and Lowland, respectively. Determine the
apportioned cost to Midland. Answer: 21,750 per lot or P870,000

32. On December 24, 2014, a fire destroyed totally the raw materials warehouse of ABC Manufacturing Company. There
were no purchases from the time of the fire until December 31, 2014.
Inventories January 1, 2014 December 31, 2014
Raw materials P180,000 ?
Factory supplies 12,000 P10,000
Goods in process 370,000 420,000
Finished goods 440,000 450,000
The accounting records show the following data:
Sales P2,400,000
Purchases of raw materials 800,000
Purchases of factory supplies 60,000
Freight in for raw materials 30,000
Direct labor 440,000
The manufacturing overhead rate is 75% of direct labor and the gross profit rate on sales is 35%. Determine the total
manufacturing cost. Answer: P1,620,000

(USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT 2 REQUIREMENTS: )

On December 31, 2015 a fire broke out in the warehouse of ABC destroying all inventory. The following data are available
for 2015:
January 1 December 31
Inventory 500,000
Accounts receivable 480,000 440,000
Accounts payable 400,000 500,000
Collection on accounts receivable 2,640,000
Payments to suppliers 1,600,000
Goods out on consignment at sales price 200,000
Salvage of inventory 20,000

2014 2015 2015

Sales 2,800,000 2,700,000 2,500,000
Gross profit 1,260,000 1,080,000 860,000
33. How much is this year’s cost of goods available for sale? 2,200,000
34. The amount of fire loss, if any, is. 500,000

35. On September 30, 2015, a fire at Mill Company’s only warehouse caused severe damage to its entire inventory.
Based on recent history, Mill has a gross profit of 30% of net sales. The ff. information is available from Mill’s records
for the nine months ended September 30, 2015:
Inventory at 01/01/15 550, 000
Total purchases received and recorded from January to date of fire 3,000,000
Total freight cosat of goods purchased and received 60,000
Total credit memo received on goods purchased and received 200,000
Total discounts taken on purchases 80,000
Invoice received for goods purchased but still in transit shipped
on September 30, 2015, FOB shipping point 120,000
Total sales delivered and recorded from Jan. to date of fire 3,600,000
Unrecorded sales invoic for goods delivered 300,000
Total sales returns accountes and recorded to date of fire 160,000

A physical inventory disclosed usable damage goods which Mill estimates can be sold to a jobber for 50,000. Using
the gross profit method, what amount of impairment loss on its inventory should Mill Company report in its December
31, 2015 profit or loss? Answer: P 662,000
36. Sultan Co. uses the retail inventory method to estimate its inventory for interim statement purposes. Data relating to
the inventory computation at June 30, 2014 are as follows:
Cost Retail
Inventory, Jan. 01 P 820,000 P 1,262,800
Net Purchases 2,280,000 3,607,200
Net mark-ups 450,000
Net markdowns 320,000
Sales 4,350,000
Sales Returns 300,000
Employee discount 100,000
Sales discount 80,000
What is the estimated cost of June 30, 2014 inventory using the average approach? Answer: P496,000

37. The closing raw materials inventory of Webster Manufacturing Company amounted to P345,000 at December
31,2014. This toal includes an item of raw material (material Zip) with a cost of P100,000 with an estimated net
realizable value of P80,000. Immediately after the balance sheet date, material Zip was applied to production and the
cost of the finished product where material Zip was applied revealed that its net selling price exceeds the cost of
producing the finished goods. AnswerP345 ,000

38. ABC Company has the following information pertaining to its merchandise inventory as of December 31, 2014.
Inventory on hand (including merchandise received on consignment of P20,000) P200,000
Inventory purchased with a buyback agreement 100,000
Merchandise in transit, FOB Shipping Point, including P5,000 freight cost 155,000
Merchandise in transit, free alongside, including delivery cost alongside the vessel, P6,000
But excluding the cost of shipment of P3,000 250,000
Merchandise in transit, CIF (including insurance costs and freight of P8,000) 175,000
What amount should ABC Company report as value of its inventory in its 2014 statement of financial position?
757,000

39. On October 1, 2014, ABC consigned 50 sewing machines to XYZ for sale at P20,000 each and paid P40,000 in
transportation cost. On December 31, 2014, XYZ reported the sale of 30 sewing machines and remitted P510,000.
The remittance was net of the agreed 15% commission. What amount should ABC recognize as consignment sales
revenue for 2014? P600,000

40. The accounting records of ABC show the following information for 2014:
In store
Inventory December 31 P290,000
Inventory January 1 220,000
Purchases 960,000
Freight in 20,000
Freight out 60,000
Out on consignment
Inventory December 31 P40,000
Inventory January 1 24,000
Shipment from consignor 120,000
Freight out to consignees 10,000
Freight out 16,000
What would be the cost of sales of ABC for 2014? P904,000