UCP :FAR 05_INVENTORIES AY 2019-2020

UNIVERSAL COLLEGE OF PARAÑAQUE

COLLEGE OF BUSINESS & ACCOUNTING

FAR05 INVENTORIES
–
RELATED STANDARDS: PAS 2 - INVENTORIES
TOPIC OUTLINE
Definition
Basic Concepts
Classes of Inventories
Scope
General Recognition Rule
Recognition
Exceptions

Initial Measurement
Measurement
INVENTORIES Subsequent Measurement
(PAS 2)

Periodic Method
Accounting for
Inventories
Perpetual Method

Purchase Committment
Other Related Topics
Inventory Estimation
Presentation and
Disclosure

LECTURE NOTES
BASIC CONCEPTS
Definition
According to PAS 2, Inventories are assets:
(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 in the rendering of
services.
Classes of Inventories
Classes of inventories vary in accordance with the entity’s nature of business.
(1) Merchandising business – Merchandise Inventories (definition (a) above).
(2) Manufacturing business – Finished Goods Inventories (definition (a) above); Work in Process
Inventories (definition (b) above); Raw Materials Inventories and Factory Supplies (definition (c)
above).
(3) Service business – Work in Progress Inventories (definition (b) above).
SCOPE
PAS 2 applies to all inventories except for the following:
(1) Assets accounted for by other standards
STANDARDS
(a) Financial Instruments PAS 32, PFRS 9
(b) Biological assets and agricultural produce at the point of harvest PAS 41

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(2) Assets not measured under PAS 2

MEASUREMENT
(a) Inventories of producers of agricultural, forest
and mineral products Net Realizable Value (NRV)
(b) Inventories of commodity broker-traders Fair Value less Cost to Sell (FV-CTS)
RECOGNITION
Inventories are recorded as assets and are reported on the balance sheet when the following conditions are
met:
(a) It is probable that the future economic benefits associated with the inventories will flow to the
enterprise.
(b) The inventories have cost or value that can be measured reliably.
But the real question is what goods shall be included in inventory?
"all goods to which the entity has title shall be included in inventory, regardless of location."
GENERAL RULE: The one who has POSSESSION has LEGAL TITLE.
EXCEPTIONS:
(1) Goods in transit
Shipping Terms Point of Transfer of Ownership
(a) FOB Shipping Point Shipping Point
(b) FOB Destination Buyer’s Location
(c) Free Alongside (FAS) Upon delivering the goods up to the dock next to
or alongside the vessel on which the goods
are to be shipped.
(d) Cost, Insurance, Freight (CIF) Upon loading of the goods to the vessel
(e) Ex-ship When the goods are unloaded at the other side
NOTE: As a rule, the entity who owns the goods should pay its related costs.
OWNER?
(2) Consignment Goods Consignor
NOTE:
(a) Inventoriable Costs:
 Freight cost and other handling costs of goods out on consignment
(b) Non-inventoriable Costs:
 Freight costs if the consigned goods are returned to the consignor
 The original freight cost of returned consigned goods
 Storage cost and other reimbursable costs charged to consignor
 Freight cost to final customer
(3) Inventory Financing Agreements
(a) Sales with a Repurchase Agreement Seller
(b) Pledge of Inventories Pledgor or Borrower
(c) Loan of Inventory Borrower
(4) Sale or Return Buyer
(5) Sale on Trial or Approval Seller
(6) Installment Sale Buyer
(7) Bill and Hold Sale Buyer
(8) Lay-away Sale Seller
(9) Special Order Sale Buyer upon completion
NOTES REGARDING EXCEPTIONS:
(a) In a sale or return agreement, if the goods are unsalable or the buyer has the intention of returning
it, the goods are not recognized on the books of the buyer.
(b) In a sale on trial or approval, the goods are not recognized on the books of the seller if the buyer
signified approval or if the goods are not returned within a reasonable time after the allowed period
elapse; it is recorded on the books of the buyer.
FREQUENTLY ASKED QUESTION ON RECOGNITION:
INVENTORY CUT-OFF
The following steps are undertaken in applying inventory cut-off
(1) Determine whether the inventory should be included or excluded (use the above concepts).
(2) Determine whether sales or purchases is recorded.
The recording of sales or accounts receivable is generally manifested by the issuance or recording of
sales invoice. On the other hand, the recording of purchases or accounts payable is usually
manifested by the receipt or recording of purchase invoice.
(3) Determine whether the inventories are actually excluded or included
If the problem did not indicate whether the goods have been actually included or excluded, the
following assumptions are used:

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(a) All sale DELIVERIES made ON OR BEFORE COUNT DATE are EXCLUDED from the count. All
deliveries made AFTER COUNT DATE are INCLUDED in the count.
(b) All RECEIPTS of goods ON OR BEFORE COUNT DATE are INCLUDED in the count, All receipts
AFTER COUNT DATE are EXCLUDED from the count.
The above rule is subject to contradicting evidence stated in the problem.
MEASUREMENT
Cost of Purchase

Cost of Conversion
INITIAL MEASUREMENT
(COST)
Other Costs

Exclusions from Cost

COST OF PURCHASE
INCLUSIONS:
(1) Purchase Price
Means of Acquisition Purchase Price
(a) Regular Purchase Invoice Price
(b) Deferred Settlement Cash Price Equivalent
(c) Lump-sum Purchase Allocated Purchase Price using Relative Fair Value
(2) Import duties
(3) Irrecoverable taxes
NOTE: VAT, being recoverable is generally NOT CAPITALIZED as cost of inventories UNLESS the entity is
NON-VAT REGISTERED.
(4) Freight and handling costs
(5) Insurance while the inventories are in transit
(6) Broker’s commission
EXCLUSIONS:
(1) Trade discounts, rebates and other similar items (deducted to arrive at invoice price)
(2) Foreign exchange differences
(3) Interest expense (unless inventories are categorized as qualifying assets)
COST OF CONVERSION
(1) Direct Labor
(2) Factory Overhead
Allocation Basis
(a) Variable FOH Actual Capacity
(b) Fixed FOH Normal Capacity
NOTE: Unallocated fixed FOH are expensed and not capitalized.
OTHER COSTS
These are costs necessary in bringing inventories to their present location and condition. (e.g. cost of
design for specific customers.
EXCLUSION FROM COSTS
Capitalized if
(1) Abnormal Losses Normal Losses
(2) Administrative Expenses Traceable
(3) Storage Costs of Finished Goods Related to Raw Materials or WIP
(4) Selling Costs N/A, always expensed
ACCOUNTING FOR INVENTORIES
Inventories are accounted for either through (a) periodic inventory system or (b) perpetual inventory
system. Let us elaborate them by comparing the two inventory systems:

Points of Comparison Periodic Perpetual

(1) When to update inventories? Upon physical count Each movement
through stock cards
(2) Treatment on inventory counts Necessary procedure For records accuracy
(3) With running balance of COGS? NO YES
(4) Inventory account treatment Residual account Maintained account
(5) When to use? When inventories are When inventories are
HIGH VOLUME but LOW VALUE LOW VOLUME but HIGH VALUE

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Summary of journal entries

Periodic Perpetual
(1) Purchase of inventories Purchases xx Inventory xx
AP xx AP xx
(2) Payment of freight cost Freight-in xx Inventory xx
Cash xx Cash xx
(3) Returned purchased goods AP xx AP xx
Purchase Returns xx Inventory xx
(4) Sold goods on account AR xx AR xx
Sales xx Sales xx
NO ENTRY COGS xx
Inventory xx
(5) Sales returns Sales returns xx Sales returns xx
AR xx AR xx
NO ENTRY Inventory xx
COGS xx

First in ; First Out

(FIFO) Method

Cost Formulas Average Method

Specific
SUBSEQUENT Identification
MEASUREMENT
(LOWER OF COST OR
NRV) Concept of NRV

Determination
Net Realizable of NRV
Value (NRV)
Direct Method
Accounting for
Inventory Write-
down Allowance
Method

NOTES:
(1) FIFO Method and Average Method are used for homogenous or interchangeable inventories while
specific identification is used for heterogeneous or non-interchangeable inventories.
(2) Last in, First out is NOT ALLOWED anymore by PAS 2.
COST FORMULAS
(1) First in, First out Method – this method assume that the items of inventory which are purchased first
are sold first and the ending inventory are represented by the most recent purchases.
FIFO costing method may be used with PERPETUAL or PERIODIC system and regardless of the system
used, the cost of the ending inventory and cost of goods sold are the same.
SOLUTION GUIDE:
(a) Ending inventory – (inventory, end quantity x cost of latest purchases)
If the quantity purchased based on the most recent transaction is not enough, the cost of the
next latest purchase is used until the entire ending inventory quantity has been assigned cost
to.
(b) Cost of Goods Sold – (inventory sold in quantity x cost of oldest purchases)
If the quantity purchased based on the oldest transaction is not enough, the cost of the next
oldest purchase is used until the entire quantity sold has been assigned cost to.
(2) Average Method – under this method, the cost of each item is determined from the average of the
cost of similar items at the beginning of a period and the cost of similar items purchased or produced
during the period.
Average method may be used with PERIODIC SYSTEM and most commonly known as WEIGHTED
AVERAGE METHOD
SOLUTION GUIDE:
(a) Ending inventory – (inventory, end quantity x weighted average unit cost)
(b) Cost of Goods Sold – (inventory sold in quantity x weighted average unit cost)
NOTE: Weighted average cost is RECOMPUTED ONCE EVERY YEAR and computed as TGAS in total /
TGAS in units

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Average method may be used with PERPETUAL SYSTEM and most commonly known as MOVING
AVERAGE METHOD
SOLUTION GUIDE:
(a) Ending inventory – (inventory, end quantity x latest moving average unit cost)
(b) Cost of Goods Sold – (inventory sold in quantity x latest moving average unit cost)
NOTE: Under this costing method, the average unit cost is RECOMPUTED after EVERY PURCHASE
TRANSACTION (it includes purchase returns transactions), so that whatever the last moving average
unit cost (after the last purchase transaction) shall be assigned as cost of ending inventory and cost
of goods sold.
OTHER CONCERNS ON COST FORMULAS:
(1) In periods of inflation
Net Income COGS Ending Inventory
FIFO results to HIGHER LOWER HIGHER
LIFO results to LOWER HIGHER LOWER
(2) In periods of deflation
Net Income COGS Ending Inventory
FIFO results to LOWER HIGHER LOWER
LIFO results to HIGHER LOWER HIGHER
NET REALIZABLE VALUE (NRV)
Concept of NRV
Measuring inventories at the lower of cost or NRV is in line with the basic accounting concept that an asset
shall not be carried at an amount in excess of amounts it is expected to be realized (recoverable amount).
So if:
Cost > NRV = There is inventory write-down
Cost < NRV = There is reversal of inventory write-down if there is a previous inventory write-down
How to compute NRV?
Net Realizable Value (NRV)
(a) Finished Goods / Merchandise Inventories ESP - ECTS
(b) Work-in-Process Inventories ESP – ECTS - ECTC
(c) Raw Materials and Factory Supplies Current Replacement Cost
ESP = Estimated Selling Price; ECTS = Estimated Cost to Sell; ECTC = Estimated Cost to Complete
Determination of LCNRV
Lower of Cost or NRV (LCNRV) is applied on an ITEM BY ITEM BASIS. This is applied to all types of
inventories except for RAW MATERIALS AND FACTORY SUPPLIES. These items of inventories are tested for
possible write-down only if the related finished goods are to be written down.
Accounting for Inventory Write-down
Direct method
The inventory is recorded at the lower of cost or net realizable value. This method is also known as "cost
of goods sold" method because any loss on inventory write-down is not accounted for separately but
"buried" in the cost of goods sold.
Allowance method
The inventory is recorded at cost and any loss on inventory write-down is accounted for separately. This
method is also known as "loss method" because a loss account, "loss on inventory write-down" is debited
and a valuation account "allowance for inventory write-down" is credited for the inventory write-down.

Allowance for Inventory Write-down

Beginning Balance xx
Reversal of Inventory Write- Loss on Inventory Write-
down xx down xx
Ending Balance xx
NOTES:
(1) The ending balance of allowance for inventory write-down is the difference between cost and NRV of
the current end of accounting period.
(2) Loss on inventory write-down is presented as addition to COGS or other losses if immaterial.
(3) Gain on reversal of inventory write-down is up to the extent of allowance balance only and presented
as deduction against COGS.
OTHER RELATED TOPICS
PURCHASE COMMITTMENTS
Purchase commitments are obligations of an entity to acquire certain goods sometime in the future at a
fixed price and fixed quantity.

Actually, a purchase order has already been made for future delivery of goods fixed in price and fixed in
quantity.

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A contracting party under a purchase commitment cannot cancel the contract without suffering a penalty.
Thus, the buyer has to accept future delivery even if the goods promised to be purchased become impaired
(there is a decrease in price). In such case, the buyer recognized loss on purchase commitments.
Entry to recognize the loss is:
Loss on purchase commitments xx
Estimated Liability on Purchase Commitments xx
When prices subsequently increase, the buyer recognizes gain on purchase commitment but up to the
extent only of the loss previously recognized.
INVENTORY ESTIMATION
Why there is a need for inventory estimation?
(1) Impossibility of Physical Count
(2) Cost-benefit Constraint
(3) Proof of the reasonable accuracy of a physical count
Frequently Asked Questions in Inventory Estimation
(1) Estimated ending inventory (there is a solution guide on how to compute these below and it varies
depending on the method used).
(2) Loss on casualty (fire, storm or earthquake)
Estimated ending inventory xx
Less: Undamaged inventories @ cost (e.g. goods in transit) (xx)
Damaged inventories @ LCNRV (xx)
Total inventory loss xx
(3) Inventory shortage
Estimated ending inventory xx
Inventory based on count (xx)
Inventory shortage xx
Methods used in Inventory Estimation
GROSS PROFIT METHOD - This method is based on the major assumption that the rate of gross profit
remains approximately the same from period to period and therefore the ratio of cost of goods sold to net
sales is relatively constant from period to period.
SOLUTION GUIDE:
The ultimate purpose of this topic is to compute estimated ending inventory.
Cost of Goods Available for Sale xx
Less: Ending Inventory (SQUEEZE) xx
Cost of Goods Sold xx
NOTES:
(1) COGS is computed as
Net sales x Cost Ratio (if GP is based on sales)
Net sales / Sales Ratio (if GP is based on cost)
(2) To arrive at net sales, sales returns are the only item to be deducted for inventory estimation
purposes only.
(3) Gross profit method may be used to estimate inventories for INTERIM REPORTING purposes but NOT
ACCEPTABLE for ANNUAL REPORTING.
RETAIL INVENTORY METHOD - The retail inventory method came to its name because the selling price or
retail price is tagged to each item and therefore the ending inventory is stated at selling price. Actually, the
gross profit method is a variation of retail method except that in retail method:
(a) The cost ratio is computed directly without regard to the gross profit rate.
(b) Net mark-ups and net mark-downs are considered.
SOLUTION GUIDE:

Cost Retail
Beginning Inventory xx xx
Purchases xx xx
Freight in xx
Purchase Discounts (xx)
Purchase Returns and Allowances (xx) (xx)
Departmental Transfer-in (debit) xx xx
Departmental Transfer-out (credit) (xx) (xx)
Abnormal Losses (xx) (xx)
Net Mark-ups xx
Net Mark-downs (xx)
TOTAL GOODS AVAILABLE FOR SALE (TGAS) xx xx
ENDING INVENTORY (SQUEEZE) xx xx
COST OF GOODS SOLD xx xx

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NOTES:
(1) COGS at retail is computed as: Gross sales less sales returns add employees discount and normal
losses. As we can see, only sales returns are deducted.
(2) COGS at cost is computed as TGAS at cost less ending inventory at cost
(3) Estimated ending inventory at cost is computed as (Ending inventory at retail x cost ratio)
(4) Cost ratio varies depending on the retail inventory method used:
Under Average Method: (TGAS @ COST / TGAS @ RETAIL)
Under FIFO Method: (TGAS @ COST – BEG. INVENTORY @ COST) / (TGAS @ RETAIL – BEG.
INVENTORY @ RETAIL)
Under Conservative Method: (TGAS @ COST / TGAS @ RETAIL + NET MARKDOWNS)
(5) Retail inventory method may be used to estimate inventories for INTERIM REPORTING purposes and
ACCEPTABLE for ANNUAL REPORTING.

FS PRESENTATION OF INVENTORIES
Inventories are reported in the Statement of Financial Position under CURRENT ASSETS section.

DISCLOSURE REQUIREMENTS
With respect to inventories, the financial statements shall disclose the following:
(a) The accounting policy adopted in measuring inventories, including the cost formula used.
(b) The total carrying amount of inventories and the carrying amount in classifications appropriate to the
entity. Common classifications of inventories are merchandise inventory, raw materials, goods in
process, finished goods and production supplies.
(c) The carrying amount of inventories carried at fair value less cost to sell.
(d) The amount of inventories recognized as an expense during the period.
(e) The amount of any write-down of inventories recognized as an expense during the period.
(f) The amount of reversal of write-down that is recognized as income.
(g) The circumstances or events that led to reversal of a write-down of inventories.
(h. The carrying amount of inventories pledged as security for liabilities.

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DISCUSSION EXERCISES
STRAIGHT PROBLEMS
INVENTORIES; COMPOSITION AND INITIAL MEASUREMENT
1. KOREA INC. conducted a physical count on December 31, 2019 which revealed merchandise with a
total cost of P2,500,000. KOREA has a gross profit rate of 40%. The following items are under
consideration for possible adjustments:
 Not included on the balance are goods located in the entity's warehouse that are on
consignment from another entity costing P200,000.
 Goods billed at P300,000, included on the inventory balance, were in transit on December 31,
2019 but received by the customers on January 3, 2020 under the shipping term FOB
destination. The related freight cost of this transaction is P5,000.
 Not included on the balance were goods costing P150,000 that were received from a vendor on
January 4, 2020. The goods were shipped on December 31, 2019, terms FOB shipping point
with a freight cost of P3,000.
 Goods with a selling price of P70,000 were sold under a bill and hold arrangement included in
the stock of inventory in the warehouse.
 Included on the balance above are goods costing P100,000 that were used as collateral for a
bank loan. The inventories are in the possession of the creditor.
REQUIREMENT: Compute for the adjusted inventory balance as of December 31, 2019.
2. THAILAND CORP. just finished its inventory count and reported inventory balance on December 31,
2019 at P2,500,000 at cost. The latter balance was before any necessary year-end adjustment
relating to the following:
(a) Goods shipped FOB destination on December 28, 2019 from a vendor to THAILAND was
received on January 4, 2020. The invoice cost was P150,000.
(b) Goods costing P250,000 were not included on the count since these are located to another
entity’s warehouse and was sent under a consignment arrangement.
(c) Good costing P100,000, not included on the balance, were sold on a sale or return agreement.
The goods were received by the customer on December 31, 2019.
(d) Goods with a selling price of P150,000 and cost of P120,000 were not included on the inventory
count balance since these were delivered to the buyer on December 30, 2019. The term of the
sale is sale on trial or approval.
(e) Goods costing P300,000 were sold to a buyer with an agreement that the former will repurchase
the goods sold at selling price plus all other reimbursable costs. These goods were not included
on the inventory count since it was shipped a day before the count.
REQUIREMENT: What amount should be reported as inventory on December 31, 2019?
3. An excerpt coming from TAIWAN CORP.’s trial balance revealed the following unadjusted balances for
the year ended 2019:
Merchandise Inventories (based on physical count) 1,000,000
Accounts Receivable 800,000
Accounts Payable 500,000
The annual inventory count of THAILAND was conducted on December 28, 2019 on the company’s
warehouses only. THAILAND applied constantly a gross profit rate of 30% to its sales transactions
during the year.
 Goods sent out of consignment on December 30 to VIETNAM INC. were recorded as sales
amounting to P150,000. The freight cost related to the consignment agreement was paid by
VIETNAM in the amount of P5,000. The said freight cost was debited as a selling cost and
credited as cash by TAIWAN. It was known that one-third of the inventories were already sold to
the customer of VIETNAM as of December 31.
 Goods at billed price of P100,000 were shipped to a customer on December 27, 2019 with a
term of FOB destination were received by the customer on January 2, 2020.
 Goods costing P60,000 were still in transit to TAIWAN. The related invoice was already received
by the Company, thus the accounts payable were credited for such amount. The goods were
shipped on an ex-ship term. The freight and loading cost were paid by the supplier amounting to
P4,500.
 Goods costing P90,000 were purchased on a bill and hold arrangement from a supplier. TAIWAN
has yet given delivery instructions to the supplier as of year-end.
 Goods shipped on December 30, 2019 were recorded as sales during 2019 amounting to
P200,000. The goods were still in transit to a customer with a term of FOB destination, freight
prepaid. The related freight cost is P10,000.
 Goods purchased and received on December 29, 2019 amounted to P50,000. The shipping term
is FOB shipping point, freight prepaid. The related invoice were received on December 30, 2019,
thus purchases are recorded. The related freight cost was not yet recorded.
REQUIREMENTS: Determine the adjusted balances of (a) merchandise inventory; (b) accounts
receivable; (c) accounts payable.

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4. On January 3, 2019 MALAYSIA CORP. consigned 3,000 units of its inventories costing P400 each to
INDONESIA INC. which will be sold by the latter to its customers on a price of P700. The
transportation cost of the goods to the premises of INDONESIA amounted to P90,000 which were paid
by INDONESIA. Based on the agreement, INDONESIA is entitled for 3% commission based on the
selling price of the goods. Advertising cost and other operating expenses paid by INDONESIA but
reimbursable from MALAYSIA amounted to P15,000. On April 30 2019, 300 units of inventories were
returned by INDONESIA since the storage capacity of the latter is at its maximum. The freight cost of
the returned goods amounted to P15,000. On December 31, 2019 500 units of inventories were held
by INDONESIA in relation to the consignment agreement
REQUIREMENTS: (1) What is the cost of ending inventory of MALAYSIA CORP. as of December 31,
2019? (2) What is the net income from the consignment arrangement earned by MALAYSIA during
2019?
5. CHINA CORP. (a NON-VAT registered) incurred the following in relation to PRODUCT A, one of its
inventories:
(a) Inventories bought from HONGKONG CORP. amounted to P112,000, VAT inclusive.
(b) Invoice price of PRODUCT A purchased from another supplier is P150,000. Quantity discounts of
20, 10 are allowed by supplier.
(c) Goods acquired from PHILIPPINES CORP., entity’s major supplier, under an extended credit term
amounted to P100,000. The selling price to be paid under normal credit term is P80,000.
(d) Abnormal amounts of wasted materials is P30,000 (150% of normal amounts).
(e) Fixed production overheads amounting to P300,000. The entity’s normal capacity is 100,000
machine hours but the company only used 80,000 machine hours.
(f) Transportation cost from supplier to CHINA amounted to P10,000; Trasportation cost from
CHINA to its customers amounted to P15,000.
(g) Storage cost of PRODUCT A, a finished product totalling P15,000.
REQUIREMENT: How much is the total inventory costs of CHINA CORP.?
6. CYPRUS CORP. has incurred the following costs during the current year:
Cost of purchases based on vendors' invoices 5,000,000
Trade discounts on purchases already deducted from vendors' invoices 500,000
Import duties 400,000
Freight and insurance on purchases 1,000,000
Other handling costs relating to imports 100,000
Salaries of accounting department 600,000
Brokerage commission paid to agents for arranging imports 200,000
Sales commission paid to sales agents 300,000
After-sales warranty costs 250,000
REQUIREMENT: What is the total cost of purchases?
7. On January 1, 2019, VIETNAM INC. purchased two items of inventories at a lump-sum price of
P65,000. Not yet included on the above price are the following items:
Recoverable taxes P30,000
Delivery costs 20,000
Insurance cost after delivery 15,000
Brokers’ commission 15,000
The inventories purchased are 3,000 units of PRODUCT ABC and 2,000 units of PRODUCT XYZ which
could be sold at a price of P5.00 and P35.00, respectively. During the month, 1,000 units of PRODUCT
ABC and 1,200 units of PRODUCY XYZ were sold.
REQUIREMENTS: (1) What is the initial cost of PRODUCT ABC and PRODUCT XYZ? (2) What is gross
profit during the month of January?
INVENTORIES; COST FORMULAS
8. PHILIPPINES CORP. is a wholesaler of party needs and supplies. The company’s activities during the
month of December are as follows:
Units Cost
December 1 Inventory 10,000 20.00
4 Purchase 40,000 25.00
7 Sale 25,000
15 Purchase 30,000 28.00
22 Sale 40,000
29 Purchase 20,000 30.00
REQUIREMENT: What is the ending inventory on December 31 under the following cost formulas?
(a) First-in, First-out Method (FIFO) (c) Average Method - Perpetual
(b) Average Method - Periodic

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9. The following information is available regarding the inventory movements of TAIWAN CORP. for the
month of September:
At the beginning of the month, the company has 2,000 units with a cost of P36.00 per unit.
PURCHASES SALES
DATE UNITS UNIT COST DATE UNITS PRICE
9/3 3,000 37.20 9/6 4,200 45
9/15 4,800 38.00 9/7 (600) 45
9/20 1,900 38.60 9/16 3,800 50
9/23 (300) 38.60
REQUIREMENTS: Compute for (a) ending inventory; (b) cost of goods sold; (c) gross profit under the
following cost formulas:
(1) First-in, First-out Method (FIFO) (3) Average Method - Perpetual
(2) Average Method - Periodic
INVENTORIES; LOWER OF COST OR NRV (LCNRV)
10. INDIA INC. follows PAS 2 in measuring its inventories. It applies the lower of cost or net realizable
value (NRV) in the valuation of its inventories. For its proper application, the following information
was provided.
Raw Materials In-Process Finished Goods
Marker Pen Marker Pen Marker Pen
Cost of Purchase 50,000 45,000 140,000 150,000 200,000 250,000
Freight-in 5,000 8,000 20,000 15,000 10,000 15,000
Freight-out - - 5,000 5,000 5,000 10,000
Conversion Cost until Completion - - 40,000 30,000 150,000 200,000
Selling Price - - 200,000 180,000 500,000 450,000
Other Selling Costs - - 10,000 5,000 40,000 30,000
Replacement Costs 40,000 43,000 - - - -
REQUIREMENT: Compute for the amount of inventories to be reported at balance sheet for the year
ended, December 31, 2019?
11. IRAQ CORP. provided the following data for the current year:
Inventory - January 1:
Cost 3,000,000
Net realizable value 2,800,000
Net purchases 8,000,000
Inventory - December 31:
Cost 4,000,000
Net realizable value 3,700,000
REQUIREMENT: What amount should be reported as cost of goods sold under the direct and allowance
method?
INVENTORIES; PURCHASE COMMITTMENTS
12. On January 1, 2019, IRAN CORP. signed a non-cancellable purchase commitment allowing IRAN to
purchase up to 40,000 units of microchip annually from BHUTAN CORP. at P30 per unit, the delivery
date of which is on April 1, 2020. On December 31, 2019, the price of microchips had fallen to P20
per unit. On April 1, 2020, the IRAN accepts delivery of microchips when the price is P28 per unit.
REQUIREMENTS: (1) How much is the loss on purchase commitments for the year 2019, if any? (2)
How much is the gain on purchase commitments for the year 2020, if any?
INVENTORIES; INVENTORY ESTIMATION
13. A fire burned the whole warehouse of CAMBODIA CORP. on November 30, 2019. The following
information is available from CAMBODIA’s records for the eleven months ended November 30, 2019:
Inventory at January 1, 2019 550,000
Total purchases received and recorded from January to date of fire 3,000,000
Total freight cost 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 November 30, 2019, FOB shipping point 120,000
Total sales delivered and recorded from Jan. to date of fire 3,600,000
Unrecorded sales invoice for goods delivered 300,000
Total sales returns accounted and recorded to date of fire * 200,000
Total sales discounts taken by customers on recorded sales 40,000
* P40,000 of which relates to credit memo issued to customers for merchandise to be returned next
year.
A physical inventory disclosed usable damaged goods which CAMBODIA estimates can be sold to a
jobber for P50,000. Based on recent history, CAMBODIA has a gross profit of 30% of net sales.
REQUIREMENT: Using the gross profit method, what amount of impairment loss on its inventory
should CAMBODIA CORP. report in its December 31, 2019 profit or loss?

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14. On December 31, 2014, a storm surge damaged the warehouse of MYANMAR INC. The entire
inventory and many accounting records were completely destroyed.
January 1 December 31
Inventory 1,500,000
Purchases 5,500,000
Cash sales 900,000
Collections of accounts receivable 8,400,000
Accounts receivable 700,000 1,100,000
Gross profit rate on sales 40%
REQUIREMENT: What is the inventory loss from the storm surge?
15. Presented below is information taken from for the three months ended March 31, 2019 in relation to
BRUNEI CORP.’s application of retail inventory method.
Cost Retail
Inventory, Jan. 1 P179,600 P200,000
Purchases 475,400 800,000
Purchase discounts 23,000
Purchase returns 50,000 80,000
Purchase allowance 10,000
Freight in 5,000
Mark-ups 200,000
Mark-up cancellations 40,000
Departmental transfer-in 70,000 100,000
Departmental transfer-out 60,000 90,000
Abnormal loss 20,000 40,000
Markdown 115,000
Markdown cancellations 10,000
Sales 800,000
Sales returns 80,000
Sales Allowance and discounts 120,000
Normal shrinkage 100,000
The company conducted its interim inventory count and valued inventory at P50,000.
REQUIREMENTS: Compute (a) estimated ending inventory; (b) cost of goods sold; (c) inventory
shortage using:
(1) Conservative method (c) FIFO method
(2) Average method
MULTIPLE CHOICE (THEORIES)
1. Which of the following is not a definition of inventories in accordance with PAS 2?
I. Are assets held for sale not in the ordinary course of business.
II. Are assets used in the production of goods and services.
A. I only C. Both I and II
B. II only D. Neither I nor II KGAUCP 2019
2. In relation to PAS 2, determine which of the following classification is correct.
Transaction Owner of Inventory
I. Consigned Goods Shipper to Consignee
II. Sale on trial Buyer
III. Loan of Inventory Lender
IV. Bill and Hold Sale Buyer
A. I and II D. I and IV
B. I and III E. I, III and IV KGAUCP 2019
C. II, III, and IV
3. Which of the following forms part as cost of inventories under PAS 2?
I. Storage cost of unfinished goods
II. Insurance cost of inventories stored outside entities premises
III. Salary of accountants in the factory.
IV. Gas and lubricants to be used by the delivery truck.
A. I and II D. II and IV
B. II and III E. I and IV KGAUCP 2019
C. I and III
4. Which of the following is incorrect regarding the accounting for inventories? FAR MILLAN 2016
A. Legal title over inventories normally passes when possession over of the goods is transferred.
B. Transfer of ownership over inventories may precede, coincide with or follow the transfer of
physical possession of the goods.
C. Ownership over inventories may be transferred to the buyer even when legal title to the goods
is retained by the seller.
D. Transfer of ownership over inventories may coincide with or follow but never precedes the
transfer of physical possession of the goods

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5. Evaluate whether the following statements are true or false:

I. Perpetual inventory system should be used when the inventories have a high turnover but low in
value.
II. Under periodic inventory system, cost of goods sold is a residual amount.
III. Inventory counts are not performed under perpetual inventory system since they have an
updated balance of inventory as well as cost of goods sold.
KGAUCP 2017 A. B. C. D.
Statement I True False False True
Statement II False False True True
Statement III True False False True
6. Evaluate whether the following statements are true or false in relation to PAS 2, Inventories
I. All inventories are to be written-down to their net realizable value if their cost above their net
realizable value.
II. Entity Y acquires merchandise from Entity Z in an arrangement whereby Entity Z is obligated to
repurchase the merchandise at a future date. Entity Y shall include the merchandise acquired
from Entity Z in its inventory
III. With FIFO, inventories are reported on the balance sheet at or near their current value.
KGAUCP 2017 A. B. C. D.
Statement I False True False True
Statement II False False True False
Statement III True False False True
7. The costing of inventory must be deferred until the end of reporting period under which of the
following method of inventory valuation?
A. FIFO perpetual C. Moving average
B. LIFO perpetual D. Weighted average FAR MILLAN 2016
8. LCNRV of inventory
A. Should always be equal to net realizable value.
B. Is always either the net realizable value or cost.
C. May sometimes be less than net realizable value.
D. Should always be equal to estimated selling price less cost to complete. FA VALIX 2016
9. How should sales staff commission be dealt with when valuing inventories at the lower of cost and net
realizable value?
A. Added to cost C. Deducted in arriving at NRV
B. Deducted from cost D. Ignored FA VALIX 2016

10. In periods of rising prices, FIFO does not result to:

I. Higher net income than LIFO
II. Higher cost of goods sold than LIFO
III. Lower ending inventory than LIFO
A. I only D. II and III
B. II only E. I and II KGAUCP 2019
C. III only
11. Gross Profit Method is not useful when:
I. A periodic system is use and inventories are required for interim statements.
II. Estimating inventories to be reported in the external financial statements.
A. I only C. Both I and II
B. II only D. Neither I nor II KGAUCP 2017
12. What is the effect of freight in on the cost-retail ratio when using the conservative retail method?
A. Increases the cost-retail ratio
B. Decreases the cost-retail ratio
C. No effect on the cost-retail ratio
D. Depends on the amount of the net markup FA VALIX 2016

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CLASSROOM DISCUSSION
1. MALDIVES CORP. conducted its year-end inventory count last December 29, 2018 and based on the
physical count, the inventory has an unadjusted balance of P450,000. The following information was
available in determining the adjusted balance of the inventory account:
SALES TRANSACTIONS
INVOICE NO. SHIPPING DATE SHIPPING TERM INVOICE AMOUNT
120154 December 30, 2018 FOB Shipping Point P200,000
120153 December 27, 2018 FOB Shipping Point 150,000
120156 December 31, 2018 Consignment 100,000
120163 December 26, 2018 FOB Destination 200,000

PURCHASES TRANSACTIONS
INVOICE NO. RECEIVING DATE SHIPPING TERM INVOICE AMOUNT
10001 December 28, 2018 FOB Shipping Point P120,000
56809 January 3, 2019 FOB Shipping Point 250,000
33352 December 29, 2018 FOB Destination P100,000
The company’s average gross profit rate based on sales is 40%.
What is the adjusted balance of the inventory account to be presented on the statement of financial
position as of December 31, 2018?
A. P800,000 C. P700,000
B. P850,000 D. P600,000 KGAUCP 2018
2. CHINA INC. (non-VAT registered) incurred the following costs in relation to its inventory account:
• CHINA purchased materials from HONG KONG INC. with a list price of P100,000. The supplier
granted a credit terms of 10, 20 2/10 n/30. The company is using the net method of accounting
its purchases.
• Materials bought from TAIWAN CORP., amounted to P336,000, 12% VAT inclusive.
• Freight cost of inventories going to customers, P15,000.
• Interest expense incurred on inventories that are ready for their intended sale, P30,000.
• Materials bought from BRUNEI CORP. amounted to P150,000, before P2,000 rebate and P5,000
import duties.
• Goods sent out on consignment at billed price of P210,000. The cost was exclusive of P5,000
transportation out to consignees.
Gross profit rate based on cost of 50% was applied constantly throughout the year.
What is the total amount of inventories for CHINA INC.?
A. 664,560 C. 704,560
B. 699,560 D. 850,560 KGAUCP 2018
3. INDONESIA CORP. counted and reported the ending inventory on December 31, 2014 at P2,000,000.
None of the following items were included when the total amount of the ending inventory was
computed:
• P150,000 in goods located in the entity's warehouse that are on consignment from another
entity.
• P200,000 in goods that were sold by the entity and shipped on December 30 and were in transit
on December 31,2014. The goods were received by the customer on January 2, 2015. Terms
were FOB destination.
• P300,000 in goods that were purchased by the entity and shipped on December 30 and were in
transit on December 31, 2014. The goods were received by the entity on January 2, 2015.
Terms were FOB shipping point.
• P400,000 in goods that were sold by the entity and shipped on December 30 and were in transit
on December 31, 2014. The goods were received by the customer on January 2, 2015. Terms
were FOB shipping point.
What is the correct amount of inventory on December 31, 2014?
A. 2,350,000 C. 2,750,000
B. 2,500,000 D. 2,900,000 FA VALIX 2016
4. MALAYSIA INC. provided the following information for the current year:
Merchandise purchased for resale 4,000,000
Freight in 100,000
Freight out 50,000
Purchase returns 20,000
Interest on inventory loan 200,000
What is the inventoriable cost of the purchase?
A. 4,030,000 C. 4,130,000
B. 4,080,000 D. 4,280,000 FA VALIX 2016
Use the following information for the next two questions: KGAUCP 2018
The following information is available regarding the inventory movements of LEBANON CORP. for the
month of August:
At the beginning of the month, the company has 2,000 units with a cost of P40 per unit.

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PURCHASES SALES
DATE UNITS UNIT COST DATE UNITS PRICE
8/2 3,000 30 8/5 2,000 50
8/3 2,500 35 8/6 1,500 45
8/7 5,000 25 8/8 4,000 55
8/10 1,500 30 8/9 2,000 45
5. Using FIFO Method, what is the amount of gross profit for the month of August?
A. 180,000 C. 145,000
B. 210,000 D. 170,000
6. Using Moving Average Method, what is the amount of gross profit for the month of August?
A. 159,900 C. 182,444
B. 147,650 D. 156,460
7. MONGOLIA CORP.’s records for the first 3 months of its existence show purchases of Commodity A as
follows:
No. of Units Cost
August 5,500 P280,500
September 8,000 416,000
October 5,100 270,300
Total 18,600 P966.800
The inventory of Commodity A at the end of October using FIFO is valued at P363,900.
Assuming that none of commodity A was sold during August and September, what value would be
shown at the end of October if average cost was assumed?
A. P351,900 C. P358,662
B. P353,300 D. P365,700 UBERITA 2015
8. The closing inventory of SAUDI ARABIA CORP. amounted to P284,000 at December 31, 2014. This
total includes two inventory lines about which the inventory taker is uncertain.
Item 1 - 500 items which had cost P15 each and which were included at P7,500. These items were
found to have been defective at the balance sheet date. Remedial work after the balance sheet date
cost P1,800 and they were then sold for P20 each. Selling expenses were P400.
Item 2 -100 items that had cost P10 each but after the balance sheet date, these were sold for P8
each with selling expenses of P150.
What figure should appear in SAUDI ARABIA's statement of financial position for inventory?
A. P283,650 C. P284,000
B. P283,950 D. P284,300 UBERITA 2015
9. SINGAPORE CORP. showed the following information on December 31, 2014.
Cost Retail
Inventory, January 1 280,000 700,000
Sales 5,000,000
Purchases 2,480,000 5,160,000
Freight in 75,000
Markup 500,000
Markup cancelation 60,000
Markdown 250,000
Markdown cancelation 50,000
Estimated normal shrinkage is 2% of sales.
The entity used the retail inventory method in estimating the value of its inventory. What is the
estimated cost of inventory on December 31, 2014 at approximate lower of average cost and net
realizable value?
A. 450,000 C. 495,000
B. 460,000 D. 506,000 FA VALIX 2016
10. On September 15, 2015, a fire destroyed a significant portion of the merchandise inventory of
HONGKONG CORP. The following information was available from the records of the company:
January 1, 2015
to Date of Fire 2014
Sales P450,200 P530,180
Sales returns and allowances 5,100 5,980
Purchases 378,245 405,476
Purchase returns and allowances 10,295 11,110
Beginning inventory 105,650 120,160
The company determined the cost of inventory not damaged to be P69,738. Damaged merchandise,
which cost P15,000, had an estimated realizable value of P5,000.
What is the estimated fire loss on September 15, 2015?
A. P51,684 C. P66,684
B. P61,684 D. P74,738 UBERITA 2015

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11. Which TWO of the following should be taken into account when determining the cost of inventories
per PAS2 Inventories?
I. Storage costs of part-finished goods III. Recoverable purchase taxes
II. Trade discounts IV. Administrative costs
A. I and II C. III and IV
B. II and III D. I and IV CRC-ACE 1011
12. Excel Corp. manufactures and sells paper envelopes. The stock envelope was included in the closing
Inventory as of December 31, 2007, at a cost P50 each per pack. During the final audit, the auditors
noted that the subsequent sale price for the inventory at January 15, 2008 was P40 each per pack.
Furthermore, inquiry reveals that during the physical count, a water leakage has created damages to
the paper and the glue.
Accordingly, in the following, Excel has spent a total of P15 per pack for repairing and reapplying glue
to the envelopes. The net realizable value and inventory write-down (loss) amount to:
A. P25 and P25 respectively C. P40 and P10 respectively
B. P30 and P15 respectively D. P45 and P10 respectively CRC-ACE 1011
13. Which of the following items are included in the balance of inventories to be reported at year-end?
I. Inventories purchased under a bill and hold arrangement.
II. Inventories shipped under a lay-away sale. The purchase price is unpaid as of year-end.
III. Inventories sold under a sale with a repurchase agreement.
A. I and II D. I, II and III
B. II and III E. Answer not given KGAUCP 2019
C. I and III
14. Where should goods in transit recently purchased FOB destination be included in the statement of
financial position?
A. Inventory C. Accounts payable FA VALIX 2016
B. Equipment D. Not in the statement of financial position
15. When the cost of goods sold method is used to record inventory at net realizable value
A. There is a direct reduction in the selling price.
B. A loss is recorded directly in the inventory account by debiting loss.
C. Only the portion of the loss attributable to inventory sold is recorded. FA VALIX 2016
D. The net realizable value for ending inventory is substituted for cost and the loss is buried in cost
of goods sold.
16. I. Foreign exchange differences arising directly on the recent acquisition of inventories are
included as inventoriable cost.
II. The original freight cost of returned consigned goods are not part of inventories, thus expensed
outright.
A. True, false C. True, true
B. False, true D. False, false KGAUCP 2018
17. In applying the Gross Profit Method, which of the following item is included in the computation?
KGAUCP 2018 A. B. C. D.
Purchase Discount Yes No Yes Yes
Sales Return No Yes Yes Yes
Sales Allowances No No No Yes
18. In a perpetual inventory system, two entries are normally made to record each sales transaction. The
purpose is best described by which of the following statements? CRC-ACE 1011
A. One entry records the purchase of merchandise and the other, records the sale
B. One entry records the subsidiary ledger, and the other updates the general ledger
C. One entry recognizes the sales revenue and the other recognizes the cost of goods sold
D. One entry records the cost of goods sold and the other reduces the balance in the inventory
account
19. Statement 1: In periods of rising prices, FIFO Method will present a lesser amount of cost of goods
sold as compared to LIFO Method.
Statement 2: PAS 2 expressly prohibits Last-in, First-out basis of valuation for certain companies and
circumstance only.
A. Only the first statement is true. C. Both statements are true.
B. Only the second statement is true. D. Both statements are false. KGAUCP 2018
20. Entities must allocate the cost of all goods available for sale between
A. The income statement and the statement of financial position.
B. The cost of goods on hand at the end and the cost of goods acquired or produced during the
period.
C. The cost goods on hand at the beginning and the cost of goods acquired or produced during the
period.
D. All of the choices are correct. FA VALIX 2016

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QUIZZER (DO-IT-YOURSELF DRILL)

THEORIES
1. Which is not within the scope of PAS 2, Inventories?
A. Goods purchased by retailer and held for resale
B. Work in process produced by a manufacturing entity
C. Work in progress arising under construction contracts
D. Cost of service of a service provider, for which the enterprise has not recognized the related
revenue
Use the following information for the next two questions:
During 2004, which was the first year of operations, Luther Company had merchandise purchases of
P985,000 before cash discounts. All purchases were made on terms of 2/10, n/30. Three-fourths of
the items purchased were paid for within 10 days of purchase. All of the goods available had been
sold at year end.
2. Which of the following recording procedures would result in the highest cost of goods sold for 2004?
1. Recording purchases at gross amounts
2. Recording purchases at net amounts, with the amount of discounts not taken shown under
"other expenses" in the income statement
A. 1
B. 2
C. Either 1 or 2 will result in the same cost of goods sold.
D. Cannot be determined from the information provided.
3. Which of the following recording procedures would result in the highest net income for 2004?
1. Recording purchases at gross amounts
2. Recording purchases at net amounts, with the amount of discounts not taken shown under
"other expenses" in the income statement
A. 1
B. 2
C. Either 1 or 2 will result in the same net income.
D. Cannot be determined from the information provided.
4. Under this inventory system, a physical count is necessary before profit is determined
A. Perpetual C. Under no such system
B. Periodical D. Periodic
5. KGA Co. purchased merchandise inventory to Mirak Inc. on December 15, 2017. If the inventory is in
the seller’s port as of December 31, 2017, which of the below freight terms (incoterms) will result to
classifying the said goods as KGA’s merchandise inventory as of December 31, 2017?
I. Ex-ship III. FOB Destination
II. FOB Seller’s Place IV. Free Along-side
A. I only D. II only
B. II and IV E. III only
C. IV only
6. I. The cost of inventories that are ordinarily interchangeable and are not produced and segregated
for specific projects shall be assigned by using the First-ln, First-Out (FIFO), Weighted Average
cost formula or Last-In, First-Out (LIFO)
II. The cost of inventories of items that are not ordinarily interchangeable and goods or services
produced and segregated for specific projects shall be assigned by using Specific Identification
of their individual costs.
A. True, false C. False, false
B. False, true D. True, true
7. Which of the following is a characteristic of a Perpetual Inventory System?
I. No entry to recognize cost of goods sold
II. With running balance of inventory and cost of goods sold account
III. Usually used in business where its inventories are with high value but low turnover.
A. I and II D. I, II and III
B. I and III E. None from I, II and III
C. II and III
8. Which of the following should not be taken into account when determining the cost of inventories?
A. Trade discounts C. Storage costs of part-finished goods
B. Recoverable purchase taxes D. Import duties on shipping of inventory inward
9. What is the effect of net markup on the cost-retail ratio when using the conservative retail method?
A. Increases the cost-retail ratio
B. Decreases the cost-retail ratio
C. No effect on the cost-retail ratio
D. Depends on the amount of the net markdown

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10. Is a non-cancellable agreement to purchase goods sometime in the future at a fixed price and fixed
quantity.
A. Purchase commitment C. Contract of sale
B. Finance lease D. None of the above.
11. Which of the following should be excluded in an entity's inventories?
A. merchandise displayed in the sales department
B. goods contained in the warehouse
C. goods in-transit purchased under FOB destination
D. goods in-transit purchased under FOB shipping point
12. Generally accepted accounting principles require the selection of an inventory cost flow method
which:
A. emphasizes the valuation of inventory for balance sheet purposes
B. most closely approximates lower of cost and net realizable value for the ending inventory
C. most clearly reflects the periodic income
D. matches the physical flow of goods from inventory with sales revenue
E. yields the most conservative amount of reported income
13. Examples of costs excluded from the cost of inventories and recognized as expenses in the period in
which they are incurred:
I. Storage cost, unless those costs are necessary in the production process prior to a further
production stage
II. Selling costs
III. Import duties and non-refundable other taxes
IV. Abnormal amounts of wasted materials
V. Administrative overheads that contribute to bringing inventories to their present location and
condition
A. I, II and IV only C. I, II, III and IV only
B. I, II, IV and V only D. I, II, III, IV and V
14. The cost of inventories of items that are not ordinarily interchangeable shall be assigned by using the
first-in, first-out (FIFO) or weighted average cost formula.
The amount of any reversal of any write-down of inventories, arising from an increase in net
realizable value, shall be recognized as a reduction in the amount of inventories recognized as an
expense in the period in which the reversal occurs.
A. True, True C. False, True
B. True, False D. False, False
15. What is consigned inventory?
A. Goods that are shipped but title remains with the shipper.
B. Goods that are shipped and title transfers to the receiver.
C. Goods that have been segregated for shipment to a customer.
D. Goods that are sold but payment is not required until the goods are sold.
16. What is the treatment for abnormal freight in?
A. Charge to expense for the period.
B. Charge to raw materials inventory.
C. Charge to finished goods inventory.
D. Allocate to raw materials, work in process and finished goods.
17. An exception to the general rule that costs should be charged to expense in the period incurred is
A. Sales commission and salary costs incurred in connection with the sale of inventory.
B. General and administrative fixed costs incurred in connection with the purchase of inventory.
C. Interest costs for financing of inventories that are routinely manufactured in large quantities on
a repetitive basis.
D. Factory overhead costs incurred on a product manufactured but not sold during the current
accounting period.
18. The allocation of fixed factory overhead to the cost of conversion is based on
A. Relative sales value method
B. Actual use of the production facilities
C. Normal capacity of the production facilities
D. Either the normal capacity or actual use of the production facilities, whichever is appropriate
19. Which of the following shows proper classification of inventories?
I. Goods in transit shipped under ex-ship – seller
II. Goods sold under sale or return basis – buyer
III. Inventory pledged – creditor / lender
IV. Special order sales where inventories are in progress of completion – buyer
A. I only D. I, II and III
B. I and II only E. II and IV only
C. I, II and IV

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20. In relation to PAS 2, determine whether the following statements are true or false:
I. Included in the measurement scope of the standard are agricultural produce after the point of
harvest.
II. Inventories held by an entity under a consignment agreement are included in its ending
inventories at year-end.
III. Lower of cost or NRV rule is applied on an item by item basis.
A. B. C. D.
Statement I True False False True
Statement II False True True True
Statement III True False False True
21. S1: Perpetual inventory system should be used when the inventories have a high turnover but low in
value.
S2: PAS 2 expressly prohibits Last-in, First-out basis of valuation for certain companies and
circumstance only.
S3: Inventory counts are still performed under perpetual inventory system but for control purposes.
A. True, false, false D. False, true, true
B. False, false, true E. Answer not given
C. True, false, true
22. Which of the following is incorrect regarding the accounting for consigned goods?
A. Consigned goods are properly included in the inventory of the consignor and not the consignee.
B. Freight incurred by the consignor in delivering the consigned goods to the consignee forms part
of the cost of inventories
C. The consignee records consigned goods received from the consignor through journal entries.
D. The consignor should not recognize revenue until the consigned goods are sold by the consignee
to third parties.
23. Under this shipping cost agreement, freight is not yet paid upon shipment. The carrier collects
shipping costs from the buyer upon delivery.
A. freight collect C. FOB shipping point
B. freight prepaid D. FOB destination
24. The purchase cost of inventories includes all of the following, except
A. purchase price
B. import duties and non-refundable taxes
C. freight cost incurred in bringing the inventory to its intended location
D. Value added, taxes paid by a VAT registered payer
25. Which of the following is/are true under PAS 2?
I. Inventories can only be "written down" but not "written up."
II. Inventories may be "written up" above their cost if it is clear that their values have increased
subsequent to previous write-down.
III. Storage costs is included in the cost of inventory only when storage cost is necessary in bringing
the inventory to its intended condition and location,
A. II only C. III only
B. I, II & III D. I & III
26. Which statement is not valid about the gross profit method?
A. It may be used by auditors.
B. It is an acceptable accounting procedure.
C. It may be used to estimate inventory for annual statements.
D. It may be used to estimate inventory for interim statements.
27. To produce an inventory valuation which approximates the lower of cost or net realizable value using
the retail inventory method, the computation of the ratio of cost to retail should
A. Include markups and markdowns C. Include markups but not markdowns
B. Include markdowns but not markups D. Ignore both markups and markdowns
28. Net realizable value of inventories may fall below cost for a number of reasons including;
I. Product obsolescence.
II. Physical deterioration of inventories.
III. An increase in the expected replacement costs of the inventory,
IV. A decrease in the estimated costs of completion.
A. I and II only. C. I, III and IV only
B. I, II and IV only D. II, III and IV only
29. Which inventory measurement procedure is not allowed to measure the cost of inventories for annual
reporting purposes?
A. First-in, first out method C. Moving average method
B. Gross profit method D. Retail inventory method

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30. Which of the following would be included in the merchandise inventory amount reported on PRTC
Company's December 31, 2015 balance sheet?
A. Items in PRTC's warehouse on consignment from another company
B. Items purchased from a supplier and en route directly to a customer of PRTC; the term from the
supplier was FOB destination; invoice received but not yet paid
C. Items sold to BIG Company on July 1, 2015 and accounted for using the installment sales
method (equal installments are due each month for 24 months from date of sale)
D. Items shipped to a customer on December 31, 2015 with delivery expected on January 3, 2016;
the term was FOB destination; an invoice has been mailed to the customer
31. When using the periodic system, which of the following generally would not be separately accounted
for in the computation of cost of goods sold?
A. Cash discounts taken during the period
B. Trade discounts applicable to purchases
C. Purchase returns and allowances during the period
D. Cost of transportation in for merchandise purchased during the period
32. 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.
33. In relation to PAS 2, determine whether the following statements are true or false:
I. Variable production overheads are allocated on the basis of the normal capacity of the company.
II. Net realizable value is the general rule for valuing commodities held by broker-traders.
III. When the cost of goods sold method is used to record inventory at NRV the NRV is substituted
for cost and the loss is buried in cost of goods sold.
A. B. C. D. E.
Statement I False False True False True
Statement II False True True True False
Statement III True True False False False
34. Which of the following is within the recognition and measurement scope of PAS 2?
I. Agricultural produce from biological assets at the point of harvest
II. Financial Instruments
III. Inventories of commodity-brokers-traders
A. I and II D. I, II and III
B. II and III E. None A, B, C and D
C. I and III
35. Which is not a required disclosure in relation to inventory?
A. The amount of any reversal of write-down of inventories
B. The amount of any writedown of inventories recognized as expense
C. The circumstances or events that led to the reversal of a write-down of inventories
D. The fair value less cost of disposal of inventories pledged as security for liabilities
PROBLEMS
1. AFGHANISTAN CORP. provided the following information for the current year:
Accounts receivable, January 1 900,000
Accounts receivable, December 31 1,000,000
Accounts receivable turnover 8 to 1
Inventory, January 1 1,100,000
Inventory, December 31 1,200,000
Inventory turnover 4 to 1
Hint: Cost of sales = Average inventory x turnover
What is the gross margin for the current year?
A. 3,000,000 C. 4,600,000
B. 3,400,000 D. 7,600,000
2. On April 1, 2017 ARMENIA INC. purchased 1,500 units, 2,000 units and 2,500 units of Products A, B
and C, respectively for a lump-sum price of P112,000, inclusive of P12,000 VAT but exclusive of
import duties amounting to P15,000. If the relative sales value for each product is P40 for A, P45 for
B and P60 for C. What is the cost of ending inventory of Product A if 1,200 units of it were sold during
the year?
A. 5,750 C. 23,000
B. 4,600 D. 18,400

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3. AZERBAIJAN CORP. (non-VAT registered) incurred the following costs in relation to its inventory
account:
• Materials acquired from KGA, entity’s supplier, under an extended credit term amounted to
P300,000. The selling price to be paid under normal credit term is P250,000.
• Invoice price of materials purchased from another supplier is P150,000. Quantity discounts of
20, 10 are allowed by supplier.
• Materials bought from Walang Forever Inc., amounted to P224,000, 12% VAT inclusive.
• Interest expense incurred on inventories that takes substantial period of time to complete,
P30,000.
• Abnormal amounts of wasted materials is P15,000 (200% of normal amounts).
• Storage costs of part-finished goods is P45,000.
• Fixed production overheads amounting to P200,000. The entity’s normal capacity is 100,000
machine hours but the company only used 80,000 machine hours.
• Transportation cost to customers on sale P5,000.
How much is the total inventory costs of AZERBAIJAN.?
A. 866,500 C. 879,000
B. 835,000 D. 855,000
4. BAHRAIN CORP. reported accounts payable on December 31, 2014 at P900.000 before any necessary
year-end adjustments relating to the following transactions:
• On December 27, 2014, BAHRAIN CORP. wrote and recorded checks to creditors totaling
P400,000 causing an overdraft of P100,000 in BAHRAIN CORP.'s bank account on December 31,
2014. The checks were mailed out on January 10, 2015.
• On December 28, 2014, BAHRAIN CORP. purchased and received goods for P150,000 terms 2
/10, n /30. BAHRAIN CORP. records purchases and accounts payable at net amount. The invoice
was recorded and paid January 3, 2015.
• Goods shipped FOB shipping point, 5/10, n/30 on December 20, 2014 from a vendor to
BAHRAIN CORP. were received January 2, 2015. The invoice cost was P200,000.
On December 31, 2014, what amount should be reported as accounts payable?
A. 1,447,000 C. 1,637,000
B. 1,450,000 D. 1,650,000
5. BANGLADESH INC. provided the following data:
Items counted in the bodega 4,000,000
Items included in the count specifically segregated per sale contract 100,000
Items in receiving department, returned by customer, in good condition 50,000
Items ordered and in the receiving department 400,000
Items ordered, invoice received but goods not
received. Freight is on account of seller. 300,000
Items shipped today, invoice mailed, FOB shipping point 250,000
Items shipped today, invoice mailed, FOB destination 150,000
Items currently being used for window display 200,000
Items on counter for sale 800,000
Items in receiving department, refused because of damage 180,000
Items included in count, damaged and unsalable 50,000
Items in the shipping department 250,000
What is the correct amount of inventory?
A. 5,150,000 C. 5,800,000
B. 5,700,000 D. 6,000,000
6. The following information is available from BHUTAN COMPANY’s 2002 accounting records:
Purchases P 530,000
Purchase discounts 10,000
Beginning inventory 160,000
Ending inventory 215,000
Freight-out 40,000
BHUTAN's 2002 cost of goods sold is
A. 465,000 C. 505,000
B. 475,000 D. 585,000
Use the following information in answering the next item(s):
Beginning Inventory P 20,000
Purchases 41,000
Purchase Returns and Allowances 3,000
Purchase Discounts 4,000
Freight-In ?
Cost of Goods Available for Sale 55,000
Ending Inventory ?
Cost of Goods Sold 22,000

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7. How much is the freight-in?

A. 3,000 C. 2,000
B. 4,000 D. 1,000
8. How much is the ending inventory?
A. 23,000 C. 33,000
B. 32,000 D. 22,000
9. BRUNEI CORP. reported inventory on hand on December 31, 2014 valued at a cost of P950,000. The
following items were not included in this inventory amount:
Item: Purchased goods in transit, shipped FOB destination, invoice price P30,000 which includes
freight charge of P1,500.
Item 2: Goods held on consignment by BRUNEI CORP. at a sales price of P28,000, including sales
commission of 20% of the sales price.
Item 3: Goods sold to BRUNEE INC. under terms FOB destination, invoiced for P18,500 which
includes P1,000 freight charge to deliver the goods. Goods are in transit. The entity's
selling price is 140%o of cost.
Item 4: Purchased goods in transit, terms FOB shipping point, invoice price P50,000, freight cost,
P2,500.
Item 5: Goods out on consignment to BRUNO CORP., sales price P35,000, shipping cost of P2,000.
What is the adjusted cost of the inventory on December 31, 2014?
A. 1,040,000 C. 1,043,000
B. 1,042,000 D. 1,073,500
10. CAMBODIA CORP. reported the 2014 year-end inventory at P7,600,000 before the following
adjustments:
* Goods valued at P1,000,000 are on consignment with a customer. These goods are not included
in the year-end inventory.
* Goods costing P250,000 were received from a vendor on January 5, 2015. The related invoice
was received and recorded on January 12, 2015. The goods were shipped on December 31,
2014, terms FOB shipping point.
* Goods costing P850,000 were shipped on December 31, 2014, and were delivered to the
customer on January 2, 2015. The terms of the invoice were FOB shipping point. The goods
were included in ending inventory for 2014 even though the sale was recorded in 2014.
* A P350,000 shipment of goods to a customer on December 31, 2014, FOB destination, was not
included in the year-end inventory. The goods cost P260,000 and were delivered to the
customer on January 8,2015. The sale was properly recorded in 2015.
* An invoice for goods costing P350,000 was received and recorded as a purchase on December
31, 2014. The related goods, shipped FOB destination, were received on January 2, 2015, and
thus were not included in the physical inventory.
* Goods valued at P650,000 are on consignment from a vendor. These goods are not included in
the year-end inventory.
* A P1,050,000 shipment of goods to a customer on December 30, 2014, terms FOB destination,
was recorded as a sale in 2014. The goods, costing P840,000 and delivered to the customer on
January 6, 2015, were not included in 2014 ending inventory.
What is the correct inventory on December 31, 2014?
A. 8,100,000 C. 9,450,000
B. 9,100,000 D. 9,950,000
11. CHINA CORP. reported P70,000 of inventory on December 31, 2015, based on physical count.
Additional information was given as follows:
a Included in the physical count were goods billed to a customer, FOB shipping point, on
December 31, 2015. The goods had a cost of P3,000 and have been billed at P5,000. The
shipment is ready for pick-up by the delivery contractor.
b Goods were in transit from a vendor. The invoice cost was P8,000 and goods were shipped FOB
shipping point on December 31, 2015.
c Work in process costing P500 was sent to an outside processor for finishing on December 30,
2015.
d Goods out on consignment amounted to P4,600 (sales price); shipping costs, P120 (markup is
15% on cost).
The correct amount of inventory on December 31, 2015 is
A. P82,500 C. P85,500
B. P82,620 D. P85,620
12. CYPRUS CORP. started 2015 with P94,000 of merchandise inventory on hand. During 2015, P400,000
in merchandise was purchased on account with credit terms of 1/15, n/45. All discounts were taken.
Purchases were all made f.o.b. shipping point. CYPRUS paid freight charges of P7,500, Merchandise
with an invoice amount of P5,000 was returned for credit. Cost of goods sold for the year was
P380,000. CYPRUS uses a perpetual inventory system.
What is ending inventory assuming Cupcake uses the gross method to record purchases?

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A. P112,490 C. P116,500
B. P112,550 D. P120,300
13. An entity reported the December 31, 2018 inventory at P 3,000,000. The entity revealed the following
transaction:
• Goods shipped to the entity FOB destination on December 26, 2018 were received on January 2,
2019. The invoice cost of P 350,000 is included in the preliminary inventory balance,
• At year-end, the entity held P 250,000 of merchandise on consignment from another entity. This
merchandise is included m the preliminary inventor) balance
• On December 29, 2018 merchandise costing P 250,000 was shipped to a customer FOB shipping
point and arrived at the customer location on January 3, 2019. The merchandise is included in
the preliminary inventory balance.
What amount should be reported as inventory on December 31, 2019?
A. 2,400,000 C. 2,150,000
B. 2,500,000 D. 2,750,000
Use the following information in answering the next two questions
The following balances were presented on the balance sheet of GEORGIA CORP. for the year ended
December 31, 2017.
Merchandise Inventories P850,000
Accounts Receivable 1,425,000
The merchandise inventory balance is based on the physical count conducted by the company on its
warehouse on December 31.
The following information was gathered in relation to the above balances:
• Goods purchased costing P120,000 were in transit and shipped under FOB Shipping Point. The
freight cost of P2,000 was paid by the buyer while insurance cost of P15,000 was paid by the
seller.
• There were two trucks siding on the company’s warehouse on December 31. The first truck were
goods to be shipped to the customer at a price of P150,000. The related sales is already
recorded as of year-end.
• There were goods to be shipped to customer A but still alongside the port at year-end. The
shipping term is Free Along Side. The sales of P120,000 were already recorded as of December
31.The cost of loading these inventories were paid in advance by GEORGIA amounting to
P3,500.
• On December 31, 2017, goods purchased was still in transit to the company’s premises costing
P130,000. The shipping term is ex-ship. The cost of shipping was paid by GEORGIA amounting
to P4,000.
• Goods processed outside the company’s premises due to insufficient capacity amounted to
P120,000 and still incomplete as of December 31. Also the company sold goods to customer
with an agreement to repurchase the goods after 4 years. The seling price of the goods, which
were already delivered and recorded on December 15 was P45,000.
Assuming all the sales were made on credit and the gross profit rate is 40%.
14. What is the inventory balance to be presented on December 31, 2017?
A. 1,224,000 C. 1,302,000
B. 1,108,000 D. 1,245,000
15. The adjusted balance of accounts receivable is
A. 1,233,500 C. 1,230,000
B. 1,287,500 D. None of the above.
Use the following information for the next two questions:
INDIA CORP. is a wholesaler of office supplies. The activity for Model III calculators during August is
shown below:
Date Balance / Transaction Units Cost
Aug. 1 Inventory 2,000 P36.00
7 Purchase 3,000 37.20
12 Sales 3,600
21 Purchase 4,800 38.00
22 Sales 3,800
29 Purchase 1,600 38.60
16. If INDIA CORP. uses a FIFO periodic inventory system, the ending inventory of Model III calculators at
August 31 is reported as
A. 150,080 C. 152,288
B. 150,160 D. 152,960 (
17. If INDIA CORP. uses a FIFO cost perpetual inventory system, the ending inventory of Model III
calculators at August 31 is reported as
A. 150,080 C. 152,232
B. 150,160 D. 152,960 (

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18. INDONESIA COMPANY is a wholesaler of photography equipment. The entity used the periodic
average cost method to account for inventory. The activity for the inventory of cameras during July is
shown below:
Units Unit cost
July 1 Inventory 20,000 36.00
7 Purchase 30,000 37.00
12 Sale 36,000
21 Purchase 50,000 37.88
22 Sale 38,000
29 Purchase 16,000 38.11
What is the ending inventory on July 31?
A. 1,534,000 C. 1,587,360
B. 1,569,120 D. 1,594,640
19. The trial balance of IRAN INC. showed inventories of P164,000. The inventories include some goods
that have a production cost of P18,000. These goods have a manufacturing defect that will cost
P6,000 to correct. The normal selling price for these goods would be P25,000, but after the remedial
work they will be sold through an agent as refurbished goods at a discount of 20% on the normal
selling price. The agent will receive a commission of 10% of the reduced selling price. In relation to
the defective goods, the company will recognize a loss on inventory write down of
A. P 0 C. P4,000
B. P1,000 D. P6,000
20. With LIFO, cost of goods sold is P195,000, and ending inventory is P45,000. If FIFO ending inventory
is P65,000, how much is FIFO cost of goods sold?
A. 215,000 C. 175,000
B. 195,000 D. 65,000
21. IRAQ CORP. provided the following data relating to an inventory item.
Units Unit cost Total cost
Jan. 1 Beginning balance 5,000 200 1,000,000
10 Purchase 5,000 250 1,250,000
15 Sale 7,000
16 Sale return 1,000
30 Purchase 16,000 150 2,400,000
31 Purchase return 2,000 150 300,000
Under the perpetual system, what is the moving average unit cost on January 31?
A. 165 C. 181
B. 167 D. 225
22. ISRAEL COMPANY used the lower of cost or net realizable value method to value inventory. Data
regarding the items in work in process inventory are presented below:
Markers Pens Highlighters
Historical cost 240,000 188,000 300,000
Selling price 360,000 250,000 360,000
Estimated cost to complete 48,000 50,000 68,000
Replacement cost 208,000 168,000 318,000
Normal profit margin as a percentage of selling price 25% 25% 10%
What is the measurement of the work in process inventory?
A. 676,000 C. 720,000
B. 694,000 D. 728,000
23. The closing raw materials inventory of JAPAN MANUFACTURING CORP. amounted to P345,000 at
December 31, 2014. This total includes an item of raw material (material ZEN) with a cost of
P100,000 with an estimated net realizable value of P80,000. Immediately after the balance sheet
date, material ZEN was applied to production and the cost of the finished product where material ZEN
was applied revealed that its net selling price exceeds the cost of producing the finished goods.
As of December 31, 2014, what amount of raw materials inventory should JAPAN report?
A. P245,000 C. P325,000
B. P265,000 D. P345,000
24. A confectioner, a chain of candy stores, purchases its candy in bulk from its suppliers. For a recent
shipment, the company paid P3,000 and received 8,500 pieces of candy that are allocated among
three groups. Group 1 consists of 2,500 pieces that are expected to sell for P0.25 each. Group 2
consists of 5,500 pieces that are expected to sell for P0.60 each. Group 3 consists of 500 pieces that
are expected to sell for P1.20 each.
Using the relative sales value method, what is the cost per item in group 1?
A. P0.166 C. P0.250
B. P0.200 D. P0.375

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25. In 2014, JORDAN CORP. experienced a decline in the value of inventory resulting in a write-down
from P3,600,000 to P3,000,000. The entity used the allowance method to record the necessary
adjustment. In 2015, market conditions have improved dramatically. On December 31, 2015, the
inventory had a cost of P5,000,000 and net realizable value of P4,600,000. What is included in the
adjusting entry on December 31, 2015?
A. Debit allowance for inventory writedown P200,000
B. Credit allowance for inventory writedown P400,000
C. Debit gain on reversal of inventory writedown P200,000
D. Credit gain on reversal of inventory writedown P400,000
26. On November 15, 2014, KAZAKHSTAN INC. entered into a commitment to purchase 100,000 barrels
of aviation fuel for P55 per barrel on March 31, 2015. The entity entered into this purchase
commitment to protect itself against the volatility in the aviation fuel market. By December 31, 2014
the purchase price of aviation fuel had fallen to P40 per barrel. However, by March 31, 2015, when
the entity took delivery of the 100,000 barrels the price of aviation fuel had risen to P60 per barrel.
What amount should be recognized as gain on purchase commitment for 2015?
A. 0 C. 1,500,000
B. 500,000 D. 2,000,000
Use the following information in answering the next item(s):
An entity used the conservative retail inventory method. At year-end, the following information
relating to the inventory was gathered:
Cost Retail
Beginning inventory 200,000 450,000
Purchases 3,000,000 4,350,000
Purchase Discount 50,000
Freight in 165,000
Marks up 300,000
Mark downs 400,000
Sales 4,400,000
Sales return 100,000
Sales discount 50,000
Sales allowance 30,000
27. What is the estimated cost of the ending inventory?
A. 400,000 C. 260,000
B. 280,000 D. 315,000
28. What is the estimated cost of goods sold?
A. 3,055,000 C. 4,300,000
B. 2,795,000 D. 3,315,000
29. A physical inventory taken on December 31, 2015 resulted in an ending inventory of P1,440,000.
KUWAIT CORP. suspects some inventory may have been taken by employees. To estimate the cost of
missing inventory, the following were gathered:
Inventory, Dec. 31, 2014 P 1,280,000
Purchases during 2015 5,640,000
Cash sales during 2015 1,400,000
Shipment received on December 26, 2015, included in physical
inventory, but not recorded as purchases 40,000
Deposits made with suppliers, entered as purchases. Goods were
not received in 2015 80,000
Collections on accounts receivable, 2015 7,200,000
Accounts receivable, January 1, 2015 1,000,000
Accounts receivable, Dec. 31, 2015 1,200,000
Gross profit percentage on sales 40%
At December 31, 2015 what is the estimated cost of missing inventory?
A. P160,000 C. P240,000
B. P200,000 D. P320,000
30. KYRGYZTAN INC.’s accounting records indicated the following information:
Inventory, 1/1/02. 1,000,000
Purchases during 2002 5,000,000
Sales during 2002 6,400,000
A physical inventory taken on December 31, 2002, revealed actual ending inventory at cost was
P1,150,000. KYRGYZTAN's gross profit on sales has regularly been about 25 percent in recent years.
The company believes some inventory may have been stolen during the year. What is the estimated
amount of missing inventory at December 31, 2002?
A. P50,000 C. P350,000
B. P200,000 D. P450,000

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31. The LAOS CORP. uses the retail inventory method. Information relating to the computation of the
inventory at December 31, 2002, is as follows:
Cost Retail
Inventory at January 1, 2002 P 32,000 P 80,000
Sales 580,000
Purchases 270,000 600,000
Freight-in 7,600
Net mar-kups 40,000
Net mark-downs 20,000
What is the ending inventory at cost at December 31, 2002, using the retail inventory method and
the FIFO cost estimation?
A. P43,000 C. P51,600
B. P45,000 D. P53,724
32. On November 30, 2015, a big flood caused severe damage to the warehouse of LEBANON COMPANY.
The Company suffered a big loss on its merchandise inventory. The following information was
available from the accounting records of Static:
01/01/15 to 11/30/15 2014
Date of Flood
Merchandise inventory, beginning P 400,000
Purchases 2,380,000 2,240,000
Purchase returns 60,000 40,000
Sales 3,120,000 2,400,000
Selling expenses 120,000 100,000
Depreciation charges 40,000 36,000
At the beginning of 2015, the company changed its policy on the selling prices of merchandise in
order to produce a gross profit rate 5% higher than the gross profit rate in 2014. Undamaged
merchandise marked to sell at P100,000 were salvaged. Damaged merchandise marked to sell at
P30,000 had an estimated realizable value of P8,000.
What is the estimated inventory cost lost from flood on November 30, 2015?
A. P436,000 C. P506,000
B. P458,000 D. P536,000
33. On October 15, 2014, a fire destroyed all the stock of equipment of MALAYSIA CORP. in its rented
stockroom. The records of the firm show the following information:
2013 2012 2011 2010
Sales P925,000 P880,000 P790,000 P710,000
Cost of sales 758,500 739,200 679,400 624,800
Gross profit P166,500 P140,800 P110,600 P 85,200

Inventory, January 1, 2014 P130,500

Sales, January 1 to October 15, 2014 960,000
Sales returns and allowances 15,000
Purchases, January 1 to October 15, 2014 890,000
Purchase returns and allowances 12,000
Cost of stock in display room, not destroyed 85,000
How much is the estimated cost of merchandise lost in the fire of October 15, 2014?
A. P120,250 C. P167,500
B. P148,600 D. P252,500
34. MALDIVES CORP. used the average cost retail inventory method. The entity provided the following
information for the year ended December 31, 2014.
Cost Retail
Inventory - January 1 1,650,000 2,200,000
Net purchases 3,725,000 4,950,000
Departmental transfer - credit 200,000 300,000
Net markup 150,000
Inventory shortage - sales price 100,000
Employee discounts 200,000
Sales (including sales of P400,000 of items which
were marked down from P500,000) 4,000,000
What is the estimated cost of inventory on December 31, 2014?
A. 1,924,000 C. 2,250,000
B. 1,950,000 D. 2,600,000

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35. MONGOLIA CORP. uses the average retail method to determine its ending inventory at cost. Assume
the beginning inventory at cost (retail) were P130,000 (198,000), purchases during the current year
at cost (retail) were P685,000 (P1,100,000), freight in on these purchases totaled P43,000, sales
during the year totaled P1,050,000, and net mark-ups (markdowns) were P24,000 (P36,000). What is
the ending inventory value at cost?
A. 153,164 C. 157,459
B. 156,165 D. 157,912

- End of FAR 05 -
“You learn more from failure than success. Don’t let it stop you. Failure builds character”.

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