INVENTORIES

INTRODUCTION

In many trading and manufacturing concerns, inventories occupy a significant portion of its assets.
In addition, the amount of inventories has an impact in the reported profit or loss as well as the liquidity
position of the entity. The management is likewise aware that an appropriate volume of inventory should
be maintained and control measures be undertaken to protect the company’s investment in inventories.

INTENDED LEARNINGS OUTCOMES

After reading this material, the related topic in the textbook, and the related materials and links, the
student is expected to

1. Define inventories and enumerate various examples in different lines of business;

2. Identify the items comprising the cost of inventories;
3. Determine the measurement bases, classification and presentation of inventories in the statement
of financial position;
4. Differentiate perpetual inventory system from periodic inventory system;
5. Compute the cost of inventory using the different cost allocation methods;
6. Measure inventories using the valuation at the lower of cost and net realizable value;
7. Calculate the estimated cost of inventory under the different inventory estimation methods; and
8. Identify the required disclosures to accompany financial statements relating to inventories.

DEFINITION AND NATURE OF INVENTORIES

International Accounting Standard 2 describes inventories as assets of an enterprise that are (a) held
for sale in the ordinary course of business; (b) in the process of production for such sales; or (c) in the form
of materials or supplies to be consumed in the production process or in the rendering of services.

For a trading or merchandising company, the term used is merchandise inventory, or simply
inventory while for a manufacturing company, inventories include finished goods inventory, goods in
process or work in process inventory and raw materials inventory. For a service company, its inventory is
in the form of supplies.

The nature of the company’s business operations determines the items that comprise its inventory.
For a real estate developer, land or lots are for sale and are therefore considered its inventory; however, for
other entities, land is generally reported as part of its property, plant and equipment. For an Apple Store,
its inventory consists of laptop and desktop computers, mobile phones, apple watches and related
accessories. For other businesses, their apple computers and desktops are part of its property, plant and
equipment. For a Toyota car dealer, its inventory consists of the different models of Toyota cars and vans
while for other entities, their Toyota van used in the delivery of their products is considered part of its
property, plant and equipment.
COST OF INVENTORIES

The cost of inventories should comprise all costs of purchase, costs of conversion and other costs
incurred in bringing the inventories to their present location and condition. When the inventory items are
purchased and will be sold in the same form (buy and sell products), the cost includes the purchase price,
import duties (if applicable), taxes, transport, handling and other costs that are directly attributable to its
acquisition. Any trade discounts, rebates and other similar items are deducted in determining the cost of
purchase.

Similar to the viewpoint of the seller (discussed under the topic Receivables), the purchase of goods
may be recorded using the gross price method or net price method. Under the gross price method, the
purchase is recorded at the gross invoice price and when payment is made within the discount period,
purchase discount is recorded. Purchase discount is reported as a deduction from purchases in the cost of
goods sold section of the profit or loss statement. Under the net price method, the purchase is recorded at
the net invoice price and when payment is made after the discount period, purchase discounts lost (or
purchase discount not taken) is recorded. Purchase discount lost (or purchase discount not taken) is
reported as other operating expenses in the profit of loss statement.

For a manufacturer, the cost of inventory includes the cost of direct materials, direct labor, and an
allocation of fixed and variable overhead costs incurred in converting the raw materials into finished goods.

For a service provider, the cost of inventories consists primarily of the labor and other costs of
personnel directly engaged in providing service.

Agricultural produce harvested from biological assets are also reported as inventories and covered
under IAS 2, Inventories. They are measured on initial recognition at fair value less estimated cost to sell
at the point of harvest.

ITEMS INCLUDED IN INVENTORY AT THE REPORTING DATE

The basic criterion for including items in inventory is economic control rather than physical
possession. Economic control is usually consistent with the possession of legal title. Therefore, at the
reporting date, there may be goods that are not physically in the possession of the entity but are proper
inclusions in its inventory. Or it could be the other way around – goods are physically in the possession of
the entity at the reporting date, but legal title to the goods still belong to another party. These items,
requiring special attention, include:

1. Goods in transit. These are goods that are no longer in the hands of the seller but are not yet
received by the buyer. The inclusion or exclusion depends on the terms of shipment as well as the
party (either buyer or seller) to the transaction. This could be summarized as follows:

Terms of shipment Buyer Seller

FOB (Free on Board) shipping point Include Exclude
FOB (Free on Board) destination Exclude Include

2. Consigned goods. These are goods transferred from one party (consignor) to another (consignee)
for the purpose of sale but the ownership and economic control remains with the owner of the
goods. At the reporting date, if the goods are unsold and in the hands of the consignee, they are
included in the inventory of the consignor. The consignee, though physically the goods are with
them, excludes this in its inventory. In summary,
 Goods out on consignment – The goods are included in the inventory of the consignor plus any
handling and shipping costs incurred in the delivery of goods to the consignee.

Goods held on consignment – Though physically held by the consignees, the goods are excluded
from its inventory.

3. Goods out on approval. These goods are already sent to the potential customer but are continued
to be included in the seller’s inventory until approval of purchase has been received from the
customer. This is usually true when the seller company is making an introduction of their new
products and considers making the products known to relatively long-time customers.

4. Segregated goods. There are situations when goods are already segregated or even loaded in a
delivery van at the reporting date, but for some reason, have not been delivered. The goods may
be considered as part of inventory of the manufacturer at the reporting date or may be considered
as sold; hence, excluded in its inventory. When the segregated goods are considered as stock items,
the goods should still be included in the ending inventory of the manufacturer. However, when the
inventory items are considered as special order or fabricated according to customer specifications,
the goods are already considered as sold by the manufacturer when they are completed and
segregated. Therefore, the cost of these goods are excluded in its ending inventory.

5. Goods sold on installment. When goods are sold on an installment basis, the substance of the
transaction is that control over the goods has already passed to the buyer, despite retention of the
title by the seller. This assumes a reasonable expectation of collection in the normal course of
business. Thus, the goods are already excluded from the sellers’ inventory.

6. Goods sold under lay away plan. Under a lay away plan, payments are made by the customer on
installment basis but the goods remain in the possession of the seller. When full payment is
received, the goods are physically delivered to the customer. Under this scheme, the seller
continues to include the goods in its inventory until actually delivered. The cash collected are
considered as advances from customers and therefore, reported as liability. Lay away plans are
common to expensive jewelry products.

7. Goods sold with buyback agreement. When the sale of goods is accompanied by a buyback
agreement, it is in effect a form of a financing arrangement. The goods are sold to a party with an
agreement to repurchase the goods at specified price, usually including all related holding costs.
The seller should report the goods as part of its inventory since the risks and rewards of ownership
for the goods retain with them and the proceeds received from the transfer is reported as a liability.
PROBLEMS ON INCLUSIONS IN AND EXCLUSIONS FROM INVENTORIES;
DETERMINING THE CORRECT AMOUNT OF INVENTORY FOR FINANCIAL REPORTING
PURPOSES

Discussion Question No. 15 (Hamster Corporation)

Include Exclude
a. Goods displayed in the store √
b. Goods stocked in the warehouse, not covered by any sales contract √
c. Goods purchased, in transit, shipped FOB seller √
d. Goods purchased, in transit, shipped FOB destination √
e. Freight cost on goods received, goods are still unsold √
f. Goods held on consignment √
g. Goods out on consignment √
h. Goods out to customers on approval √
i. Goods in the hands of traveling salesmen √
j. Goods sold with a buyback arrangement for the full selling price and other √
costs incurred by the buyer
k. Unused factory supplies and indirect materials √
l. Goods which require additional processing √
m. Direct materials stocked in the warehouse √
n. Storage costs of goods completed √
o. Insurance premiums paid on stocked goods √
p. Goods completed, manufactured to customer’s specification, awaiting
instruction for delivery by the customer √
q. Freight paid on goods sold √
r. Unused supplies for administrative purposes √
s. Unused store supplies √
t. Goods sold with a right to return granted to buyers, amount of return is
reasonably predictable. √
u. Goods sold under FAS, at the port designated by the buyer √
v. Goods at the port, purchased CIF √

1-1. Crossings Company regularly buys merchandise from Best Company and is allowed trade
discounts of 20% and 10% from the list price. Crossings made a purchase on March 20, 2022, and
received an invoice with a list price of P150,000, a freight charge of P2,500, and payment terms of
net 30 days.

REQUIRED:

What is the total cost of merchandise purchases?

Invoice price (150,000 x 0.80 x 0.90) P 108,000

Freight charge 2,500
Total cost of merchandise purchases P 110,500

Trade discounts are proper deductions to determine invoice price of goods purchased. Any
freight on goods purchased is an addition to its cost.
1-2. Jane, Inc. had 10,200 units on April 30, 2022, based on physical count of goods on that date. The
following items have not yet been recorded as purchases and sales as of April 30.

Number
No. Transaction Terms of units
1 Purchase FOB shipping point 250
2 Purchase FOB destination 300
3 Sale FOB shipping point 650
4 Sale FOB destination 500

Items 1-4 were shipped by the seller April 30, 2022 and received by the buyer May 5, 2022.

REQUIRED:

How many units should be considered as inventory at the end of April 2022?

Reported units on April 30, 2022 10,200

Adjustments:
No. 1 item – Purchased FOB shipping point
still in transit not included in purchases 250
No. 4 item – Sold FOB destination still in transit not
included in inventory 500
Correct inventory quantity 10,950

Note that the 10,200 units are based on physical count; therefore, the items enumerated are
not included in this total since they are all in transit as of April 30. Ownership of Item 1 has
already transferred to Jane (purchase, fob sh point) so 250 is added. The title or ownership
of Item 4 has not been transferred yet to the customer of Jane, 500 is included in its inventory
at April 30.

1-3. The Orient Trading’s inventory at the end of 2022 is P9,500,000, before considering the
following information. Included in the amount are the following items:

¨ Merchandise in transit, purchased FOB shipping point, P680,000.

¨ Merchandise in transit, purchased FOB destination, with invoice cost of P420,000.
¨ Goods held on consignment, P500,000.
¨ Goods out on consignment, at cost plus 50% markup on cost plus P10,000 delivery charge,
P610,000.

The P9,500,000 balance does not include the following items:

¨ Merchandise in transit to customers, FOB shipping point, at selling price of P540,000,

which includes a 40% markup on selling price.
¨ Merchandise in transit to customers, FOB destination at selling price of P400,000, which
includes a 40% markup on selling price.
¨ Merchandise purchased in transit, “Free Alongside,” costing P150,000.
¨ Merchandise sold, in transit, “Cost, Insurance, Freight,” charged to the buyer, with selling
price of P180,000 and cost of P120,000.
 REQUIRED:

What is the correct amount of inventory?

Reported inventory P9,500,000

Merchandise in transit purchased FOB destination (420,000)
Goods held on consignment (500,000)
Mark up on goods out on consignment
Sales price 600,000
Cost (600,000÷ 1.5) 400,000 (200,000)
Merchandise in transit to customers FOB destination
400,000 x (100% - 40%) 240,000
Merchandise purchased in transit FAS 150,000
Correct inventory P8,770,000

The first group of bulleted items were INCLUDED in inventory total of P9.5M. Hence, in
the analysis of each item, if the described item should be included, there is no adjustment
required. If the described item should not be included, then it must be deducted from the
given reported total.

The second group of bulleted items were NOT INCLUDED in the total of P9.5M; therefore,
if in the analysis, the described item should be included, the amount should be added. But if
in the analysis, the item should not be included, then there is no adjustment required. Any
amount, if included, should be the cost of inventory. Any mark-up or profit included therein
should be eliminated.

For merchandise purchased under FREE ALONG SIDE, the title passes to the company
(buyer) when the goods are at the port designated by them. Since they are already in transit,
it is the impression that the goods are already on the dock.

1-4. The physical inventory on December 31, 2022 of Tintin Co. showed merchandise at P172,000.
You discovered that the following items were excluded from this amount:

¨ Merchandise costing P31,500 shipped by a vendor FOB shipping point on December 31,
2022 and received by Tintin on January 5, 2023.
¨ Merchandise costing P40,000 shipped by a vendor FOB destination on December 30, 2022
and received by Tintin on January 4, 2023.
¨ Merchandise costing P12,500 which was shipped FOB destination to a customer on
December 29, 2022. The customer expected to receive the merchandise on January 6,
2023.
¨ Merchandise costing P28,500 which was shipped FOB shipping point to a customer on
December 29, 2022. The goods are scheduled to arrive at the destination point on January
2, 2023.

REQUIRED:
What is the correct amount of inventory that should appear on Tintin’s December 31, 2022
statement of financial position?
 Physical inventory at December 31, 2022 P 172,000
Merchandise in transit shipped FOB shipping point 31,500
Merchandise sold FOB destination still in trans 12,500
Correct inventory at December 31, 2022 P 216,000

1-5. At December 31, 2022, Delta Company made a complete physical count of its inventory totaling
P630,000. However, the said count did not consider the following data:

• Towards the end of the year, goods costing P122,500 were sent on consignment to Beta
Company, to sell for P159,250 with a 30% markup on cost. At December 31, 2022, Beta
reported P93,600 sales of the consigned goods and the remainder are still on hand at year end.
• In addition, Delta Company purchased P45,500 worth of goods that were shipped on December
27, FOB destination. The goods were received by Delta on January 3, 2023.

REQUIRED:
What is the correct amount of inventory to be reported by Delta Company on December 31, 2022?

Inventory, December 31, 2022 per physical count P630,000

Adjustment:
Cost of goods out on consignment 122,500 – (93,600/1.3) 50,500
Correct amount of inventory at December 31, 2022 P680,500

Goods that were sent out on consignment should be included in the consignor’s inventory, if
at the end of the period, the goods have not been sold. However, if the consigned goods have
already been sold by the consignee, the items are excluded in the consignor’s inventory.

1-6. Centerpoint, Inc. is preparing its 2022 year-end financial statements. Prior to any adjustments,
inventory is valued at P562,500. The following information has been found relating to certain
inventory transactions.

a. Goods valued at P110,000 are on consignment with a customer. These goods are not
included in the P562,500 inventory figure.
b. Goods costing P27,000 were received from a vendor on January 5, 2023. The related
invoice was received and recorded on January 12, 2023. The goods were shipped on
December 31, 2022, terms FOB shipping point.
c. Goods costing P85,000 were shipped on December 31, 2022, and were delivered to the
customer on January 2, 2023. The terms of the sale were FOB shipping point. The goods
were included in ending inventory of 2022, even though the sale was recorded also in 2022.
d. A P35,000 shipment of goods to a customer on December 31, 2022, terms FOB destination
was not included in the year-end inventory. The goods cost P26,000 and were delivered to
the customer on January 8, 2023. The sale was properly recorded in 2023.
e. An invoice for goods costing P35,000 was received and recorded as a purchase on
December 31, 2022. The related goods, shipped FOB destination, were received on
January 2, 2023, and thus were not included in the physical inventory.
f. Goods valued at P65,000 are on consignment from a vendor. These goods are not included
in the year-end inventory figure.
 g. A P60,000 shipment of goods to a customer on December 30,2022, terms FOB destination,
was recorded as a sale in 2022. The goods, costing P37,000 and received by the customer
on January 6, 2023, were not included in 2022 ending inventory.

REQUIRED:
Determine the correct inventory amount to be reported on Centerpoint, Inc.’s statement of financial
position at December 31, 2022.

Reported inventory P 562,500

Adjustments:
a. Goods out on consignment 110,000
b. Goods purchased in transit FOB shipping point 27,000
c. Goods sold in transit FOB shipping point included in inventory (85,000)
d. Goods sold in transit FOB destination not included in inventory 26,000
g. Goods sold in transit FOB destination not included in inventory 37,000
Correct inventory P 677,500

INVENTORY SYSTEMS

The quantity and cost of inventories may be accounted for using either the periodic (also called
physical) system or perpetual system.

The periodic system is usually adopted by entities with numerous lines of merchandise, usually of
low value. Some of the entities using periodic system are department stores, pharmacy or drug stores,
supermarkets and construction hardware stores. The entity does not maintain a continuous record of the
physical quantities or costs of inventory on hand. The quantity of inventory at the end of the reporting
period is determined by making a physical count of goods. All acquisitions of inventory is charged to a
nominal account, purchases. Returns and allowances are recorded separately under purchase returns and
allowances account.

On the other hand, perpetual inventory system is most likely used by entities with few lines of
merchandise, usually of high value. Car dealers, machinery companies, and high-end jewelry shops are
some of the entities that would likely adopt the perpetual system. Records are kept showing the continuous
movement of goods for each inventory; thus, the amount of inventory on hand at any time may be
determined from the records. A physical count of inventory may be made not necessarily at the end of the
year, to confirm inventory balance per books. Acquisitions of inventory under the perpetual system is
recorded by debiting the Inventory account (instead of purchases under the periodic system). The sale of
goods is accompanied by an entry debiting cost of goods sold and crediting inventory.

COST ALLOCATION METHODS

IAS 2, Inventories mandates the use of specific identification method for items that are segregated
for specific projects and for inventories that are not ordinarily interchangeable. This method requires that
each unit sold and each unit on hand be identified and that the actual costs of those units be included in the
cost of goods sold and ending inventory, respectively.

For items that are ordinarily interchangeable and with large number of items in inventory, an entity
may adopt either the first-in, first-out method (FIFO) or average method.
 The FIFO method assumes that the items of inventory which were purchased first are sold first and
consequently, the items remaining in inventory at the reporting date are those most recently produced or
purchased. Apparently, the earliest costs are charged to cost of goods sold. This method has the advantage
of reporting ending inventory at their approximate replacement costs. However, there is no proper
matching of costs against revenue because old costs are matched to current revenues. It is expected that in
periods of rising costs (inflation), the FIFO method reports a lower cost of goods sold, higher ending
inventory and higher profit as compared to other methods.

The average method considers goods to be indistinguishable and are therefore valued at an average
of the costs incurred. Under the periodic system, weighted average method is used, where the average unit
cost is determined at the end of the period, computed as total cost of goods available for sale divided by the
total units available for sale.

Under the perpetual system, the moving average method is used, that shows a running or continuous
balance of inventory quantity and costs. This requires a computation of a new average unit cost after each
new purchase. Issuances or sales are measured at the most recent computed average unit cost.

PROBLEMS ON INVENTORY COST ALLOCATION

1-7. Mega Company had the following inventory transactions during 2022:
Units Unit Cost Unit Selling Price
Inventory, January 1 250 P10.50
Purchase, March 7 200 11.00
Purchase, July 15 275 11.75
Sale, May 20 (120) P14.00
Sale, June 30 (55) 15.00
Sale, September 17 (250) 16.00
Inventory, December 31 300

REQUIRED:
Determine the cost of ending inventory, cost of goods sold and gross profit under each of the
following inventory cost flow methods. Complete the table given below. (Where necessary, round
off unit cost to nearest centavo and total cost to nearest peso)

Cost of EI CGS Gross Profit

FIFO 3,506 4,550 1,955
Weighted average 3,333 4,723 1,782
Moving average 3,370 4,686 1,819

FIFO
Cost of ending inventory:
275 x 11.75 3,231.25
25 x 11.00 275.00 P3,506.25
Cost of goods sold:
Cost of goods available for sale 8,056.25
Less ending inventory 3,506.25 P4,550.00
Gross profit:
Sales 6,505.00
Less cost of goods sold 4,550.00 P1,955.00
 Weighted average
Cost of ending inventory:
Cost of goods available for sale 8,056.25
Number of units available for sale ÷ 725
Weighted average cost per unit 11.11
Units in ending inventory x 300 P3,333.00
Cost of goods sold:
Cost of goods available for sale 8,056.25
Less ending inventory 3,333.00 P4,723.25
Gross profit:
Sales 6,505.00
Less cost of goods sold 4,723.25 P1,781.75

Moving average
Cost of ending inventory:
Inventory, Jan 1 250 x 10.50 = 2,625.00
Purchase, March 7 200 x 11.00 = 2,200.00
Total 450 x 10.72 = 4,825.00
Sale, May 20 (120 x 10.72 = 1,286.40)
Sale, June 30 ( 55 x 10.72 = 589.60)
Balance 275 x 10.72 = 2,949.00
Purchase, July 15 275 x 11.75 = 3,231.25
Total 550 x 11.24 = 6,180.25
Sale, September 17 (250 x 11.24 = 2,810.00)
Balance 300 x 11.24 = P3,370.25
Cost of goods sold:
Cost of goods available for sale 8,056.25
Less ending inventory 3,370.25 P4,686.00
Gross profit:
Sales 6,505.00
Less cost of goods sold 4,686.00 P1,819.00

1-8. The following data were taken from the inventory records of Landmark Enterprises for Jan 2022:
Units Unit cost Total cost
Balance at January 1 2,400 P10.75 P25,800
Purchases: January 5 1,900 11.35 21,565
24 3,800 11.80 44,840
Sales: January 8 2,200
30 3,600
Balance at January 31 2,300

REQUIRED: Determine the inventory value at January 31 assuming that – (Round off the unit
cost to the nearest centavo and total cost to the nearest peso.)

(a) Landmark Enterprises maintains perpetual inventory records and uses the average costing
method.
(b) Landmark Enterprises does not maintain perpetual inventory records and uses the average
costing method.
 a. Cost of ending inventory (Moving Average)
1/1 2,400@ 10.75 25,800
1/5 1,900@ 11.35 21,565
4,300@ 11.02 47,365
1/8 2,200@ 11.02 24,244
2,100@ 11.01 23,121
1/24 3,800@ 11.80 44,840
5,900@ 11.52 67,961
1/30 3,600@ 11.52 41,472
2,300@ 11.52 26,489

b. Cost of goods available for sale (25,800 + 21,565 + 44,840) P92,205

Number of units available for sale (2,400 + 1,900 + 3,800) ÷ 8,100
Weighted average cost per unit P 11,38
Number of units in ending inventory x 2,300
Cost of ending inventory (Weighted Average) P26,174

1-9. The inventory records of Rockwell Club, Inc. could not be located because the accountant quit
without formal turnover of records. In order to reconstruct the inventory at the beginning, the store
manager gathered the following data from their sales records for the month of January:

Units Unit Price

January sales 160,500 P12.00
January purchases:
January 4 30,000 7.80
10 37,500 7.50
16 45,000 7.20
24 42,000 7.40

As of January 31, 45,000 units were on hand. Rockwell’s gross profit on sale for January was
P738,600. The company uses a periodic FIFO inventory costing system.

REQUIRED:
What was the total cost and the unit average cost of the January 1 inventory?

Amount Units
Cost of sales:
Sales (160,500 x 12) 1,926,000
Less gross profit 738,600 P1,187,400 160,500
Add ending inventory (FIFO basis)
42,000 x 7.40 310,800
3,000 x 7.20 21,600 332,400 45,000
Available for sale P1,519,800 205,500
Deduct purchases 1,150,050 154,500
Inventory, January 1 P 369,750 51,000
Average cost per unit (369,750 ÷ 51,000 units) P 7.25
 This problem requires work back analysis. Ordinarily, we are used to computing cost of
goods sold or ending inventory, such that the computation runs as follows: BI plus
purchases equals available for sale; then deduct EI to get CGS. This time, the requirement
is the beginning inventory. Starting point is the CGS followed by EI to get AFS less
purchases. Computation is both for the amount and units since the problems calls for the
average cost per unit of the beginning inventory.

1-10. The Mazda Corporation, which was established in 2020, manufactures lubricants used by car
manufacturers. The following data were abstracted from the company’s records:

2020 2021 2022

Number of units produced 13,000 18,000 25,000
Number of units sold 10,000 16,000 24,000
Production cost per unit P700 P820 P850

Sales for each year:

2020 P12,000,000
2021 P18,800,000
2022 P29,400,000

REQUIRED:
Determine the amount of gross profit for each of the years 2020, 2021, and 2022 using

(a) FIFO method

(b) Weighted average method applying the periodic inventory system

(a) FIFO
2020 2021 2022
Sales P12,000,000 P18,800,000 P29,400,000
Cost of goods sold 7,000,000 12,760,000 20,250,000
Gross profit P 5,000,000 P 6,040,000 P 9,150,000

Cost of goods sold:

2020 10,000 x 700 = 7,000,000
2021 3,000 x 700 = 2,100,000
13,000 x 820 = 10,660,000 12,760,000
2022 5,000 x 820 = 4,100,000
19,000 x 850 = 16,150,000 20,250,000

(b) Weighted average

2020 2021 2022
Sales P12,000,000 P18,800,000 P29,400,000
Cost of goods sold* 7,000,000 12,845,760 20,211,360
Gross profit P 5,000,000 P 5,954,240, P 9,188,640
 *Cost of goods sold:
2020 10,000 x 700 7,000,000
2021 (3,000 x 700) + (18,000 x 820) x 16,000* 12,845,760
21,000
2022 (5,000 x 802.86) + (25,000 x 850) x 24,000* 20,211,360
30,000

*unit costs were rounded off to nearest centavo: 802.86 and 842.14, for 2021
and 2022, respectively.

MEASUREMENT OF INVENTORIES SUBSEQUENT TO INITIAL RECOGNITION

Inventories are measured at the lower of cost and net realizable value. Cost is determined by using
the specific cost formula such as first-in, first-out method, average method or specific identification method.
Net realizable value is the estimated selling price in the ordinary course of business less the estimated
costs of completion and the estimated cost necessary to make the sale. The lower of cost or net
realizable value is applied to individual inventory items and not on its total. If the total net realizable
value is lower than the total cost of inventory, the difference is recorded as a decline in inventory value.
The write down of inventory cost to lower of cost and net realizable value may be recorded using either the
direct method or allowance method.

Under the direct method, both beginning and ending inventories are recorded at the lower of
cost and net realizable value and these amounts are taken in the computation of cost of goods sold.
Since the inventories are reported directly at the lower of cost and net realizable value, the decline in net
realizable value is absorbed by the cost of goods sold.

Under the allowance method, a separate valuation account and a separate loss account and the
effects of the write down and its subsequent recovery can be clearly identified in the entity’s profit or loss
statement. Both beginning and ending inventories are recorded at cost and at the reporting date, any
decline is recorded by debiting loss from decline in NRV of inventory and crediting allowance to
reduce inventory to NRV. In the entity’s profit or loss, cost of goods sold is computed by taking into
account the beginning and ending inventories at cost; the loss from decline being reported separate
as other operating losses. The two methods will report different amounts of cost of goods sold, but profit
or loss reported will be the same.

1-12. Based on a physical inventory taken on December 31, 2022, City Company determined its
chocolate inventory on a FIFO basis at P26,000. City estimated that, after further processing costs
of P12,000, the chocolate could be sold as finished candy bars for P40,000. City's normal profit
margin is 10% of sales.

REQUIRED:
Under the lower of cost and net realizable value, how much should City Company report as
chocolate inventory at December 31, 2022?

Cost (under FIFO basis) P26,000

Net realizable value (40,000 – 12,000) P28,000
Lower of cost and net realizable value P26,000

The normal profit margin of 10% is of no relevance in inventory valuation at LCNRV.

1-13. The following information is available for the Century Trading:

Product A B C D
Cost P102 P45 P24 P9
Estimated sales price 120 60 30 15
Estimated disposal costs 15 18 8 5
Number of units 4,000 6,000 5,500 7,200

REQUIRED:

Using the lower of cost and net realizable value, determine the total inventory value to be presented
in Century Trading’s statement of financial position.

Product Cost NRV Lower Quantity Amount

A 102 105 102 4,000 P408,000
B 45 42 42 6,000 252,000
C 24 22 22 5,500 121,000
D 9 10 9 7,200 64,800
Total P845,800

The total cost of the inventory items is computed as the sum of (102 x 4,000) + (45 x 6,000)
+ 24 x 5,500) and (9 x 7,200), or a total of P874,800. The loss from decline in NRV is the
difference of P29,000 (874,800 – 845,800). Note that the lower of cost and NRV is applied
on the individual items.

1-14. The Dechavez Company reported the following inventory figures at the end of each year:

12/31/22 12/31/21 12/31/20

Lower of cost and NRV P600,000 P480,000 P300,000
Cost (FIFO) 660,000 500,000 380,000

Year Ended
12/31/22 12/31/21
Sales P3,200,000 P2,900,000
Purchases 1,400,000 1,200,000
Selling Expenses 450,000 330,000
Administrative Expenses 300,000 310,000

REQUIRED:
Present the profit or loss section of the statement of comprehensive income for the years ended
December 31, 2022 and 2021 using

(a) Direct method

(b) Allowance method
(a) Direct Method

The profit is computed as follows:

2022 2021
Sales P3,200,000 P2,900,000
Cost of goods sold (see below) (1,280,000) (1,020,000)
Gross profit P1,920,000 P1,880,000
Selling expenses (450,000) (330,000)
General and administrative expenses (300,000) (310,000)
Profit P 1,170,000 P 1,240,000

Cost of goods sold:

Beginning inventory P 480,000 P 300,000
Purchases 1,400,000 1,200,000
Total cost of goods available for sale P1,880,000 P 1,500,000
Ending inventory 600,000 480,000
Cost of goods sold P1,280,000 P 1,020,000

Under the direct method, beginning and ending inventories are taken at the lower of cost
and NRV. Any recovery on decline and loss on decline are apparently absorbed by the cost
of goods sold.

(b) Allowance method

The profit is computed as follows:

2022 2021
Sales P3,200,000 P2,900,000
Cost of goods sold (see below) (1,240,000) (1,080,000)
Gross profit P1,960,000 P1,820,000
Selling expenses (450,000) (330,000
General and administrative expenses (300,000) (310,000)
Decline in NRV (40,000
Gain on adjustment of allowance __________- 60,000
Profit P 1,170,000 P 1,240,000

Cost of goods sold:

Beginning inventory P 500,000 P 380,000
Purchases 1,400,000 1,200,000
Total cost of goods available for sale P1,900,000 P 1,580,000
Ending inventory (660,000) 500,000
Cost of goods sold P1,240,000 P 1,080,000

Under the allowance method, beginning and ending inventories are taken at cost. Any
recovery on decline and loss on decline are reported separately as other income or other
loss, respectively, in profit or loss. Notice that the CGS under the two methods differ but
the bottom line figure/profit are the same.
1-15. Purple Company had determined its December 31, 2022 inventory on a FIFO basis at P200,000.
Information pertaining to that inventory follows:

Estimated selling price P204,000

Estimated costs of disposal 10,000
Normal profit 30,000

Purple records losses that result from applying the lower of cost and net realizable value rule.

REQUIRED:
What is the amount of loss that Purple Company should recognize at December 31, 2022?

Cost P200,000
Net realizable value (204,000 – 10,000) 194,000
Loss P 6,000

Note that the normal profit information is irrelevant in this problem.

1-16. The following information pertains to Powder Blue Company at December 31, 2022:
Inventory, January 1 P1,400,000
Purchases during the year 6,600,000
Inventory, December 31:
Cost 1,200,000
Net realizable value 1,000,000

Prior to 2022, the application of the lower of cost and net realizable value never produced a write
down in the company’s inventory to an amount below cost.

REQUIRED:
What is the cost of goods sold assuming the company applies the lower of cost and net realizable
value using the allowance method?

Inventory, January 1 P1,400,000

Purchases during the year 6,600,000
Cost of goods available for sale P8,000,000
Less Inventory, December 31 (at cost) 1,200,000
Cost of goods sold P6,800,000

It is implied that under the allowance method, the decline of P200,000 in the ending
inventory is reported as a separate item in the profit and loss statement.

1-17. The Philam Grocers Company uses the first-in, first-out method in calculating the cost of goods
sold for the two products that the company sells. At January 1, 2022, the balance of inventory
account was P435,000 and the allowance to reduce inventory to net realizable value had a balance
of P15,000.
Inventories and purchases information concerning these two products are given for the year 2022:
Date Transaction Product X Product Y
Jan. 1 Inventory 2,500 @P120 1,500 @P90
Jan.1 – Dec. 31 Purchases 2,000 @P122 1,000 @P94
(in chronological order) 2,400 @P124 1,500 @P95
3,000 @P125 2,000 @P98
Jan.1-Dec. 31 Sales 7,000 @P150 5,000@P124

At December 31, 2022, because of a government order, Philam’s suppliers reduced the prices of
both Product X and Product Y by 10%, effective January 1, 2023. As a consequence, Philam also
reduced its selling prices for Product X and Y by 10%, effective January 1, 2023. Selling cost is
consistently10% of sales price.

REQUIRED:
(a) Determine the cost of the inventory of Product X and Product Y at December 31, 2022.
(b) At what amount should the inventory be shown on December 31, 2022 statement of
financial position?
(c) How much cost of goods sold will be shown in the statement of comprehensive income for
the year ended December 31, 2022?
(d) How much gain or loss shall be recognized as a result of measuring the inventories at the
lower of cost and net realizable value?
(e) Give the entries to set up the ending inventory and the adjustment of the related valuation
account at the end of the year.

(a) Cost of product X and product Y

Product X Product Y
January 1 inventory 2,500 units 1,500 units
Purchases 7,400 units 4,500 units
Sold (7,000 units) (5,000 units)
December 31 inventory 2,900 units 1,000 units
Unit cost (all coming from latest purchase price, as
ending inventory is less than latest purchases) P125 P98
Ending inventory at FIFO cost P362,500 P98,000

(b)
Product X Product Y
SP (effective 2023) 90% x previous SP P135.00 P111.60
Estimated selling cost (13.50) (11.16)
Net realizable value P121.50 P100.44
Lower of C and NRV value, per unit P121.50 P98
Number of units in ending inventory 2,900 units 1,000 units
Inventory value at lower of cost and NRV P352,350 P98,000

Total inventory value at Dec. 31, 2022 (352,350+98,000) = P450,350

 (c) Cost of goods sold in the statement of comprehensive income

Product X Product Y Total

Inventory Jan. 1 P 300,000 P135,000 P 435,000
Purchases 916,600 432,500 1,349,100
Goods available for sale P1,216,600 P567,500 P1,784,100
Ending inventory at cost 362,500 98,000 460,500
Cost of goods sold P1,323,600

(d) Inventory at cost P460,500

Inventory at lower of cost and NRV 450,350
Required allowance P 10,150
Existing allowance 15,000
Gain on adjustment of allowance P 4,850

(e) Inventory 460,500

Income Summary 460,500

(or using the cost of goods sold method)

Inventory, December 31 460,500

Cost of Goods Sold 1,323,600
Purchases 1,349,100
Inventory, January 1 435,000

Allowance to Reduce Inventory to NRV 4,850

Gain on Adjustment of Allowance to
Reduce Inventory to NRV 4,850

INVENTORY ESTIMATION METHODS

There are situations when an entity is unable to take a physical count of goods in its inventory.
This particularly takes place when the entity uses the periodic system and the goods may have been
damaged or lost in catastrophe such as fire, flood, earthquake and similar events, where physical count is
impossible. Estimation of inventory is thus called for. In addition, inventory estimation is also acceptable
for interim reporting (but not for year-end reporting. Lastly, inventory estimation is also used to test check
the validity of amount obtained by physical count. The most common methods of inventory estimation
methods are (a) gross profit method and (b) retail inventory method.

Gross profit method. The gross profit method is based on an assumed relationship between gross
profit and sales. The gross profit rate may be a percentage based on sales or a percentage based on cost.
The computation simple goes around the cost of goods sold section of the profit or loss statement. The
beginning inventory and net purchases are added to arrive at the cost of goods available for sale. From this
amount, an estimated cost of goods sold is deducted that is calculated using the sales data and the gross
profit rate. After deducting the estimated cost of goods sold from the total cost of goods available for sale,
the estimated ending inventory is obtained. If the entire inventory is lost as a result of a catastrophe (no
portion is saved or salvaged), then the amount obtained represents the inventory loss.
 When there is undamaged or partially damaged merchandise, inventory loss is computed by
deducting the cost of undamaged merchandise and/or the realizable value of damaged merchandise from
the estimated cost of inventory taken.

The template in the computation under the gross profit method is the CGS section of the
profit or loss statement, as follows:

Beginning inventory + Purchases = Available for sale

Available for sale – Estimated CGS = Estimated ending inventory

*Almost always, beginning inventory is a given item.

*Purchases may not be given but can be determined in various ways depending on the
information provided.
*The estimated CGS is always calculated. Computation may differ depending on whether
the GP rate given is based on sales or based on cost.
If based on sales (Assume GP is 20% of sales), estimated CGS is -
Net Sales x (100% - 20%)
If based on cost (Assume GP is 20% of cost), estimated CGS is –
Net Sales ÷ (100% + 20%)
Sales discount, if any, is ignored (not deducted from sales to get net sales)
GP rate used, if not given, is the average of the past year/s GP rate.

*AFS less estimated CGS gives you the estimated ending inventory. If the requirement is
inventory loss as a result of a catastrophe, any damaged or undamaged inventory is deducted
at cost or realizable value, whichever is lower.

*If the requirement is the inventory loss as a result of suspected pilferage, any amount
determined by physical count is deducted from the estimated ending inventory obtained.

1-18. Your audit of DEC Company’s inventory and related records revealed the following information:

Merchandise inventory, January 1, 2022 P 450,000

Purchases for the year 2022 3,150,000
Sales for the year 2022 4,200,000

You conducted a physical inventory on December 31, 2022 and determined P500,000 was in
the company’s warehouse. The company’s president suspects some new employees may have
pilfered a portion of the merchandise inventory.

REQUIRED:

Determine the estimated cost of the missing inventory, assuming DEC Company’s gross profit
remained constant at
(a) 40% of sales.
(b) 40% of cost of sales.

(a) Gross profit is 40% based on sales

Merchandise inventory, January 1, 2022 P 450,000
Purchases for the year 3,150,000
Cost of goods available for sale P3,600,000
 Less estimated cost of goods sold (4,200,000 x 60%) 2,520,000
Estimated cost of ending inventory P1,080,000
Physical inventory on December 31, 2022 500,000
Estimated cost of the missing inventory P 580,000

(b) Gross profit is 40% based on cost of sales

Merchandise inventory, January 1, 2022 P 450,000
Purchases for the year 3,150,000
Cost of goods available for sale P3,600,000
Less estimated cost of goods sold (4,200,000/1.40) 3,000,000
Estimated cost of ending inventory P 600,000
Physical inventory on December 31, 2022 500,000
Estimated cost of the missing inventory P 100,000

1-19. You took a physical inventory for your sole proprietorship at the close of business on July 31, 2022.

The inventory totaled P205,000. You were verifying the accuracy of the inventory records at June
30, 2022, therefore you must estimate an inventory amount on that date. You find that during the
period July 1 through July 31, 2022, sales were P705,000; sales returns, P18,000; gross purchases,
P650,000; purchase returns, P12,000, freight-in, P6,000.

REQUIRED:
What is the estimated cost of inventory on June 30, 2022 assuming that goods are sold at 20%
above cost?

Estimated cost of goods sold (705,000 – 18,000)/1.20 P572,500

Add Inventory at July 31, 2022 205,000
Cost of goods available for sale P777,500
Less net purchases for the period (650,000 – 12,000 + 6,000) 644,000
Estimated cost of June 30, 2022 inventory P133,500

1-20. On May 6, 2022, a flash flood caused damage to the merchandise stored in the warehouse of Manel
Company. You were asked to submit an estimate of the merchandise destroyed in the warehouse.
The following data were established:

2021 net sales, P8,000,000 matched against cost of P5,600,000.

Merchandise inventory, January 1, 2022 was P2,000,000, 90% of which was in the warehouse and
10% in downtown showroom.

From January 1, 2022 to date of flood, you ascertained the following: invoice value of purchases
(all stored in the warehouse), P1,000,000; freight inward, P40,000; purchase returns, P60,000.
Cost of merchandise transferred from the warehouse to showroom was P80,000 and net sales from
January 1 to May 6, 2022 (all warehouse stock) was P3,200,000.
 REQUIRED:
Assuming gross profit rate in 2022 to be the same as in the previous year, what was the estimated
cost of merchandise destroyed by the flood?
(Phil. CPA Adapted)

Merchandise inventory, January 1 P2,000,000

Purchases (1,000,000 + 40,000 – 60,000) 980,000
Cost of goods available for sale P2,980,000
Estimated cost of goods sold (3,200,000 x 70%) 2,240,000
Estimated ending inventory P 740,000
Less goods undamaged in showroom (200,000 + 80,000) 280,000
Estimated cost of merchandise destroyed by the flood P 460,000

1-21. The Herminia Company is engaged in buying and selling cleansing products. The following
transactions and other information are available for the year ended December 31, 2022:

Inventory, January 1, 2022 P 200,000

Gross purchases, all under the credit terms 2/10; n/30 5,000,000
Purchase returns made by the company, all made before payment of accounts. 80,000
Gross sales 7,380,000
Sales allowances granted 30,000
Sales returns 180,000

At December 31, 2022, purchases costing P100,000 were in transit, FOB shipping point.

REQUIRED:
Determine the estimated cost of inventory at December 31, 2022, assuming that the company sells
its products allowing a 40% gross profit on sales.

Inventory, January 1 P 200,000

Purchases P5,000,000
Purchase returns (80,000) 4,920,000
Total P5,120,000
Estimated cost of goods sold (7,380,000 – 180,000) x 60% 4,320,000
Estimated cost of ending inventory P 800,000

1-22. Old Rose Company’s pricing structure has been established to yield a gross margin of 30%. The
following data pertains to the year ended December 31, 2022:

Sales – P2,200,000; Inventory, January 1, 2022 – P1,000,000; Purchases – P800,000; Freight cost
on purchases – P20,000; Freight cost on merchandise sold – P30,000; Inventory inside the
company’s warehouse, per actual account on 12/31/22 – P160,000; Credit memo issued to
customers for goods returned and received – P50,000; Credit memo issued to customers for
merchandise to be returned, 01/02/23 – P40,000; Sales Discounts – P100,000.

Old Rose Company is satisfied that all sales and purchases have been fully and properly recorded.
 REQUIRED:
How much would Old Rose Company reasonably estimate as a shortage in inventory at December
31, 2022?

Inventory, January 1, 2022 P1,000,000

Purchases 800,000
Freight in 20,000
Cost of goods available for sale P1,820,000
Estimated cost of goods sold (2,200,000 – 50,000) x 70% 1,505,000
Estimated cost of ending inventory P 315,000
Inventory per actual count 160,000
Shortage in inventory P 155,000

1-23. Blazing Red Company began operations in 2019. On August 28, 2022, a fire broke out in the
company’s warehouse destroying all inventory and most of the accounting records. The following
information was assembled from the microfilmed records. All sales and purchases are on account.

Jan. 1, 2022 Aug. 28, 2022

Inventory P575,400
Accounts Receivable 522,360 P515,560
Accounts Payable 352,560 491,400
Collections from customers, January 1 to August 28, 2022 3,015,200
Payments to suppliers, January 1 to August 28, 2022 1,950,000
Goods out on consignment on August 28, 2022, at cost 195,000
Goods in transit at Aug. 28, 2022. purchased FOB shipping point 69,500

The company’s average gross profit percentage for the past three years is 30%.

REQUIRED:
What is the inventory fire loss?

Inventory, January 1, 2022 P 575,400

Purchases:
Payments to suppliers P1,950,000
Accounts Payable, 8/28/22 491,400
Accounts Payable, 1/1/22 ( 352,560) 2,088,840
Cost of goods available for sale P2,664,240
Estimated cost of goods sold:
Collections from customers P3,015,200
Accounts Receivable, 8/28/22 515,560
Accounts Receivable, 1/1/22 ( 522,360)
Sales P3,008,400
Cost percentage 70% 2,105,880
Estimated cost of ending inventory P558,360
Less undamaged goods:
Goods out on consignment P195,000
Goods in transit 69,500 264,500
Estimated inventory fire loss P 293,860
 Retail inventory method. The retail inventory method is used for measuring inventories of large
numbers of inventories with high turnover. This method takes into consideration changes in the retail price
of goods such as mark ups, mark up cancellations, mark downs, and markdown cancellations. The retail
method requires the maintenance of records of purchases at both cost and selling price (retail). A ratio of
cost to retail is calculated and this is the rate applied to the ending inventory computed using the retail
prices.

It will be noted in the following problems and computations, there is again a template in the
computation under the retail inventory method. It always run in the CGS section of the profit or
loss statement; to wit – BI + Purchases = AFS – CGS = EI. However, this should take into account
both the cost and retail prices. So, for retail prices, instead of CGS, it is the sales figure that is
deducted from AFS to get the EI at retail. The estimated cost of EI is taken by multiplying the EI at
retail by the Cost to Retail percentage which could be taken in two ways, depending on whether the
company uses AVERAGE RETAIL OR FIFO RETAIL.

In developing the cost to retail percentage under the average retail, the beginning inventory
is taken into account while under the FIFO retail, the beginning inventory is excluded. In both
methods, the markups and markdowns are included in the retail prices of goods (IAS 2).

1-24. Chic Department Store uses the retail method of inventory. At the end of June, the records of the
company provided the following information:

Purchases during June: at cost, P2,400,000; at retail, P4,000,000.

Sales during June: P3,500,000.
Inventory, June 1: at cost, P355,000; at retail, P750,000.

REQUIRED:
Estimate the ending inventory and cost of goods sold for June under
(a) FIFO cost basis; and
(b) Average cost basis (round off cost ratios to two decimals).

(a) (FIFO cost basis

Cost Retail
Inventory, June 1 P 355,000 P 750,000
Purchases 2,400,000 4,000,000
Available for sale P2,755,000 P4,750,000
Sales 3,500,000
Inventory, June 30 at retail P1,250,000
Cost percentage (2.4M/4M) 60%
Estimated cost of inventory P 750,000

Cost of goods available for sale P2,755,000

Less estimated cost of ending inventory 750,000
Estimated cost of goods sold P2,005,000

(b) Average cost basis

Inventory, June 30 at retail P1,250,000
Cost percentage (2,755,000/4,750,000) 58%
Estimated cost of inventory P 725,000
 Cost of goods available for sale P2,755,000
Less estimated cost of ending inventory 725,000
Estimated cost of goods sold P2,030,000

1-25. London Company uses the retail method of inventory valuation. The following information is
available:
Cost Retail
Beginning inventory P145,000 P160,000
Purchases (net) 283,920 420,800
Additional markups 25,200
Mark up cancellations 9,200
Markdowns 38,100
Markdown cancellations 6,900
Sales revenue 450,000
Sales returns 15,200
Sales discounts 3,800

REQUIRED:
What is the estimated cost of ending inventory, using average cost retail?
(AICPA Adapted)

Average cost retail

Cost Retail
Beginning Inventory P145,000 P160,000
Purchases 283,920 420,800
Additional markups 25,200
Markup cancellations (9,200)
Markdown (38,100)
Markdown cancellations ________ 6,900
Total available for sale P428,920 P565,600
Cost to retail ratio 428,920/565,600 = 75.8%
Sales, net of sales returns (434,800)
Ending inventory at retail 130,800
Ending inventory at average cost retail (130,800 x 75.8%) P 99,146

1-26. The inventory records of Alemar’s Drygoods, Inc. disclosed the following data for the month of
January 2022:

Beginning Inventory - at cost P 630,000

Beginning Inventory - at retail value 1,050,000
Purchases - at cost 420,000
Purchases - at retail value 735,000

Net sales amounted to P1,050,000; markdowns amounted to P105,000. During the month, the sales
manager increased the selling price of 1,600 pieces of T-shirts by P50.00 because of the increase
in demand. This increase was subsequently canceled on the remaining 300 pieces. The physical
inventory on January 31, 2022 was P665,000 at retail value.
 REQUIRED:
What was the inventory overage (shortage) at retail value on January 31, 2022?

Retail
Beginning Inventory P1,050,000
Purchases 735,000
Markups (1,600 x 50) 80,000
Markup cancellations (300 x 50) ( 15,000)
Markdowns (105,000)
Total P1,745,000
Sales Revenue (1,050,000)
Ending Inventory, at retail P 695,000
Physical inventory on January 31, 2022 665,000
Inventory shortage at retail value P 30,000

1-27. The retail inventory method is used by Uniwide Sales. The records of inventory, purchases, and
sales for the year 2022 are given below:

Cost Retail
Beginning Inventory P185,700 P202,000
Purchases 339,380 458,000
Purchase Allowance 11,000
Freight-in 7,300
Departmental Transfers-in 2,000 3,000
Additional Markups 12,000
Markup Cancellations 2,500
Inventory Shortage 7,000
Sales (including sales of P4,500 which
were marked down from P6,000) 374,000

REQUIRED:
(a) Compute the cost of the ending inventory using
(1) average retail method and
(2) FIFO retail method.
(b) Compute the cost of goods sold under the two methods in (a).

(a) (1) Average retail

Cost Retail
Beginning Inventory P185,700 P202,000
Purchases 339,380 458,000
Purchase Allowance ( 11,000)
Freight In 7,300
Departmental Transfers In 2,000 3,000
Additional Markups 12,000
Markup Cancellations ( 2,500)
Markdowns (6,000 – 4,500) _________ (1,500)
Total P523,380 P671,000
Sales (374,000)
Inventory Shortage (7,000)
 Ending Inventory, at retail P290,000
Cost to retail ratio (523,380/671,000) 78%
Ending Inventory, at estimated average cost P226,200

(2) FIFO retail (exclude the beginning inventory in computing the cost ratio)
337,680/469,000 = 72%
Ending inventory at FIFO cost 72% x P290,000 = P208,800

(b) Cost of goods sold

Average FIFO
Goods available for sale P523,380 P523,380
Ending inventory (226,200) (208,800)
Cost of goods sold P297,180 P314,580

EFFECT OF INVENTORIES IN PROFIT CALCULALTION

Since both beginning and ending inventories are considered in the calculation of cost of goods sold,
it follows that it has an impact in profit computation. Let us simply remember that any
overstatement in beginning inventory would overstated CGS, thus understated the profit. The
effect would be the reverse for the ending inventory. If ending inventory is overstated, CGS is
understated and profit is overstated. To summarize –

Effect on CGS Effect on Profit

Beginning inventory over over under
Beginning inventory under under over
Ending inventory over under over
Ending inventory under over under
Purchases (same as BI)

1-11. The Sta. Lucia Company, organized in 2020, used the average costing method for its inventory. It is
considering to change its inventory costing policy and to adopt the FIFO basis. Profit under the
average costing method and inventory costs, based on both average and FIFO methods, are
shown below:
2020 2021 2022
Profit P3,600,000 P5,000,000 P7,000,000
Inventory, end:
Average basis 1,200,000 1,300,000 2,000,000
FIFO basis 1,240,000 1,420,000 2,650,000

REQUIRED:
Determine the profit of Sta. Lucia Company for each of the three years had the company used the
FIFO costing method.
 2020 2021 2022
Reported profit under average method P3,600,000 P5,000,000 P7,000,000
Difference in inventory using FIFO
Beginning inventory - (40,000) (120,000)
Ending inventory 40,000 120,000 650,000
Profit under FIFO basis P3,640,000 P5,080,000 P7,530,000

1-28. Examination of the records of Grand Company for the year ended December 31, 2022 revealed
the following:
• Inventory at January 1, 2022 was overstated by P71,000 because some inventories were
counted twice on December 31, 2021.
• Goods in transit from a supplier on December 31, 2022 under FOB shipping point were
appropriately recorded as purchases but were not included in the physical count, P96,000.
• Grand recorded as sales a P60,000 invoice price of goods shipped to customers on December
30. The goods costing P52,000, were in transit at December 31 and were excluded from the
ending inventory. 60% of these goods were shipped FOB shipping point, while the remaining
goods were shipped FOB destination.
• Purchases of P100,000 were recorded when payment was made in 2022, although the goods
were received in 2021 and were included in the 2021 ending inventory.
• Profit before income tax and before adjustments for the above items was P658,000.

REQUIRED:
(a) Calculate the correct profit before income tax for 2022.
(b) Determine the net effect of the foregoing errors on profit before income tax for the year
2021.

(a)
Profit before tax reported for 2022 P658,000
Adjustments:
Overstatement of beginning inventory 71,000
Understatement of ending inventory 96,000
Goods still in transit shipped to customers FOB destination
recorded as sales (40% x 60,000); related cost was excluded
in ending inventory (40% x 52,000), net (3,200)
Purchases of 2021 recorded in 2022 100,000
Correct profit before income tax for 2022 P921,800

(b)
Effect on 2021 profit
Overstated 2021 ending inventory P 71,000 overstated
Understated 2021 purchases 100,000 overstated
Total overstatement in 2021 profit P171,000
1-29. The Lambda Company reported income before taxes of P709,400 and P789,350 for 2021 and 2022,
respectively. The entity uses periodic system and takes a physical count of its inventory every
December 31. Upon review of its records, the following data were discovered:

a. An item of inventory comprising 2,200 units are included in the 2021 ending inventory figure.
These were costed at P98 per unit, whereas the correct unit cost is P89.

b. On December 29, 2022, goods costing P57,000 were sold to a customer. The related invoice
was issued to the customer and the sale was properly recorded on that date. However, the
customer requested for a 3-day custody of the goods by Lambda Company and promised to
pick them up on January 2, 2022. The goods were mistakenly included in the December 31
inventory count.

REQUIRED:
Compute the adjusted income before taxes for the year 2021 and 2022.

2021 2022
Reported income before taxes P709,400 P789,350
Adjustments:
Overstated unit cost of 2021 ending
inventory 2,200 x (98 – 89) (19,800) 19,800
Goods sold held for pick up but
erroneously included in 2022
ending inventory (57,000)
Adjusted income before taxes P689,600 P752,150

LOSSES ON PURCHASE COMMITMENTS

Losses on purchase commitments may occur when an entity enters into a noncancellable contract to
purchase goods/inventory for delivery in the next accounting period. Prudence dictates that a loss
on the commitment is required to be recognized when the price of the committed commodity fall
below the agreed price at the end of the year or prior to its delivery.

1-30. During 2022, USTFU Company signed a non-cancelable contract with Nueva Ecija Milling
Company to purchase 1,000 sacks of rice at P1,200 per sack with delivery to be made in 2023. On
December 31, 2022, the price of rice had fallen to P1,150 per sack.

REQUIRED:
Give the entries on December 31, 2022 and on February 28, 2023 (the date of actual purchase)
when the market price on February 28, 2023 of each sack of rice is:
(a) P1,150
(b) P1,100
(c) P1,200
(a)
December 31, 2022
Loss on Purchase Commitments 50,000
Estimated Liability on Purchase Commitments 50,000
1,000 x (1,200 – 1,150)

February 28, 2023

Purchases 1,150,000
Estimated Liability on Purchase Commitments 50,000
Accounts Payable 1,200,000

(b)
December 31, 2022
Loss on Purchase Commitments 50,000
Estimated Liability on Purchase Commitments 50,000

February 28, 2023

Purchases 1,100,000
Estimated Liability on Purchase Commitments 50,000
Loss on Purchase Commitments 50,000
Accounts Payable 1,200,000

(c)
December 31, 2022
Loss on Purchase Commitments 50,000
Estimated Liability on Purchase Commitments 50,000

February 28, 2023

Purchases 1,200,000
Estimated Liability on Purchase Commitments 50,000
Accounts Payable 1,200,000
Recovery of Loss on Purchase Commitments* 50,000

*Recovery is recognized only to the extent of the previous loss.

MULTIPLE CHOICE PROBLEMS AND ANSWERS

MC22 Galleria Sportswear, Inc. regularly buys sweaters from Bon Company and is allowed a trade
discount of 20% and 10% from the list price. Galleria made a purchase on March 20, 2022, and
received an invoice with a list price of P90,000, a freight charge of P5,000, and payment terms of
net 30 days.

What is the total cost of the inventory purchase?

a. P63,000
b. P64,000
c. P69,000
d. P69,800

90,000 X .80 X .90 = 64,800; 64,800 + 5,000 = 69,800 (C)

MC23 Celine Company purchased an item of merchandise quoted and listed at P150,000 under the
following terms: Trade discounts of 15%, 10%, 5%, 2/10, n/30.

What was the invoice price of the merchandise?

a. P100,900.00
b. P105,000.00
c. P109,012.50
d. P106,832.25

Invoice price (150,000 x .85 x .90 x .95) (C) P109,012.50

MC24 Use the same information given in MC23. How much was the cash payment if settlement was
made within the discount period?
a. P106,832.25
b. P104,693.50
c. P102,900.00
d. P100,842.00

109,012.50 x .98 = 106,832.25 (A)

MC25 Rock Distributors, a computer store in Virra Mall, specializes in the sale of IBM compatibles and
software packages and had the following transactions with one of its suppliers:

Purchases of IBM compatibles P3,280,000

Purchases of commercial software package 900,000
Returns and allowances 80,000
Purchase discounts taken 27,000

Purchases were made throughout the year on terms 3/11, n/30. All returns and allowances took
place within 5 days of purchase and prior to any payment of account.

How much were the discounts lost?

a. P98,400
b. P96,000
c. P71,400
d. P69,000
3,280,000 + 900,000 – 80,000 = 4,100,000; 4,100,000 x 3% = 123,000
123,000 – 27,000 = 96,000 (B)

MC26 Robinson Company’s inventory at December 31, 2022, was P1,500,000 based on a physical count
of goods priced at cost, and before any necessary year-end adjustment relating to the following:

• Included in the physical count were goods billed to a customer F.O.B. shipping point on
December 31, 2022. These goods had a cost of P30,000 and were picked up by the carrier
on January 10, 2023.

• Goods shipped F.O.B. shipping point on December 28, 2022, from a vendor to Robinson
were received on January 4, 2023. The invoice cost was P50,000.

What amount should Robinson Company report as inventory on its December 31, 2022 statement
of financial position?
a. P1,470,000
b. P1,480,000
c. P1,520,000
d. P1,550,000

1,500,000 + 50,000 = 1,550,000 (D)

MC27 The inventory on hand on December 31, 2022 for SM Corporation is valued at a cost of
P3,000,000. The following items were not included in the inventory:
a. Goods purchased in transit shipped FOB destination, with price of P300,000, which
includes freight charge of P30,000.
b. Goods sold in transit FOB destination with invoice price of P490,000 which includes
freight charge of P40,000 to deliver the goods.
c. Goods held on consignment by SM at a sales price of P100,000, excluding a 20%
commission on the sales price. Freight paid by SM, P10,000.
d. Goods purchased in transit FOB shipping point with invoice of P600,000. Freight cost
amounts to P60,000.
 e. Goods out on consignment with sales price of P300,000. Shipping cost amounts to
P30,000.
The company sells goods at 150% of cost.
What is the correct inventory on December 31, 2022?
a. P4,400,000
b. P4,190,000
c. P4,160,000
d. P4,100,000

Reported amount of inventory P3,000,000

Goods sold in transit shipped FOB destination not included in inventory
(490,000 – 40,000 = 450,000; 450,000 ÷1.5) 300,000
Goods purchased in transit shipped FOB shipping point plus freight cost
(600,000 + 60,000) 660,000
Goods out on consignment
(300,000 ÷1.5 = 200,000; 200,000 + 30,000) 230,000
Correct inventory, December 31 (B) P4,190,000

MC28 The accounting staff of Yellow Ribbon Company submitted an inventory list at December 31,
2022 which showed a total of P5,000,000. The following information that may or may not be
relevant to the inventory value submitted, are given below.

Excluded from the inventory were merchandise costing P80,000 because they were transferred
to the delivery department for packaging on December 28 to be shipped on January 2, 2023.

The bill of lading and its import documents on merchandise were delivered by the bank and the
trust receipt accepted by the company on December 26, 2022. Taxes and duties have been paid
on this shipment but the customs broker has not delivered the merchandise until January 7,
2023. Delivered cost of shipment totaled P800,000. This shipment was not included in the
inventory in December 2022.

A review of the company’s purchase orders shows a commitment to buy P100,000 worth of
merchandise. This was not included in the inventory because the goods were received on
January 3, 2023.

Suppliers’ invoice for P30,000 worth of merchandise dated December 28, 2022 was received
thru the mails on December 30, 2022 although the goods arrived only January 4, 2023.
Shipment term is FOB shipping point. This item was included on December 31, 2022 inventory
by the company.

Goods valued at P20,000 were received on December 28, 2022 for approval by Yellow Ribbon
Company. The inventory team included this merchandise in the list but did not place any value
on it. On January 4, 2023, the company informed the supplier by long distance telephone of
the acceptance of the goods and the supplier’s invoice was received on January 7, 2023.

On December 27, 2022 an order for P25,000 worth of merchandise was placed. This was
included in the year-end inventory although it was received only on January 5, 2023. Seller
shipped goods FOB destination.

The correct merchandise inventory at Dec. 31, 2022 of Yellow Ribbon Company was
 a. P5,055,000
b. P5,825,000
c. P5,855,000
d. P5,880,000
(Phil. CPA Adapted)
Reported amount of inventory P5,000,000
Merchandise in the delivery department excluded in inventory 80,000
Imported goods not included, trust receipts already accepted 800,000
Goods in transit shipped FOB destination included in inventory (25,000)
Correct merchandise inventory (C) P5,855,000

MC29 The following purchase transactions occurred during the last few days of Whilczel Company’s
business year, which ends on October 31, or in the first few days after that date. A periodic
inventory system is used.

1. An invoice for P6,000, terms FOB shipping point, was received and entered November 1.
The invoice shows that the material was shipped October 29, but the receiving report
indicates receipt of goods on November 3.

2. An invoice for P2,700, terms FOB destination, was received and entered November 2. The
receiving report indicates that the goods were received October 29.

3. An invoice for P3,150, terms, FOB shipping point, was received October 15, but never
entered. Attached to it is a receiving report indicating that the goods were received October
18. Across the face of the receiving report is the following notation: “Merchandise not of
same quality as ordered - returned for credit October 19.”

4. An invoice for P3,600 terms FOB shipping point, was received and entered October 27.
The receiving report attached to the invoice indicates that the shipment was received
October 27 in satisfactory condition.

5. An invoice for P4,800, terms FOB destination, was received and entered October 28. The
receiving report indicates that the merchandise was received November 2.

Inventory was determined by physical count on October 31 as P77,500.

What is the correct inventory amount that should be shown in the October 31 statement of
financial position?
a. P86,200
b. P83,500
c. P80,350
d. P74,850

77,500 + 6,000 = 83,500 (B)

MC30 The Elegance Manufacturing Company, in its statement of financial position as of December 31,
2022, has an inventory of P1,760,000 which consists of:
Direct materials P550,000
Direct materials purchases in transit, FOB destination 120,000
Direct materials purchases in transit, FOB shipping point 90,000
 Prepaid insurance on inventory 20,000
Work in process 380,000
Finished goods 450,000
Goods shipped on consignment, at selling price with 20% profit on sales 150,000

What is the cost of inventory to be shown in the statement of financial position of Elegance as of
December 31, 2022?
a. P1,625,000
b. P1,595,000
c. P1,590,000
d. P1,500,000

550,000 + 90,000 + 380,000 + 450,000 + 120,000 = 1,590,000 (C)

MC31 The inventory account of Nike Trading at December 31, 2022 included the following items:

Goods purchased in transit, FOB shipping point P130,000

Merchandise out on consignment at sales price (including markup of 30% on
cost) 104,000
Goods held on consignment 56,000
Goods out on approval, at sales price (cost, P25,000) 32,500

Based on the above information, the inventory account at December 31, 2022 should be reduced
by
a. P81,500
b. P84,500
c. P87,500
d. P91,600

104,000/1.3 = 80,000; 80,000 x .30 = 24,000

24,000 + 56,000 + (32,500 – 25,000) = 87,500 (C)

MC32 You were furnished the following data of Filinvest Sales Company relative to Commodity Excel:

Balance, January 1 4,000 units at P25

Purchases: January 4 3,000 units at P26
January 15 3,500 units at P28
January 25 500 units at P27
Sales: January 3 3,000 units at P35
January 16 2,000 units at P36
January 28 1,000 units at P37

How much is the gross profit on sales if the company uses FIFO inventory costing system?
 a. P62,000
b. P58,000
c. P50,000
d. P46,000

Sales (3,000 x 35) + (2,000 x 36) + (1,000 x 37) P214,000

Cost of sales (4,000 x 25) + (2,000 x 26) 152,000
Gross profit on sales (A) P 62,000

MC33 Ever Company recorded the following data pertaining to Inventory X during January 2022:

Date Received Unit Cost Sold On hand

1/01 Inventory P8.00 3,200
1/12 1,600 1,600
1/22 4,800 P9.60 6,400

What is the moving average unit cost of Inventory X at January 31, 2022?
a. P8.80
b. P8.96
c. P9.20
d. P9.60

1/12 1,600 @ 8.00 12,800

1/22 4,800 @ 9.60 46,080
Total 6,400 58,880 / 6,400 units (C) P9.20

MC34 The management of Goodwill Enterprises, has been using the lower of cost and net realizable value
in costing its inventory. It maintains only two items of inventory as follows:

Confidence: 300 on hand; cost, P22 each; estimated sales price, P30; estimated distribution cost,
P3 each; and normal profit, 10% of the sales price.

Positive Attitude: 200 on hand; cost, P55 each; estimated sales price, P80; estimated distribution
cost, P28; and normal profit, 20% of the sales price.

Using the lower of cost and net realizable value, what are the unit inventory values for Confidence
and Positive Attitude?
a. Confidence, P27; Positive attitude, P52
b. Confidence, P22; Positive attitude, P52
c. Confidence, P22; Positive attitude, P55
d. Confidence, P27; Positive attitude, P55
(Phil. CPA Exam)

Confidence: cost 22; NRV = 30 – 3 = 27 Lower – P22

Positive attitude: cost 55; NRV = 80 – 28 = 52 (B) Lower – P52
MC35 The December 31, 2022 inventory of Hope Company consisted of four products, for which certain
information is provided below.
Estimated Estimated Normal
Unit Number disposal cost selling price profit
Product Cost of units per unit per unit on sales
H 25 1,000 6.50 40 20%
O 42 2,000 12.00 48 25%
P 120 3,000 25.00 190 30%
E 18 4,000 3.00 26 10%
Hope Company measures its inventory at the lower of cost and net realizable value on an item-by-
item basis.

How much is the total inventory value at December 31, 2022?

a. P692,500
b. P541,000
c. P529,000
d. P469,000

(1,000 x 25) + (2,000 x 36) + (3,000 x 120) + (4,000 x 18) = 529,000 (C)

MC36 On March 31, 2022, the store inventory of Gotesco Corporation was destroyed by fire. The
company’s mark up on cost is 40%. The following information was obtained from available
records:

Inventory, December 31, 2021 P 600,000

Sales Purchases
January P640,000 P400,000
February 750,000 500,000
March 850,000 600,000
What is the cost of inventory immediately before the fire?
a. P600,000
b. P532,000
c. P500,000
d. P450,000

600,000 + (400,000 + 500,000 + 600,000) = 2,200,000

2,200,000 – (2,240,000/1.4) = 500,000 (C)

MC37 Ali Mall’s accounting records indicated the following information:

12/31/22 1/1/22
Inventory (based on physical count) P110,000 P180,000
Accounts Receivable 900,000 700,000
Accounts Payable 250,000 300,000
 Collections from customers 2,800,000
Payments to suppliers 2,550,000

All sales and purchases are on credit. Ali Mall’s gross profit rate based on cost has remained
constant at 25% in recent years.

What is the amount of inventory overage (shortage)?

a. P20,000
b. P(20,000)
c. P(170,000)
d. P170,000

180,000 + (2,550,000 + 250,000 – 300,000) = 2,680,000 AFS

2.8M + 900,000 – 700,000 = 3M sales; 3M/1.25 = 2,400,000 CGS
2,680,000 – 2,400,000 = 280,000 EI; 280,000 – 110,000 = 170,000 (C)

MC38 On December 31, 2022, Georgetown Corporation lost all of warehouse inventory by fire. Data for
years 2020, 2021, and 2022 follow:

2022 2021 2020

Inventory, January 1 P 520,000 P 705,000 P 425,000
Net purchases 2,180,000 1,365,000 1,320,000
Net sales 2,500,000 2,000,000 1,700,000

Goods with selling price of P150,000 were sent on consignment to Atlas Trading. As of December
31, 2022, these goods are unsold and still in the possession of Atlas Trading.

On December 28, 2022, goods costing P95,000 were purchased by Georgetown, terms FOB
shipping point. The goods are still in transit but were properly recorded by Georgetown as
purchases during 2022.

What is the cost of the inventory lost by fire?

a. P705,000
b. P750,000
c. P845,000
d. P950,000

Total cost of goods sold for 2020 and 2021 (1.04M + 1.55M) P2,590,000
Total sales for 2020 and 2021 (1.7M + 2.0M) P3,700,000
Average cost rate (2,590,000/3,700,000) 70%
Inventory, January 1, 2022 P 520,000
Purchases 2,180,000
Total cost of goods available for sale P2,700,000
Estimated cost of goods sold (2,500,000 x 70%) 1,750,000
Estimated cost of ending inventory P950,000
Cost of merchandise out on consignment (150,000 x 70%) (105,000)
Cost of goods undamaged (in transit FOB shipping point) (95,000)
Cost of inventory lost by fire (B) P750,000
MC39 On September 15, 2022, a fire destroyed significant portion of the merchandise inventory of
National Wholesale Corporation. The following information was available from the records of the
company:

Jan. 1, 2022
to date of fire 2021
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 inventory of
National, which cost P15,000 had an estimated realizable value of P5,000.

What is the estimated fire loss on September 15, 2022?

a. P74,738
b. P66,684
c. P61,584
d. P51,684

Beginning inventory P105,650

Net purchases (378,245 – 10,295) 367,950
Estimated cost of goods sold (450,200 – 5,100) x 78%* (347,178)
Estimated cost of ending inventory P126,422
Cost of undamaged inventory (69,738)
Realizable value of damaged merchandise (5,000)
Estimated fire loss (D) P 51,684
*Cost rate in 2021
Cost of goods sold (120,160 + 394,366 – 105,650 = 408,876 = 78%
Net sales (530,180 – 5,980) = 524,200

MC40 On September 30, 2022, a flash flood damaged the warehouse and factory of Waltermart, Inc.
completely destroying its work in process inventory. There was no damage to either raw materials
or finished goods since these were stored in an elevated section of the warehouse.

A physical inventory taken immediately after the flood subsided showed the following: Raw
materials – P740,000; Finished goods – P1,310,000.

Inventories at January 1, 2022 consisted of the following: Raw Materials – P400,000; Work in
Process – P1,100,000; Finished Goods – P1,500,000.

The company’s profit margin for the last several years is 25%. Sales for the first nine months of
2022 were P4,000,000. Raw materials purchases were P1,280,000. Direct labor cost for the period
amounted to P960,000. Manufacturing overhead is applied at 50% of direct labor cost.

What is the value of the work in process lost from flood at September 30, 2022?
a. P580,000
 b. P640,000
c. P670,000
d. P720,000

Direct materials used (400,000 + 1,280,000 – 740,000) P940,000

Direct labor 960,000
Manufacturing overhead (50% x 960,000) 480,000
Total manufacturing cost P2,380,000
Work in process, beginning 1,100,000
Total cost put into process P3,480,000
Cost of goods sold (4.0M x 75%) P3,000,000
Finished goods, end 1,310,000
Cost of goods available for sale P4,310,000
Finished goods, beginning (1,500,000) 2,810,000
Cost of work in process lost by fire (C) P 670,000

MC41 Syvels Trading uses the retail inventory method to estimate inventory. The following information
was obtained from the accounting records for the year ended December 31, 2022:

At cost: Inventory, January 1 – P617,000; Purchases – P1,281,000; Purchase returns – P21,000;

Freight-in – P31,000.

At retail: Inventory, January 1 – P1,057,000; Purchases – P2,158,000; Purchase returns – P35,000;

Sales – P2,365,000; Sales returns – P62,000.

How much is the cost of inventory pilferage if the physical count revealed an ending inventory at
retail of P780,000?
a. P107,000
b. P 97,000
c. P 58,200
d. P 38,800

Cost Retail
Inventory, January 1 P 617,000 P1,057,000
Purchases 1,281,000 2,158,000
Purchase returns (21,000) (35,000)
Freight in 31,000 ___________
Available for sale P1,908,000 P3,180,000
Cost to retail ratio (1,908,000/3,180,000=60%)
Net sales (2,365,000 – 62,000) (2,303,000)
Ending inventory, at retail P877,000
Physical count of inventory at retail 780,000
Inventory pilferage, at retail P 97,000
Cost of inventory pilferage (97,000 x 60%)(C) P 58,200

MC42 The following data is available for Corona Trading:

 Cost Retail
Inventory, January 1 P 47,075 P 70,025
Purchases (net) 213,327 306,375
Freight in 3,400
Sales 320,500
Additional markups 18,900
Cancellation of additional markups 7,800
Markdowns 10,640
Physical inventory, December 31, at retail 39,390

Corona Trading uses the average retail method.

What is the cost of goods sold before loss on inventory shortage?

a. P248,355
b. P231,798
c. P225,175
d. P224,350

Cost = 47,075 + 213,327 + 3,400,000 = 263,802

Retail = 70,025 + 306,375 + 11,100 – 10,640 = 376,860
263,802/376,860 = 70%; 70% x 320,500 = 224,350 (D)

MC43 Use the same information given in MC42. The estimated loss from inventory shortage is
a. P11,879.00
b. P12,727.50
c. P16,970.00
d. P39,452.00

Available for sale at retail P376,860

Sales (320,500)
Ending inventory, at retail P56,360
Physical count of inventory 39,390
Inventory shortage, at retail P16,970
Estimated loss from inventory shortage (16,970 x 70%) (A) P11,879

MC44 Webster Company uses the average retail method of inventory valuation. The following
information is made available:
Cost Retail
Beginning inventory P 23,000 P 60,000
Purchases 120,000 220,000
Net markups 20,000
Net markdowns 40,000
Sales revenue 180,000

What is the estimated cost of ending inventory?

a. P80,000
b. P48,000
 c. P44,000
d. P38,133

Cost = 23,000 + 120,000 = 143,000

60,000 + 220,000 + 20,000 – 40,000 = 260,000
143,000/260,000 = 55%
260,000 – 180,000 = 80,000; 80,000 x 55% = 44,000

MC45 While examining the December 31, 2022 financial statements of Google Company, the following
errors were discovered.

• Ending inventory was overstated by P10,000.

• Beginning inventory was understated by P4,000.
• P100,000 worth of merchandise was purchased and received towards the end of 2022 and
included in inventory. The purchase was recorded in 2023 when payment for the goods was
made.

Profit reported in the 2022 profit and loss before adjustment for the given items is P600,000.

What is the adjusted profit for the year ended December 31, 2022?
a. P714,000
b. P686,000
c. P494,000
d. P486,000

600,000 – 10,000 – 4,000 – 100,000 = 486,000 (D)