DE LA SALLE UNIVERSITY MANILA

RVR COB DEPARTMENT OF ACCOUNTANCY

REVDEVT 1ST Term AY 14-15

Theory of Accounts
TOA Quizer 9

Prof. Francis H. Villamin

IAS 2 - INVENTORIES

1.

Which of the following inventories carried by a manufacturer is similar to the merchandise

inventory of a retailer?
a. Raw materials.
b. Work-in-process.
c. Finished goods.
d. Supplies.

2.

Where should raw materials be classified on the statement of financial position?

a. Prepaid expenses.
b. Inventory.
c. Equipment.
d. Not on the statement of financial position.

3.

Which of the following accounts is not reported in inventory?

a. Raw materials.
b. Equipment.
c. Finished goods.
d. Supplies.

4.

Computers For You is a retailer specializing in selling computers and related equipment.
Which of the following would not be reported in the merchandise inventory account reported
on the statement of financial position for Computers For You at December 31, 2013?
a. Computer purchased for resale during November 2013.
b. Shelving materials purchased during December 2013.
c. Freight costs related to the computers purchased in November.
d. All of the choices are included in the merchandise inventory account at December 31,
2013.

5.

Twin Company purchases the majority of its inventory from three primary suppliers for re-sale
to customers around the world. Twin Companys statement of financial position will include
a. Finished goods inventory.
b. Work-in-process inventory.
c. Merchandise inventory.
d. All of the choices are correct.

6.

Companies must allocate the cost of all the goods available for sale (or use) between
a. The cost goods on hands at the beginning of the period as reported on the statement of
financial position and the cost of goods acquired or produced during the period.
b. The cost of goods on hand at the end of the period as reported on the statement of
financial position and the cost of goods acquired or produced during the period.
c. The income statement and the statement of financial position.
d. All of the choices are correct.

TOA

Inventories/Agricultural Assets/PPE

`Page 2

7.

Mineral Makers (MM) Company keeps its inventory records using a perpetual system. At
December 31, 2013, the unadjusted balance in the inventory account is P64,000. Through a
physical count on December 31, 2013, MM determines that its actual merchandise inventory
at year-end is P62,500. Which of the following is true regarding the statement of financial
position and the income statement of MM at December 31, 2013?
a. Inventory is increased and cost of goods sold is decreased by P1,500.
b. Inventory is decreased and cost of goods sold is increased by P1,500.
c. Inventory is increased and cost of goods sold is increased by P1,500.
d. Inventory is decreased and cost of goods sold is decreased by P1,500.

8.

Tang, Inc. sells collectible jewelry on consignment from various manufacturers. Additionally,
Tang sells its own line of specialty jewelry manufactured in-house. On December 31, 2013,
during Tang, Inc 's annual inventory count, an inexperienced new staff member included in
Tangs ending inventory P350,000 worth of inventory held on consignment from Metcalf
Associates. Which of the following is correct regarding the impact of this error on Tangs
income statement and statement of financial position at December 31, 2013?
a. Ending inventory is understated by P350,000.
b. Retained earnings is overstated by P350,000.
c. Cost of goods sold is overstated by P350,000.
d. The financial statements are correctly stated.

9.

Why are inventories included in the computation of net income?

a. To determine cost of goods sold.
b. To determine sales revenue.
c. To determine merchandise returns.
d. Inventories are not included in the computation of net income.

10.

Which of the following is a characteristic of a perpetual inventory system?

a. Inventory purchases are debited to a Purchases account.
b. Inventory records are not kept for every item.
c. Cost of goods sold is recorded with each sale.
d. Cost of goods sold is determined as the amount of purchases less the change in
inventory.

11.

How is a significant amount of consignment inventory reported in the statement of financial

position?
a. The inventory is reported separately on the consignor's statement of financial position.
b. The inventory is combined with other inventory on the consignor's statement of financial
position.
c. The inventory is reported separately on the consignee's statement of financial position.
d. The inventory is combined with other inventory on the consignee's statement of financial
position.

12.

Where should goods in transit that were recently purchased f.o.b. destination be included on
the statement of financial position?
a. Accounts payable.
b. Inventory.
c. Equipment.
d. Not on the statement of financial position.

13.

If a company uses the periodic inventory system, what is the impact on net income of
including goods in transit f.o.b. shipping point in purchases, but not ending inventory?
a. Overstate net income.
b. Understate net income.
c. No effect on net income.
d. Not sufficient information to determine effect on net income.

14.

If a company uses the periodic inventory system, what is the impact on the current ratio of
including goods in transit f.o.b. shipping point in purchases, but not ending inventory?
a. Overstate the current ratio.
b. Understate the current ratio.
c. No effect on the current ratio.
d. Not sufficient information to determine effect on the current ratio.

TOA

Inventories/Agricultural Assets/PPE

`Page 3

15.

What is consigned inventory?

a. Goods that are shipped, but title transfers to the receiver.
b. Goods that are sold, but payment is not required until the goods are sold.
c. Goods that are shipped, but title remains with the shipper.
d. Goods that have been segregated for shipment to a customer.

16.

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.

17.

Goods in transit which are shipped f.o.b. shipping point should be

a. included in the inventory of the seller.
b. included in the inventory of the buyer.
c. included in the inventory of the shipping company.
d. none of these.

18.

Goods in transit which are shipped f.o.b. destination should be

a. included in the inventory of the seller.
b. included in the inventory of the buyer.
c. included in the inventory of the shipping company.
d. none of these.

19.

Which of the following items should be included in a company's inventory at the statement of
financial position date?
a. Goods in transit which were purchased f.o.b. destination.
b. Goods received from another company for sale on consignment.
c. Goods sold to a customer which are being held for the customer to call for at his or her
convenience.
d. None of these.

Use the following information for questions 50 and 51.

During 2012 Carne Corporation transferred inventory to Nolan Corporation and agreed to repurchase
the merchandise early in 2013. Nolan then used the inventory as collateral to borrow from Norwalk
Bank, remitting the proceeds to Carne. In 2013 when Carne repurchased the inventory, Nolan used
the proceeds to repay its bank loan.
20.

This transaction is known as a(n)

a. consignment.
b. installment sale.
c. assignment for the benefit of creditors.
d. product financing arrangement.

21.

On whose books should the cost of the inventory appear at the December 31, 2012
statement of financial position date?
a. Carne Corporation
b. Nolan Corporation
c. Norwalk Bank
d. Nolan Corporation, with Carne making appropriate note disclosure of the transaction

22.

Valuation of inventories requires the determination of all of the following except

a. the costs to be included in inventory.
b. the physical goods to be included in inventory.
c. the cost of goods held on consignment from other companies.
d. the cost flow assumption to be adopted.

23.

The accountant for the Pryor Sales Company is preparing the income statement for 2012
and the statement of financial position at December 31, 2012 . Pryor uses the periodic
inventory system. The January 1, 2012 merchandise inventory balance will appear
a. only as an asset on the statement of financial position.
b. only in the cost of goods sold section of the income statement.
c. as a deduction in the cost of goods sold section of the income statement and as a current
asset on the statement of financial position.
d. as an addition in the cost of goods sold section of the income statement and as a current
asset on the statement of financial position.

TOA

Inventories/Agricultural Assets/PPE

`Page 4

24.

If the beginning inventory for 2012 is overstated, the effects of this error on cost of goods
sold for 2012, net income for 2012, and assets at December 31, 2013, respectively, are
a. overstatement, understatement, overstatement.
b. overstatement, understatement, no effect.
c. understatement, overstatement, overstatement.
d. understatement, overstatement, no effect.

25.

The failure to record a purchase of merchandise on account even though the goods are
properly included in the physical inventory results in
a. an overstatement of assets and net income.
b. an understatement of assets and net income.
c. an understatement of cost of goods sold and liabilities and an overstatement of assets.
d. an understatement of liabilities and an overstatement of equity.

26.

Dolan Co. received merchandise on consignment. As of March 31, Dolan had recorded the
transaction as a purchase and included the goods in inventory. The effect of this on its
financial statements for March 31 would be
a. no effect.
b. net income was correct and current assets and current liabilities were overstated.
c. net income, current assets, and current liabilities were overstated.
d. net income and current liabilities were overstated.

27.

Green Co. received merchandise on consignment. As of January 31, Green included the
goods in inventory, but did not record the transaction. The effect of this on its financial
statements for January 31 would be
a. net income, current assets, and retained earnings were overstated.
b. net income was correct and current assets were understated.
c. net income and current assets were overstated and current liabilities were understated.
d. net income, current assets, and retained earnings were understated.

28.

Feine Co. accepted delivery of merchandise which it purchased on account. As of December

31, Feine had recorded the transaction, but did not include the merchandise in its inventory.
The effect of this on its financial statements for December 31 would be
a. net income, current assets, and retained earnings were understated.
b. net income was correct and current assets were understated.
c. net income was understated and current liabilities were overstated.
d. net income was overstated and current assets were understated.

29.

On June 15, 2014, Wynne Corporation accepted delivery of merchandise which it

purchased on account. As of June 30, Wynne had not recorded the transaction or included
the merchandise in its inventory. The effect of this on its statement of financial position for
June 30, 2014 would be
a. assets and equity were overstated but liabilities were not affected.
b. equity was the only item affected by the omission.
c. assets, liabilities, and equity were understated.
d. none of these.

30.

What is the effect of a P50,000 overstatement of last year's inventory on current years
ending retained earning balance?
a. Understated by P50,000.
b. No effect.
c. Overstated by P50,000.
d. Need more information to determine.

31.

When inventory is misstated, its presentation lacks?

a. Relevance.
b. Faithful representation.
c. Comparability.
d. All of the choices are correct.

TOA

Inventories/Agricultural Assets/PPE

`Page 5

32.

Which of the following costs should not be included on the statement of financial position as
part of the cost of inventory?
a. Abnormal freight.
b. Import duties.
c. Conversion costs.
d. All of the choices are included on the statement of financial position as part of the cost of
inventory.

33.

Jarvis, Inc. manufactures cruise ships for sale. Each ship costs approximately P25,000,000
to build and takes 3 years to fully construct. During the time it takes to construct one cruise
ship, Jarvis incurs P2,400,000 in interest cost related to the construction. The interest cost is
incurred evenly throughout the construction period. During the first year of construction,
Jarvis builds a shell that can be customized for any purchaser according to specifications;
construction during the final 2 years is all based on client specification. The International
Accounting Standards Board requires that Jarvis account for this interest cost as
a. P2,400,000 is recorded as interest expense as incurred.
b. P2,400,000 is capitalized to the cruise ship.
c. P800,000 incurred in 1st year is expensed as incurred; the remaining amount is
capitalized to the cruise ship.
d. P800,000 is capitalized to the cruise ship; the remaining amount is expensed as incurred.

34.

Oats Company offers a trade discount to its customers as a reward for large orders.
According to the International Accounting Standards Board (IASB) how should the customers
of Oats Company account for these trade discounts?
a. As an expense.
b. As a revenue.
c. As a reduction in the cost of inventory.
d. The IASB allows any of these treatments so long as the company applies it consistently.

35.

Which of the following is a product cost as it relates to inventory?

a. Selling costs.
b. Interest costs.
c. Raw materials.
d. Abnormal spoilage.

36.

Which of the following is a period cost?

a. Labor costs.
b. Freight in.
c. Production costs.
d. Selling costs.

37.

Which method may be used to record cash discounts a company receives for paying
suppliers promptly?
a. Net method.
b. Gross method.
c. Average method.
d. a and b.

38.

Which of the following is included in inventory costs?

a. Product costs.
b. Period costs.
c. Product and period costs.
d. Neither product or period costs.

39.

Which of the following is correct?

a. Selling costs are product costs.
b. Manufacturing overhead costs are product costs.
c. Interest costs for routine inventories are product costs.
d. All of these.

40.

Costs which are inventoriable include all of the following except

a. costs that are directly connected with the bringing of goods to the place of business of
the buyer.
b. costs that are directly connected with the converting of goods to a salable condition.
c. buying costs of a purchasing department.
d. selling costs of a sales department.

TOA

Inventories/Agricultural Assets/PPE

`Page 6

41.

Which of the following types of interest cost incurred in connection with the purchase or
manufacture of inventory should be capitalized as a product cost?
a. Purchase discounts lost
b. Interest incurred during the production of discrete projects such as ships or real estate
projects
c. Interest incurred on notes payable to vendors for routine purchases made on a repetitive
basis
d. All of these should be capitalized.

42.

The use of a Discounts Lost account implies that the recorded cost of a purchased inventory
item is its
a. invoice price.
b. invoice price plus the purchase discount lost.
c. invoice price less the purchase discount taken.
d. invoice price less the purchase discount allowable whether taken or not.

43.

The use of a Purchase Discounts account implies that the recorded cost of a purchased
inventory item is its
a. invoice price.
b. invoice price plus any purchase discount lost.
c. invoice price less the purchase discount taken.
d. invoice price less the purchase discount allowable whether taken or not.

Use the following information for questions 44 and 45.

During 2013, which was the first year of operations, Oswald 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.
44.

Which of the following recording procedures would result in the highest cost of goods sold for
2013?
1. Recording purchases at gross amounts
2. Recording purchases at net amounts, with the amount of discounts not taken
shown under "other income and expense" 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.

45.

Which of the following recording procedures would result in the highest net income for 2013?
1. Recording purchases at gross amounts
2. Recording purchases at net amounts, with the amount of discounts not taken
shown under "other income and expense" 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.

46.

When using the periodic inventory system, which of the following generally would not be
separately accounted for in the computation of cost of goods sold?
a. Trade discounts applicable to purchases during the period
b. Cash (purchase) discounts taken during the period
c. Purchase returns and allowances of merchandise during the period
d. Cost of transportation-in for merchandise purchased during the period

47.

Which inventory costing method most closely approximates current cost for ending
inventory?
a. Average
b. FIFO
c. LIFO
d. Specific identification

TOA

Inventories/Agricultural Assets/PPE

`Page 7

48.

The pricing of issues from inventory must be deferred until the end of the accounting period
under the following method of inventory valuation:
a. moving average.
b. weighted-average.
c. specific identification.
d. FIFO.

49.

An inventory pricing procedure in which the oldest costs incurred rarely have an effect on the
ending inventory valuation is
a. FIFO.
b. LIFO.
c. specific identification.
d. weighted-average.

50.

Which method of inventory pricing best approximates specific identification of the actual flow
of costs and units in most manufacturing situations?
a. Average cost
b. First-in, first-out
c. moving-average
d. weighted-average

51.

Assuming no beginning inventory, what can be said about the trend of inventory prices if cost
of goods sold computed when inventory is valued using the FIFO method exceeds cost of
goods sold when inventory is valued using the average cost method?
a. Prices decreased.
b. Prices remained unchanged.
c. Prices increased.
d. Price trend cannot be determined from information given.

52.

In a period of rising prices, the inventory method which tends to give the highest reported net
income is
a. moving-average.
b. first-in, first-out.
c. specific identification.
d. weighted-average.

53.

In a period of rising prices, the inventory method which tends to give the highest reported
inventory is
a. FIFO.
b. moving average.
c. specific identification.
d. weighted-average.

54.

Tanner Corporation's inventory cost on its statement of financial position was lower using
first-in, first-out than it would have been using average cost. Assuming no beginning
inventory, in what direction did the cost of purchases move during the period?
a. Up
b. Down
c. Steady
d. Cannot be determined

55.

In a period of declining prices, the inventory method which tends to give the highest reported
cost of goods sold is
a. specific identification.
b. average cost.
c. FIFO.
d. none of these.

56.

The acquisition cost of a certain raw material changes frequently. The book value of the
inventory of this material at year end will be the same if perpetual records are kept as it
would be under a periodic inventory method only if the book value is computed under the
a. weighted-average method.
b. moving average method.
c. FIFO method.
d. None of these.

TOA

Inventories/Agricultural Assets/PPE

`Page 8

57.

Which of the following is a reason why the specific identification method may be considered
ideal for assigning costs to inventory and cost of goods sold?
a. The potential for manipulation of net income is reduced.
b. There is no arbitrary allocation of costs.
c. The cost flow matches the physical flow.
d. Able to use on all types of inventory.

58.

In a period of falling prices which inventory method generally provides the lowest reported
inventory?
a. Average cost.
b. FIFO.
c. Moving average.
d. Specific identification.

59.

In a period of falling prices, which inventory method generally provides the lowest amount of
net income?
a. Average cost.
b. Moving average.
c. FIFO.
d. Specific identification.

60.

The International Accounting Standards Board requires the specific identification method in
certain circumstances. Which of the following is likely to be a circumstance where the
specific identification criteria can be met?
a. Unit price is low.
b. Inventory turnover is low.
c. Inventory quantities are large.
d. All of the choices are circumstances where the criteria are likely to be met.

**************************************

IAS 41 AGRICULTURE
1. Regarding the choice of measurement basis used for valuing biological assets, PAS 41
a. sets out several ways of measuring fair value.
b. recommends the use of historical cost.
c. recommends the use of current cost.
d. recommends the use of present value.
2. Entity A had a plantation forest that is likely to be harvested and sold in 30 years. The income
should be accounted for in the following way:
a. No income should be reported until first harvest and sale in 30 years.
b. Income should be measured annually and reported using a fair value approach that
recognizes and measures biological growth.
c. The eventual sale proceeds should be estimated and matched to the profit and loss account
over the 30-years period.
d. The plantation forest should be valued every 5 years and the increase in value should be
shown in the statement of recognized gains and losses.
3. Generally speaking, biological assets relating to agricultural activity should be measured using:
a. historical cost
b. historical cost less depreciation less impairment
c. a fair value approach
d. net realizable value
4. Where there is a long aging or maturation process after harvest, the accounting for such
products should be dealt with by
a. PAS 41
b. PAS 2, Inventory
c. PAS 16, Property, Plant and Equipment
d. PAS 40, Investment Property

TOA

Inventories/Agricultural Assets/PPE

`Page 9

5. Which of the following is not dealt with by PAS 41?

a. The accounting for biological assets.
b. The initial measurement of agricultural produce harvested from the entitys biological assets.
c. The processing of agricultural produce after harvesting.
d. The accounting treatment of government grants received in respect of biological assets.
6. When agricultural produce is harvested, the harvest should be accounted for by using PAS 2,
Inventories, or another applicable Philippine Accounting Standard. For the purpose of that
Standard, cost at the date of harvest is deemed to be
a. its fair value less estimated point-of-sale costs at point of harvest.
b. the historical cost of the harvest.
c. the historical cost less accumulated impairment losses.
d. market value.
7. A gain or loss arising on the initial recognition of a biological asset and from the change in the
fair value less estimated point-of-sale costs of a biological asset should be included in
a. the net profit or loss for the period
b. the statement of recognized gains and losses
c. a separate revaluation reserve
d. a capital reserve within equity
8. Which of the following values is unlikely to be used in fair value measurement?
a. Quoted price in a market
b. The most recent market transaction price
c. The present value of the expected net cash flows from the assets
d. External independent valuation
9. Which of the following costs are not included in point-of-sale costs?
a. Commissions to brokers and dealers
b. Levies by regulatory agencies
c. Transfer duties and taxes
d. Transport and other costs necessary to get the assets to a market.
10. Where the fair value of biological asset cannot be determined reliably, the biological asset
should be measured at
a. cost
b. cost less accumulated depreciation
c. cost less accumulated depreciation and accumulated impairment losses
d. net realizable value
11. Where there is a production cycle of more than one year, the Standard encourages separate
disclosure of the
a. physical change only
b. price change only
c. total change in value
d. physical change and price change
12. If a government grant is conditional on certain events, then the grant should be recognized as
a. income when the conditions attaching to the grant are met.
b. income when the grant has been approved.
c. a deferred credit when the conditions attached to the government grant are met.
d. a deferred credit when the grant is approved.
13. An unconditional government grant related to a biological asset that has been measured at fair
value less point-of-sale costs should be recognized as:
a. income when the grant becomes receivable
b. a deferred credit when the grant becomes receivable
c. income when the grant application has been submitted
d. a deferred credit when the grant has been approved

TOA

Inventories/Agricultural Assets/PPE

`Page 10

14. Land that is related to agricultural activity is valued

a. at fair value.
b. in accordance with PAS 16, Property, Plant and Equipment or PAS 40, Investment Property.
c. at fair value in combination with the biological asset that is being grown on the land.
d. at the resale value separate from the biological asset that has been grown on the land.
15. Contract prices are not necessarily relevant in determining fair value, and the fair value of a
biological asset or agricultural produce is not adjusted because of the existence of a contract.
a. True
b. False

TOA

Inventories/Agricultural Assets/PPE

`Page 11

*S100. Which of the following statements is not true as it relates to the dollar-value LIFO inventory
method?
a. It is easier to erode LIFO layers using dollar-value LIFO techniques than it is with
specific goods pooled LIFO.
b. Under the dollar-value LIFO method, it is possible to have the entire inventory in only
one pool.
c. Several pools are commonly employed in using the dollar-value LIFO inventory method.
d. Under dollar-value LIFO, increases and decreases in a pool are determined and
measured in terms of total dollar value, not physical quantity.
*S101. Which of the following is not considered an advantage of LIFO when prices are rising?
a. The inventory will be overstated.
b. The more recent costs are matched against current revenues.
c. There will be a deferral of income tax.
d. A company's future reported earnings will not be affected substantially by future price
declines.
*102.

Which of the following is true regarding the use of LIFO for inventory valuation?
a. If LIFO is used for external financial reporting, then it must also be used for internal
reports.
b. For purposes of external financial reporting, LIFO may not be used with the lower-ofcost-or-net realizable value approach.
c. If LIFO is used for external financial reporting, then it cannot be used for tax purposes.
d. None of these.

*103.

If inventory levels are stable or increasing, an argument which is not an advantage of the
LIFO method as compared to FIFO is
a. income taxes tend to be reduced in periods of rising prices.
b. cost of goods sold tends to be stated at approximately current cost on the income
statement.
c. cost assignments typically parallel the physical flow of goods.
d. income tends to be smoothed as prices change over time.

1. Which one of the following should be excluded from inventories?

a. Goods in transit to which title is held.
b. Shopworn goods stable at a price lower than the regular sale price.
c. Goods on consignment.
d. Goods held on consignment.
2. Which of the following items should not be included in the inventory at year-end?
a. Goods held but awaiting return to vendor due to wrong specifications.
b. Goods returned by a customer.
c. Goods out on consignment.
d. Goods held on consignment for sale on commission.
3. On a particular date, which of the following should be included in a companys inventory?
a. Goods in the companys warehouse which have been received from another company for
sale on consignment.
b. Goods sold through a sales contract the terms of which have been completed, but the
goods are being held for the customer to call for at his convenience.
c. Goods purchased and in transit FOB destination.
d. Goods held for sale in the possession of an agent of the company.
4. Solid Company should include the following items in its merchandise inventory:
a. goods purchased FOB destination still en route.
b. goods held on consignment from the Royal Company to Solid Company.
c. goods sold by Solid Company FOB shipping point still en route.
d. goods purchased FOB shipping point still en route.

TOA

Inventories/Agricultural Assets/PPE

`Page 12

5. Blast Company should include the following in its inventory:

a. goods purchased FOB destination still en route.
b. goods held for pick up by the buyer.
c. goods it sold FOB shipping point, still en route.
d. goods out on consignment to the Crump Company.
6. Which of the following would not be included in the merchandise inventory amount reported on
Pegasus Companys statement of financial position?
a. Items out on consignment to another company.
b. Items shipped today FOB shipping point, invoice has been mailed to the customer.
c. Items purchased from a supplier and en route directly to a customer of Pegasus Company,
the term is FOB destination; invoice received but not yet paid.
d. Items in the receiving department of Pegasus Company; returned by the customer, invoice
has been mailed.
7. When a periodic inventory system is used:
a. cost of goods sold is a residual amount.
b. ending inventory is transferred to expense and the beginning inventory is transferred to
assets.
c. two entries must be made when goods are purchased.
d. a purchases account is not used; all inventory purchase entries are debits to the inventory
account.
8. When determining the unit cost of an inventory item, which of the following should not be
included?
a. Interest on loans obtained to purchase the item.
b. Commissions paid when purchased.
c. Freight costs on the item when purchased.
d. Storage fees prior to sale.
9. Philippine Financial Reporting Standards (PFRS) require the selection of an inventory cost flow
method which:
a. emphasizes the valuation of inventory for statement of financial position purposes.
b. most closely approximates lower-of-cost-or-market 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.
10. All of the following correctly describe the average cost inventory cost flow method except:
a. a moving average cost is used with a perpetual inventory system only.
b. the average cost methods are based on the view that the cost of inventory on hand and the
cost of goods sold during a period should be representative of all purchase costs available
for the period.
c. a weighted average unit cost is used with a periodic inventory system only.
d. a moving average cost is used with either a periodic or a perpetual inventory system.
11. Flush Meadows Company purchased raw materials with a catalog price of P70,000. Credit
terms of 5/15, n/60 apply. If Flush Meadows uses the net price method, the purchase should
be recorded at:
a. P70,000
b. P66,500
c. P59,500
d. P42,000
12. A listing of the Aura Companys inventory items at the end of 2014 totals P95,000. Included in
this amount are the following items:
Merchandise in transit as of 12/21/2014,
purchased FOB shipping point ---------------------------

P6,800

TOA

Inventories/Agricultural Assets/PPE

`Page 13

Goods held by Aura Company as consignee from

Justine
----------------------------

5,000

Goods on consignment, at cost plus 50%

markup on cost
----------------------------

6,000

What is the peso amount of Auras 2014 ending inventory that should be reported on the
statement of financial position?
a. P83,100
b. P86,200
c. P87,900
d. P88,000
13. The Purchases Discounts Taken account may appear in the accounting records if which
method is used to account for purchase discounts?
a. net price method
b. gross price method
c. allowance method
d. sales price method
14. Which statement is true?
a. Until goods are sold by the consignee, the consignor includes the goods in his/her inventory
at cost, less handling and shipping costs incurred in the delivery to the consignee.
b. When goods are sold on an installment plan, the seller retains title and continues to include
them on his/her statement of financial position until full payment has been received.
c. Title to goods may not pass before shipment occurs.
d. In accounting for inventory, economic substance should take precedence over legal form.
15. Which of the following is least likely to be included in determining the cost of inventory?
a. Interest cost for amounts borrowed to finance the purchase of inventory.
b. Purchasing costs.
c. Receiving and unpacking costs.
d. Freight costs.
16. A manufacturing company has three basic types of inventory:
a. Finished goods, work-in process, and ready to sell merchandise.
b. Perpetual, periodic and estimated.
c. FIFO and average cost.
d. Raw materials, work-in-process and finished goods.
17. In a perpetual inventory system, two entries are normally made to record each sales
transaction. The purpose of these entries is best described as follows:
a. One entry recognizes the sales revenue and the other recognizes the cost of goods sold.
b. One entry records the purchase of merchandise and the other records the sale.
c. One entry records the cost of goods sold and the other reduces the balance in the Inventory
account.
d. One entry updates the subsidiary ledger and the other updates the general ledger.
18. In a perpetual inventory system, recording a sale on account involves debiting which of the
following accounts?
a. Only Accounts Receivable.
b. Accounts Receivable and Inventory.
c. Accounts Receivable and Cost of Goods Sold.
d. Accounts Receivable, Cost of Goods Sold, and Inventory.
19. In a perpetual inventory system, recording a sale on account involves creating which of the
following accounts?
a. Only Sales
b. Sales and Inventory

TOA

Inventories/Agricultural Assets/PPE

`Page 14

c. Sales and Cost of Goods Sold

d. Sales, Inventory and Cost of Goods Sold
20. In a perpetual inventory system, an inventory flow assumption is used primarily for determining
which costs to use in:
a. recording purchases of inventory
b. recording the cost of goods sold
c. recording sales revenue
d. forecasts of future operating results
21. The specific identification method can be used only:
a. in income tax returns
b. for financial reporting purposes (but not in income tax returns)
c. when the individual items in inventory are similar in terms of cost, function, and sales value
d. when the actual acquisition cost of individual units can be determined from the accounting
records
22. Gondola Corporations inventory of a particular product includes 50 units purchased at a perunit cost of P100, and another 50 units purchased at a unit cost of P120. If Gondola sells 10
units of this product, the cost of goods sold will be:
a. P1,000
b. P1,100
c. P1,200
d. The answer will depend upon the inventory flow assumption in use
23. The specific identification method is more appropriate than a flow assumption:
a. for a large inventory of identical low-priced items.
b. if each item in the inventory is unique.
c. if purchase costs are rising.
d. if purchase costs are failing.
24. Which of the following flow assumptions is not acceptable under PFRS 2?
a. First-in, first-out
b. Specific identification
c. Last-in, first-out
d. Average cost
25. Which of the following is not affected by the inventory valuation method used by a business?
a. Amounts owed for income taxes
b. Cost of merchandise sold
c. Amounts paid to acquire merchandise
d. Net income of the business
26. In a manufacturing company, the just-in-time concept of inventory management is best
illustrated by:
a. receiving deliveries of materials from suppliers just before the materials are used in the
production process.
b. completing the manufacturing process just before the deadline established by the customer.
c. an automated factory which reduces production time below that of other companies in the
industry.
d. selling finished products before they go out of style.
27. As a result of taking an annual physical inventory, it usually is necessary in a perpetual
inventory system to make an entry:
a. reducing assets and increasing the cost of goods sold.
b. reducing assets and increasing liabilities.
c. reducing the cost of goods sold.
d. none of the above; a physical inventory usually does not indicate the need for any entries in
the accounting records.

TOA

Inventories/Agricultural Assets/PPE

`Page 15

28. Explorer Company discovered a P20,000 overstatement of its 2014 ending inventory after the
financial statements for 2014 were prepared. The effect of this error on the 2014 financial
statements was:
a. current assets were overstated and income was understated.
b. current assets were understated and income was overstated.
c. current assets were overstated and income was overstated.
d. current assets were understated and income was understated.