Junior Philippine Institute of Accountants

University of Cebu – Banilad Chapter

IAS 2 Inventories TEST BANK

Multiple Choice - Conceptual

1. Inventories shall be measured at
a. Cost
b. Net realizable
c. Lower of cost and net realizable value
d. Lower of cost and market
2. The cost of inventories shall be measured using
a. FIFO
b. Average method
c. LIFO
d. Either FIFO or average method
3. Net realizable value is
a. Current replacement cost
b. Estimated selling price
c. Estimated selling price less estimated cost to complete
d. Estimated selling price less estimated cost to complete and estimated cost of disposal
4. Inventories are usually written down to net realizable value
a. Item by item
b. By classification
c. By total
d. By segment
5. The amount of any write down of inventory to net realizable value and all losses of
inventory should be
a. Recognized as operating expense in the period the writedown or loss occurs.
b. Recognized as other expense in the period the writedown or loss occurs.
c. Recognized as component of cost of sales in the period the writedown or loss occurs.
d. Deferred until the related inventory is sold.
6. Which statement is incorrect regarding LCNRV?
a. Net realizable is the selling price less estimated cost to complete and estimated cost of
disposal.
b. In most situations, entities price inventory on a total inventory basis.
c. One of the methods may be used to record the income effect of valuing inventory at
net realizable value.
d. Entities use an allowance account, the "allowance to reduce inventory to net realizable
value."
7. Which of the following statements is true regarding inventory writedown and reversal
of writedown?
a. Reversal of inventory writedown is prohibited.
b. Separate reporting of reversal of inventory writedown is required.
c. Entities are required to record writedown in a separate loss account.
d. All of the choices are correct.
8. LCNRV of inventory
a. Is always either the net realizable value or cost.
b. Should always be equal to net realizable value.
c. May sometimes be less than the net realizable value.
d. Should always be equal to the estimated selling price less cost to complete.
9. Lower of cost and net realizable value
a. Gives the lowest valuation if applied to the total inventory.
b. Gives the lowest valuation if applied to major group of inventory.
c. Gives the lowest valuation if applied to individual item of inventory.
d. Must be applied to major group.
10. Reporting inventory at the lower of cost and net realizable value is a departure from
a. Historical cost
b. Consistency
c. Conservatism
d. Full disclosure
11. When inventory declines in value below original cost, what is the maximum amount
that the inventory can be valued at?
a. Sales price
b. Net realizable value
c. Historical cost
d. Sales price reduced by estimated cost of disposal
12. Lower of cost and net realizable value as it applies to inventory is best described as
the
a. Reporting of a loss when there is decrease in the future utility below the original cost.
b. Method of determining cost of goods sold.
c. Assumption to determine inventory flow.
d. Change in inventory value to net realizable value.
13. Which method may be used to record a loss due to a price decline in the value of
inventory?
a. Loss method
b. Sales method
c. Cost of goods sold method
d. Loss method and cost of goods sold method
14. When the cost of goods sold method is used to record inventory at net realizable value
a. There is a direct reduction in the selling price.
b. A loss is recorded directly in the inventory account by debiting loss.
c. Only the portion of the loss attributable to inventory sold is recorded.
d. The net realizable value for ending inventory is substituted for cost and the loss is
buried in cost of goods sold.
15. Which of the following financial attributed would not be used to measure inventory?
a. Historical cost
b. Current replacement cost
c. Net realizable value
d. Present value at future cash flows
16. The cost of inventories shall comprise all costs of purchase, cost of conversion and
other costs incurred in bringing the inventories to their present location and condition.
Which of the following cost shall be included in the cost of inventories?
a. Import duties and other taxes, transport, handling and other costs directly
attributable to the acquisition of finished goods, materials and services
b. Abnormal amounts of wasted materials, labor or other production costs.
c. Storage costs unnecessary in its production process.
d. Administrative overheads that do not contribute to brining inventories to their
present location and condition.
17. A major advantage of the retail inventory method is that it
a. Permits companies which use it avoid taking annual inventory
b. Hides costs from customers and employees
c. Provides a method for inventory control and facilitates determination of the periodic
inventory.
d. Gives a more accurate statement of inventory cost than other methods
18. The measurement basis 'net realizable value' is best described as:
a. unamortized historical cost;
b. an asset's selling price or a liability's settlement amount
c. unadjusted initial cost;
d. time adjusted cash flow.
19. Inventories are assets
I. held for sale in the ordinary course of business
II. in the process of production for such sale
III. in the form of materials or supplies to be consumed in the production process or in
the rendering of services
a. I and II only
b. I only
c. I, II and III
d. ll and III only
20. Net realizable value is
a. estimated selling price in the ordinary course of business
b. estimated selling price in the ordinary course of business less the estimated costs of
completion in the case of finished goods and estimated costs necessary to make the sale
in the case of work in process
c. estimated selling price in the ordinary course of business less the estimated costs of
completion in the and estimated costs necessary to make the sale.
d. is the amount for which an asset could be exchanged, or a liability settled, between
knowledgeable willing parties in an arm's length transaction.
21. The measurement rule for inventories, mandated by IAS 2 Inventories, is:
a. lower of fair value and selling price
b. lower of cost and net realizable value
c. higher of initial cost and realizable value
d. higher of completion costs and replacement costs
22. 'Net realizable value’ of inventory is defined as the net amount that an enterprise
expects to realise from the sale of the inventory:
a. the ordinary course of operations less estimated costs of completion and costs
necessary to make the sale
b. plus the estimated costs of completion plus the estimated costs necessary to make the
sale:
c. in a forced sale
d. plus the estimated costs of completion
23. Net realizable value of inventories may fall below cost for a number of reasons
including:
I. Product obsolescence.
II. Physical deterioration of inventories
III. An increase in the expected replacement costs of the inventory,
IV. An increase in the estimated costs of completion
a. I, II and IV only
b. I, Ill and IV only
c. II, III and IV only
d. I and II only
24. When determining the net realizable value of inventory, estimates must be made of
the following:
I. Estimated costs of completion.
II. Expected replacement cost.
III Expected selling price.
IV. Estimated selling price.
a. I, II, III and IV
b. I, II and Ill only
c. II and IV only
d. I, lll and IV only
25. IAS 2 Inventories requires that when inventories are written down to net realizable
value, they are written-down:
a. on a class-by-class basis
b. on the basis of industry segment
c. on an item-by-item basis
d. according to geographical segment within the entity
26. If the inventory account at the end of the year is understated, the effect will be to
a. Overstate the gross profit on sales
b. Understate the net purchases
c. Overstate the cost of goods sold
d. Overstate the goods available for sale
27. If the selling price of inventory that has been written down to net realisable value in a
prior period, subsequently recovers the:
a. previous amount of the write-down can be reversed
b. carrying amount of the inventory cannot be adjusted;
c. value adjustment can be recognized immediately in equity
d. adjustment must be recognized in a 'provision for future inventory write-downs'
account.
28. Under IAS 2 Inventories, Items of inventory that are used by business enterprise as
components in a self-constructed property asset are required to be:
a. aggregated into the 'cost of goods sold' expense in the period in which the items are
used:
b. expensed directly into equity in the period in which the items are used:
c. capitalized and depreciated
d. added to a 'property construction provision account.
29. All of the following are common classifications for the disclosure of Inventories in a
set of financial statements:
I. Raw materials
II. Finished goods
III. Work in progress
IV. Assets held for resale
a. I and Il only
b. I, II, III and IV
c. II and III only
d. II and IV only
30. Where the net realizable value of inventory falls below cost, IAS 2 Inventories,
requires that:
a. the inventory continue to be carried in the balance sheet at cost;
b. the inventory be written down to net realizable value
c. no adjustment be made, but the difference between net realizable value and cost be
disclosed in the notes to the financial statements
d. the difference be added to the carrying amount of the inventory.
31. Which of the following items are comprised (added or deducted) in the cost of
inventories according to IAS 2. Inventories?
I. Storage costs for work in progress
II. Fixed administration overheads
III. Trade discount
IV. Storage costs relating to finished goods
V. Fixed production overheads
a. I, II and V only
b. I and V only
c. I, III and V only
d. all of the above
32. IAS 2 should be applied in financial statements prepared in accounting for inventories
other than which of the following?
a. Biological assets related to agricultural activity
b. Finished goods assets held for sale in a retail business
c. Raw material assets in the manufacturing process
d. Materials or supplies assets to be consumed in the rendering of services
33. Which of the terms listed below has this definition: The estimated selling price in the
ordinary course of business less the estimated costs of completion and the estimated costs
necessary to make the sale according to this Standard?
a. Write-down value
b. Net realizable value
c. Actual cost value
d. Delayed inventory value
34. The costs that comprises the purchase price, import duties and other taxes (other than
those subsequently recoverable by the entity from the taxing authorities), and transport,
handling and other costs directly attributable to the acquisition of finished goods,
materials and services
a. Costs of conversion
b. Costs of purchase
c. Other costs
d. All of these
35. Which of the following types of inventories are excluded under the scope of IAS 2?
I. Commodities such as soybeans
II. Purchased subcomponents
III. Work in progress arising under construction contracts
IV. Copper that has been extracted
V. Stationary for administrative use
VI. Forest product produce after the point of harvest
a. I. IV and V only
b. I, IV, V and VI only
c. I, III, IV, V and VI only
d. All of these
36. What methods are used to measure cost under IAS 2?
I. Standard costing system
II. Retail method
III. Specific identification method
IV. FIFO
V. Weighted average method
a. IV and V only
b. III, IV and V only
c. II. III. IV and V only
d. all of these
37. In valuing raw materials inventory at lower of cost or market, what is the meaning of
the term "market"?
a. Net realizable value
b. Net realizable value less a normal profit margin
c. Current replacement cost
d. Discounted present value
38. The costs of conversion of inventories include all of the following, except
a. Costs directly related to the units of production, such as direct labor
b. Systematic allocation of fixed production overhead
c. Systematic allocation of variable production overhead
d. Systematic allocation of administrative overhead
39. When agricultural crops have been harvested or mineral ores have been extracted and
a sale is assured under a forward contract or government guarantee, such inventories are
measured at
a. Net realizable value
b. Cost
c. Standard cost
d. Relative sales price
40. This is defined as " those who buys or sell commodities for others or on their own
account"
a. Brokers
b. Traders
c. Commission agents
d. Broker-traders
41. Commodities of broker-traders are measured at
a. Fair value
b. Fair value less cost to sell
c. Cost
d. Net realizable value
42. Which of the items listed below are comprised in determining the cost of inventories
according to IAS 2?
a. General administrative overheads, trade discounts, and recoverable purchase taxes
b. Variable production overheads, fixed production overheads, and general
administrative overheads
c. Storage costs of work in progress, variable production overheads, and fixed
production overheads
d. Import duties on shipping of inventory Inwards, trade discounts received on purchase
of inventory, and recoverable purchase taxes
43. In measuring the costs of purchase, you have noted that an entity bought inventory
on deferred credit terms, thus paying a price higher than it would have been under normal
credit terms. How is the excess amount treated under IAS 2?
a. The excess is included in the cost of the inventory
b. The excess is recognized as interest expense over the period of the financing
c. A percentage of the excess is recognized as directly attributable to the acquisition of
the inventory
d. The excess is recognized directly to equity
44. Complete the following statement: When measuring fixed production overheads, if an
entity has abnormally high production in excess of normal capacity, it is necessary to:
a. Expense unallocated overheads in the period
b. Increase the amount of overheads allocated to each unit of production
c. Reduce the rate of overhead absorption in order to avoid carrying the inventory at
more than actual cost
d. Allocated to units produced on the basis of actual use of the production facilities
45. Heroes Co. received merchandise on consignment. As of March 31, Heroes 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

TRUE or FALSE - Conceptual

1. A manufacturing concern would report the cost of units only partially processed as
inventory in the balance sheet.
2. Both merchandising and manufacturing companies normally have multiple
inventory accounts.
3. When using a perpetual inventory system, freight charges on goods purchased are
debited to Freight-In.
4. If a supplier ships goods f.o.b. destination, title passes to the buyer when the
supplier delivers the goods to the common carrier.
5. If ending inventory is understated, then net income is understated.
6. If both purchases and ending inventory are overstated by the same amount, net
income is not affected.
7. Freight charges on goods purchased are considered a period cost and therefore are
not part of the cost of the inventory.
8. Purchase Discounts Lost is a financial expense and is reported in the “other
expenses and losses” section of the income statement.
9. The cost flow assumption adopted must be consistent with the physical movement
of the goods.
10. In all cases when FIFO is used, the cost of goods sold would be the same whether
a perpetual or periodic system is used.
11. The change in the LIFO Reserve from one period to the next is recorded as an
adjustment to Cost of Goods Sold.
12. Many companies use LIFO for both tax and internal reporting purposes.
13. LIFO liquidation often distorts net income, but usually leads to substantial tax
savings.
 14. LIFO liquidations can occur frequently when using a specific-goods approach.
15. Dollar-value LIFO techniques help protect LIFO layers from erosion.
16. The dollar-value LIFO method measures any increases and decreases in a pool in
terms of total dollar value and physical quantity of the goods.
17. A disadvantage of LIFO is that it does not match more recent costs against current
revenues as well as FIFO.
18. The LIFO conformity rule requires that if a company uses LIFO for tax purposes,
it must also use LIFO for financial accounting purposes.
19. Use of LIFO provides a tax benefit in an industry where unit costs tend to decrease
as production increases.
20. LIFO is inappropriate where unit costs tend to decrease as production increases.

ANSWERS:
Multiple Choice -
TRUE or FALSE
Conceptual
1. C 16. A 31. C 1. True 11. True
2. D 17. A 32. A 2. False 12. False
3. D 18. B 33. B 3. False 13. False
4. A 19. C 34. B 4. False 14. True
5. C 20. C 35. C 5. True 15. True
6. B 21. B 36. D 6. True 16. False
7. B 22. A 37. A 7. False 17. False
8. A 23. A 38. D 8. True 18. True
9. C 24. D 39. A 9. False 19. False
10. A 25. C 40. D 10. True 20. True
11. B 26. C 41. B
12. A 27. A 42. C
13. D 28. C 43. B
14. D 29. B 44. C
15. D 30. B 45. B