Inventories

LECTURE NOTES
Nature of inventories Cost should include all
 costs of purchase (including taxes, transport, and
Inventories include:
handling) net of trade discounts received
 Assets held for sale in the ordinary course of
 costs of conversion (including fixed and variable
business (finished goods),
manufacturing overheads) and
 Assets in the production process for sale in the
 other costs incurred in bringing the inventories to
ordinary course of business (work in process), and
their present location and condition
 Materials and supplies that are consumed in
production (raw materials).
Inventory cost should not include:
 abnormal waste
 storage costs
Whose inventory is it?
 administrative overheads unrelated to production
Goods in transit  selling costs
 foreign exchange differences arising directly on the
 Shipping terms determine when title to goods passes recent acquisition of inventories invoiced in a foreign
to the purchaser. currency
a. FOB (free on board) shipping point—title passes to  interest cost when inventories are purchased with
the buyer with the loading of goods at the point of deferred settlement terms.
shipment.
b. FOB destination—legal title does not pass until the Net realizable value is the estimated selling price in the
goods are received by the buyer. ordinary course of business less the estimated costs of
 Goods shipped FOB shipping point belong to the buyer completion and the estimated costs necessary to make the
while they are in transit and should normally be sale.
included in the buyer’s inventory while in transit.
 Goods shipped FOB destination belong to the seller Fair value is the amount for which an asset could be
while in transit and are normally included in the seller’s exchanged, or a liability settled, between knowledgeable,
inventory. willing parties in an arm’s length transaction.

Goods on consignment
 Goods held by the dealer (consignee) for which title is Other measurement bases
held by the shipper (consignor). Repossessed merchandise–fair value or best approximation
 Consigned goods are included in the inventory of the of fair value
consignor.
Trade-in inventory–net realizable value minus normal
Conditional sales, installment sales, and repurchase profit margin
agreements
Commodities of brokers-traders–fair value less costs to
 If title to the goods is retained by the seller, the seller sell. Broker-traders are those who buy or sell commodities
may report as an asset the cost of the goods less the for others or on their own account.
purchaser’s equity in the goods such as established by
Agricultural, forest and mineral products–net realizable
collections.
value
 Generally however, in the usual case where the
possibilities of default or return are low, the seller, in Agricultural produce at the point of harvest–fair value less
anticipation of contract completion and ultimate costs to sell
passing of title, will recognize the transaction as a
regular sale and remove the goods from reported
inventory at the time of sale. Inventory cost formulas
 Repurchase agreements result in no sale being
The purpose of an inventory valuation method is to
recorded; the inventory is thus not removed from the
allocate the total inventory cost of good available for sale
books, and instead the “seller” records a liability for
during the period between cost of goods sold and ending
the proceeds of the “sale”, which more accurately in
inventory.
substance is a short-term loan secured by inventory as
collateral.
Specific identification
 Required for inventories that are not ordinarily
Measurement of inventories (PAS 2) interchangeable and goods or services produced and
segregated for specific projects.
Inventories are required to be stated at the lower of cost
 Using the specific identification method, the original
and net realizable value (NRV).
cost of each item is identified, resulting in actual costs
being accumulated for the specific items on hand and
sold.

 This method is consistent with the physical flow of

goods (though note, it is not required that one has to
choose a cost-flow method which corresponds to the
actual, underlying physical flow of goods).

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 Though theoretically attractive and useful when each First- in, first- out method (FIFO)
inventory item is unique and has a high cost, it is
 The first goods purchased are the first goods sold.
frequently not economically feasible (even if taking
 Using the FIFO method, the accountant computes the
into account advances in technology), particularly
cost of goods sold and ending inventory as if the first
where inventory is composed of a great many items or
items purchased are the first to be sold, leaving the
identical items acquired at different times and at
most recently purchased items in inventory.
different prices.
 This often matches the physical flow of goods.
 It is subject to manipulation, as seller has the flexibility
 FIFO affords little opportunity for profit manipulation.
of selectively choosing specific items of higher/lower-
 FIFO best approximates the current replacement value of
costing inventory depending on particular income goals
ending inventory.
at the time of sale.
 It is the least common method observed in practice.
Comparison of methods: cost of goods sold and ending
inventory
Average cost method The average cost method:
 Differs from the other methods in that no assumption
 This method assigns the same average cost to each
is made about the sale of specific units.
unit.
 Rather, all sales are assumed to be of the “average”
 Based on the assumption that goods sold should be
unit at the average cost per unit.
charged at an average cost, with the average being
 The gross profit margin tends to follow a similar
weighted by the number of units acquired at each
pattern to FIFO in response to changing prices.
price.
 Generally provides inventory values similar to FIFO
 The average cost method can be supported as realistic
values, since average costs are heavily influenced by
and as paralleling the physical flow of goods,
current costs.
particularly where there is an intermingling of identical
inventory units.
FIFO:
 It provides the same cost for similar items of equal
 In a period of rising prices, matches oldest low-cost
utility.
inventory with rising sales prices, thus expanding the
 It does not permit profit manipulation.
gross profit margin.
 Its limitation is that inventory values may lag
 In a period of declining prices, oldest high-cost
significantly behind current prices in periods of rapidly
inventory is matched with declining sales prices, thus
rising or falling prices.
narrowing the gross profit margin.
 Inventories are reported on the balance sheet at or
near current costs.

Specific identification:
 Can produce any variety of results depending on which
particular units are selected for shipment.

Illustrative Problem – Cost flow assumptions

The following information has been extracted from the records of Praktis Corporation about one of its products.
Date No. of Units Unit Cost Total Cost
January 1 Beginning balance 1,600 P14.00 P22,400
January 6 Purchased 600 14.10 8,460
February 5 Sold @ P24.00 per unit 2,000
March 19 Purchased 2,200 14.70 32,340
March 24 Purchase returns 160 14.70 2,352
April 10 Sold @ P24.20 per unit 1,400
June 22 Purchased 16,800 15.00 252,000
July 31 Sold @ P26.50 per unit 3,600
August 4 Sales returns @ P26.50 per unit 40
September 4 Sold @ P27.00 per unit 7,000
November 15 Purchased 1,000 16.00 16,000
December 28 Sold @ P30.00 per unit 6,200

REQUIRED:
Compute for the closing inventory under each of the following pricing methods? (Round unit costs to two decimal places.)
1. FIFO - Periodic
2. FIFO - Perpetual
3. Weighted average - Periodic
4. Weighted average – Perpetual (Moving average)

SOLUTION:

FIFO – Periodic
From November 15 purchases (1,000 units x P16.00) - P16,000
From June 22 purchases (880 units x P15.00) - 13,200
Total P29,200

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PROFESSIONAL REVIEW and TRAINING CENTER, INC.

FIFO – Perpetual

Purchased Sold Balance

Unit Unit Unit
Units Cost Total Cost Units Cost Total Cost Units Cost Total Cost
Jan. 1 1,600 14.00 22,400
Jan. 6 600 14.10 8,460 1,600 14.00 22,400
600 14.10 8,460
2,200 30,860
Feb. 5 1,600 14.00 22,400
400 14.10 5,640 200 14.10 2,820
Mar. 19 2,200 14.70 32,340 200 14.10 2,820
2,200 14.70 32,340
2,400 35,160
Mar. 24 (160) 14.70 (2,352) 200 14.10 2,820
2,040 14.70 29,988
2,240 32,808
Apr. 10 200 14.10 2,820
1,200 14.70 17,640 840 14.70 12,348
Jun. 22 16,800 15.00 252,000 840 14.70 12,348
16,800 15.00 252,000
17,640 264,348
Jul. 31 840 14.70 12,348
2,760 15.00 41,400 14,040 15.00 210,600
Aug. 4 (40) 15.00 (600) 14,080 15.00 211,200
Sep. 4 7,000 15.00 105,000 7,080 15.00 106,200
Nov. 15 1,000 16.00 16,000 7,080 15.00 106,200
1,000 16.00 16,000
8,080 122,200
Dec. 28 6,200 15.00 93,000 880 15.00 13,200
1,000 16.00 16,000
1,880 29,200

Average – Periodic
Total cost (1,880 units x P14.92) - P28,050

Weighted average unit cost (P328,848/22,040 units) - P14.92

Average – Perpetual (Moving average)

Purchased Sold Balance

Unit Unit Unit
Units Cost Total Cost Units Cost Total Cost Units Cost Total Cost
Jan. 1 1,600 14.00 22,400
Jan. 6 600 14.10 8,460 1,600 14.00 22,400
600 14.10 8,460
2,200 14.03 30,860
Feb. 5 2,000 14.03 28,060 200 14.03 2,800
Mar. 19 2,200 14.70 32,340 200 14.03 2,800
2,200 14.70 32,340
2,400 14.64 35,140
Mar. 24 (160) 14.70 (2,352) 200 14.03 2,800
2,040 14.70 29,988
2,240 14.64 32,788
Apr. 10 1,400 14.64 20,496 840 14.64 12,292
Jun. 22 16,800 15.00 252,000 840 14.64 12,292
16,800 15.00 252,000
17,640 14.98 264,292
Jul. 31 3,600 14.98 53,928 14,040 14.98 210,364
Aug. 4 (40) 14.98 (599) 14,080 14.98 210,963
Sep. 4 7,000 14.98 104,860 7,080 14.98 106,103
Nov. 16 1,000 16.00 16,000 7,080 14.98 106,103
1,000 16.00 16,000
8,080 15.11 122,103
Dec. 28 6,200 15.11 93,682 1,880 15.11 28,421

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Accounting for inventory write down  Using the perpetual system, entries for revenue, cost
of goods sold, and the reduction of inventory are
The cost of inventories may not be recoverable if:
recorded for each sales transaction.
 those inventories are damaged
 A continuous record of quantities in inventory and
 they have become wholly or partially obsolete
items sold is maintained.
 their selling prices have declined
 Shrinkage is a term related to any observed
 the estimated costs of completion or the estimated
differences, attributable to a variety of possible
costs to be incurred to make the sale have increased
factors, between the inventory quantity at year-end as
The practice of writing inventories down below cost to net
indicated by the perpetual record and the actual
realizable value is consistent with the view that assets
quantity on hand as determined by a physical
should not be carried in excess of amounts expected to be
inventory.
realized from their sale or use.
 Benefits of a perpetual system.
Inventories are usually written down to net realizable value 1. Provides a continuous check and control
item by item. mechanism on inventory.
2. Facilitates purchasing and production planning
Materials and other supplies held for use in the production 3. Ensures adequate on-hand inventories
of inventories are not written down below cost if the 4. Helps identify and measure the magnitude of
finished products in which they will be incorporated are inventory shrinkage.
expected to be sold at or above cost. However, when a 5. Advances in, and cost reductions relating to,
decline in the price of materials indicates that the cost of technology have made perpetual systems much
the finished products exceeds net realizable value, the more feasible, and it’s a good thing – today’s fast-
materials are written down to net realizable value. In such paced, competitive business environment
circumstances, the replacement cost of the materials may magnifies the importance of a perpetual system’s
be the best available measure of their net realizable value. benefits.
When the circumstances that previously caused inventories
to be written down below cost no longer exist or when
there is clear evidence of an increase in net realizable Purchase commitments
value because of changed economic circumstances, the  A lock on the inventory purchase price in advance. An
amount of the write-down is reversed (i.e. the reversal is executory contract (an exchange of promises about
limited to the amount of the original write-down) so that future actions).
the new carrying amount is the lower of the cost and the
revised net realizable value.  No journal entry is required to record an asset and
liability at the commitment date.
Recognition as an Expense
 However, when price declines take place subsequent to
When inventories are sold, the carrying amount of those the commitment and it is outstanding at the end of an
inventories shall be recognized as an expense in the period accounting period, the loss is recorded just as losses
in which the related revenue is recognized. The amount of with goods on hand are recognized (i.e., as with LCM,
any write-down of inventories to net realizable value and in the period in which the inventory price decline took
all losses of inventories shall be recognized as an expense place).
in the period the write-down or loss occurs. The amount
 Acquisition of the goods in a subsequent period is also
of any reversal of any write-down of inventories, arising
recorded.
from an increase in net realizable value, shall be
1. Purchases are recorded at current market value.
recognized as a reduction in the amount of inventories
2. Difference between current market value of goods
recognized as an expense in the period in which the
and total amount owed per the purchase
reversal occurs.
commitment is reflected by the removal of the
estimated loss on purchase commitments account
Some inventories may be allocated to other asset
(a balance sheet account created above).
accounts, for example, inventory used as a component of
self-constructed property, plant or equipment. Inventories  Current loss recognition is not appropriate when:
allocated to another asset in this way are recognized as an 1. Commitments can be cancelled,
expense during the useful life of that asset. 2. Commitments provide for price adjustment,
3. Hedging transactions prevent losses, or
Inventory systems 4. Declines do not suggest reductions in sales prices.
Periodic inventory system  If, prior to delivery, the market price increases, the
estimated loss on purchase commitments account is
 An inventory system in which only revenue is recorded
reduced and a gain is recorded, though such
each time a sale occurs; the inventory balance is
“recovery” can only be recognized to the extent of the
determined by a periodic physical inventory.
original loss recorded.
 Using the periodic system, items must be physically
counted to determine quantities on hand.
 Quantities of items sold are determined indirectly by
Using inventory information for financial analysis
subtracting the units on hand from the sum of the
units in the beginning inventory and units purchased Inventory balances are often used to measure a company’s
during the year. efficiency in using that asset to generate sales.

Perpetual inventory system Inventory turnover evaluates the inventory position and
the appropriateness of its size (cost of goods sold/ average
 An inventory system which provides a continuous
inventory).
summary of goods on hand.

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Number of days’ sales in inventory gives average time it

takes to turn over the inventory (Average inventory/ - done -
average daily cost of goods sold) (or number of days in the
year/ inventory turnover rate).
PROBLEMS
1. La Union Company included the following items under shipped after it was counted. The invoice was
inventories: prepared and recorded as a sale for P189,000 on
Materials P1,400,000 December 31. The cost of this merchandise was
Advance for materials ordered 200,000 P105,200, and Kemp received the merchandise on
Goods in process 650,000 January 5.
Unexpired insurance on inventories 60,000 h. Excluded from inventory was carton labeled
Advertising catalogs and shipping “Please accept for credit.” This carton contains
boxes 150,000 merchandise costing P15,000 which had been sold
Finished goods in factory 2,000,000 to a customer for P25,000. No entry had been
Finished goods in company-owned made to the books to reflect the return, but none
retail stores, including 50% profit of the returned merchandise seemed damaged.
on cost 750,000 The adjusted inventory cost of Ovation Company at
Finished goods in hands of consignees December 31, 2010 should be
including 40% profit on sales 400,000 a. P2,217,620 c. P2,411,320
Finished goods in transit to customers, b. P2,396,320 d. P2,373,920
shipped FOB destination, at cost 250,000 E8-5 Kieso 11th
Finished goods out on approval, at 3. The physical inventory of Pangasinan Company on
cost 100,000 December 31, 2010, showed merchandise with a cost
Unsalable finished goods, at cost 50,000 of P4,000,000 was on hand at that date. You also
Office supplies 40,000 discovered the following items were all excluded from
Materials in transit shipped FOB the count:
shipping point, excluding freight of a. Merchandise costing P160,000, which was
P30,000 330,000 held by Pangasinan on consignment. The
Goods held on consignment, at sales consignor is a subsidiary.
price, cost P150,000 200,000 b. A special machine, fabricated to order for a
Compute the amount to be presented as “Inventories” customer costing P400,000, was finished and
under current assets. specifically segregated in the back part of the
a. P5,500,000 c. P5,650,000 shipping room on December 31, 2010. The
b. P5,470,000 d. P5,700,000 customer was billed on that date and the machine
excluded from inventory although it was shipped
2. Ovation Company asks you to review its December 31, on January 4, 2011.
2010, inventory values and prepare the necessary c. Merchandise costing P80,000, which was
adjustments to the books. The following information is shipped by Pangasinan f.o.b. destination to a
given to you. customer on December 31, 2010. The customer
a. Ovation uses the periodic method of recording expects to receive the merchandise on January 3,
inventory. A physical count reveals P2,348,900 2011.
inventory on hand at December 31, 2010. d. Merchandise costing P120,000 which was
b. Not included in the physical count of inventory is shipped by Pangasinan f.o.b. shipping point to a
P134,200 of merchandise purchased on December customer on December 29, 2010.
15 from Standing. This merchandise was shipped e. Merchandise costing P50,000 shipped by a
f.o.b. shipping point on December 29 and arrived vendor f.o.b. seller on December 28, 2010 and
in January. The invoice arrived and was recorded received by Pangasinan on January 10, 2011.
on December 31. The corrected balance of Pangasinan’s inventory
c. Included in inventory is merchandise sold to Oval should be
on December 30, f.o.b. destination. This a. P4,530,000 c. P4,480,000
merchandise was shipped after it was counted. b. P4,130,000 d. P4,690,000
The invoice was prepared and recorded as a sale
on account for P128,000 on December 31. The 4. Buyer Co. regularly buys shirts from Vendor Company
merchandise cost P73,500, and Oval received it on and is allowed trade discounts of 20% and 10% from
January 3. the list price. Buyer purchased shirts from Vendor on
d. Included in inventory was merchandise received May 27, 2010 and received an invoice with a list price
from Owl on December 31 with an invoice price of of P100,000 and payment terms 2/10, n/30. If Buyer
P156,300. The merchandise was shipped f.o.b uses the net method of recording purchases, the
destination. The invoice, which has not yet journal entry to record the payment on June 8, 2010
arrived, has not been recorded. will include
e. Not included in inventory is P85,400 of a. A debit to Accounts payable of
merchandise purchased from Oxygen Industries. P72,000.
The merchandise was received on December 31 b. A debit to Purchase Discounts
after the inventory had been counted. The invoice Lost of P1,440.
was received and recorded on December 30. c. A credit to Purchase Discounts of
f. Included in inventory was P104,380 of inventory P1,440.
held by Ovation on consignment from Ovoid d. A credit to Cash of P70,560.
Industries. RPCPA 1097 - AMP
g. Included in inventory is merchandise sold to Kemp
f.o.b. shipping point. This merchandise was

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5. Landquake Corp. purchased merchandise during 2010 b. P150,800 d. P108,000

on credit for P200,000; terms 2/10, n/30. All of the
gross liability except P40,000 was paid within the 9. The cost of inventory as of December 31, 2010 using
discount period. The remainder was paid within the moving average method is (Round unit costs to the
30-day term. At the end of the annual accounting nearest peso)
period, December 31, 2010, 90% of the merchandise a. P133,672 c. P145,349
had been sold and 10% remained in inventory. The b. P143,485 d. P145,285
company uses a periodic system.

What peso amount should be reported for the cost of Solution guide for question #9:
goods sold under the net method of recording
purchases? Assume that there was no beginning Unit
inventory. Date Description Units Cost Total Cost
a. P180,000 c. P176,800 Dec. 1 Balance 350 820 287,000
b. P177,120 d. P176,400
43 850 36,550
C8 Pr8-76 Kieso TB, 11th ed-AMP
393 823 323,550
Use the following information for the next two questions. Dec. 2 Sale (300) 823 (246,900)
Balance 93 823 76,650
Transactions for the month of June were:
Sales
Purchases Sales Dec. 3 returns 5 823 4,115
June 1 400 @ P3.20 June 2 300 @ P5.50 Balance 98 823 80,765
(balance)
Dec. 9 Purchase 55 910 50,050
3 1,100 @ 3.10 6 800 @ 5.50
7 600 @ 3.30 9 500 @ 5.50 Balance 153 855 130,815
15 900 @ 3.40 10 200 @ 6.00 Dec. 13 Purchase 76 960 72,960
22 250 @ 3.50 18 700 @ 6.00 Balance 229 890 203,775
25 150 @ 6.00 Dec. 15 Sale ( 86) 890 (76,540)
Balance 143 890 127,235
6. Assuming that perpetual inventory records are kept in Purchase
pesos, the ending inventory on a FIFO basis is Dec. 16 returns ( 1) 910 ( 910)
a. P1,900 c. P2,065
Balance 142 890 126,325
b. P1,920 d. P2,100
Dec. 22 Sale ( 60) 890 (53,400)
7. Assuming that perpetual inventory records are kept in Balance 82 890 72,925
units only, the ending inventory on an average-cost Dec. 26 Purchase 72 980 70,560
basis is Balance 154 932 143,485
a. P1,980 c. P1,970
b. P1,956 d. P1,995 10. Balungao Company changed its accounting policy in
K, W & W 2009 with respect to the valuation of inventories. Up
Moving average. = 2,040 to 2009, inventories were valued using weighted-
average cost (WAC) method. In 2010 the method was
Use the following information for the next two questions. changed to first-in, first-out (FIFO), as it was
Orang Dampuan Co. wholesales bicycles. It uses the considered to more accurately reflect the usage and
perpetual inventory system. The company's reporting date flow of inventories in the economic cycle. The impact
is 31 December. At 1 December 2010, inventory on hand on inventory valuation was determined to be
consisted of 350 bicycles at P820 each and 43 bicycles at At December 31, 2008: An increase of P100,000
P850 each. During the month ended 31 December 2010, At December 31, 2009: An increase of P150,000
the following inventory transactions took place (all At December 31, 2010: An increase of P200,000
purchase and sales transactions are on credit):
The change in accounting policy increased net profit for
Dec. 02 Sold 300 bicycles for P1,200 each. 2010 by
03 Five bicycles were returned by a customer. a. P200,000 c. P450,000
They had originally cost P820 each and were b. P150,000 d. P 50,000
sold for P1,200 each.
09 Purchased 55 bicycles at P910 each. 11. The trial balance of Esplanade Company showed
13 Purchased 76 bicycles at P960 each. inventories of P164,000. The inventories include some
15 Sold 86 bicycles for P1,350 each. goods that have a production cost of P18,000. These
16 Returned one damaged bicycles to the goods have a manufacturing defect that will cost
supplier. This bicycle had been purchased on P6,000 to correct. The normal selling price for these
9 December. goods would be P25,000, but after the remedial work
22 Sold 60 bicycles for P1,250 each. they will be sold through an agent as refurbished
26 Purchased 72 bicycles at P980 each. goods at a discount of 20% on the normal selling price.
29 Two bicycles, sold on 22 December, were The agent will receive a commission of 10% of the
returned by a customer. The bicycles were reduced selling price. In relation to the defective
badly damaged so it was decided to write goods, the company will recognize a loss on inventory
them off. They had originally cost P910 each. write down of
a. P6,000 c. P1,000
8. The cost of inventory as of December 31, 2010 using b. P4,000 d. P 0
FIFO method is ACCA F7 07-08 #18C.5
a. P148,980 c. P149,890

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Unit NRV/ Lower of

Product Units cost unit cost/NRV
569,850

Use the following information for the next three questions.

Bangar Sales Company uses the first-in, first-out method
in calculating cost of goods sold for the three products that
the company sells. At July 1, the balance of inventory
account was P658,500, and the allowance for inventory
writedown was P3,000. Inventories and purchase
information concerning the three products are given for
the month of July.

C P A
July 1 Inventory 50,000 30,000 65,000
units at units at units at
P6.00 P10.00 P0.90
July Purchases 70,000 45,000 30,000
1-15 units at units at units at
P6.50 P10.50 P1.25
July Purchases 30,000
16-31 units at
P8.00
July Sales 105,000 50,000 45,000
1-31 units units units
July 31 Sales price
per unit P8.00 P11.00 P2.00

On July 31, the company’s suppliers reduced their prices

from the most recent purchase prices by the following
percentages: product C, 20%; product P, 10%; product A,
8%. Accordingly, Bangar decided to reduce its sales prices
on all items by 10%, effective August 1. Bangar’s selling
cost is 10% of sales price. Products C and P have a
normal profit (after selling costs) of 30% on sales prices,
while the normal profit on product A (after selling cost) is
15% of sales price.

12. The amount of Inventory to be reported on the

company’s statement of financial position at July 31 is
a. P595,350 c. P559,350
b. P569,850 d. P543,810

13. The loss on inventory write down for the month of July
is
a. P 5,650 c. P85,650
b. P13,500 d. P82,650

14. The cost of sales after loss on inventory write down for
the month of July is
a. P1,298,500 c. P1,208,000
b. P1,290,650 d. P1,022,260

Solution guide for question #12:

Unit NRV/ Lower of
Product Units cost unit cost/NRV
C 30,000 8.00 6.48 194,400
15,000 6.50 6.48 97,200
45,000 291,600
P 25,000 10.50 8.91 222,750

A 30,000 1.25 1.62 37,500

20,000 0.90 1.62 18,000
50,000 55,500

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15. Alcala Company installs replacement siding, windows, a. P13,485,700 c. P12,200,000

and louvered glass doors for family homes. At b. P10,800,000 d. P12,047,600
December 31, 2010, the balance of inventory account RPCPA 5/84, P79Kimwell
was P502,000, and the allowance for inventory
writedown was P33,000. The inventory cost and other 17. On November 15, 2009, Socrates entered in to a
data at December 31, 2010, are as follows: (amounts commitment to purchase 200,000 units of raw material
in thousands) X for P8,000,000 on March 15, 2010. Socrates
entered into this purchase commitment to protect itself
Replace
against the volatility in the price of raw material X. By
ment Sales Normal
December 31, 2009, the purchase price of material X
Item Cost Cost Price NRV Profit
had fallen to P35 per unit. However, by March 15,
A P 89 P 86 P 91 P 87 P 5
2010, when Socrates took delivery of the 200,000
B 94 92 93 85 7
units, the price of the material had risen to P42 per
C 125 135 129 111 10
unit. How much will be recognized as gain on
D 194 114 205 197 20
purchase commitment on March 15, 2010?
Total P502 P427 P518 P480 P32
a. P1,400,000 c. P400,000
The gain on reversal of inventory writedown is b. P1,000,000 d. P 0
a. P33,000 c. P8,000
b. P11,000 d. P 0 18. The following information for Bagulin Industries was
taken from the company's financial statements
16. Caravana Development Corporation bought a 10- (amounts in thousands):
hectare land in Novaliches, to be improved, subdivided
2010 2009
into lots, and eventually sold. Purchase price of the
Sales P24,000 P18,000
land was P58,000,000. Taxes and documentation
Cost of goods sold 19,600 13,900
expenses on the transfer of the property amounted to
Inventory 1,400 1,200
P800,000. The lots were classified as follows:
Accounts receivable 3,900 3,600
Lot Number Selling price Total Net income 560 320
class of lots per lot clearing costs
A 10 P1,000,000 None What is the inventory turnover for the year 2010?
B 20 800,000 P1,000,000 a. 15 times c. 14 times
C 40 700,000 3,000,000 b. 3 times d. 18 times
D 50 600,000 8,000,000
- now do the DIY drill -
Purchase and improvement costs allocated for class B
lots under the relative sales value method of inventory
valuation are

DO-IT-YOURSELF (DIY) DRILL

1. The Alcala Company counted its ending inventory on Direct materials purchases in transit,
December 31. None of the following items were FOB shipping point 9,000
included when the total amount of the company’s Prepaid insurance on inventory 2,000
ending inventory was computed: Work-in-process 38,000
 P150,000 in goods located in Alcala’s warehouse Finished goods 45,000
that are on consignment from another company. Goods shipped on consignment, at selling
 P200,000 in goods that were sold by Alcala and price with 20% profit on sales 15,000
shipped on December 30 and were in transit on
What is the cost of inventory to be shown in the
December 31; the goods were received by the
statement of financial position of Mary I Mfg. Co. as of
customer on January 2. Terms were FOB
December 31, 2010?
Destination.
a. P162,500 c. P159,000
 P300,000 in goods were purchased by Alcala and
b. P150,000 d. P159,500
shipped on December 30 and were in transit on
December 31; the goods were received by Alcala
3. Skyfall Co. records purchases at net amounts. On May
on January 2. Terms were FOB shipping point.
5 Skyfall purchased merchandise on account, P32,000,
 P400,000 in goods were sold by Alcala and shipped
terms 2/10, n/30. Skyfall returned P2,000 of the May
on December 30 and were in transit on December
5 purchase and received credit on account. At May 31
31; the goods were received by the customer on
the balance had not been paid.
January 2. Terms were FOB shipping point.
By how much should the account payable be adjusted
The company’s reported inventory (before any
on May 31?
corrections) was P2,000,000. What is the correct
a. P600 c. P680
amount of the company’s inventory on December 31?
b. P640 d. P 0
a. P2,550,000 c. P2,500,000
C8 P39 Kieso TB, 11th ed
b. P1,950,000 d. P2,700,000
Use the following information for the next two questions.
2. The Mary I Mfg. Co. in its balance sheet as of
December 31, 2010 has an inventory the amount of Miller Inc. is a wholesaler of office supplies. The activity
P176,000 which consists of: for Model III calculators during August is shown below:
Direct materials P55,000 Balance/
Direct materials purchases in transit, Date Transaction Units Cost
FOB destination 12,000 Aug. 1 Inventory 2,000 P36.00

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PROFESSIONAL REVIEW and TRAINING CENTER, INC.

Balance/ C8 P41 Kieso TB, 11th ed-AMP

Date Transaction Units Cost
7 Purchase 3,000 37.20 7. Yontabal Company started operations in 2008. The
12 Sales 3,600 following data are abstracted from the company’s
21 Purchase 4,800 38.00 production and sales records:
22 Sales 3,800 2008 2009 2010
29 Purchase 1,600 38.60 Number of units
4. If Miller Inc. uses a FIFO perpetual inventory system, produced 240,000 232,500 202,500
the ending inventory of Model III calculators at August Number of units
31 is reported as sold 150,000 217,500 195,000
a. P152,288 c. P150,080 Unit production
b. P152,960 d. P150,160 cost 4.50 5.20 5.80
Sales revenue 1,200,000 1,800,000 1,950,000
5. If Miller Inc. uses a weighted average cost periodic Using the FIFO cost flow assumption, the gross profit
inventory system, the ending inventory of Model III for the year ended December 31, 2010 is
calculators at August 31 is reported as a. P819,000 c. P1,068,000
a. P150,080 c. P150,160 b. P882,000 d. P1,072,500
b. P152,960 d. P146,400
(Skousen TB 15thed) 8. At the beginning of the year, Anda Realty embarked on
a real estate development project involving single
6. The following information was available from the family dwellings. On July 1, 2010, Anda realty
inventory records of Breakaway Company for January: purchased a track of land for P60,000,000. Anda
Units Unit Cost incurred additional cost of P10,000,000 during the
Balance at January 1 3,000 P9.77 remainder of 2010 in preparing the land for sale as
Purchases: follows.
January 6 2,000 10.30
Subdivision Sales price
January 26 2,700 10.71
Phase Number of lots per lot
Sales:
1 100 400,000
January 7 2,500
2 200 300,000
January 31 3,200
3 400 250,000
Assuming that Breakaway maintains perpetual
What amount of cost should be allocated Phase 1 lots?
inventory records, what should be the inventory at
a. P12,000,000 c. P14,000,000
January 31, using the moving-average inventory
b. P40,000,000 d. P21,000,000
method, rounded to the nearest peso?
a. P20,474 c. P20,720
b. P20,520 d. P21,010

 - end of P1.902 - 

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