Quiz 4 - With Answers Part II

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The document discusses various inventory valuation methods such as lower of cost or net realizable value, retail inventory method, and specific identification method. It also covers required disclosures for inventories under PAS 2.

The main inventory valuation methods discussed are lower of cost or net realizable value (LCM), first-in first-out (FIFO), weighted average cost. Specific identification is also mentioned.

Required disclosures under PAS 2 include accounting policies for measuring inventories, carrying amounts, amounts of write-downs and reversals of write-downs.

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UNIVERSITY OF THE EAST – Caloocan


College of Business Administration
Department of Accountancy, Business Law and Taxation
Financial Accounting & Reporting, Part 1 (BAC 213)
Quiz 4

Name: ___________________________________Yr. and Section: _______ Prof. J. C. MINORCA, CPA


Instructions: In the following questions, encircle the letter of the choice that corresponds to your best
answer. Strictly no erasures allowed.

I - Theories

1. Which of the following items should be included in a company’s inventory at the balance sheet date?
a. Goods in transit which were purchased FOB 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 the customer’s
convenience.
d. Goods in transit which were purchased FOB shipping point.

2. Which statement is incorrect with respect to inventories under PAS No. 2?


a. Inventories should be measured at the lower of cost and net realizable value.
b. 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.
c. The cost of inventories of a service provider consists primarily of labor and other costs of personnel
directly engaged in providing the service, including supervising personnel and attributable
overhead.
d. The costs of conversion of inventories include costs directly related to the units of
production such as direct labor, and a systematic allocation of variable production
overhead.

3. The inventories of a service provider may simply be described as


a. Work in progress c. Unbilled receivables
b. Billed receivables d. Deferred costs

4. The cost of purchase of inventory does not include


a. Purchase price
b. Import duties and taxes
c. Freight, handling and other cost directly attributable to acquisition
d. Trade discount, rebate and other similar item

5. The cost of inventories that are not ordinarily interchangeable and goods or services produced and
segregated for specific projects should be assigned by using
a. LIFO b. FIFO c. Average method d. Specific identification

6. Which costs may be capitalized as cost of inventories?


a. Normal shrinkage and scrap incurred for the manufacture of a product in ending inventory.
b. Storage costs
c. Selling costs
d. Foreign exchange differences which arises directly on the recent acquisition of inventories invoiced
in a foreign currency.

7. 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 to sell
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8. The cost of inventories in applying the valuation at lower of cost or net realizable value should be
assigned by using
a. FIFO only c. Average method only
b. LIFO only d. Either FIFO or average method

9. Reporting inventory at the LCM is a departure from the accounting principle of


a. Historical cost b. Conservatism c. Consistency d. Full disclosure

10. Which statement is not valid in relation to the LCM rule for inventories?
I. Inventories are usually written down to net realizable value on an item by item basis.
II. It is appropriate to write down inventories based on a classification of inventory, for example,
finished goods or all inventories in a particular industry or geographical segment.
a. I only b. II only c. Both I and II d. Neither I nor II

11. The original cost of an inventory item is below both replacement cost and net realizable value. The net
realizable value less normal profit margin is below the original cost. Under LCM method, the inventory
item should be valued at
a. Replacement cost
b. Net realizable value
c. Net realizable value less normal profit margin
d. Original cost

12. 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 c. Standard cost
b. Cost d. Relative sales price

13. The cost of inventories may not be recoverable under all of the following conditions, except
a. The estimated costs of completion or the estimated costs to be incurred to make the sale have
increased.
b. The inventories have become wholly or partially obsolete.
c. The inventories are damaged
d. The selling prices of the inventories have increased.

14. Which of the following is not an acceptable basis for valuation of inventories in published financial
statements?
a. Historical cost
b. Standard cost
c. Prime cost
d. Current selling price less cost to complete and cost to sell

15. Theoretically, freight and warehousing costs incurred in the transfer of consigned goods from the
consignor to the consignee should be considered
a. An expense by the consignor c. Inventoriable by the consignor
b. An expense by the consignee d. Inventoriable by the consignee

16. Goods on consignment should be included in the inventory of


a. The consignor but not the consignee c. Both the consignor and the consignee
b. The consignee but not the consignor d. Neither the consignor nor the consignee

17. All of the following costs should be charged against revenue in the period, except
a. Manufacturing overhead costs for a product manufactured and sold in the same accounting period.
b. Costs which will not benefit any future period.
c. Costs from idle manufacturing capacity resulting from an unexpected plant shutdown.
d. Costs of normal shrinkage and scrap incurred for the manufacture of a product in ending
inventory.

18. 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
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c. Invoice price less the purchase discount taken
d. Invoice price less the purchase discount allowable whatever taken or not

19. The use of 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

20. Theoretically, cash discounts permitted on purchased raw materials should be


a. Added to other income, whether taken or not
b. Added to other income, only if taken
c. Deducted from inventory, whether taken or not
d. Deducted from inventory, only if taken

21. When a portion of inventories has been pledged as security on a loan


a. The value of the portion pledged should be subtracted from the debt
b. An equal amount of retained earnings should be appropriated
c. The fact should be disclosed but the amount of current assets should not be affected
d. The cost of the pledged inventory should be transferred from current to noncurrent asset

22. If a material amount of inventory has been ordered through a formal purchase contract at balance
sheet date for future delivery at firm prices
a. This fact must be disclosed
b. Disclosure is required only if prices have declined since the date of the order
c. Disclosure is required only if prices have since risen substantially.
d. An appropriation of retained earnings is necessary.

23. The credit balance that arises when a net loss in a purchase commitment is recognized should be
a. Presented as a current liability
b. Subtracted from ending inventory
c. Presented as an appropriation of retained earnings
d. Presented in the income statement

24. When using a perpetual inventory system


I. No purchases account is used.
II. A cost of goods sold account is used.
III. Two entries are required to record a sale.
a. I and II only b. II only c. II and III only d. I, II and III

25. During periods of arising prices, when the FIFO inventory cost flow method is used, a perpetual
inventory system would
a. Not be permitted
b. Result in a higher ending inventory than a periodic system inventory system
c. Result in the same ending inventory as a periodic system
d. Result in a lower ending inventory than a periodic inventory system

26. Generally, which inventory costing method approximates most closely the current cost for each of the
following:
Cost of goods sold Ending inventory
a. LIFO FIFO
b. LIFO LIFO
c. FIFO FIFO
d. FIFO LIFO

27. To produce an inventory valuation which approximates the lower of average cost or market using the
conservative retail inventory method, the computation of the ratio of cost to retail should
a. Include markups but not markdowns c. Include markups and markdowns
b. Ignore both markups and markdowns d. Include markdowns but not markups
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28. The gross margin method of estimating ending inventory may be used for all of the following except
a. Internal as well as external interim reports
b. Internal as well as external year-end reports
c. Estimate of inventory destroyed by fire or other casualty
d. Rough test of the validity of an inventory cost determined under either periodic or perpetual
system.

29. The gross profit method of inventory valuation is invalid when


a. A portion of the inventory is destroyed.
b. There is substantial increase in inventory during the year.
c. There is no beginning inventory because it is the first year of operation.
d. The gross profit percentage applicable to goods in the ending inventory is different from
the percentage applicable to goods sold during the period.

30. This cost formula assumes that the items of the inventory that were purchased or produced the first are
sold first and consequently the items remaining in inventory at the end of the period are those most
recently purchased or produced.
a. FIFO
b. LIFO
c. Weighted average
d. Moving average

31. Under the weighted average cost formula, the cost of each item is determined from
I. Weighted average of the cost of similar items at the beginning of a period and the cost of
similar items at the end of the period
II. Weighted average of the cost of similar items at the beginning of a period and the cost
similar items purchased or produced during the period
a. I only
b. II only
c. Either I or II
d. Neither I nor II

32. The weighted average method may be calculated


I. On a periodic basis
II. As each shipment is received depending upon the circumstances of the entity
a. I only
b. II only
c. Either I or II
d. Neither I or II

33. This is defined as “those who buy or sell commodities for others or in their own account”.
a. Fair value
b. Traders
c. Commission agents
d. Broker traders

34. Commodities of broker-traders are measured at


a. Fair value
b. Fair value less cost to sell
c. Cost
d. Net realizable value

35. When agricultural crops have been harvested or mineral ores have been extracted and a sale is
assured under a forward contract of government guarantee, such inventories are measured at
a. Net realizable value
b. Cost
c. Standard cost
d. Relative sales price
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36. The credit balance that arises when a loss on a purchases commitment is recognized shall be
a. Presented as a current liability
b. Subtracted from ending inventory
c. Presented as an appropriation of retained earnings
d. Presented in the income statement

37. An example of an inventory accounting policy that should be disclosed is


a. Effect of inventory profit caused by inflation
b. Classification of inventory into raw materials, work in process and finished goods
c. Identification of major suppliers
d. Method used for inventory

38. Under PAS 2, which is not a mandated disclosure?


a. Accounting policy adopted in measuring inventories, including the cost formula used
b. The carrying amount of each item of inventories
c. The carrying amount of inventories carried at fair value less cost to sell
d. The amount of inventories recognized as expense

39. Under PAS 2, which is not a required disclosure


a. The amount of any writedown of inventories recognized as expense
b. The amount of any reversal of writedown of inventories
c. The circumstance or events that led to the reversal of a writedown of inventories
d. The fair value less cost to sell of inventories pledged as security for liabilities

40. This method is often used for convenience for measuring inventories of large number of rapidly
changing items with similar margins for which it is impractice to use other costing methods.
a. Standard cost
b. Retail method
c. Gross profit method
d. Relative sales price

41. Under the retail inventory method, the cost of inventory is determined by reducing the sales value by
appropriate percentage gross margin. Which statement is correct concerning the appropriate
percentage used?

I. The percentage used takes into consideration inventory that has been marked down to
below its original selling price.
II. An average percentage for each retail department is often used.
a. I only
b. II only
c. Both I and II
d. Neither I or II

42. A major advantage of the retail inventory method is that it


a. Permits entities to avoid taking an annual physical inventory
b. Gives more accurate measurement of inventory than other methods
c. Hides costs from customers and employees
d. Provides a method for inventory control and facilities determination of the periodic
inventory

43. When the conventional retail inventory method is used, markdowns are commonly ignored in the
computation of the cost to retail ratio because
a. There may be no markdowns in a given year
b. This tends to give a better approximation of the lower of cost or market
c. Markups are also ignored
d. This tends to result in the showing of a normal profit margin in a period when no markdown
goods have been sold
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44. If the average retail inventory method is used, which of the following calculations would include or
exclude net markdowns?
Cost ratio Ending inventory at retail
a. Include Include
b. Include Exclude
c. Exclude Include
d. Exclude Exclude

45. The retail inventory method would include of the following in the calculation of goods available for sale
at both cost and retail?
a. Freight in
b. Purchase returns
c. Markups
d. Markdowns

46. Under the retail inventory method, freight in would be included in the calculation of the goods available
for sale for which of the following?
I. Cost
II. Retail

a. I only
b. II only
c. Both I and II
d. Neither I nor II

47. With regard to the retail inventory method, which of the following is the most accurate statement?
a. Generally, accountants ignore net markups and net markdowns in computing the cost price
percentage
b. Generally, accountants exclude net markups and include net markdowns in computing cost
price percentage
c. This method results in a lower ending inventory cost if net markups are included but net
markdowns are excluded in computing the cost price percentage
d. It is not adaptable to FIFO costing

48. The conventional retail method produces an ending inventory that approximates
a. Lower of average cost or market
b. Lower of FIFO cost or market
c. Lower of LIFO cost or market
d. Lower of cost or net realizable value

49. Which of the following would cause a decrease in the cost ratio as used in the retail inventory method?
a. Higher retail prices
b. Lower net markups
c. More employee discounts
d. Higher freight in charges

“That in all things, GOD maybe glorified”

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saved. Believe in Christ, and you will be saved, you and your entire household” Acts 4:12; 16:31

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John 3:27

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