4_Inventory Theory of Accounts

1. Inventories are assets defined by all of the following, except

a. Held for sale in the ordinary course of business.
b. In the process of production for such sale
c. In the form of materials of supplies to be consumed in the production process or the rendering or
services
d. Used in the production or supply of goods and services for administrative purposes.

2. Entities must allocate the cost of all goods available for sale between
a. The cost of goods on hand at the beginning and the cost of goods acquired during the period
b. The cost of goods on hand at the end and the cost of goods acquired during the period
c. The income statement and the statement of financial position
d. All of the choices are correct.

3. How is a significant amount of consignment inventory reported?

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

4. Variable production overheads are allocated to each unit of production on the basis of the
a. Normal capacity of the production facilities
b. Actual use of the production facilities
c. Either the normal capacity or the actual use of production facilities
d. Neither the normal capacity nor the actual use of production facilities

5. Which incorrect concerning the maritime term FAS (free alongside)?

a. The seller must bear all expenses and risk in delivering the goods to the dock next to the vessel
b. The buyer bears the cost of loading and cost of shipment.
c. Title passes to the buyer when the carrier takes possession of the goods.
d. Title passes upon receipt of the goods by the buyer.

6. The use of a discount lost account implies that the recorded cost of an inventory is
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

7. Which of the following is not an acceptable basis for valuation of inventory?

a. Historical cost
b. Prime cost
c. Standard cost
d. Current selling price less cost to complete and cost to sell

8. The cost of inventories that are not ordinarily interchangeable and goods or services produced and
segregated for specific projects shall be measured using
4_Inventory Theory of Accounts
a. FIFO
b. Averaged method
c. LIFO
d. Specific identification

9. Which is the reason why the specific identification method may be considered ideal?
a. The potential manipulation of income is reduced.
b. The cost flows matches the physical flow.
c. There is no arbitrary allocation of cost.
d. It is applicable to all types of inventory

10. The pricing of issues from inventory must be deferred until the end of the accounting period under which
of the following method of inventory valuation?
a. Moving average
b. Weighted average
c. Specific Identification
d. FIFO

11. 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 net realizable value
d. Should always be equal to estimated selling price less cost to complete

12. LCNRV
a. Gives the lowest valuation if applied to total inventory.
b. Gives the lowest valuation if applied to major groups of inventory
c. Gives the lowest valuation if applied to individual items of inventory
d. Must be applied to major groups for tax purposes.

20. Which of the following statements is true regarding inventory write downs and recovery of write down?
a. Recovery of inventory write down is prohibited under IFRS.
b. IFRS requires separate reporting of reversal of inventory write down.
c. IFRS requires entities to record write down in a separate loss account.
d. All of the choices are true.

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

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

22. 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 inventory system
c. Result in the same ending inventory as a periodic inventory system
d. Results in a lower ending inventory than a periodic inventory system

23. What condition is not necessary when using the retail inventory method?
a. A record of total cost of goods sold for the period.
b. A record of total cost and retail value of goods purchased
c. A record of total cost and retail value of goods available for sale
4_Inventory Theory of Accounts
d. A record of sales for the period

24. The use of the gross profit method assumes

a. the amount of gross profit is the same as in prior years.
b. Sales and cost of goods sold have not changed from previous years.
c. Inventory value has not increased from previous years.
d. The relationship between selling price and cost of goods sold is similar to prior years.

25. Which statement is not true about the gross profit method of inventory valuation?
a. It may be used to estimate inventories for interim statements.
b. It may be used to estimate inventories for annual statements.
c. It may be used by auditors.
d. All of these statement are not true

Practice questions:
1. Inventories are assets (choose the incorrect one)
A. Held for sale in the ordinary course of business.
B. In the process of production for sale.
C. In the form of materials or supplies to be consumed in the production process or in the rendering of
services.
D. Held for use in the production or supply of goods and services.

2. The costs of purchase of inventories comprise 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. Trade discounts,
rebates and other similar items are deducted in determining the costs of purchase.

The costs of conversion of inventories include costs directly related to the units of production, such as direct
labor. They also include a systematic allocation of fixed and variable production overheads that are incurred
in converting materials into finished goods.
A. True, False B. True, True C. False, True D. False, False

3. The following are costs excluded from the cost of inventories, except
A. abnormal amounts of wasted materials, labor or other production costs;
B. storage costs, unless those costs are necessary in the production process before a further production
stage;
C. administrative overheads that do not contribute to bringing inventories to their present location and
condition; and
D. Import duties

4. Which statement is incorrect regarding cost formulas?

A. Specific identification of cost means that specific costs are attributed to identified inventory.
B. The FIFO formula assumes that the items of inventory that were purchased or produced last are sold
first, and consequently the items remaining in inventory at the end of the period are those earlier
purchased or produced.
C. Under the weighted average cost formula, the cost of each item is determined from weighted average of
the cost of similar items at the beginning of a period and the cost of similar items purchased or produced
during the period.
D. The average cost formula may be calculated on a periodic basis, or as each additional shipment is
received, depending upon the circumstances of the entity.

5. When using the moving average method of inventory valuation, a new unit cost must be computed after each
4_Inventory Theory of Accounts
A. Purchase C. purchase and issuance from inventory
B. issuance from inventory D. month-end

6. To determine an inventory valuation that using the retail method under the average method, the computation
of the cost to retail percentage should
A. Include markups but not markdowns
B. Include markups and markdowns
C. Include markdowns but not markups
D. Exclude markups and markdowns

7. The gross profit 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 validity of an inventory cost determined under the periodic or perpetual system.

8. The use of the gross profit method assumes

A. the amount of gross profit is the same as in prior years
B. sales and cost of goods sold have not changed from previous years
C. inventory values have not increased from previous years
D. the relationship between selling price and cost of goods sold is similar to prior years.

9. Which of the following is not a basic assumption of the gross profit method?
A. The beginning inventory plus the purchases equal the total goods available for sale
B. Goods not sold must be on hand.
C. If the sales, reduced to the cost basis, are deducted from the sum of the opening inventory plus
purchases, the result is the amount of inventory on hand.
D. The total amount of purchases and the total amount of sales remain relatively unchanged from the
comparable previous period.

10. Which of the following represents the best justification for valuing the inventories at the lower of cost and net
realizable value?
A. It is easier to keep track of market value that it is to keep track of cost as market value is available from
any supplier.
B. Cost loses its relevance for the determination of cost of goods sold if the cost of inventory has been
incurred in an earlier accounting period.
C. The balance sheet valuation of inventory is the most important consideration in the preparation of
financial statements.
D. The practice of writing inventories below cost to net realizable value is consistent with the view that assets
should not be carried in excess of amount expected to be realized from their sale or use.

11. 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; C. I, III and IV only;
B. II, III and IV only; D. I and II only.

12. Lower of cost or net realizable value

A. is most conservative if applied to the total inventory
B. is most conservative if applied to major categories of inventory
C. is most conservative if applied to individual items of inventory
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D. must be applied to major categories for taxes.

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

A. effect of inventory profits 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 costing.

14. When a portion of the inventories has been pledged to secure the payment of indebtedness:
A. The fact of a portion having been pledge should be disclosed in the notes to financial statements
B. The value of the portion pledged should be deducted from the value of the inventories shown in the
current assets section of the balance sheet.
C. The value of the portion pledged should be transferred from current assets to noncurrent assets.
D. The value of the inventories shown in the current assets section of the balance sheet remains the same
but the fact of having been pledged a portion of the inventories should be disclosed in the financial
statements or notes.

Answers: DBDBA BDDDD ACDD