REVIEW OF FINANCIAL ACCOUNTING THEORY AND PRACTICE REVIEW OF FINANCIAL ACCOUNTING THEORY AND PRACTICE
INVENTORIES INVENTORIES 1.
1. CagayCagayan Companan Company incluy included thded the followe following items ing items under under inentorinentories!ies! "
"aatteerriiaallss ## 11$$%%&&&&$$&&&&&& 'dance
'dance for materfor materials ordeials orderedred (&&$&&&(&&$&&& )
)ooooddss iinn pprroocceessss **++&&$$&&&&&& ,
,nnee--ppiirreed d iinnssuurraanncce e on on iinneennttoorriieess *&*&$$&&&&&& 'dertis
'dertising cataling catalogs and ogs and shipping shipping o-eso-es 1+&$&&&1+&$&&& /
/iinniisshheed d ggoooodds s iin n ffaaccttoorryy (($$&&&&&&$$&&&&&& /inished goods in company0owned retails store$ including +& profit
/inished goods in company0owned retails store$ including +& profit o
onn ccoosstt 22++&&$$&&&&&& /
/ininisishehed gd goooodds is in hn haanndds os on cn coonnssigignneees es ininccluluddiing ng %%&& p proroffit it oon sn saaleless %%&&&&$&$&&&&& /inished goods in transit to customers$ shipped /O3 destination$ at
/inished goods in transit to customers$ shipped /O3 destination$ at c
coosstt ((++&&$$&&&&&&
/
/iinniisshheed d ggoooodds s oouut t oon n aapppprrooaall$ $ aat t ccoosstt 11&&&&$$&&&&&& ,
,nnssaallaalle e ffiinniisshheed d ggooooddss$ $ aat t ccoosstt ++&&$$&&&&&& O
Offffiiccee ssuupppplliieess %%&&$$&&&&&& "aterials in transit shipped /O3 shipping point$ e-cluding freight of
"aterials in transit shipped /O3 shipping point$ e-cluding freight of #
#44&&$$&&&&&& 4444&&$$&&&&&& )
)oooodds s hheelld d oon n ccoonnssiiggnnmmeenntt$ $ aat t ssaallees s pprriiccee$ $ ccoosst t ##11++&&$$&&&&&& ((&&&&$$&&&&&& 5ow much is the correct amount of inentories6
5ow much is the correct amount of inentories6 a
a. . ##++$$**11&&$$&&&&&& cc. . ##++$$4422++$$&&&&&& . #+$+&&$&&&
. #+$+&&$&&& d. #+$%+&$&&&d. #+$%+&$&&&
(.
(. The 'The 'ulug "anuulug "anufacfacturituring Compang Company reiewny reiewed its ed its yeayear0enr0end d ininentoentory and ry and foufound thend the following items!
following items! 7a
7a88 ' ' papac9c9ining g cacase se cocontntaiainining ng a a prprododucuct t cocoststining g #1#1&&&&$&$&&& && wawas s ststanandiding ng in in ththee shipping room wh
shipping room when the physical ineen the physical inentory was ta9enntory was ta9en. . It was not included in theIt was not included in the inentory ecause it
inentory ecause it was mar9ed was mar9ed :5old for :5old for shipping instructions.; shipping instructions.; The customer<sThe customer<s order was dated =ecemer 1>$ ut the case was shipped and the costumer illed order was dated =ecemer 1>$ ut the case was shipped and the costumer illed on ?anuary 1&$ (&&*.
on ?anuary 1&$ (&&*. 78
78 "er"erchachandndise cosise costiting #*&&ng #*&&$&$&&& was rece&& was receieied d on =eceon =ecememer r (>(>$ $ (&&(&&+$ and the+$ and the inoice wa
inoice was recorded. s recorded. The inoicThe inoice was in the hands of the purche was in the hands of the purchasing agentasing agent@ it@ it was mar9ed :On consignment;.
was mar9ed :On consignment;. 7c
7c88 "e"ercrchahandndisise e rerececeiied ed on on ?a?anunuarary y *$ *$ (&(&&*&*$ $ cocoststining g #2#2&&&&$&$&&& && wwas as enenteterered d inin purchase re
purchase register on ?anugister on ?anuary 2. ary 2. The inoThe inoice showed shice showed shipment was made /ipment was made /O3O3 ship
shipping poinping point on t on =ec=ecemeemer 41$ (&&+. r 41$ (&&+. 3ec3ecausause it e it was not on hand duriwas not on hand during theng the inentory count$ it was not included.
inentory count$ it was not included. 7d8
7d8 ' spe' special maccial machine cohine costinsting #(&&$g #(&&$&&&&&&$ faric$ faricated to ordated to order for a particer for a particular cusular custometomer$r$ was finished in the shipp
was finished in the shipping room on =ecemer 4&. ing room on =ecemer 4&. The customThe customer was illed for er was illed for #4&&$&&& on that date and the machine was e-cluded from inentory although it #4&&$&&& on that date and the machine was e-cluded from inentory although it was shipped ?anuary %$ (&&*.
was shipped ?anuary %$ (&&*. 7e8
7e8 "erc"erchandhandise cosise costing #(ting #(&&$&&&$&&& was rec&& was receieied on ?aned on ?anuary *$ (&uary *$ (&&*$ an&*$ and the relad the relatedted purchase inoice was recorded ?anuary
purchase inoice was recorded ?anuary +. +. The inoice showed The inoice showed the shipment wasthe shipment was made on =ecemer (A$(&&+$ /O3 destination.
made on =ecemer (A$(&&+$ /O3 destination. 7f8
7f8 "erc"erchandhandise cise costiosting #1ng #1+&$&+&$&&& w&& was solas sold on ad on an insn installtallment ment asiasis on =s on =ecemecemer 1er 1+.+. The customer to
The customer too9 possesso9 possession of the goods on that dation of the goods on that date. e. The merchaThe merchandise wasndise was included in inento
included in inentory ecause 'ry ecause 'ulug still holds legal title. ulug still holds legal title. 5istoric5istorical e-perienceal e-perience suggests that full payment on installment sale is receied appro-imately AA of suggests that full payment on installment sale is receied appro-imately AA of the time.
the time. 7g8
7g8 )oo)oods cods coststing #ing #+&+&&$&&$&&& we&& were sore sold anld and deld deliiereered on =ecd on =ecememer (&er (&. . ThThe gooe goodsds were included in the
were included in the inentorinentory ecause the y ecause the sale was accompanied y a sale was accompanied y a purchaspurchasee agreement reBuiring 'ulug to uy ac9 the inentory in /eruary (&&*.
5ow much of these items should e included in the inentory alance at =ecemer 41$ (&&+6
a. #1$4&&$&&& c. #1$*+&$&&& . # >&&$&&& d. #1$&+&$&&&
4. The 'lcala Company counted its ending inentory on =ecemer 41. None of the following items were included when the total amount of the company<s ending inentory was computed!
• #1+&$&&& in goods located in 'lcala<s warehouse that are on consignment from
another company.
• #(&&$&&& in goods that were sold y 'lcala and shipped on =ecemer 4& and were
in transit on =ecemer 41@ the goods were receied y the customer on ?anuary (. Terms were /O3 =estination.
• #4&&$&&& in goods were purchased y 'lcala and shipped on =ecemer 4& and
were in transit on =ecemer 41@ the goods were receied y 'lcala on ?anuary (. Terms were /O3 shipping point.
• #%&&$&&& in goods were sold y 'lcala and shipped on =ecemer 4& and were in
transit on =ecemer 41@ the goods were receied y the customer on ?anuary (. Terms were /O3 shipping point.
The company<s reported inentory 7efore any corrections8 was #($&&&$&&&. hat is the correct amount of the company<s inentory on =ecemer 416
a. #($++&$&&& c. #($+&&$&&& . #1$A+&$&&& d. #($2&&$&&&
%. 'parri Company included the following items in its inentory on =ecemer 41$ (&&+! "erchandise out on consignment$ at sales price$
including (+ mar9up on cost #%$&&&$&&& )oods purchased in transit$ /O3 destination ($&&&$&&& )oods held on consignment y 'parri Company 1$&&&$&&& 3y what amount should the inentory at =ecemer 41$ (&&+ e reduced6
a. #4$>&&$&&& c. #1$>&&$&&& . #($&&&$&&& d. #1$&&&$&&&
+. 'llapacan Company had the following consignment transactions during (&&+!
Inentory shipped on consignment to 3enguet Company$ consignee #*&&$&&&
/reight paid y 'llapacan +&$&&&
Inentory receied on consignment from Ifugao$ consignor >&&$&&&
/reight paid y Ifugao +&$&&&
No sales of consigned goods were made through =ecemer 41$ (&&+. In its =ecemer 41$ (&&+ alance sheet$ 'llapacan should include consigned inentory of
a. #*&&$&&& c. # *+&$&&& . #2&&$&&& d. #1$+&&$&&&
*. On ?une 1$ (&&+ 'mulung Company sold merchandise with a list price of #+$&&&$&&& to '3C. 'mulung allowed trade discounts of (& and 1&. Credit terms were +D1&$ nD4& and the sale was made /O3 shipping point. 'mulung prepaid #(&&$&&& of deliery cost for '3C as an accommodation. On ?une 11$ (&&+$ 'mulung receied from '3C full remittance of
a. #4$%(&$&&& c. #4$*&&$&&& . #4$*(&$&&& d. #4$>&&$&&&
2. 3aggao Company<s accounts payale alance at =ecemer 41$ (&&+ was #>$&&&$&&& efore considering the following data!
• )oods shipped to 3aggao /O3 shipping point on =ecemer 1+$ (&&+ were lost in
transit. The inoice cost of #+&&$&&& was not recorded y 3aggao. On ?anuary 1+$ (&&*$ 3aggao filed a #+&&$&&& claim against the common carrier.
• On =ecemer 4&$ (&&+$ a endor authoried 3aggao to return for full credit goods
shipped and illed at #(&&$&&& on =ecemer 1+$ (&&+. The returned goods were shipped y 3aggao on =ecemer 41$ (&&+. ' #(&&$&&& credit memo was receied and recorded on ?anuary +$ (&&*.
hat should 3aggao report as accounts payale on =ecemer 41$ (&&+6 a. #>$4&&$&&& c. #2$>&&$&&&
. #>$+&&$&&& d. #2$+&&$&&&
>. 3allesteros Company egan operations late in (&&%. /or the first Buarter ended "arch 41$ (&&+$ 3allesteros made aailale the following information!
Total merchandise purchased through "arch 1+$ recorded at net #%$A&&$&&& "erchandise inentory at =ecemer 41$ (&&%$ at selling price 1$+&&$&&& 'll merchandise was acBuired on credit and no payments hae een made on
accounts payale since the inception of the company. 'll merchandise is mar9ed to sell at +& aoe inoice cost efore time discounts of (D1&$ nD4&. No sales were made in (&&+.
5ow much cash is reBuired to eliminate the current alance in accounts payale6 a. #*$&&&$&&& c. #*$%&&$&&&
. #+$A&&$&&& d. #+$2+&$&&&
A. Calayan Company has determined its =ecemer 41$ (&&+ inentory on a /I/O asis at #A$+&&$&&&. Information pertaining to that inentory follows!
Estimated selling price #1%$&&&$&&& Estimated cost to complete and cost of disposal +$&&&$&&&
Normal profit margin ($&&&$&&&
Current replacement cost >$&&&$&&& Calayan records losses that result from applying the lower of cost or mar9et rule. 't =ecemer 41$ (&&+$ Calayan should report inentory at
a. #A$+&&$&&& c. #A$&&&$&&& . #>$&&&$&&& d. #2$&&&$&&&
1&.Claeria Company installs replacement siding$ windows$ and louered glass doors for family homes. 't =ecemer 41$ (&&+$ the alance of raw materials inentory account was #+&($&&&$ and the allowance for inentory writedown was #44$&&&. The inentory cost and mar9et data at =ecemer 41$ (&&+$ are as follows!
Cost Replacement Cost Sales Price Net Realizable value Normal Profit 'luminum siding
>A$&&& >*$&&& A1$+&& >2$&&& +$&&& "ahogany siding A%$&&& A($&&& A4$&&& >+$&&& 2$&&& Fouered glass
door 1(+$&&& 14+$&&& 1(A$&&& 111$&&& 1&$&&& )lass windows 1A%$&&& 11%$&&& (&+$&&& 1A2$&&& (&$&&& Total +&($&&& %(2$&&& +1>$+&& %>&$&&& 4($&&& The correct alance of the raw materials inentory after any allowance for write down is a. #%(2$&&& c. #%>&$&&&
11. Enrile Company had 1>&$&&& units of #roduct ' on hand at ?anuary 1$ (&&+ costing #(& each. #urchases of product ' during the month of ?anuary were as follows!
,nits ,nit cost
?anuary + 1*&$&&& 4&
1+ (&&$&&& %&
41 1%&$&&& +&
' physical count on ?anuary 41$ (&&+ shows (&&$&&& units of product ' on hand. The inentory on ?anuary 41$ should e
/I/O FI/O
a. #A$%&&$&&& #%$(&&$&&& . #%$(&&$&&& #A$%&&$&&& c. #A$%&&$&&& #+$>&&$&&& d. #%$(&&$&&& #2$&&&$&&&
1(.)onaga Company uses the weighted aerage method to determine the cost of its inentory. )onaga recorded the following information pertaining to its inentory!
,nits ,nits cost Total cost
3alance 1D1 1*&$&&& *& A$*&&$&&& Sold on 1D1+ 1%&$&&&
#urchased on 1D41 >&$&&& A& 2$(&&$&&&
hat amount of inentory should )onaga report in its ?anuary 41$ (&&+ alance sheet6 #erpetual #eriodic a. #>$%&&$&&& #2$&&&$&&& . #2$&&&$&&& #>$%&&$&&& c. #>$%&&$&&& #2$+&&$&&& d. #2$&&&$&&& #2$+&&$&&&
14. Fasam Company sells one product$ which it purchases from arious suppliers. The trial alance at =ecemer 41$ (&&+$ included the following accounts!
Sales 71&&$&&& units at #1+&8 #1+$&&&$&&& Sales discount 1$&&&$&&&
#urchases A$4&&$&&&
#urchase discount %&&$&&&
/reight in 1&&$&&&
/reight out (&&$&&&
The inentory purchases during (&&+ were as follows!
,nits ,nit cost Total cost 3eginning inentory$ ?anuary 1 (&$&&& #*& # 1$(&&$&&& #urchases$ Buarter ended "arch 41 4&$&&& *+ 1$A+&$&&& #urchases$ Buarter ended ?une 4& %&$&&& 2& ($>&&$&&& #urchases$ Buarter ended Sept. 4& +&$&&& 2+ 4$2+&$&&& #urchases$ Buarter ended =ec. 41 1&$&&& >& >&&$&&& 1+&$&&& #1&$+&&$&&& Fasam<s accounting policy is to report inentory in its financial statements at the lower of cost or mar9et$ applied to total inentory. Cost is determined under the first0in$ first0 out method.
Fasam has determined that$ at =ecemer 41$ (&&+$ the replacement cost of its inentory was #2& per unit and the net realiale alue was #2( per unit. The normal profit margin is #1& per unit.
hat should Fasam report as cost of goods sold for the year (&&+6 a. #*$%&&$&&& c. #*$2&&$&&& . #*$*&&$&&& d. #2$1&&$&&&
1%.The following Buarterly cost data hae een accumulated for #amplona "fg. Inc. Raw materials G eginning inentory 7?an. 1$ (&&+8 1&$&&& units H#*.&&
#urchases >$+&& units H#2.&&
11$&&& units H#2.+& Transferred (1$+&& units of raw materials to wor9 in process!
or9 in process G eginning inentory 7?an. 1$ (&&+8 +$*&& units H#14.+&
=irect laor #(+&$&&&
"anufacturing oer head #4(+$&&&
or9 in process G ending inentory 7"ar. 41$ (&&+8 %$(&& units H#14.2+ If #amplona uses the /I/O method for aluing raw materials inentories$ compute for the cost of goods manufactured for the Buarter ended "ar. 41 (&&+
a. #*AA$1+& c. #24%$>+&
. #212$&&& d. #2%*$>+&
1+.Total deits and total credits in selected accounts of #iat Company$ after closing entries were posted on =ecemer 41$ (&&+ are gien elow.
=eits Credits
"aterials # *&&$&&& # (&&$&&& )oods in process +&&$&&& 4&&$&&& "aterial purchases ($+&&$&&& ($+&&$&&& #urchase discounts 1&&$&&& 1&&$&&& Transportation in (&&$&&& (&&$&&& =irect laor 4$&&&$&&& 4$&&&$&&& "anufacturing oerhead 1$+&&$&&& 1$+&&$&&& /inished goods 2&&$&&& %&&$&&& Cost of goods sold was
a. #2$1&&$&&& c. #*$A&&$&&& . #2$&&&$&&& d. #2$%&&$&&&
1*.On 'ugust 4&$ (&&+$ Sta. 'na Company purchased a tract of land for #1($&&&$&&&. Sta. 'na incurred additional cost of #4$&&&$&&& during the remainder of (&&+ in preparing the land for sale. The tract was sudiided into residential lots as follows!
Fot class Numer of lots Sales price per lot
' 1&& (%&$&&&
3 1&& 1*&$&&&
C (&& 1&&$&&&
,sing the relatie sales alue method$ what amount of cost should e allocated to Class C lots6
a. #*$&&&$&&& c. #2$+&&$&&& . #+$&&&$&&& d. #%$&&&$&&&
12.On Noemer 12$ (&&+$ Solana 'irways entered in to a commitment to purchase 4$&&& arrels of aiation fuel for #A$&&&$&&& on "arch (4$ (&&*. Solana entered into this purchase commitment to protect itself against the olatility in the aiation fuel mar9et. 3y =ecemer 41$ (&&+$ the purchase price of aiation fuel had fallen to #($(&& per arrel. 5oweer$ y "arch (4$ (&&*$ when Solana too9 deliery of the 4$&&& arrels$ the price of aiation fuel had risen to #($+&& per arrel. 5ow much should e recognied as loss on purchase commitment on =ecemer 41$ (&&+6
a. #1$+&&$&&& c. #($%&&$&&&