Problem 18-1 Multiple choice (PAS 2)

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
Answer : c. Lower of cost and net realizable value
2. The cost of inventories shall be measured using
a. FIFO
b. Average method
c. LIFO
d. Either FIFO or average method
Answer : 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
Answer : 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
Answer : a. Item by item

5. The amount of any writedown 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.
Answer : c. Recognized as component of cost of sales in the period the
writedownor loss occurs.
Problem 18-2 Multiple Choice (IAA)
1. Which statement is incorrect regarding LCNRV?
a. Net realizable is the selling price less estimated cost to complete and
estimated cost ofdisposal.
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.
Answer :b. In most situations, entities price inventory on a total inventory
basis.
2. 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.
Answer :b. Separate reporting of reversal of inventory writedown is required.

3. 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.
Answer :a. Is always either the net realizable value or cost.

4. 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.
Answer :c. Gives the lowest valuation if applied to individual item of
inventory.
5. Which of the following is not an acceptable method of applying the LCNRV?
a. Inventory location
b. Group Inventory
c. Individual Item
d. Total of the inventory
Answer :a. Inventory location
6. 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
Answer :a. Historical cost

7. 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
Answer :b. Net realizable value
8. 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.
Answer : a. Reporting of a loss when there is decrease in the future utility
below theoriginal cost.
9. Which method may be used to record a loss due to a price decline in the value o
inventory?
a. Loss method
b. Sales method
c. Cost of goods sold method
d. Loss method and cost of goods sold method
Answer :d. Loss method and cost of goods sold method

10. 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.
Answer : d. The net realizable value for ending inventory is substituted for
cost and the loss is buried in cost of goods sold.
Problem 18-3 Multiple Choice (IAA)
1. How should sales staff commission be dealt with when valuing inventory at
LCNRV?
a. Added to cost
b. Ignored

c. Deducted in arriving at net realizable value

d. Deducted from cost
Answer :c. Deducted in arriving at net realizable value
2. How should trade discounts be dealt with when valuing inventory at LCNRV?
a. Added to cost
b. Ignored
c. Deducted in arriving at net realizable value
d. Deducted in arriving at cost
Answer :d. Deducted in arriving at cost
3. How should prompt payment discount be dealt with when valuing inventory at
LCNRV?
a. Added to cost
b. Ignored
c. Deducted in arriving at net realizable value
d. Deducted from cost
Answer :b. Ignored
4. How should import duties be dealt with when valuing inventory at LCNRV?
a. Added to cost
b. Ignored
c. Deducted in arriving at net realizable value
d. Deducted from cost
Answer: a. Added to cost
5. Inventory should be measured at
a. Lower of cost and fair value
b. Lower of cost and net realizable value
c. Lower of cost and net selling price
d. All of these are used in measuring inventory
Answer : b. Lower of cost and net realizable value
Problem 18-4 Multiple Choice (IAA)
1. The credit balance that arises when a loss on a purchase commitment is recognized
should be

a. Presented as a current liability

b. Subtracted from ending inventory
c. Presented as component of other comprehensive income
d. Presented in the income statement
Answer :a. Presented as a current liability
2. If a material amount of inventory has been ordered through a formal purchase
contract atthe end of reporting period 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 order.
c. Disclosure is required only if prices have risen substantially.
d. An appropriation of retained earnings is necessary.
Answer :a. This fact must be disclosed.

3. When a portion of inventory has been pledged as security for a loan

a. The value of the inventory pledged should be deducted 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 asset
to noncurrent asset.
Answer :c. The fact should be disclosed but the amount of current assets
should notbe affected.
4. 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, goods in process, and
finished goods.
c. Identification of major suppliers.
d. Method used for inventory costing
Answer :d. Method used for inventory costing
Problem 18-5 Multiple Choice (IAA)
1. Commodities of broker-traders are measured at
a. Fair value

b. Fair value less cost of disposal

c. Cost
d. Current replacement cost
Answer : b. Fair value less cost of disposal
2. Commodity broker-traders
a. Produce commodities such as rice, corn, or precious metals.
b. Hold inventory primarily to sell in the near term and generate a profit from
pricefluctuation.
c.Measure inventories at the lower of cost and net realizable value.
d. All of the choices are correct regarding broker-traders
Answer : b. Hold inventory primarily to sell in the near term and generate a
profit from price fluctuation.
3. Net realizable value is the general rule for valuing which inventory?
a. Commodities held by broker-traders
b. Computer components held for sale
c. Inventories priced on an item by item basis
d. All of these inventories are measured at net realizable value
Answer :a. Commodities held by broker-traders
4. Net realizable value is used to measure which inventory?
a. Agricultural Inventory
b. Minerals
c. Commodities held by broker-traders
d. All of these are measured at net realizable value
Answer. d. All of these are measured at net realizable value
5. 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
Answer: d. Present value at future cash flows

Problem 19-1 Multiple choice

1. Biological assets
a. Are found only in Biotech entities
b. Are living animals or living plants and must disclosed as a separate line
item inthe statement of financial position
c. Must be measured at cost
d. Do not generally have future economic benefits
Answer: b. Are living animals or living plants and must disclosed as a
separate line item in the statement of financial position
2. It is the management by an entity of the biological transformation and harvest of
biological assets for sale or for conversion into agricultural produce into additional
biological asset.
a.Agricultural activity
b.Biological activity
c.Economic activity
d.Development activity
Answer: a. Agricultural activity
3.Biological assets are measured at
a.Cost
b.Lower of cost and net realizable value
c.Net realizable value
d.Fair value less cost to disposal
Answer: d. Fair value less cost to disposal
4.Agricultural produce is measured at
a.Fair value
b.Fair value less cost of disposal at the point of harvest

c.Net realizable value

d.Net realizable value less normal profit margin
Answer: b. Fair value less cost of disposal at the point of harvest
5.Agricultural produce is
a.The harvested product from biological asset
b.Valued at the time of harvest at the cost of production
c.Valued at each reporting period at fair value less cost of disposal
d.All of the choices are correct regarding agricultural product
Answer: a. The harvested product from biological asset
6.Agricultural activity results in which of the following type of asset?
a.Biological asset only
b.Agricultural produce only
c.Both biological asset and agricultural produce
d.Neither biological asset nor agricultural produce
Answer: c. Both biological asset and agricultural produce
7.Agricultural activity includes all of the following, except
a.Raising livestock
b.Perennial cropping
c.Aquaculture
d.Ocean fishing
Answer: d. Ocean fishing
8.Biological transformation results from asset changes through all of the following,
except
a.Growth
b.Degeneration
c.Procreation
d. Production of agricultural produce
Answer: d. Production of agricultural produce

9.It is a market in which transactions for the asset or liability take place with
sufficient regularity and volume to provide pricing information on an going basis.
a.Active market
b.Principal market
c.Global market
d.Financial market
Answer: a. Active market
10.Which of the following should not be considered cost of disposal?
a.Commission to broker and dealer
b.Levy by regulatory agency
c.Transfer tax
d.Transport cost
Answer: d.Transport cost

Problem 19-2 Multiple choice

1.Generally speaking, biological assets relating to agricultural activity shall be
measure using
a.Historical cost
b.Historical less depreciation less impairment
c.A fair value approach
d.Net realizable value
Answer: c. A fair value approach
2.An entity had a plantation forest that is likely to be harvested and sold in 30 years.
The income shall be accounted for in which of the following?
a.No income shall be reported annually until first harvest and sale in 30 years
b.Income shall be measured annually and reported using a fair value approach
that recognizes and measures biological growth
c.The eventual sale proceeds shall be estimated and matched to the profit and
loss account over the 30-year period.
d.The plantation forest shall be measured every 5 years and the increase in
value shall be shown in the statement of comprehensive income
Answer: b. Income shall be measured annually and reported using a fair value
approach that recognizes and measures biological growth

3.Which of the following statements is true regarding agricultural produce?

a.In all cases, an entity shall measure agricultural produce at fair value less
cost of disposal at the point harvest.
b.The prevailing view is that the fair value of agricultural produce at the point
of harvest can always be measured reliably
c.The fair value measurement of agricultural produce stops at the time of
harvest
d.All of these statements are true regarding agricultural produce.
Answer: d. All of these statements are true regarding agricultural produce.
4.What is the measurement basis for valuing biological assets and agricultural
produce?
a.Historical cost
b.Current cost
c.Present value
d.Fair value
Answer: d. Fair value
5.Where the fair value of the biological asset cannot be determined reliably, the
biological asset shall measured at
a.Cost
b.Cost less accumulated depreciation
c.Cost less accumulated depreciation and accumulated impairment loss
d.Net realizable value
Answer: c. Cost less accumulated depreciation and accumulated impairment
loss

6.Which of the following is unlikely to be in fair value measurement?

a.Quoted price of an identical asset in an active market
b.Quoted price of a similar asset in an active market
c.The present value of the expected net cash flows from the asset
d.External independent valuation
Answer: d. External independent valuation

7.A gain or loss arising on the initial recognition of a biological asset and from a
change in the fair value less cost disposal of a biological asset shall be included in
a.Profit or loss for the period
b.Other comprehensive income
c.A separate revaluation reserve
d.An appropriation reserve
Answer: a. Profit or loss for the period
8.Where there is a long aging or mutation process after harvest, the accounting for
such products shall be dealt with by
a.PAS 41, Agriculture
b.PAS 2, Inventories
c.PAS 16, Property, plant and equipment
d.PAS 40, Investment property
Answer: b. PAS 2, Inventories
9.Which of the following information shall be disclosed in relation to agricultural
activity?
a.Separate disclosure of the gain or loss relating to biological asset and
agricultural produce
b.The aggregate gain or loss arising on the initial recognition of biological
asset and agricultural produce and from the change in fair value less cost
disposal of biological asset
c.The total gain or loss from biological asset, agricultural produce, and from
changes in fair value less cost of disposal of biological asset
d.There is no requirement to disclose separately any gain or loss
Answer: b. The aggregate gain or loss arising on the initial recognition of
biological asset and agricultural produce and from the change in
fair value less cost disposal of biological asset
10.When agricultural produce is harvested, the harvest shall be accounted for as
inventory. For the purpose, cost at the date of harvest is deemed to be
a.The fair value less cost of disposal at the point of harvest.
b.The historical cost
c.The historical cost less accumulated impairment losses
d.Market value
Answer: a. The fair value less cost of disposal at the point of harvest.

Problem 19-3 Multiple choice

1.Which of the following is not dealt with by IAS 41?
a.The accounting for biological asset
b.The initial measurement of agricultural produce harvested from the entitys
biological asset
c.The processing of agricultural produce after harvesting
d.The accounting treatment of government grant received in respect of
biological asset
Answer: c. The processing of agricultural produce after harvesting
2.Land that is related to agricultural activity is measured
a.At fair value
b.In accordance with IAS 16, Property, Plant and Equipment, or IAS 40,
Investment Property
c.At fair value in combination with biological asset that is being grown on the
land
d.At the resale value separate from the biological asset that is being grown on
the land
Answer: b. In accordance with IAS 16, Property, Plant and Equipment, or IAS
40, Investment Property

3.Anunconditional government grant related to a biological asset that has been

measured at fair value less cost of disposal shall be recognized as
a.Income when the grant becomes receivable
b.A deferred credit when the grant becomes receivable
c.Income when the grant application has been submitted
d. A deferred credit when the grant has been approved
Answer: a. Income when the grant becomes receivable
4.If a government grant related to biological asset is conditional, the grant shall be
recognized as
a.Income when the conditions attaching to the grant are met
b.Income when the grant has been approved
c.A deferred credit when the conditions attached to the grant are met
d.A deferred credit when the grant is approved
Answer: a Income when the conditions attaching to the grant are met

5.Where there is a production cycle of more than one year for a biological asset, IAS
41 encourages separate disclosure of the
a.Physical change only
b.Price change only
c.Total change in value
d.Physical change and price change
Answer: d. Physical change and price change
6.All of the following criteria must be satisfied before a biological asset can be
recognized in an entitys financial statements, except
a.The entity controls the asset as a result of past event
b.It is probable that future economic benefits relating to the asset will flow to the
entity
c.An active market for the asset exists
d.The fair value or cost of the asset can be measured reliably
Answer: c. An active market for the asset exists
7.All of the following would be classified as biological asset, except
a.Dairy cattle
b.Chickens
c.Eggs
d.Trees
Answer: c. Eggs
8.All of the following would be classified as agricultural produce?
a. Tree
b.Bush
c.Butter
d.Apple
Answer: d. Apple
9.Animals related to recreational activities, for example, game parks and zoos,
including the natural breeding of animals in zoos, shall be accounted for what
under what standard?
a.IAS 41 Agriculture

b.IAS 16 Property, plant and equipment

c.IAS 41 Investment Property
d.Either IAS 41 or IAS 16
Answer: b. IAS 16 Property, plant and equipment
10. According to IASB, bearer plants, such as grape vines, rubber trees and oil palms
which are used solely to grow produce over several periods should be accounted
for as
a.Biological assets with disclosure
b.Biological assets without disclosure
c.Property, plant and equipment
d.Noncurrent investments
Answer: c. Property, plant and equipment

Problem 20-1 Multiple choice

1. Which will not require an estimate of inventory?
a. Inventory destroyed by typhoon
b. Proof of the reasonable accuracy of the physical inventory
c. Interim financial statements are prepared
d. Determination of the ending inventory to be reported in the statement of
financial position at year-end
Answer: c. Interim financial statements are prepared
2. How is the gross profit method used as it relates to inventory valuation?
a. To verify the accuracy of the perpetual inventory record.
b. To verify the accuracy of the physical inventory.
c. To estimate cost of goods sold.
d. To provide an inventory value under FIFO
Answer: c. to estimate cost of goods sold.
3. Which of the following is not a basic assumption of the gross profit method?
a. The beginning inventory plus purchases equal total goods to be accounted for.
b. Goods not sold must be hand
c. The sales reduced to cost basis when deducted from the sum of the beginning
inventory and purchases would result to inventory on hand
d. The amount of purchases and amount of sales remain relatively unchanged from

the comparable previous period.

Answer: d. The amount of purchases and amount of sales remain relatively
unchanged from the comparable previous period.
4. If the gross profit rate is based on cost, the cost of goods sold is computed as
a. Net sales times cost ratio
b. Net sales divided by sales ratio
c. Gross sales times cost ratio
d. Gross sales divided by sales ratio
Answer: b. Net sales divided by sales ratio
5. 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 report
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.
Answer: b.Internal as well as external year- end report
6. 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 not increased from previous years.
d. The relationship between selling price and cost of goods sold is similar to prior
years.
Answer: a. The amount of gross profit is the same as in prior years.
7. The gross profit method of estimating inventory would not be useful when
a. A periodic system is use and inventories are required for interim statements.
b. Inventories have been destroyed or lost by fire, theft or other casualty and the
specific data required for inventory valuation are not available.
c. There is a significant change in product being sold.
d. The relationship between gross profit and sales remain stable over time
Answer: c. There is a significant change in product being sold

8. The gross profit method of inventory valuation is not valid when

a. There is substantial increase in the quantity of inventory during the year.
b. There is substantial increase in the cost of inventory during the year.
c. The gross margin percentage changes significantly during the year.
d. All ending inventory is destroyed by fire before it can be counted.
Answer: c. The gross margin percentage changes significantly during the year.
.
9. The gross profit method of inventory valuation is invalid when
a. A portion of inventory is destroyed
b. There is a 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 ending inventory is different
from the percentage applicable to goods sold during the period.
Answer: a portion of inventory is destroyed
10.Which of the following statements is not valid about the gross profit method?
a. It may be used by auditors
b. It is an acceptable accounting procedure
c. It may be used to estimate inventory for interim statements
d. It may be used to estimate inventory for annual statements.
Answer d. It may be used to estimate inventory for annual statements.
.
Problem 20-1 Multiple choice
1. Which will not require an estimate of inventory?
a. Inventory destroyed by typhoon
b. Proof of the reasonable accuracy of the physical inventory
c. Interim financial statements are prepared
d. Determination of the ending inventory to be reported in the statement of financial
position at year-end
Answer: c. Interim financial statements are prepared
2. How is the gross profit method used as it relates to inventory valuation?
a. To verify the accuracy of the perpetual inventory record.
b. To verify the accuracy of the physical inventory.
c. To estimate cost of goods sold.
d. To provide an inventory value under FIFO

Answer: c .To estimate cost of goods sold.

3. Which of the following is not a basic assumption of the gross profit method?
a. The beginning inventory plus purchases equal total goods to be accounted for.
b. Goods not sold must be hand
c. The sales reduced to cost basis when deducted from the sum of the beginning
inventory and purchases would result to inventory on hand
d. The amount of purchases and amount of sales remain relatively unchanged from
the comparable previous period.
Answer: d. The amount of purchases and amount of sales remain relatively
unchanged from the comparable previous period.
4. If the gross profit rate is based on cost, the cost of goods sold is computed as
a. Net sales times cost ratio
b. Net sales divided by sales ratio
c. Gross sales times cost ratio
d. Gross sales divided by sales ratio
Answer: b. Net sales divided by sales ratio
5. 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 report
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.
Answer: b. Internal as well as external year end report
6. 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 not increased from previous years.
d. The relationship between selling price and cost of goods sold is similar to prior
years.
Answer: a. The amount of gross profit is the same as in prior years.

7. The gross profit method of estimating inventory would not be useful when
a. A periodic system is use and inventories are required for interim statements.
b. Inventories have been destroyed or lost by fire, theft or other casualty and the
specific data required for inventory valuation are not available.
c. There is a significant change in product being sold.
d. The relationship between gross profit and sales remain stable over time
Answer c. There is a significant change in product being sold.
8. The gross profit method of inventory valuation is not valid when
a. There is substantial increase in the quantity of inventory during the year.
b. There is substantial increase in the cost of inventory during the year.
c. The gross margin percentage changes significantly during the year.
d. All ending inventory is destroyed by fire before it can be counted.
Answer: c. The gross margin percentage changes significantly during the year.
9. The gross profit method of inventory valuation is invalid when
a. A portion of inventory is destroyed
b. There is a 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 ending inventory is different
from the percentage applicable to goods sold during the period.
Answer : a. A portion of inventory is destroyed
10. Which of the following statements is not valid about the gross profit method?
a. It may be used by auditors
b. It is an acceptable accounting procedure
c. It may be used to estimate inventory for interim statements
d. It may be used to estimate inventory for annual statements.
Answer: d. It may be used to estimate inventory for annual statements.