University of the East- Caloocan

College of Accountancy, Law and Taxation

Financial Accounting, Part 1
Inventories
Name:__________________________
Subj. & Sec__________________________
Select the correct answer:
ABCD-

Both statements are true

Both statements are false
First statement is true, second statement is false
First statement is false, second statement is true

1.

A. Under the periodic inventory system, the merchandise inventory account

continuously discloses the amount of inventory on hand.
B. Under the periodic inventory system, a physical inventory is taken to
determine the cost of the inventory on hand and the cost of the merchandise
sold.

2. A. In valuing damaged merchandise for inventory purposes, net realizable

value is the estimated
selling price less any direct costs of disposal.
B. During periods of increasing costs, an advantage of the LIFO inventory cost
method is that it
matches more recent costs against current revenues.
3.

A. During periods of increasing costs, an advantage of the LIFO inventory

cost method is that it
matches more recent costs against current revenues.
B. The use of the lower-of-cost-or-market method of inventory valuation
increases net income for the period in which the inventory replacement price
declined.

4. A. When merchandise inventory is shown on the balance sheet, both the

method of determining the cost of the inventory and the method of valuing
the inventory should be shown.
B. Most large companies will use only one inventory costing methods for all of
its different segments.
5. A. In the retail inventory method, the cost to retail ratio is equal to the cost of
goods sold divided by the retail price of the good sold.
B. Use of the retail inventory method requires taking a physical count of
inventory.
6.

A. Average inventory is computed by adding the inventory at the beginning

of the period to the

inventory at the end of the period and dividing by two.

B. If a company uses the periodic inventory system to cost its inventory, the
gross profit method is a method that can be used to check on theft when the
actual inventory is taken by the company.
7.

A. Inventory errors, if not discovered, will self-correct in two years.

B. One negative effect of carrying too much inventory is risk that customers
will change their buying habits.

8. A. If ending inventory for the year is overstated, owners equity reported on

the balance sheet at the end of the year is understated.
B. The average cost method will always yield results between FIFO and LIFO.
9.

A. The selection of an inventory costing method has no significant impact on

the financial statements.
B. Of the three widely used inventory costing methods (FIFO, LIFO, and
average cost), the LIFO
method of costing inventory assumes costs are charged based on the most
recent purchases first.

10. A. A subsidiary inventory ledger can be an aid in maintaining inventory levels

at their proper levels.
B. Inventory controls start when the merchandise is shelved in the store area.
II. Multiple Choice
1. Taking a physical count of inventory
a. is not necessary when a periodic inventory system is used
b. should be dine near year-end
c. has no internal control relevance
d. is not necessary when a perpetual inventory system is used
2. Control of inventory should begin as soon as the inventory is received. Which
of the following
internal control steps is not done to meet this goal?
a. check the invoice to the receiving report
b. check the invoice to the purchase order
c. check the invoice with the person who specifically purchased the item
d. check the invoice extensions and totals
3. Which of the following is not an example for safeguarding inventory?
a. Storing inventory in restricted areas.
b. Physical devices such as two-way mirrors, cameras, and alarms.
c. Matching receiving documents, purchase orders, and vendors invoice.
d. Returning inventory that is defective or broken.
4. When merchandise sold is assumed to be in the order in which the purchases
were made, the
company is using
a. first-in, last-out

b. last-in, first-out
c. first-in, first-out
d. average cost
5. The inventory method that assigns the most recent costs to cost of goods
sold is
a. FIFO
b. LIFO
c. average
d. specific identification
6. Inventory costing methods place primary emphasis on assumptions about
a. flow of goods
b. flow of costs
c. flow of goods or flow of costs depending on the method
d. neither flow or goods or flow of costs
7. Under the _________ inventory method, accounting records maintain a
continuously updated
inventory value.
a. retail
b. periodic
c. physical
d. perpetual
8. Under a periodic inventory system
a. accounting records continuously disclose the amount of inventory
b. a separate account for each type of merchandise is maintained in a
subsidiary ledger
c. a physical inventory is taken at the end of the period
d. merchandise inventory is debited when goods are returned to vendors
The following lots of a particular commodity were available for sale during the
year:
Beginning inventory
10 units at P55
First purchase
25 units at P65
Second purchase
30 units at P68
Third purchase
15 units at P70
The firm uses the periodic system and there are 25 units of the commodity on
hand at the end of the year.
9. What is the amount of the inventory at the end of the year using the FIFO
method?
a. P1,645
b. P1,525
c. P1,730
d. P3,535
10. What is the amount of the inventory at the end of the year using the
average cost method?
a. P1,645
b. P1,525

c. P1,730
d. P3,620
11.If merchandise inventory is being valued at cost and the price level is
steadily rising, the method of costing that will yield the highest net income is
a. periodic
b. LIFO
c. FIFO
d. average
12.If merchandise inventory is being valued at cost and the purchase price is
steadily falling, which
method of costing will yield the largest net income?
a. average cost
b. LIFO
c. FIFO
d. weighted average
13. If the revenues are correctly reported and the Gross Profit of a company
is understated, what is the effect on Owners Equity?
a. Understated
b. Overstated
c. Correctly Stated
d. None of the above
14.If a manufacturer ships merchandise to a retailer on consignment, the
unsold merchandise should be included in the inventory of the
a. consignee
b. retailer
c. manufacturer
d. shipper
15. Damaged merchandise that can be sold only at prices below cost should
be valued at
a. net realizable value
b. LIFO
c. FIFO
d. average
Problems:
1. The following units of a particular item were available for sale during the
year:
Beginning inventory 150 units @ P755
Sale 120 units @ P925
First purchase 400 units @ P785
Sale 200 units @ P925
Second purchase 300 units @ P805
Sale 290 units @ P925

The firm uses the perpetual inventory system and there are 240 units of
the item on hand at the end of the year. What is the total cost of ending
inventory according to FIFO?
The three identical units of Product Basic H are purchased during July, as shown
below.
Date
Product Basic H
Units
Cost
July 3
Purchase
1
P35
July 10
Purchase
1
P36
July 24
Purchase
1
P37
Total
3
P108
Average cost per unit P36
Assume one unit sells on July 28 for $45.
Determine the gross profit, cost of merchandise sold, and ending
inventory on July 31 using (2) first in first out, (3) last in last out, (4)
average cost flow methods.
The following information was extracted from the Stone Companys
records. (11pts.)
Gross Sales P232,566
Gross Profit P87,990
Sales Discounts P1,125 (= 1/2 % of Net Sales)
Total Operating Expenses P88, 440
Selling Expenses P33, 560

12-15

Good Luck!!