INVENTORIES - THEORIES

1. Which of the following would be included as inventory?

I. Land acquired for resale by real estate firm.
II. Agricultural products held by as farm.
III. Partially completed goods held by a manufacturing company.
IV. Machinery acquired by a manufacturing for use in the production process.
A. I,II,III, and IV
B. I,II, and III
C. II, III, and IV
D. II and III only
Answer: B

2. This refers to the assets held for sale in the ordinary course of business, used in the
process of production for such sale in the form of materials or supplies to be consumed
in the production process or in rendering or services.
A. Raw materials
B. Inventories
C. Current assets
D. Equipment
Answer: B

3. Goods on consignment are included in the inventory of

A. The consignor
B. The consignee
C. Both the consignor and the consignee
D. Neither the consignor nor the consignee.
Answer: A

4. The valuation of inventory on a prime cost basis

A. Would achieve the same results as direct costing.
B. Would exclude all overhead from inventory cost.
C. Is always achieved when standard costing is adopted.
D. Is always achieved when FIFO is adopted.
Answer: B

5. The classification of inventory concerned in buying and selling of goods in the same
form purchased.
A. Trading concern
B. Manufacturing concern
C. Going concern
D. Non-trading concern
Answer: A

6. Classification of inventory concerned in buying of goods which are altered or

converted into another form before they are made available for sale.
A. Trading concern
B. Manufacturing concern
C. Going concern
D. Non-trading concern
Answer: B

7. Which of the following should be included in the cost of inventories?

A. Selling costs.
B. Freight charges on goods acquired FOB destination.
C. Abnormal amount of wasted materials, labor, or other production costs.
D. Storage costs that are necessary to a further production process.
Answer: D

8. Inventories encompass:
I. Merchandise purchased by a retailer and held for resale.
II. Land and other property held for resale by a real estate developer.
III. Finished goods produced.
IV. Abnormal amount of wasted materials, labor, or other production costs.
A. I,II,III, and IV
B. I,II, and III
C. I and III
D. I only
Answer: B

9. Under this, the ownership of the goods purchased is transferred only upon receipt of
the goods by the buyer at the point of destination, thus seller should be legally
responsible for freight charges and other expenses.
A. FOB shipping point
B. Freight prepaid
C. FOB destination
D. Freight collect
Answer: C

10. This accounting system for inventories is generally used when the individual
inventory items have small peso investment such as groceries, hardware and autoparts.
A. Perpetual system
B. Periodic system
C. FIFO
D. LIFO
Answer: B

11. The indirect cost of production that remains relatively constant regardless of the
volume of production.
A. Unallocated overhead
B. Variable production overhead
C. Fixed production overhead
D. Manufacturing overhead
Answer: C
12. The following are excluded from the cost of inventories and recognized as expenses
in the period when incurred EXCEPT for:
A. Abnormal amounts of wasted materials, labor and other production costs.
B. Administrative overheads that do not contribute to bringing inventories to their
present location and condition.
C. Distribution or selling costs.
D. Partially completed products which require further process or work before they can
be sold.
Answer: D

13. Applying the legal test, which of the following items can be included in the
inventory?
I. Goods in transit and sold FOB destination.
II. Goods out on consignment
III. Goods held by customers on approval or on trial.
IV. Goods in the hands of salesman or agents.
A. I,II,III, and IV
B. I,II, and III
C. I and III
D. I only
Answer: A

14. Cost of purchases comprises of:

A. Cost directly related to the units of production such as direct labor.
B. Import duties, irrecoverable taxes, and freight.
C. Costs incurred to bring inventories to their present location and condition.
D. Cost of selling and distributing goods.
Answer: B

15. This method assumes that goods first purchased are first sold and consequently the
goods remaining in the inventory at the end of the period are those most recently
purchased or produced.
A. LIFO
B. FIFO
C.NRV
D. LCNRV
Answer: B

16. Net realizable value is the:

A. Estimated selling price in the ordinary course of business less the estimated cost of
completion and the estimated cost of disposal.
B. Estimated selling price in the ordinary course of business add the estimated cost of
completion less the estimated cost of disposal.
C. Estimated selling price in the ordinary course of business less the estimated cost of
completion add the estimated cost of disposal.
D. None of the above.
Answer: A
17. The cost of inventories may not be recoverable under which of the following
circumstances.
A. The inventories have become wholly or partially obsolete.
B. The selling prices have declined.
C. The estimated cost of completion or the estimated cost of disposal has increased.
D. All of the above.
Answer: D

18. This refers to the obligations of the entity to acquire certain goods sometime in the
future at a fixed price and fixed quantity.
A. Purchase commitments
B. Non-cancelable commitments
C. Purchase order
D. None of the above.
Answer: A

19. The use of a discount loss account implies that cost of a purchased inventory is
A. Invoice price
B. List price
C. Invoice price less the purchase discount allowable whether or not taken.
D. Invoice price less the purchase discount taken.
Answer: C

20. An entity paid the in- transit insurance premium for consignment goods shipped to a
consignee. In addition, the entity advanced part of the commission that will be due when
the consignee sells the goods. What amount should be included by the entity as part of
the inventory cost?
A. Insurance premium
B. Advanced commission
C. Both insurance premium and advanced commission
D. Neither of them will be included.
Answer: A

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

A. Inventory purchases are debited to a purchase account.
B. Inventory records are not kept for every time.
C. Cost of goods sold is determined as the amount of purchases less the change in
inventory.
D. Cost of goods sold is recorded with each sale.
Answer: D

22. An entry debiting inventory and crediting cost of goods sold would be made when
A. Merchandise is sold and the periodic inventory method is used.
B. Merchandise is returned and the periodic inventory method is used.
C. Merchandise is returned and the perpetual inventory method is used.
D. Merchandise is sold and the perpetual inventory method is used.
Answer: C
23. Valuation of the inventory requires the determination of all of the following except
A. The cost flow assumption.
B. The cost of goods held on consignment.
C. The physical goods to be included in the inventory.
D. The cost to be included in inventory.
Answer: B

24. Cost of goods sold is the same under a periodic system and perpetual system when
an entity uses
A. FIFO
B. LIFO
C. Weighted average
D. Specific identification
Answer: A

25. 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 an appropriation of retained earnings
D. Presented in the income statement.
Answer: A

26. Sales where the goods are delivered only when the buyer makes final payment are
called:
a. Bill and hold sales
b. Sales subject to installation or inspection
c. Consignment sales
d. Layaway sales
Answer: D

27. Sales in which the buyer is not yet ready to take delivery but does take title are
known as
a. Barter sales
b. Bill and hold sales
c. Layaway sales
d. Sales with buyback
Answer: B

28. For which of the following products is it appropriate to recognize revenue at the
completion of production even though no sale has been made?
a. Automobile
b. Large appliances
c. Residential unit
d. Precious metal
Answer: D

29. Inventories include all of the following assets, except

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
d. Held for use in the production or supply of goods or services
Answer: D

30. The cost of inventory is the sum of

a. Cost of purchase and cost of conversion
b. Direct cost, indirect cost and other cost
c. Cost of purchase, cost of conversion and other cost incurred in bringing the inventory
to the present location and condition
d. Cost of conversion and other cost incurred in bringing the inventory to the present
location and condition
Answer: C

31. The cost of purchase of inventory does not include

a. Purchase price
b. Import duties and irrecoverable taxes
c. Freight, handling and other cost directly attributable to the acquisition of goods
d. Trade discounts, rebates and other similar items
Answer: D

32. The cost of conversion of inventory include all of the following except:
a. Costs directly related to the units of production, such as direct labor
b. Systematic allocation of foxed production overhead
c. Systematic allocation of variable production overhead
d. Systematic allocation of administrative overhead
Answer: D

33. The allocation of fixed factory overhead is based on

a. Normal capacity of the production facilities
b. Actual use of the production facilities
c. Either the normal capacity or actual use of the production facilities, whichever is
appropriate
d. Relative sales value method
Answer: A

34. How should unallocated fixed overhead be treated?

a. Allocated to finished goods and cost of goods sold.
b. Allocated to raw materials, goods in process and finished goods.
c. Recognized as an expense in the period incurred.
d. Allocated to goods in process and finished goods.
Answer: C

35. Variable production overhead is allocated to each unit of production on the basis of
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, whichever is
appropriate
d. Neither the normal capacity nor the actual use of production facilities
Answer: B

36. The inventory of a service provider is described as work in progress and includes
which of the following
a. Labor and other cost of personnel directly engaged in providing the service
b. Compensation of supervisor directly engaged in providing the service
c. Attributable overhead incurred in providing the services
d. All of these are included
Answer: D

37. Which of the following should not be taken into account when determining the cost
of inventory
a. Storage costs of part-finished goods
b. Trade discounts
c. Recoverable purchase taxes
d. Import duties on shipping of inventory inward
Answer: C

38. The cost of inventory does not include

a. Salaries of factory staff
b. Storage cost necessary in the production process before a further production stage
c. Abnormal amount of wasted materials
d. Irrecoverable purchases taxes
Answer: C

39. Which of the following costs of conversion cannot be included in cost of inventory?
a. Cost of direct labor
b. Factory rent and utilities
c. Salaries of sales staff
d. Factory overhead based on normal capacity
Answer: C

40. Which of the following should be taken into account when determining the cost of
inventory?
a. Storage cost of part-finished goods
b. Abnormal freight in
c. Recoverable purchased tax
d. Interest on inventory loan
Answer: A

41. Inventories encompass all of the following except

a. Merchandise purchased by a retailer
b. Land and other property not held for sale
c. Finished goods produced
d. Materials and supplies awaiting use in the production process
Answer: B

42. A property developer must classify properties that it holds for sale in the ordinary
course of business are
a. Inventory
b. Property, plant and equipment
c. Financial asset
d. Investment property
Answer: A

43. Consumable supplies to be consumed in the production process are reported as

a. Inventory
b. Property, plant and equipment
c. Investment property
d. Intangible asset
Answer: A

44. Which of the following should not be reported as inventory?

a. Land acquired for resale by a real estate firm
b. Shares and bond held for sale by a brokerage firm
c. Partially completed goods held by a manufacturing entity
d. Machinery acquired by a manufacturing entity for use in the production process.
Answer: D

45. Theoretically, cash discount 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
Answer: C

46. Which of the following generally would not be separately accounted for in the
computation of cost of goods sold?
a. Trade discount applicable to purchases
b. Cash discount taken
c. Purchase returns and allowances
d. Cost of transportation for merchandise purchased
Answer: A

47. What is the treatment for abnormal freight in?

a. Charge to expense for the period
b. Charge to finishes goods inventory
c. Charge to raw materials inventory
d. Allocate to work in process inventory
Answer: A

48. The use of purchased discount account implies that the recorded cost of a
purchased inventory is
a. Invoice price
b. Invoice price plus any purchased discount lost
c. Invoice price less the purchased discount taken
d. Invoice price less the purchase discount allowable whether taken or not
Answer: A