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INVENTORY ESTIMATION Inventory estimates will be required for the following, except a. As proof of reasonable accuracy of the physical inventory b. When inventory is destroyed by typhoon or lahar flow c. When interim financial statements are prepared d. In the determination of the ending inventory t...

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INVENTORY ESTIMATION 1. Inventory estimates will be required for the following, except a. b. c. d.

As proof of reasonable accuracy of the physical inventory When inventory is destroyed by typhoon or lahar flow When interim financial statements are prepared In the determination of the ending inventory to be shown on the balance sheet at year end

2. Noel Corp. has annual sales totaling P650,000 and an average gross profit of 20% of cost. What is the peso amount of the gross profit? a. b. c. d.

130,000 162,500 108,333 97,500

SOLUTION: P650,000 - (P650,000 ÷ 1.20) = P108,333 3. The following information is available for October for Joseph Company Beginning inventory Net purchases Net sales Percentage markup on cost

P 50,000 150,000 300,000 66.67%

A fire destroyed Joseph’s October 31 inventory, leaving undamaged inventory with a cost of P3,000. Using the gross profit method, the estimated ending inventory destroyed by fire is a. b. c. d.

P17,000 P77,000 P80,000 P100,000

SOLUTION: (P50,000 + P150,000) – (P300,000 ÷ 5/3) – P3,000 = P17,000 4. April Company uses the retail inventory method to value its merchandise inventory. The following information is available for the current year:

Beginning inventory Purchases Freight-in Net markups

Cost P 30,000 145,000 2,500 -

Retail P 50,000 200,000 8,500

Net markdowns Employee discounts Sales

-

10,000 1,000 205,000

If the ending inventory is to be valued at the lower-of-cost-or-market, what is the cost to retail ratio? a. b. c. d.

P177,500 ÷ P258,500 P177,500 ÷ P250,000 P175,000 ÷ P260,000 P177,500 ÷ P248,500

SOLUTION: Cost: P30,000 + P145,000 + P2,500 = P177,500. Retail: P50,000 + P200,000 + P8,500 = P258,500 5. For 2013, cost of goods available for sale for JP Corporation was P900,000. The gross profit rate was 20%. Sales for the year were P800,000. What was the amount of the ending inventory? a. b. c. d.

0 260,000 160,000 180,000

SOLUTION: P900,000 - (P800,000 × .80) = P260,000 6. Evening Company uses the FIFO retail inventory method of determining the value of their inventory. The following information is made available:

Inventory beginning Purchases Freight in Purchase returns Mark-ups Mark-up cancellation Markdowns Markdown cancellation Sales Sales returns Sales discounts Employee discounts

Cost 600,000 3,048,000 80,000 140,000

What would be the estimated cost of the ending inventory? a. 662,000

Market 1,500,000 5,500,000 180,000 600,000 100,000 1,300,000 300,000 4,470,000 150,000 200,000 400,000

b. 992,000 c. 774,000 d. 896,000 7. On August 31, a hurricane destroyed a retail location of Magee including the entire inventory on hand at the location. The inventory on hand as of June 30 totaled P320,000. Since June 30 until the time of the hurricane, the company made purchases of P85,000 and had sales of P250,000. Assuming the rate of gross profit to selling price is 40%, what is the approximate value of the inventory that was destroyed? a. b. c. d.

205,000 255,000 320,000 181,500

SOLUTION: (P320,000 + P85,000) - [P250,000 × (1 - .40)] = P255,000 8. On December 31, 2013, Lean Company provided the following information: Inventory, January 1 Purchases Additional mark-ups

Cost 735,000 4,165,000

Retail 1,015,000 5,775,000 210,000

Sales for the year totaled P5,530,000. Markdowns amounted to P70,000. Under the approximate lower of average cost or market retail method, what is the inventory on December 31, 2013? a. b. c. d.

1,400,000 1,078,000 1,540,000 980,000

9. Under the retail inventory method of approximating ending inventory, which of the following is included in the computation of the cost to retail percentage? a. b. c. d.

Mark-up Mark-down Freight-in All of these

10.Which of the following would cause a decrease in the cost ratio used in the retail inventory method? a. Higher retail prices b. Higher freight in costs c. More employee discounts

d. Lower net markups 11.The retail inventory method includes all of the following in the calculation of the goods available for sale at both cost and retail, except a. b. c. d.

Departmental transfer-in Purchase returns Freight in Abnormal shortage

12.The inventory account of Irick Company at December 31, 2013, included the following items: Merchandise out on consignment at sales price (including markup of 40% on selling price) Goods purchased, in transit (shipped f.o.b. shipping point) Goods held on consignment by Irick Goods out on approval (sales price P7,600, cost P6,400)

15,000 12,000 13,000 7,600

Based on the above information, the inventory account at December 31, 2013, should be reduced by a. b. c. d.

20,200 32,000 22,600 32,200

SOLUTION: (P15,000 × 40%) + P13,000 + (P7,600 - P6,400) = P20,200 13.Henry’ Co.’s pricing structure has been established to yield a gross margin of 30%. The following data pertain to the year ended December 31, 2013. Sales Inventory, January 1, 2013 Purchases Freight cost on purchases Freight cost on merchandise sold Inventory inside the company’s warehouse, per actual count on 12/31/13 Credit memo issued to customers for goods returned & received Credit memo issued to customers for merchandise to be returned,1/02/14 Sales discount

P2,200,00 0 1,000,000 800,000 20,000 30,000 160,000 50,000 40,000 100,000

Henry is satisfied that all sales and purchases have been fully and properly recorded. How much would Henry reasonably estimate as a shortage in inventory at December 31, 2013?

a. b. c. d.

143,000 343,000 183,000 155,000

14.Under the gross profit method, if the gross profit rate is based on cost, the cost of sales is computed as a. b. c. d.

Net sales times cost ratio Gross sales divided by sales ratio Net sales divided by sales ratio Gross sales times cost ratio

15.Which instance will not require inventory estimation? a. Proof of the reasonable accuracy of the physical inventory account b. Year-end reporting for inventory shown on the face of the statement of financial position c. Inventory destroyed by a major fire incident in the production facility d. External and internal interim financial statements are prepared 16.The following information is available for October for Wally Company Beginning inventory Net purchases Net sales Percentage markup on cost

P100,000 300,000 600,000 66.67%

A fire destroyed Wally’s October 31 inventory, leaving undamaged inventory with a cost of P6,000. Using the gross profit method, the estimated ending inventory destroyed by fire is a. b. c. d.

154,000 160,000 200,000 34,000

SOLUTION: (P100,000 + P300,000) - (P600,000 ÷ 5/3) - P6,000 = P34,000 17.This is often used for convenience for measuring inventories of large number of rapidly changing items with similar margins for which it is impracticable to use other costing method. a. b. c. d.

Gross profit method Standard cost method Relative sales price method Retail method

18.Eric Company’s accounting records indicated the following for 2013: Inventory, January 1 Purchases Sales

5,000,000 23,000,000 25,000,000

A physical inventory taken on December 31, 2013 resulted in an ending inventory of P5,000,000. On December 31, 2013, unsold goods on consignment with selling price of P1,500,000 are in the hands of a consignee. The gross profit on cost remained constant at 25% in recent years. The entity suspects that some inventory may have been taken by a new employee. On December 31, 2013, what is the estimated cost of missing inventory? a. b. c. d.

3,350,000 1,800,000 1,500,000 3,050,000

19.Julie Company has a recent gross profit history of 33 ½ %. The following data are available from Julie’s accounting records for the three months ended March 31, 2013:Inventory at 01/01/13, P600,000; Purchases, P3,000,000; Sales, P4,000,000; Purchase Returns, P70,000; Freight in P50,000; Sales Returns, P100,000; Sales Discounts, P20,000; Purchase Discounts, P30,000 and Freight Out, P5,000. If the gross profit rate is based on cost, what is the estimated cost of inventory end for the 3 months ended March 31, 2013? a. b. c. d.

950,000 964,000 625,000 969,000

20.The sales price for a product provides a gross profit of 25% of sales price. What is the gross profit as a percentage of cost? a. b. c. d.

20% 33% 25% Not enough information is provided to determine

SOLUTION: 25% ÷ (100% - 25%) = 33%. 21.The retail inventory method would include which of the following in the calculation of the goods available for sale at both cost and retail? a. Purchase returns

b. Markups c. Freight in d. Markdowns 22.Maria, Inc. estimates the cost of its physical inventory at March 31 for use in an interim financial statement. The rate of markup on cost is 25%. The following account balances are available: Inventory, March 1 Purchases Purchase returns Sales during March

P220,000 172,000 8,000 300,000

The estimate of the cost of inventory at March 31 would be a. b. c. d.

144,000 112,000 159,000 84,000

SOLUTION: COGS = P300,000 ÷ 1.25 = P240,000 (P220,000 + P172,000 - P8,000) P240,000 = P144,000 23.Joanne uses the conventional retail method to determine its ending inventory at cost. Assume the beginning inventory at cost (retail) were P130,000 (P198,000), purchases during the current year at cost (retail) were P685,000 (P1,100,000), freight-in on these purchases totaled P43,000, sales during the current year totaled P1,050,000, and net markups (markdowns) were P24,000 (P36,000). What is the ending inventory value at cost? a. b. c. d.

156,165 157,412 236,000 153,164

SOLUTION: P198,000 + P1,100,000 + P24,000 – P1,050,000 – P36,000 = P236,000; (P130,000 + P685,000 + P43,000) ÷ (P198,000 + P1,100,000 + P24,000) = . 649; P236,000 × .649 = P153,164 24.The use of the gross profit method assumes a. Sales and cost of goods sold have not changed from previous years b. The relationship between selling price and cost of goods sold is similar to prior years. c. The amount of gross profit is the same as in prior years d. Inventory values have not increased from previous years

25.Thea supply uses the conventional retail method to determine its ending inventory at cost. Assume the beginning inventory at cost (retail) were P265,600 (P326,900), purchases during the current year at cost (retail) were P1,068,600 (P1,386,100), freight-in on these purchases totaled P63,900, sales during the current year totaled P1,302,000, and net markups (markdowns) were P2,000 (P96,300). What is the ending inventory value at cost? a. b. c. d.

246,667 411,000 316,700 258,111

SOLUTION: P326,900 + P1,386,100 + P2,000 - P1,302,000 - P96,300 = P316,700; (P265,600 + P1,068,600 + P63,900) ÷ (P326,900 + P1,386,100 + P2,000) = 81.5%; P316,700 × .815 = P258,111 26.On October 31, a fire destroyed PH Inc.'s entire retail inventory. The inventory on hand as of January 1 totaled P680,000. From January 1 through the time of the fire, the company made purchases of P165,000 and had sales of P360,000. Assuming the rate of gross profit to selling price is 40%, what is the approximate value of the inventory that was destroyed? a. b. c. d.

680,000 629,000 673,000 485,000

SOLUTION: (P680,000 + P165,000) - [P360,000 × (1 - .40)] = P629,000 27.On April 15 of the current year, a fire destroyed the entire uninsured inventory of a retail store. The following data are available: Sales, January 1 through April 15 Inventory, January 1 Purchases, January 1 through April 15 Markup on cost The amount of the inventory loss is estimated to be a. b. c. d.

30,000 50,000 60,000 75,000

SOLUTION:

P300,000 50,000 250,000 25%

50,000 + P250,000 - (300,000/1.25) = P60,000. 28.In computing cost ratio, the conservative/conventional retail method should a. b. c. d.

Exclude markup and markdown Include markup and markdown Include markup but not markdown Exclude markup but not markdown

29.Evening Company uses the FIFO retail inventory method of determining the value of their inventory. The following information is made available:

Inventory beginning Purchases Freight in Purchase returns Mark-ups Mark-up cancellation Markdowns Markdown cancellation Sales Sales returns Sales discounts Employee discounts

Cost 600,000 3,048,000 80,000 140,000

Market 1,500,000 5,500,000 180,000 600,000 100,000 1,300,000 300,000 4,470,000 150,000 200,000 400,000

What is the estimated amount of cost of goods sold? a. b. c. d.

2,782,000 2,679,944 2,596,400 2,926,400

30.Lea Inc. uses the conventional retail method to determine its ending inventory at cost. Assume the beginning inventory at cost (retail) were P65,500 (P99,000), purchases during the current year at cost (retail) were P568,000 (P865,600), freight-in on these purchases totaled P26,500, sales during the current year totaled P811,000, and net markups were P69,000. What is the ending inventory value at cost? a. b. c. d.

174,366 152,308 222,600 142,241

SOLUTION:

P99,000 + P865,600 + P69,000 - P811,000 = P222,600; (P65,500 + P568,000 + P26,500) ÷ (P99,000 + P865,600 + P69,000) = 63.9%; P222,600 × .639 = P142,241 31.Guel Company, a wholesaler, budgeted the following sales for the indicated months: Sales on account Cash sales Total sales

June P1,800,000 180,000 P1,980,000

July P1,840,000 200,000 P2,040,000

August P1,900,000 260,000 P2,160,000

All merchandise is marked up to sell at its invoice cost plus 20%. Merchandise inventories at the beginning of each month are at 30% of that month's projected cost of goods sold The cost of goods sold for the month of June is anticipated to be a. b. c. d.

1,650,000 1,440,000 1,500,000 1,520,000

SOLUTION: (1 + .2)C = 1,980,000; C = P1,650,000

Average: 32.Which statement is true about the retail inventory method? a. b. c. d.

It may not be used to estimate inventories for annual statements It may not be used by auditors It may not be used to estimate inventories for interim statements None of these

33.Under the retail inventory method, freight in would be included in the calculation of the goods available for sale for which of the following? I. Cost II. Retail a. b. c. d.

I only II only Both I and II Neither I nor II

34.To produce an inventory valuation which approximates the lower of cost or market using the conventional retail inventory method, the computation of the ratio of cost to retail should a. b. c. d.

include markups and markdowns include markups but not markdowns ignore both markups and markdowns include markdowns but not markups

35.Which of the following is not a basic assumption of the gross profit method? a. 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 b. The total amount of purchases and the total amount of sales remain relatively unchanged from the comparable previous period. c. The beginning inventory plus the purchases equal total goods to be accounted for d. Goods not sold must be on hand 36.Paul Company uses the average cost retail inventory method. The following information is available for the year ended December 31, 2013. Inventory - January 1 Net purchases Departmental transfer - credit Net markup Inventory shortage - sales price Employee discount Sales, including sales of P400,000 of items which were marked down from P500,000

Cost 1,650,000 3,725,000 200,000

Retail 2,200,000 4,950,000 300,000 150,000 100,000 200,000 4,000,000

What is the cost of goods sold for the year ended December 31, 2013? a. b. c. d.

3,425,000 2,925,000 3,225,000 2,575,000

37.The following information has been extracted from the records of James Company about one of its products.

Jan. 1 5 15 16

Beginning balance Purchase Sale Sale return

Units 10,000 10,000 15,000 1,000

Unit cost 150 180

Total Cost 1,500,000 1,800,000

25 Purchase 26 Purchase return

4,000 500

200 200

800,000 100,000

Under the perpetual average method or moving average, what amount should be reported respectively as cost of ending inventory and cost of goods sold? a. b. c. d.

1,616,995 and 2,383,005 1,790,000 and 2,210,000 1,700,500 and 2,299,500 1,690,000 and 2,310,000

38.On May 1, 2013, a flash flood caused damage to the merchandise stored in the warehouse of Rafael Company. The following data were established: Net sales for 2012 were P800,000 matched against cost of P560,000 Merchandise inventory, January 1, 2013 was P200,000, 90% of which was in the warehouse and 10% in downtown showrooms. From January 1, 2013 to date of flood, the invoice value of purchases (all stored in the warehouse) is ascertained to be P100,000; freight inward, P4,000; and purchase return, P6,000 Cost of merchandise transferred from the warehouse to showrooms was P8,000 and net sales from January 1 to May 1, 2013 (all warehouse stock) amounted to P320,000.

  



What is the estimated cost of merchandise destroyed by the flood? a. b. c. d.

80,000 46,000 66,000 50,000

39.The gross profit method of estimating ending inventory may be used for all of the following except a. b. c. d.

Internal as well as external interim reports Estimate of inventory destroyed by fire or other casualty Internal as well as external year-end reports Rough test of the validity of an inventory cost determined under either periodic or perpetual system

40.On the night of December 31, 2014, a fire destroyed most of the merchandise inventory of Charles Company. All goods were completely destroyed except for partially damaged goods that normally sell for P100,000 and that had an estimated net realizable value of P25,000 and undamaged goods that normally sell for P60,000. The following data are available: Inventory, January 1, 2014 Net purchases for 2014 Net sales for 2014

600,000 4,300,000 5,600,000

Net sales Cost of sales Gross income

Total 9,000,000 6,750,000 2,250,000

2013 5,000,000 3,840,000 1,160,000

2012 3,000,000 2,200,000 800,000

2011 1,000,000 710,000 290,000

What is the estimated amount of fire loss on December 31, 2014? a. b. c. d.

700,000 580,000 630,000 615,000

41.The cost ratio computed under average retail inventory includes a. b. c. d.

Net markdowns but not markups Net markups but not markdowns Net markups and markdowns for purchases only Net markups and markdowns for both purchases and opening stock

42.The retail inventory method is based on the assumption that the a. b. c. d.

ratio of cost to retail changes at a constant rate ratio of gross margin to sales is approximately the same each period proportions of markups and markdowns to selling price are the same final inventory and the total of goods available for sale contain the same proportion of high-cost and low-cost ratio goods

43.Which of the following is not required when using the retail inventory method? a. A record of the total cost and retail value of goods purchased b. All inventory items must be categorized according to the retail markup percentage which reflects the item’s selling price c. Total sales for...