Inventories

Question 1

It refers to the necessary, normal notal business activities of an entity.

Answer 1

Ordinary course of business

Question 2

Held for sale in the ordinary course of business (finished goods)

Answer 2

Inventories

Question 3

In the process of production for such sale (work in process)

Answer 3

Inventories

Question 4

In the form of materials or supplies to be consumed in the production process or in the rendering of services (raw materials and manufacturing supplies).

Answer 4

Inventories

Question 5

These are goods that the seller has already shipped but the buyer has not yet received.

Answer 5

Goods in transit

Question 6

ownership is transferred to the buyer upon shipment. Therefore, the goods in transit form part of the buyer’s inventories. The buyer records the purchase (and accounts payable) on shipment date.

Answer 6

FOB shipping point

Question 7

ownership is transferred to the buyer only when the buyer receives the goods. Therefore, the goods in transit still form part of the seller’s inventories.

Answer 7

FOB destination

Question 8

Sale contracts may also contain terms for shipping costs

Answer 8

Freight

Question 9

The seller pays the freight in advance before
shipment. However, this does not mean that the seller is the one who is supposed to pay for the freight.

Answer 9

Freight prepaid

Question 10

Freight is not yet paid upon shipment. The carrier collects shipping costs from the buyer upon delivery.
Thus, the buyer pays for the freight. However, this does not mean that the buyer is the one who is supposed to pay for the freight.

Answer 10

Freight collect

Question 11

The seller assumes all expenses in delivering the goods to the dock next to (alongside) the carrer on which the goods are to be shipped. The buyer assumes loading and shipping costs. Title passes upon shipment to the
carrier.

Answer 11

FAS (free alongside)

Question 12

The seller assumes all expenses until the goods are unloaded from the carrier, at which time title passes to the buyer.

Answer 12

Ex-ship

Question 13

The buyer pays in lump sum the cost of the goods and the insurance and freight costs.

Answer 13

CIF (cost, insurance, and freight)

Question 14

The buyer pays in lump sum the cost of the goods and the freight cost.

Answer 14

CF (cost and freight)

Question 15

the buyer owns the goods being shipped but the seller already paid the shipping costs

Answer 15

FOB shipping point, freight prepaid

Question 16

the seller owns the gods being shipped but the carrier will be collecting the shipping costs from the buyer.

Answer 16

FOB Destination, freight collect

Question 17

The _____ retains control over the consigned goods til they are sold to end customers.

Answer 17

Consignor

Question 18

Since ownership is not transferred, transfers of consigned pods between the consignor and consignee are usually recorded aly through ________

Answer 18

Memo entries

Question 19

Freight and other incidental costs of transferring consigned goods to the consignee form part of the ______

Answer 19

Cost of consigned goods

Question 20

Inventory financing agreements:

Answer 20

a. Product financing agreement
b. Pledge of Inventory
>Warehouse financing
c. Loan of inventory

Question 21

a seller sells inventory to a buyer but assumes an obligation to repurchase it at a later date.
This arrangement does not result to the transfer of control over the asset. Therefore, the seller retains ownership over tie
inventory.

Answer 21

Product financing agreement

Question 22

A borrower uses its inventory as a collateral security for a loan. This arrangement does not result to the transfer of control over the asset. Therefore the borrower retains ownership over inventory.

Answer 22

Pledge of inventory

Question 23

under this arrangement a third party (e.g., a public warehouse) holds the inventory and acts as the creditor’s agent. The public warehouse then furnishes the creditor the warehouse receipts evidencing rights to the inventory.

Answer 23

Warehouse financing

Question 24

an entity borrows inventory from another entity to be replaced with the same kind of inventory. This arrangement results to transfer of control over the asset.
Accordingly, the borrower includes the loaned goods in its inventory.

Answer 24

Loan of inventory

Question 25

a seller allows a prospective customer to use a good for a given period of time. At bie end of that time, if the prospective customer is satisfied with le good, he purchases it. If not, he returns it to the seller.

Answer 25

Sale on trial / sale on approval

Question 26

It is where the possession of the goods is transferred to the buyer but the seller retains legal title solely to protect the collectability of the amount due is considered as a regular sale. Therefore, the goods are excluded from the seller’s inventory and included in the buyer’s inventory at the point of sale.

Answer 26

Installment sale

Question 27

It is a contract (of sale) under which a seller bills a customer but retains physical possession of the goods until it is transferred to the customer at a future date.

Answer 27

Bill-and-hold arrangement

Question 28

is a type of sale in which goods are delivered when the buyer makes the final payment in a series installments. This is different from a regular installment sale wherein goods are delivered to the buyer at the time of sale.

Answer 28

Lay away sale

Question 29

Inventories are accounted for either:

Answer 29

• Perpetual inventory system
• Periodic inventory system

Question 30

If it is charged as loss, e.g. theft, pilferage, and loss on

Answer 30

Abnormal spoilage

Question 31

Inventory shortage is charged to cost of goods sold if it is considered _______

Answer 31

Normal spoilage

Question 32

Ending inventory and Profit have a ____ relationship.

Answer 32

direct

Question 33

It means that if ending inventory is understated, profit is also understated

Answer 33

Direct relationship

Question 34

This means that if an account (e.g. ending inventory) is understated, the related account (e.g. COGS) is overstated.

Answer 34

Inverse relationship

Question 35

Derive the following relationship:

Beginning Inventory & Purchases: Profit

Answer 35

Inverse Relationship

Question 36

Derive the following relationship:

Ending Inventory : Cost of goods sold

Answer 36

Inverse Relationship

Question 37

Derive the following relationship:

Beginning Inventory & Purchases: Cost of Goods Sold

Answer 37

Direct Relationship

Question 38

Measurement of Inventories:

Answer 38

Lower of cost and Net Realizable Value

Question 39

Cost of Inventories:

Answer 39

1. Purchase Cost
2. Conversion Cost
3. Other Cost

Question 40

Examples that are excluded from the cost of inventories and are expensed:

Answer 40

a. Abnormal amounts of wasted materials, labor or other production costs,

b. Selling costs, eg., advertising and promotion costs and delivery expense or freight out;

c. Administrative overheads that do not contribute to bringing inventories to their present location and condition; and

d. Storage costs, unless those costs are necessary
in the
production process before a further production stage. (PA26)

> Storage costs of partly finished or partly completed goods are. capitalized as cost of inventory, e.g., storage cost of wine during fermentation.

> Storage costs of finished or completed goods are expense. e.g, warehousing costs of completed inventories.

Question 41

It given to encourage orders in large quantities.

Answer 41

Trade discounts

Question 42

It is deducted from the list price when determining the invoice price.

Answer 42

Trade Discount

Question 43

It is given to encourage prompt payment.

Answer 43

Cash Discounts

Question 44

It is deducted from the invoice price when determining the amount of net payment required within the discount period.

Answer 44

Cash Discounts

Question 45

Accounting for Cash Discounts:

Answer 45

1. Gross Method
2. Net Method

Question 46

The cost of inventory and accounts payable are initially recorded net of cash discounts, whether taken or not.

Answer 46

Net method

Question 47

The cost of inventory and accounts payable are recorded gross of cash discounts.

Answer 47

Gross Method

Question 48

It refers to direct labor and manufacturing overhead he a necessary in converting raw materials into finished goods.

Answer 48

Conversion costs

Question 49

It refers to costs that are not directly traceable to the finished goods but are necessary in producing those goods.

Answer 49

Manufacturing Overhead

Question 50

Manufacturing overhead is sub-classified:

Answer 50

a. Variable Production Overhead
b. Fixed Production Overhead

Question 51

Under this formula, cost of sales and ending inventory are determined based on on weighted average cost of beginning inventory and all inventories purchased or produced during the period.

Answer 51

Weighted Average

Question 52

Under this formula, specific costs are attributed to identified items of inventory.

Answer 52

Specific Identification

Question 53

Under this formula, it is assumed that inventories that were purchased or produced first are sold first, and therefore unsold inventories at the end of the period are those most recently purchased or produced.

Answer 53

First-In, First-Out (FIFO)

Question 54

It is “an agreement with an unrelated pay, binding on both parties and usually legally enforceable,

Answer 54

Firm purchase commitment

Question 55

It is estimated selling price less estimated costs of completion and estimated costs to sell.

Answer 55

Net realizable value (NRV)

Question 56

It is whereby the seller retains title to the goods sold solely to protect the collectability of the sale price is considered a regular sale.

Answer 56

Installment Sale