Chapter 7

Question 1

These are those that are being sold by an entity in their normal operations.

Answer 1

Inventories

Question 2

Why do entities sell inventories?

Answer 2

To earn gross profit

Question 3

What PAS covers all about inventories?

Answer 3

PAS 2 Inventories

Question 4

What comprises the cost of inventories?

Answer 4

Costs of purchase
Costs of production
Other costs incurred in bringing inventories to present location

Question 5

Non-recoverable taxes are part of costs of purchase. How are recoverable taxes accounted for?

Answer 5

Recoverable taxes are excluded from costs of purchase and are included in another section of assets aside from inventories.

Question 6

is freight out considered as transport costs under costs of purchase?

Answer 6

No. It is considered as a selling expense and are excluded from transport costs.

Question 7

How are trade discounts and rebates in the purchase of inventories accounted for?

Answer 7

They are deducted.

Question 8

How are basket price of inventories allocated?

Answer 8

Using the relative sales value method.

Question 9

How are abnormal amounts of wasted materials, storage costs, administrative overhead, and selling costs accounted for?

Answer 9

They are outright expenses.

Question 10

What storage costs are excluded and are included in the costs of conversion?

Answer 10

Storage costs for RM and WIP goods are included.

Storage costs for FG are excluded.

Question 11

This is an entity that buys finished goods from another entity (manufacturer) for resale.

Answer 11

Trader or merchandiser

Question 12

What is the only type of inventories that merchandisers or traders have?

Answer 12

Merchandise Inventory

Question 13

How do we arrive at the cost of goods sold?

Answer 13

Beginning Inventory
Add: Net Purchases
Total goods available for sale
Less: Ending Inventory
Cost of Goods Sold

Question 14

What are the types of inventories that a manufacturer maintains?

Answer 14

Raw materials
Work-in-process
Finished goods
Factory Supplies

Question 15

These represent the physical aspect of an inventory item.

Answer 15

Raw materials

Question 16

These are raw materials which can be easily traced to the finished product.

Answer 16

Direct Materials

Question 17

These are raw materials which cannot be economically attributed to the finished product.

Answer 17

Indirect Materials

Question 18

These inventories represent cost of unfinished products as of a reporting date.

Answer 18

Work-in-process inventory

Question 19

These inventories represent cost of fully transformed products ready for sale.

Answer 19

Finished Goods

Question 20

This represent costs which are paid to personnel who are directly involved in the production process.

Answer 20

Direct Labor

Question 21

This represents costs which are not directly traceable to the finished product but still necessary costs of production.

Answer 21

Manufacturing Overhead

Question 22

These are indirect costs of production that remain relatively constant regardless of the volume of production.

Answer 22

Fixed factory overheads

Question 23

These are indirect costs of production that vary directly with the volume of production such as indirect materials and indirect labor.

Answer 23

Variable factory overheads

Question 24

How are office supplies accounted for?

Answer 24

It is to be expensed as supplies expense.

Question 25

This method is used when the inventory is of high-value and the turnover is slow.

Answer 25

Perpetual Inventory method

Question 26

This method is used when the inventory is of low-value and the turnover is fast.

Answer 26

Periodic Inventory Method

Question 27

What are included in prime costs?

Answer 27

Direct Materials + Direct Labor

Question 28

What are included in conversion costs?

Answer 28

Direct Labor + Factory Overhead

Question 29

How are unallocated overheads accounted for?

Answer 29

They are expensed in the period they are incurred.

Question 29

How is fixed factory overhead allocated?

Answer 29

Based on the normal capacity of the production facilities.