PAS 2 : INVENTORIES

1. Inventory is defined as those goods held for sale in the ordinary course of business, in
the process of production for such sale, and to be consumed in the production of goods
or services available for sale. Which item would not be properly classified as inventory?
a. Manufacturing supplies c. Office supplies
b. Raw materials d. Work in process
c
2. The cost of purchase of inventories does not include
a. Purchase price.
b. Import duties and taxes.
c. Freight, handling and other costs directly attributable to the acquisition of goods.
d. Trade discounts, rebates and other similar items.
d
3. The cost of conversion does not include
a. Direct labor c. Variable production overhead
b. Fixed production overhead d. Administrative overhead
d
4. What is the primary purpose of inventory accounting?
a. To minimize income tax.
b. To parallel the physical flow of units of merchandise.
c. To maximize reported income.
d. To attain the fairest matching of cost against revenue.
d
5. In a perpetual inventory system, two entries are normally made to record each sales
transaction. The purpose of these entries is best described as follows:
a. One entry recognizes the sales revenue and the other recognizes the cost of goods
sold.
b. One entry recognized the purchase of merchandise and the other records the sale.
c. One entry records the cost of goods sold and the other reduces the balance in the
inventory account.
d. One entry updates the subsidiary ledger and the other updates the general ledger.
a
6. As a result of taking an annual physical inventory, it is usually necessary in a perpetual
inventory system to make an entry
a. Reducing assets and increasing the cost of goods sold.
b. Reducing assets and increasing liabilities.
c. Reducing the cost of goods sold.
d. None of the above (a physical inventory usually does not indicate the need for any
entries in the accounting records).
d
7. Which of the following items would most likely be accounted for under a perpetual
inventory system?
a. Auto parts b. Hardware c. Grocery items d. Jewelry
d
8. An inventory pricing procedure in which the oldest costs incurred rarely have an effect on
the ending inventory is
a. FIFO c. Weighted average
b. Specific identification d. None of the above
a
9. The cost of goods available for sale during the period divided by the total units available
for sale during the period equals an average units cost multiplied by the units on hand
equals cost of ending inventory
a. Weighted average periodic c. Specific identification
b. Weighted average perpetual d. Standard cost
a
10. The specific identification method is more appropriate than a flow assumption
a. For a large inventory of identical low-priced items.
b. If each item in the inventory is unique.
c. If purchase costs are rising.
d. If purchase costs are falling.
b
11. Which of the following is not affected by the inventory valuation method used by a
business?
a. Amounts owed for income taxes. c. Amounts paid to acquire merchandise.
b. Cost of merchandise sold. d. Net income of the business.
c
22. Theoretically, which of the following costs should be considered inventoriable?
Freight Warehousing
a. No No
b. No Yes
c. Yes No
d. Yes Yes
c
23. The weighted and simple average method of inventory costing are applicable to
which of the following system?
Periodic Perpetual
a. Yes Yes
b. Yes No
c. No Yes
d. No No
b
24. Themoving average method of inventory cost flow is applicable to which of the following
inventory system?
Periodic Perpetual
a. Yes Yes
b. Yes No
c. No Yes
d. No No
c
25. The net method of recording purchases
a. is the theoretically accepted method because the cost measured represents the cash
equivalent price of the inventory
b. is the one used by most companies
c. violates the matching principle
d. is more convenient than the gross method from a bookkeeping standpoint
a
26. The retail inventory method is characterized by
a. the recording of sales at cost
b. the recording of purchases at selling price
c. the reporting of year-end inventory at retail in the financial statements
d. the recording of markups at retail and markdowns at cost
b
35. When the conventional retail inventory method is used, markdowns are commonly
ignored in the computation of the cost to retail ratio because
a. there may be no markdowns in a given year
b. this tends to give better approximation of the lower of cost or market
c. markups are also ignored
d. this tends to result in the showing of a normal profit margin in a period when no
markdown goods have been sold
b
36. With regards to the retail inventory method, which of the following is the most accurate
statement?
a. generally, accountants ignore net markups and net markdowns in computing the
cost-price-percentage
b. generally, accountants include both net markups and net markdowns in computing
cost-price-percentage
c. this method results in a lower ending inventory cost if net markups are included but
net markdowns are excluded in computing the cost-price-percentage
d. it is not applicable to LIFO costing
c
37. What is the treatment of inventory spoilage under the retail method?
a. Ignored
b. Deducted from cost of goods available for sale
c. Deducted from sales
d. Deducted from goods available for sale at retail
d
38. The use of the gross profit method assumes
a. the amount of gross profit is the same as in prior years
b. sales and cost of goods sold have not changed from previous years
c. inventory values have not increased from previous years
d. the relationship between selling price and cost of goods sold is similar to prior years
d
40. Accruing net losses on firm purchase commitments for inventory is an example of the
accounting concept of
a. periodicity b. realization c. materiality d. conservatism
d