INVENTORY VALUATION

THEORIES

1. Which of the following is the reason why the specific identification method may be considered ideal for assigning cost to
inventory and cost of goods sold?
A. There is no arbitrary allocation of cost.
B. It is applicable to all types of inventory.
C. The cost flow matches the physical flow.
D. The potential for manipulation of net income is reduced.

2. The weighted average method may be calculated

I. On a periodic basis.
II. As each shipment is received depending upon the 
circumstances of the entity.
A. I only C. Either I or II
B. II only D. Neither I nor II

3. During periods of rising prices, when the FIFO inventory cost flow method is used, a perpetual inventory system would
A. Not be permitted.
B. Result in the same ending inventory as a periodic 
inventory system.
C. Result in a lower ending inventory than a periodic 
inventory system.
D. Result in a higher ending inventory than a periodic 
inventory system.

4. Lower of cost and net realizable value

A. Must be applied to major group.
B. Gives the lowest valuation if applied to the total inventory.
C. Gives the lowest valuation if applied to major group 
of inventory.
D. Gives the lowest valuation if applied to individual item of inventory.

5. If a material amount of inventory has been ordered through a formal purchase contract at the end of reporting period for future
delivery at firm prices
A. This fact must be disclosed.
B. An appropriation of retained earnings is necessary.
C. Disclosure is required only if prices have since risen substantially.
D. Disclosure is required only if prices have declined since the date of the order.

PROBLEMS

Problem 1: (Cost formulas/Cost Flow Assumption)

Case 1: ABC Company had the following inventory transactions during 20X5:
UNITS UNIT COST UNIT SELLING PRICE
Inventory, January 1 250 P 10.50
Purchase, May 7 200 11.00
Purchase, July 15 275 11.75
Sale, May 20 (120) P14.00
Sale, June 30 (55) 15.00
Sale, September 17 (250) 16.00
Inventory December 31 300

Required: Determine the cost of ending inventory, cost of goods sold and gross profit under each of the following inventory cost
flow methods.

Suggested Answer:

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 Cost of EI Cost of Goods Sold Gross Profit
FIFO 3,506 4,550 1,955
Weighted average 3,333 4,726 1,779
Moving average 3,370 4,686 1,819

FIFO
Cost of ending inventory:
275 x 11.75 3,231.25
25 x 11.00 275.00 3,506.25
Cost of goods sold:
Cost of goods available for sale 8,056.25
Less ending inventory 3,506.25 4,550.00
Gross profit:
Sales 6,505.00
Less cost of goods sold 4,550.00 1,955.00

Weighted average
Cost of ending inventory:
Cost of goods available for sale 8,056.25
Number of units available for sale ÷ 725
Weighted average cost per unit 11.11
Units in ending inventory x 300 3,333.00
Cost of goods sold:
Cost of goods available for sale 8,056.25
Less ending inventory 3,330.00 4,726.15

Gross profit:
Sales 6,505.00
Less cost of goods sold 4,726.25 1,778.75

Moving average
Cost of ending inventory:
Inventory, January 1 250 x 10.50 = 2,625.00
Purchase, March 7 200 x 11.00 = 2,200.00
Total 450 x 10.72 = 4,825.00
Sale, May 20 (120 x 10.72 = 1,286.40)
Sale, June 30 ( 55 x 10.72 = 589.60)
Balance 275 x 10.72 = 2,949.00
Purchase, July 15 275 x 11.75 = 3,231.25
Total 550 x 11.24 = 6,180.25
Sale, September 17 (250 x 11.24 = 2,810.00)
Balance 300x 11.24 = 3,370.25

Cost of goods sold:

Cost of goods available for sale 8,056.25
Less ending inventory 3,370.25 4,686.00
Gross profit:
Sales 6,505.00
Less cost of goods sold 4,686.00 1,819.00

Case 2: Records of the Galo Company show the following data relative to Product ABC:
Units Unit cost Total cost
April 1 Balance 20,000 P10 P200,000
April 2 Purchase 30,000 12 360,000
April 4 Sale 25,000
April 10 Purchase 15,000 14 210,000
April 15 Sale 21,000
April 17 Sales return 1,000
April 28 Purchase 20,000 16.75 335,000

Questions: Based on the above data, answer the following:

1. Using the weighted average method, how much is the cost of inventory at the end of April?
a. P580,000 b. P605,000 c. P520,000 d. P525,000

2. Using the weighted average method, how much is the cost of goods sold in April?
a. P525,000 b. P500,000 c. P585,000 d. P520,000

3. Using the moving average method, how much is the cost of inventory at the end of April?
a. P580,000 b. P605,000 c. P520,000 d. P525,000

4. Using the moving average method, how much is the cost of goods sold in April?
a. P525,000 b. P500,000 c. P585,000 d. P520,000

5. Using the perpetual FIFO method, how much is the cost of inventory at the end of April?
a. P580,000 b. P605,000 c. P520,000 d. P525,000

6. Using the perpetual FIFO method, how much is the cost of goods sold in April?
a. P525,000 b. P500,000 c. P585,000 d. P520,000

7. Using the periodic FIFO method, how much is the cost of inventory at the end of April?

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a. P580,000 b. P605,000 c. P520,000 d. P525,000

8. Using the periodic FIFO method, how much is the cost of goods sold in April?
a. P525,000 b. P500,000 c. P585,000 d. P520,000

SUMMARY OF ANSWERS:

1 . C 2 . C 3 . A 4 . A 5 . B 6 . B 7 . B 8 . B

Weighted Average Method

Units Unit cost Total cost
April 1 20,000 10.00 200,000
April 2 30,000 12.00 360,000
April 10 15,000 14.00 210,000
April 28 20,000 16.75 335,000
85,000 1,105,000 13.00
April 4 (25,000)
April 15 (20,000)
Ending 40,000 13.00 (520,000)
Cost of Sales 585,000

Moving Average
IN OUT BALANCE
April 1 20,000 10.00 200,000
April 2 30,000 30,000 12.00 360,000
50,000 11.20 560,000
April 4 25,000 (25,000) 11.20 (280,000)
25,000 280,000
April 10 15,000 15,000 14.00 210,000
40,000 12.25 490,000
April 15 20,000 (20,000) 12.25 (245,000)
20,000 245,000
April 28 20,000 20,000 16.75 335,000
40,000 580,000

TGAS 1,105,000
Less: Ending Inventory (580,000)
Cost of Sales 525,000

FIFO
April 2 5,000 12.00 60,000
April 10 15,000 14.00 210,000
April 28 20,000 16.75 335,000
40,000 605,000

TGAS 1,105,000
Less: Ending Inventory (605,000)
Cost of Sales 500,000

Problem 2: (Cost formulas)

Case 1: (FIFO-Periodic / Perpetual) Jackpot Company used the perpetual system. The following information has been extracted
from the records about one product:
Units Unit cost Total cost
Jan. 1 Beginning balance 8,000 P70.00 P560,000
Jan. 6 Purchase 3,000 70.50 211,500
Feb. 5 Sale 10,000
Mar. 5 Purchase 11,000 73.50 808,500
Mar. 8 Purchase return 800 73.50 58,800
Apr. 10 Sale 7,000
Apr. 30 Sale return 300

Required: If the FIFO cost flow method is used, what is the cost of the inventory on April 30?

From March 5 purchase (4,500 units x 73.50) 330,750

Whether periodic or perpetual system, the FIFO inventory is the same.

Case 2: (FIFO-Periodic / Perpetual) Luigi Company accumulated the following data for the current year.
Raw materials – beginning inventory 90,000 units @ P7.00
Purchases 75,000 units @ P8.00
120,000 units @ P8.50

The entity transferred 195,000 units of raw materials to work in process during the year.
Work in process – beginning inventory 50,000 units @ P 14.00
Direct labor P3,100,000
Manufacturing overhead P2,950,000
Work in process – ending inventory 48,000 units @ P15.00

Required: The entity used the FIFO method for valuing inventory. What is the cost of goods manufactured for the current year?

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 Beginning raw materials (90,000 x 7) 630,000
Purchases (75,000 x 8 + 120,000 x 8.50) 1,620,000
Raw materials available for use 2,250,000
Ending raw materials (90,000 x 8.50) (765,000)
Raw materials used 1,485,000
Direct labor 3,100,000
Manufacturing overhead 2,950,000
Total manufacturing cost 7,535,000
Beginning work in process (50,000 x 14) 700,000
Total work in process 8,235,000
Ending work in process (48,000 x 15) ( 720,000)
Cost of goods manufactured 7,515,000
Beginning raw materials of 90,000 units plus purchases of 75,000 and 120,000 minus 195,000 units transferred equals
90,000 ending raw materials.

Case 3: (Average method-periodic) Lapaz Company provided the following inventory card during February:
Purchase Price Units Units Used Balance Units
Jan. 10 P100 20,000 20,000
Jan. 31 10,000 10,000
Feb. 8 P110 30,000 40,000
Feb. 9 (Returns from factory)- January 10 lot (1,000) 41,000
Feb. 28 11,000 30,000
Required: Using the weighted average method, what is the cost of inventory on February 28?

Units Unit cost Total cost

January 10 20,000 100 2,000,000
February 8 30,000 110 3,300,000
50,000 5,300,000
Weighted average unit cost (5,300,000/50,000) 106
Cost of inventory (30,000 x 106) 3,180,000

Case 4: (Average method-perpetual) Carlita Company provided the following data relating to an inventory item.
Units Unit cost Total cost
Jan. 1 Beginning balance 5,000 P200 P1,000,000
10 Purchase 5,000 250 1,250,000
15 Sale 7,000
16 Sale return 1,000
30 Purchase 16,000 150 2,400,000
31 Purchase return 2,000 150 300,000

Required: Under the perpetual system, what is the moving average unit cost on January 31?
Units Unit cost Total cost
Jan. 1 Beginning balance 5,000 200 1,000,000
10 Purchase 5,000 250 1,250,000
Balance 10,000 225 2,250,000
15 Sale (7,000) 225 (1,575,000)
Balance 3,000 225 675,000
16 Sale return 1,000 225 225,000
Balance 4,000 225 900,000
30 Purchase 16,000 150 2,400,000
Balance 20,000 165 3,300,000
31 Purchase return (2,000) 150 ( 300,000)
Balance 18,000 167 3,000,000
Observe that the moving average unit cost changes every time there is a new purchase or a purchase return. The
moving average unit cost is not affected by a sale or a sale return.

Case 5: (Specific Identification Method) Big Co. sells apples. At the start of the period:
 Big Co.’s inventory consisted of one (1) red apple with a carrying amount of P2,000.
 During the period, Big Co. acquired one (1) green apple for P3,000 and one (1) blue apple for P4,000.
 Big Co. sold the green apple at P5,000.
Required: Under the specific identification cost formula, the cost of goods sold is_____

P3,000

Problem 3: Accounting for Inventory write-down

Case A: (Write-down of inventories) Information on ABC Co.’s December 31, 20X1 inventory is shown below:
Product A Product B Product C
Purchase price P100,000 P250,000 P300,000
Freight-in 12,000 30,000 36,000
Selling price 210,000 300,000 570,000
Freight-out 9,500 70,000 10,400
Cost to complete 1,000 5,000 1,000
General overhead costs 6,300 9,000 17,100

Required:
1. Compute for the inventory to be presented in ABC’s December 31, 20X1 statement of financial position.
2. Compute for the amount of write-down to be recognized in 20X1 profit or loss.

Requirement (a):
Product
Product B Product C Total
A
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 Purchase price 100,000 250,000 300,000
Freight-in 12,000 30,000 36,000
Cost 112,000 280,000 336,000

Selling price 210,000 300,000 570,000

Freight-out
and cost to (10,500) (75,000) (11,400)
complete
NRV 199,500 225,000 558,600

Lower 112,000 225,000 336,000 673,000

Requirement (b):
Product B: (280,000 – 225,000) = 55,000

Case B: (Write-down of raw materials) The raw materials inventory of ABC Co. on December 31, 20X1 have a cost of P10,000
and an estimated net realizable value of P8,000. Immediately after the balance sheet date the raw materials were applied to
production and it was found out that the net realizable value of the finished goods to which the raw materials were applied exceeds
the production costs. As of December 31, 20X1, what amount of raw materials inventory should ABC Co. report?

P10,000 Cost
 Note again the raw materials and manufacturing supplies held for use in the production of inventories are not
written down below cost if the finished products in which they will be incorporated and expected to be sold at or above cost.

Case C: (Reversal of write-down) Dover Company began operations in 20x0 and determined its ending inventory at cost and at
a LCNRV at December 31, 20x0, and December 31, 20x1. This information is presented below.
Cost Net Realizable Value
12/31/x0 P520,000 P485,000
12/31/x1 615,000 585,000

Instructions
(a) Prepare the journal entries required at December 31, 20x0, and December 31, 20x1, assuming that the inventory is
recorded at LCNRV, using a perpetual inventory system and the cost-of-goods-sold method.
(b) Prepare the journal entries required at December 31, 20x0, and December 31, 20x1, assuming that the inventory is
recorded at cost, using a perpetual system and the loss method.
(c) Which of the two methods above provides the higher net income in each year?

(a)
12/31/x0 Cost of goods sold 35,000
Allowance to reduce inventory to NRV 35,000

12/31/x1 Allowance to reduce inventory to NRV 5,000

Cost of goods sold 5,000
35,000 – (615,000-585,000)

(b)
12/31/x0 Loss due to decline of inventory to NRV 35,000
Allowance to reduce inventory to NRV 35,000

12/31/x1 Allowance to reduce inventory to NRV 5,000

Recovery of inventory loss 5,000
35,000 – (615,000-585,000)

(c) Both methods provide the same net income.

Problem 4: (Purchase commitments) During 20x5, ABC Company signed a non-cancellable contract with Nueva Ecija Milling
Company to purchase 1,000 sacks of rice at P1,200 per sack with delivery to be made in 20x6. On December 31, 20x5, the price of
rice had fallen to P1,150 per sack.

Required: Give the entries on December 31, 20x5 and on February 28, 20x6 (the date of actual purchase) when the market price
on February 28, 20x6 of each sack of rice is--
a. P1,150 b. P1,100 c. P1,210

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 (a)
Dec. 31, 20x5
Loss on Purchase Commitments 50,000
Estimated Liability on Purchase Commitments 50,000
1,000 x (1,200 – 1,150)

Feb. 28, 20x6

Purchases 1,150,000
Estimated Liability on Purchase Commitments 50,000
Accounts Payable 1,200,000
(b)
Dec. 31, 20x5
Loss on Purchase Commitments 50,000
Estimated Liability on Purchase Commitments 50,000

Feb. 28, 20x6

Purchases 1,100,000
Estimated Liability on Purchase Commitments 50,000
Loss on Purchase Commitments 50,000
Accounts Payable 1,200,000

(c)
Dec. 31, 20x5
Loss on Purchase Commitments 50,000
Estimated Liability on Purchase Commitments 50,000

Feb. 28, 20x6

Purchases 1,200,000
Estimated Liability on Purchase Commitments 50,000
Accounts Payable 1,200,000
Recovery of Loss on Purchase Commitments 50,000

FULL PFRS SMES

Inventories Inventories are measured at LCNRV. If the NRV is An SME shall measure inventories at the lower of
lower than cost, the writedown is recognized as cost and estimated selling price less cost to
component of cost of goods sold. complete and sell.

If the estimated selling price less cost to complete

and sell is lower than cost, the writedown is
recognized as impairment loss.

Most recent purchase price is not mentioned as Most recent purchase price is mentioned as an
an example of technique measuring at cost example of technique measuring at cost

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