Inventories - Preliminary Considerations

In a manufacturing entity, the following are components of total manufacturing costs, except

• Direct materials purchased

• Direct materials used

• Direct labor

• Factory overhead

An entity incurred the following costs in acquiring its merchandise inventory. Which of these costs are capitalizable as inventory?

• Import duties

• Recoverable taxes

• Both import duties and recoverable taxes

• Neither import duties nor recoverable taxes

A manufacturing entity incurred storage costs related to its inventory item. Which of the following correctly describe the relevant accounting procedures for these costs?

• Storage costs related to finished goods are capitalized while storage costs related to work-in-process inventory are expensed outright.

• Storage costs related to finished goods are expensed outright while storage costs related to work-in-process inventory are capitalized.

• Storage costs related both to finished goods and work-in-process inventory are capitalized.

• Storage costs related both to finished goods and work-in-process inventory are expensed outright.

When incurring conversion costs in manufacturing inventories, which of the following shall not be capitalized?

• Depreciation of factory building

• Depreciation of delivery truck

• Salaries of factory administration employees

• Salaries of production line workers

Which of the following correctly describes the accounting procedures for transportation costs?

• Transportation costs related to the acquisition of goods shall be capitalized while the transportation costs related to the delivery of goods to customers shall be expensed outright.

• Transportation costs related to the acquisition of goods shall be expensed outright while the transportation costs related to the delivery of goods to customers shall be capitalized.

• Both the transportation costs related to acquisition of goods and delivery of goods to customers shall be capitalized.

• Both the transportation costs related to acquisition of goods and delivery of goods to customers shall be expensed outright.

The following assets are correctly classified as inventory of the relevant entity, except for

• Condominium units being sold by a real estate developer.

• Equipment sold by a hardware store.

• Land sold by a fastfood restaurant.

• Vegetables sold by a market vendor.

Statement I: Raw materials inventories are goods that a manufacturer has completed and are ready to be sold to customers.

Statement II: Work-in-process inventories are the goods that a manufacturer has started processing but not yet finished as of the reporting date.

• Only I is correct

• Only II is correct

• Neither I nor II is correct

• Both I and II are correct

Statement I: An asset classified as inventory by one entity is not necessarily considered as an inventory by another entity.

Statement II: Land can be classified as an inventory even though it is immovable.

• Only I is correct

• Only II is correct

• Neither I nor II is correct

• Both I and II are correct

When an entity uses gross method in recording its purchases, which of the following is false?

• An entity initially records the related accounts payable without deducting the prompt payment discount.

• If there is a failure to pay the accounts payable within the discount period, other loss shall be recorded.

• If the accounts payable has been paid within the discount period, there will be an overall decrease in the amount of cost of goods sold.

• An account named "purchase discount lost" is not used whether or not the accounts payable have been paid within the discount period or not.

Which of the following is true if an entity uses net method in recording its purchases?

• The amount of cost of goods sold will not change, whether or not the payments were made within the discount period.

• Accounts payable are initially measured equal to the amount appearing in the invoice.

• If there is a failure to pay within the discount period, the amount of purchases will be increased.

• Compared to gross method, the net method will normally report a higher balance in accounts payable.