Estimating Inventories

1. Techniques for the measurement of the cost of

inventories may be used for convenience if the results On January 1, 2016, the Corporation’s pricing policy
approximate cost. The following are acceptable for was changed so that the gross profit rate would be
year-end financial reporting purposes, except three percentage points higher than the one earned in
a. Standard cost method 2015.
b. Retail method Salvaged undamaged merchandise was marked to sell
c. Gross profit method at P120,000 while damaged merchandise was marked
d. None of the above. to sell at P80,000 had an estimated realizable value of
P18,000.
2. The use of the gross profit method assumes
a. The amount of gross profit is the same as in prior How much is the inventory loss due to fire?
years. a. P918,200 c. P856,200
b. Sales and cost of goods sold have not changed b. P947,000 d. P824,600
from previous years.
c. Inventory values have not increased from previous 7. Luna Manufacturing began operations 5 years ago. On
years. August 13, 2016, a fire broke out in the warehouse
d. The relationship between selling price and cost of destroying all inventory and many accounting records relating
goods sold is similar to prior years. to the inventory. The information available is presented
below. All sales and purchases are on account.
3. The gross profit method of estimating inventory would January 1, August 13,
NOT be useful when 2016 2016
a. Inventories have been destroyed or lost by fire, Inventory P143,850
theft, or other casualty, and the specific data Accounts Receivable 130,590 P128,890
required for inventory valuation are not available. Accounts Payable 88,140 122,850
b. A periodic system is in use and inventories are Collections on accounts rec.,

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required for interim statements. Jan. 1- Aug. 13 753,800

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c. The relationship between gross profit and sales Payments to suppliers,
remains stable over time. Jan. 1- Aug. 13 487,500

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d. There is a significant change in the mix of products
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being sold. at Aug. 13, at cost 52,900

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4. The gross profit method assumes Summary on previous years’ sales:
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a. The beginning inventory plus purchases equal total 2013 2014 2015
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goods to be accounted for. Sales P626,000 P705,000 P680,000

Gross Profit 187,800 183,300 231,200
b. Goods not sold must be on hand. GPR 30% 26% 34%
c. If sales, reduced to cost, are deducted from the
Determine the inventory loss suffered as a result of the
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sum of the opening inventory plus purchases, the

fire.
result is the ending inventory.
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a. P139,590 c. P86,690
d. All of these.
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b. P102,560 d. P86,310
5. On May 6, 2016 a flash flood caused damage to the
merchandise stored in the warehouse of Cabanatuan
8. The work-in-process inventory of Burp Company were
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Co. You were asked to submit an estimate of the

completely destroyed by fire on June 1, 2016. You were
merchandise destroyed in the warehouse. The
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able to establish physical inventory figures as follows:

following data were established:
January 1, 2016 June 1, 2016
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a. Net sales for 2015 were P800,000, matched

against cost of P560,000. Raw materials P 60,000 P120,000
b. Merchandise inventory, Jan. 1, 2016 was P200,000, Work-in-process 200,000 -
90% of which was in the warehouse and 10% in Finished goods 280,000 240,000
downtown showrooms.
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c. For Jan. 1, 2016 to date of flood, you ascertained

invoice value of purchases (all stored in the
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warehouse), P100,000; freight inward, P4,000;

purchases returned, P6,000.
d. Cost of merchandise transferred from the
warehouse to show-rooms was P8,000, and net
sales from January 1 to May 6, 2016 (all warehouse
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stock) were P320,000.

Assuming gross profit rate in 2016 to be the same as in
the previous year, the estimated merchandise
destroyed by the flood was
a. P80,000 c. P50,000
b. P66,000 d. P46,000
6. The Bayambang Corporation was organized on January
1, 2015. On December 31, 2016, the corporation lost
most of its inventory in a warehouse fire just before the
year-end count of inventory was to take place. Data
from the records disclosed the following:
2015 2016
Goods available for sale 4,069,400 4,157,000
Sales 3,940,000 4,180,000
Sales returns and
allowances 80,000 100,000
Gross profit rate 21% ?
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 Sales from January 1 to May 31, were P546,750.
Purchases of raw materials were P200,000 and freight 11. The estimated cost of inventory at the end of the
on purchases, P30,000. Direct labor during the period current year using the conventional (lower of cost or
was P160,000. It was agreed with insurance adjusters market) retail inventory method is
that an average gross profit rate of 35% based on cost a. P3,200,000 c. P3,250,000
be used and that direct labor cost was 160% of factory b. P3,000,000 d. P3,360,000
overhead.
12. The estimated cost of inventory at the end of the
The work in process inventory destroyed by fire is
current year using the average retail inventory method
a. P366,000 c. P265,000
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b. P314,612 d. P185,000
a. P3,200,000 c. P3,250,000
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b. P3,000,000 d. P3,584,000
SOLUTION GUIDE:
13. The estimated cost of inventory at the end of the
Raw materials, 1/1 P 60,000 current year using the FIFO retail inventory method is
Purchases 200,000 a. P3,200,000 c. P3,250,000
Freight in 30,000 b. P3,000,000 d. P3,658,480
RM available for use 290,000
Raw materials, 6/1 ( 120,000) 14. Which method results in highest cost of sales?
Raw materials used 170,000 a. Conventional
Direct labor 160,000 b. Average
Factory overhead ? c. FIFO
Total manufacturing costs ? d. Cannot be determined from the information given.
WIP, 1/1 200,000
Total costs placed in process ?
WIP, 6/1 ? SOLUTION GUIDE:
Cost of goods manufactured ?
Finished goods, 1/1 280,000 Conventional Average FIFO

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TGAS ? GAS at

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Finished goods, 6/1 (240,000) cost
COGS P ?

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The retail method is often used in the retail industry for
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retail

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measuring inventories of large numbers of rapidly Cost ratio
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changing items with similar margins for which it is
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EI at cost
impracticable to use other costing methods. Which
statement is incorrect regarding the retail inventory
method?
a. The cost of the inventory is determined by LECTURE NOTES:
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reducing the sales value of the inventory by the

Differences in applying retail method:
appropriate percentage gross margin.
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b. The percentage used takes into consideration Conventional Average FIFO

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inventory that has been marked down to below its

original selling price. Net Exclude Include Include
c. An average percentage for each retail department markdown (Deduct) (Deduct)
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is often used.
d. All the statements are correct. Inventory, Include Include Exclude
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beginning
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Use the following information for the next five questions.

Pugo uses the retail inventory method. The following 15. In calculating the cost-to-retail percentage for the retail
information is available for the current year: method, the retail column will not include:
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a. Purchases
Cost Retail b. Purchase returns
Beginning inventory P 1,300,000 P 2,600,000
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c. Abnormal shortages
Purchases 18,000,000 29,200,000 d. Freight-in
Freight in 400,000
Purchase returns 600,000 1,000,000
Purchase allowances 300,000
Departmental transfer in 400,000 600,000
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Net markups 600,000

Net markdowns 2,000,000
Sales 24,700,000
Sales returns 350,000
Sales discounts 200,000
Employee discounts 600,000
Loss from breakage 50,000

10. Assume that the loss from breakage is abnormal. In

computing cost-to-retail ratio, the loss should be
a. Added to the total goods available for sale at cost
and retail
b. Added from the total goods available for sale at
cost and retail
c. Deducted to the total goods available for sale at
cost and retail
d. Deducted from the total goods available for sale at
cost and retail
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16. The records of Binmaley’s Department Store report the
following data for the month of January: 17. Yumul Company provided the following data:
Beginning inventory at cost P 440,000 Cost Retail
Beginning inventory at sales price 800,000 Beginning inventory P 160,000 P 400,000
Purchases at cost 4,500,000 Purchases 2,800,000 3,200,000
Initial markup on purchases 2,900,000 Freight in 40,000
Purchase returns at cost 240,000 Markup 300,000
Purchase returns at sales price 350,000 Markup cancellation 30,000
Freight on purchases 100,000 Markdown 160,000
Additional mark up 250,000 Markdown
Mark up cancellations 100,000 cancellation 40,000
Mark down 600,000 Sales 3,000,000
Mark down cancellations 100,000 Physical inventory at
Net sales 6,500,000 year end 500,000
Sales allowance 100,000 Estimated normal
Sales returns 500,000 shrinkage is 4% of
Employee discounts 200,000 sales
Theft and other losses 100,000
Assuming the company uses the average retail
Using the average retail inventory method, Binmaley’s inventory method, the estimated inventory shortage is
ending inventory is a. P104,000 c. P200,000
a. P360,000 c. P420,000 b. P130,000 d. P 4,000
b. P384,000 d. P448,000
18. The retail inventory method is characterized by
SOLUTION GUIDE: a. The recording of sales at cost.
Cost Retail b. The reporting of year-end inventory at retail in the
Beginning inventory financial statements.
Purchases c. The recording of markups at retail and markdowns

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Purchase returns at cost.

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Freight in d. The recording of purchases at selling price.

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Additional mark up
Mark up cancellations
Mark down
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Mark down cancellations
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ILLUSTRATIVE PROBLEM
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Average Retail Method

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A fire destroyed the New Jersey Company’s warehouse causing damage to its inventories stored in the warehouse. The
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company uses average retail inventory method in inventory estimation. In connection with this, the company’s
accountant gathered the following information relating its inventorie s:
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Cost Retail Price

Inventory, Beginning 190,000 300,000
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Purchase Price 2,900,000 4,000,000

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Purchase Discount 50,000 100,000

Purchase Allowance 90,000 150,000
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Purchase returns 60,000 120,000

Freight In 20,000 30,000
Net Mark-up 60,000
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Net Mark Down 80,000

Departmental Transfer – in (Debit) 386,800 430,000
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Departmental Transfer – Out (Credit) 400,000 550,000

Abnormal Wastages 80,000 120,000
Normal Wastages 100,000 120,000
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Employee Discounts 6,000 9,500

Sales Discount 5,000 8,200
Sales Allowances 21,000 32,150
Sales Returns 5,000 6,780

The company’s policy is to record sales adjustments directly to sales account. The sales account showed ending balance
of P2,908,000 on the date of fire. Physical inventory conducted after the fire disclosed usable damaged goods which the
company estimates can be sold at P100,000. Also, it is estimated that the company will incur P4,000 to sell the goods.
The original cost of this goods amounted to P50,000.

QUESTION:

How much should the company recognize as loss on inventory fire?

SOLUTION:

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