Aklan Catholic College

Archbishop Gabriel M. Reyes St.

5600 Kalibo, Aklan, Philippines
Tel. Nos.: (036)268-4152; 268-9171
Fax No.: (036)268-4010
Website: http://www.acc.edu.ph
E-mail Add: [email protected]

INVENTORIES

Inventories are assets which are held for sale in the ordinary course of business, in the process of
production for such sale or in the form of materials or supplies to be consumed in the production or in the
rendering of services.

Inventories encompass goods purchased and held for resale. It also encompass finished goods produced,
goods in process and materials and supplies awaiting use in the production.

In case of service provider, inventories include the cost of the service for which the entity has not yet
recognized the related revenue.

1. Childish Company has a cost card in relation to an inventory:

Materials 700,000
Storage costs of finished goods 180,000
Delivery to customers 40,000
Irrecoverable purchase taxes 60,000

At what figure should the inventory be measured?

a. 880,000 c. 980,000
b. 760,000 d. 940,000

Notes:
→ The cost of purchase of inventories comprises the purchase price, import duties and
irrecoverable taxes, freight, handling and other costs directly attributable to the acquisition of
finished goods, materials and services.

2. Brilliant Company purchases motorcycles from various countries and exports them to Europe. The
entity has incurred the following costs during the current year:

Cost of purchases based on vendor’s invoices 5,000,000

Trade discounts on purchases already deducted
from vendor’s invoices 500,000
Import duties 400,000
Freight and insurance on purchases 1,000,000
Other handling costs relating to imports 100,000
Salaries of accounting department 600,000
Brokerage commission paid to agents for arranging imports 200,000
Sales commission paid to sales agents 300,000
After-sales warranty costs 250,000

What is the total cost of the purchases?

a. 5,700,000 c. 6,500,000
b. 6,100,000 d. 6,700,000

3. Eagle Company produced units of a certain product. The costs incurred were P180,000 direct materials
and labor, P25,000 variable production overhead, P15,000 factory administrative cost and P20,000
fixed production cost. What is the correct inventory value of the product?
a. 205,000 c. 195,000
b. 225,000 d. 240,000

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Note:
→ The term finished goods, goods in process, raw materials and factory or manufacturing
supplies refer to inventories of a manufacturing concern. Costs indirectly attributable to the
production may be classified as factory overhead to be inventoried.

4. Scotch Company took a physical inventory at the end of the year and determined that P1,900,000 of
goods were on hand. In addition, the entity determined that P240,000 of goods purchased were in
transit shipped FOB destination. The goods were actually received three days after the inventory count.
The entity sold P100,000 worth of inventory FOB destination. Such inventory is in transit at year-end.
What amount should be reported as inventory at year-end?
a. 1,900,000 c. 2,000,000
b. 2,140,000 d. 2,240,000

Notes:
→ Goods includible in the inventory
As a rule, all goods to which the entity has title shall be included in the inventory,
regardless of location. Where title has already passed from the seller to the buyer, the goods form
part of the inventory of the latter.

→ Who is the owner of goods in transit?

Under FOB destination, ownership of goods purchased is transferred only upon receipt of
the goods by the buyer at the point of destination. Under FOB destination, the goods in transit
are still the property of the seller.

If the term is FOB shipping point, ownership in transferred upon shipment of the goods
and therefore, the goods in transit are the property of the buyer.

5. Honor Company’s inventory on December 31, 2024 was P1,500,000 based on physical count of goods
priced at cost, and before any necessary year-end adjustment relating to the following:

Included in the physical count were goods billed to a customer FOB shipping point on December 31,
2024. These goods had a cost of P30,000 and were picked up by the carrier on January 10, 2025.

Goods shipped FOB destination on December 31, 2024 from a vendor to Honor Company were
received on January 4, 2025. The invoice cost was P50,000.

What amount should be reported as inventory on December 31, 2024?

a. 1,470,000 c. 1,500,000
b. 1,480,000 d. 1,550,000

6. On December 28, 2024, Caress Company purchased goods costing P500,000. The term is FOB
destination. These goods were received on December 31, 2024. Some of the costs incurred in
connection with the purchase of the goods were P10,000 packaging for shipment P15,000 shipping
and P25,000 special handling charge. On December 31, 2024, what is the measurement of inventory?
a. 540,000 c. 550,000
b. 535,000 d. 500,000

Notes:
→ Under FOB shipping point, the seller shall legally be responsible for freight charges and other
expenses up to the point of destination. On the other hand, if the term is FOB shipping point, the
buyer shall legally be responsible for freight charges and other expenses from the point of
shipment to the point of destination.

→ Fright terms
Freight collect – this means that the freight charge on the goods shipped is not yet paid. The
common carrier shall collect the same from the buyer. Thus, under this, the freight charge is
actually paid by the seller.

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 Freight prepaid – this means that the freight charge on the goods shipped is already paid by the
seller.

These terms determine the party who actually pay the freight charges, but not the party who is
legally responsible to pay the freight charge.

7. Dignity Company had the following consignment transactions during 2024:

Inventory shipped on consignment to a consignee 600,000

Freight paid by Dignity Company 50,000
Inventory received on consignment from a consignor 800,000
Freight paid by consignor 50,000

No sales of consigned goods were made through December 31, 2024. On December 31, 2024, what
amount should be reported as consigned inventory?
a. 1,500,000 c. 850,000
b. 650,000 d. 600,000

Notes:
→ Consigned goods shall be included in the consignor’s inventory and excluded from the consignee’s
inventory. Freight and other handling charges on goods out on consignment are part of the cost of
goods consigned.

8. The total cost of inventory is the sum of

a. Costs of purchase and costs of conversion.
b. Direct costs, indirect costs and other costs.
c. Costs of purchase, costs of conversion and other costs incurred in bringing the inventory to the
present location and condition.
d. Costs of conversion and other costs incurred in bringing the inventory to the present location and
condition.

9. Which term represents the deduction from the invoice price of purchased goods granted by suppliers
for early payment?
a. Sales discount c. Trade discount
b. Purchase discount d. Purchase return and allowance

10. Which of the following is a characteristic of a perpetual inventory system?

a. Inventory purchases are debited to purchases account.
b. Inventory records are not kept for every item.
c. Cost of goods sold is recorded with each sale.
d. Cost of goods sold is determined as the amount of purchases less the change in inventory.

11. Which of the following is not true of the perpetual inventory method?
a. Purchases are recorded as debit to the inventory account.
b. The journal entry to record a sale includes a debit to cost of goods sold and a credit to inventory.
c. After a physical inventory count, inventory is credited for any missing inventory.
d. Purchase returns are recorded by debiting accounts payable and crediting purchase returns and
allowances.

12. In a periodic inventory system, the beginning inventory is

a. Net purchases minus cost of goods sold
b. Net purchases minus ending inventory
c. Total goods available for sale minus net purchases
d. Total goods available for sale minus cost of goods sold

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13. Costs that are incurred in bringing the inventories to their present location and condition are capitalized
as cost of inventories and these include
a. Costs of designing products for specific customers
b. Abnormal amount of wasted materials, labor and production cost.
c. Storage cost not necessary in the production process before a further production stage
d. Distribution cost

INVENTORY VALUATION

PAS 2, paragraph 9, provides that “inventories shall be measured at the lower of cost and net realizable
value”.

The measurement of inventory at the lower of cost and net realizable value is now known as LCNRV.

Cost Formulas

PAS 2, paragraph 25, expressly provides that the cost of inventories shall be determined by using either:
a. First in, First out
b. Weighted average

PAS 2, paragraph 23, provides that the cost of inventories that are not ordinarily interchangeable and
inventories that are segregated for specific projects shall be determined by using specific identification
method.

14. The following information has been extracted from the records of Junket Company about one of its
products. The entity uses the perpetual system.

Units Unit Cost Total Cost

Jan. 1 Beginning balance 8,000 70.00 560,000
Jan. 6 Purchases 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 Sales return 300

Using the FIFO method, what is the cost of the inventory on April 30?
a. 330,750 c. 433,876
b. 329,360 d. 329,360

Notes:
→ The FIFO method assumes that the goods first purchased are first sold and consequently the
goods remaining in the inventory at the end of the period are those most recently purchased or
produced.

15. The following information pertains to Massive Company, seller of recliners for the year ended
December 31, 2024:
Units Unit Cost Total Cost
January 1 Inventory on hand 200 1,500 300,000
April 6 Purchases 300 1,750 525,000
Feb. 5 Sale 500 2,000 1,000,000

The entity sold recliners on June 25 and 400 on December 10.

What is the weighted average cost of the inventory on December 31, 2024?
a. 350,000 c. 730,000
b. 400,000 d. 365,000

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Notes:
→ Weighted Average – Periodic
The cost of the beginning inventory plus the total cost of purchases during the period is
divided by the total units purchased plus those in the beginning inventory to get a weighted
average unit cost.

Such weighted average unit cost is then multiplied by the units on hand to derive the inventory
value.

In other words, the average unit cost is computed by dividing the total cost of goods available for
sale (TGAS) by the total units available for sale.

16. The following data were extracted from the records of Jailbird Company about its inventory for the
month on the current year:

Units Unit Cost Total Cost

Jan. 1 Beginning 16,000 140 2,240,000
5 Purchase 4,000 150 600,000
10 Sale 15,000
15 Purchase 20,000 160 3,200,000
16 Purchase return 1,000 160 160,000
25 Sale 8,000
26 Sales return 4,000
31 Purchase 30,000 150 4,500,000

What is the moving average cost of the inventory on January 31?

a. 7,625,000 c. 7,690,000
b. 7,500,000 d. 7,530,000

Notes:
→ Weighted Average – Perpetual
PAS 2, paragraph 27, provides that the weighted average may be calculated on a periodic
basis or as each additional shipment is received depending upon the circumstances of the entity.
Under this method, a new weighted average unit cost must be computed after every purchase and
purchase return.

17. Matrimony Company has determined its December 31, 2024, inventory on a FIFO basis to be
P4,000,000. Information pertaining to the inventory follows:

Estimated selling price 4,050,000

Estimated cost of disposal 200,000
Normal profit margin 500,000
Current replacement cost 3,500,000

The entity records losses that result from applying the lower of cost or net realizable value. On
December 31, 2024, what is the carrying amount of the inventory?
a. 4,000,000 c. 3,350,000
b. 3,850,000 d. 3,500,000

Notes:
→ PAS 2, paragraph 9, provides that “inventories shall be measured at the lower of cost and net
realizable value”.

Net realizable value or NRV is the estimated selling price in the ordinary course of business less
the estimated cost of completion and the estimated cost of disposal.

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18. Starstuck Company is a retailer of Italian furniture and has five major product lines. On December 31,
2024, the entity provided the following inventory data:

Units Unit Cost NRV per unit

Sofas 100 1,000 1,020
Dining tables 200 500 450
Beds 300 1,500 1,600
Closets 400 750 770
Lounge chains 500 250 200

What is the inventory on December 31, 2024 using the lower of cost and net realizable value?
a. 1,040,000 c. 1,998,000
b. 1,075,000 d. 2,033,000

Notes:
→ Inventories are usually written down to net realizable value on an item by item or individual basis. It
is not appropriate to writedown inventories based on a classification of inventory, for example,
finished goods or all inventories in a particular industry or geographical segment.

19. Gem Company used the lower of cost or net realizable value method to measure inventory. Data
regarding the items in work in process inventory are as follows:

Markers Pens Highlighters

Historical cost 240,000 188,000 300,000
Selling price 360,000 250,000 360,000
Estimated cost to complete 48,000 50,000 68,000
Normal profit margin as a
Percentage of selling price 25% 25% 10%

What is the measurement of the work in process inventory?

a. 720,000 c. 676,000
b. 728,000 d. 694,000

20. Emerald Company manufactures bath towels. The production comprises 60% of “Class A” which sells
for P500 per dozen and 40% of “Class B” which sells for P250 a dozen. During the current year, 60,000
dozens were produced at an average cost of P360 a dozen. The inventory at the end of the current
year was as follows:

2,200 dozens “Class A” @ P360 792,000

3,000 dozens “Class B” @ P360 1,080,000
Total inventory 1,872,000

Using the relative sales value method which management considers as a more equitable basis of cost
distribution, what is the measurement of the inventory?
a. 1,170,000 c. 1,872,000
b. 1,665,000 d. 2,340,000

Notes:
→ When different commodities are purchased at a lump sum, the single cost is apportioned among
the commodities based on their respective sales price. This is based on the philosophy that cost is
proportionate to selling price.

21. Inventories shall be measured at

a. Cost
b. Net realizable value
c. Lower of cost and net realizable value
d. Lower of cost and market

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22. Net realizable value is
a. Current replacement cost
b. Estimated selling price
c. Estimated selling price less estimated cost to complete
d. Estimated selling price less estimated cost to complete and estimated cost of disposal

23. The amount of any writedown of inventory to net realizable value and all losses of inventory should be
a. Recognized as operating expense in the period the writedown or loss occurs.
b. Recognized as other expense in the period the writedown or loss occurs.
c. Recognized as component of cost of sales in the period the writedown or loss occurs.
d. Deferred until the related inventory is sold.

24. How should sales staff commission be dealt with when valuing inventories at the lower of cost and net
realizable value?
a. Added to cost
b. Ignored
c. Deducted in arriving at net realizable value
d. Deducted from cost

25. Which of the following inventory method measures most closely the current cost of inventory?
a. FIFO c. Specific identification
b. Weighted average d. LIFO

26. Which inventory cost flow assumption would consistently result in the highest income in a period of
sustained inflation?
a. FIFO c. Weighted average
b. LIFO d. Specific identification

27. Cost of goods sold is the same under a periodic system as under a perpetual system when an entity
uses
a. FIFO c. Weighted average
b. LIFO d. Specific identification

INVENTORY ESTIMATION

In many cases, it is necessary to know the appropriate values of inventory when it is not possible to take a
physical count, or even if the physical count is possible, the same may prove costly, difficult or inconvenient
at the moment.

There are two widely accepted procedures for approximating the value of inventory, namely the gross profit
method and the retail inventory method.

28. On June 30, a fire destroyed Intense Company’s entire inventory. The inventory on January 1, through
the time of the fire, the entity made purchases of P3,000,000, incurred freight in of P300,000, and had
sales of P7,800,000. The rate of gross profit on selling price is 30%. What is the approximate cost of
inventory that was destroyed?
a. 3,600,000 c. 4,440,000
b. 4,140,000 d. 3,900,000

Notes:
→ The gross profit method is based on the assumption that the rate of gross profit remains
approximately the same from period to period and therefrom the ratio of cost of goods sold to net
sales is relatively constant from period to period.

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 → To compute for the estimated ending inventory, the estimated Cost of Goods Sold (COGS) is
deducted from the Goods Available for Sale (GAS) as follows:

Beginning inventory xxx

Net cost of purchases xxx
Goods available for sale xxx
Cost of sales (net sales x cost ratio) (xxx)
Ending Inventory (estimated) xxx

Estimated Cost of Goods Sold is computed by multiplying the net sales by the cost ratio.

29. The following information appears in Celibacy Company’s records for the year ended December 31,
2024:

Inventory, January 1 650,000

Purchases 2,300,000
Purchase returns 80,000
Freight in 60,000
Sales 3,400,000
Sales discounts 20,000
Sales returns 30,000

On December 31, 2024, a physical inventory revealed that the ending inventory was only P420,000.
The gross profit on sales has remained constant at 30% in recent years. The entity suspects that some
inventory may have been pilfered by one of the entity’s employees. On December 31, 2024, what is the
estimated cost of missing inventory?
a. 151,000 c. 420,000
b. 165,000 d. 585,000

Notes:
→ Sales allowance and sales discount are ignore, that is, not deducted from sales. The reason is that
while these items decrease the amount of sales, they do not affect the physical volume of goods
sold.

Where the account is “sales return and allowances” with no details, the same should be deducted
from sales.

30. Ombudsman Company lost its entire inventory by fore on December 31, 2024.

2024 2023 2022

Inventory – January 1 1,040,000 1,410,000 850,000
Net purchases 4,360,000 2,730,000 2,640,000
Net sales 5,000,000 4,000,000 3,400,000

Goods with selling price of P300,000 are sent on consignment. These goods are still unsold by the
consignee on December 31, 2024. Goods purchased costing P190,000 are in transit on December 31,
2024. The goods were shipped FOB shipping point on December 28, 2024 and properly recorded as
purchases. What amount of inventory fire loss should be reported?
a. 1,500,000 c. 1,410,000
b. 1,900,000 d. 1,690,000

Notes:
→ Gross profit can be computed using the previous years’ data.

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31. If the gross profit is based on sales, the cost of sales is computed as
a. Net sales times cost ratio
b. Gross sales times cost ratio
c. Net sales divided by sales ratio
d. Gross sales divided by sales ratio

32. The gross profit method of inventory is not valid when

a. There is substantial increase in the quantity of inventory during the year.
b. There is substantial increase in the cost of inventory during the year.
c. The gross margin percentage changes significantly during the year.
d. All ending inventory is destroyed by fire before it can be counted.

33. The use of 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. The inventory values have not increased from previous years.
d. The relationship between gross profit and sales remains stable over time.

RETAIL INVENTORY METHOD

PAS 2, paragraph 22, provides that this method is often used in the retail industry for measuring inventory
of large number of rapidly changing items with similar margin for which it is impractical to use other costing
method.

Information required:
a. Beginning inventory valued at cost and at retail price.
b. Purchases during the period at cost and at retrial price.
c. Adjustments to the original retail price such as additional markup, markup cancellation, markdown
and markdown cancellation.
d. Other adjustment such as department transfer, breakage, shrinkage, theft, damaged goods and
employee discount.

Basic Formula:

Goods available for sale at cost

Cost ratio =
Goods available for sale at selling price

By the reason of the computation of the cost ratio, it is necessary that the goods available for sale should
be determined not only in terms of selling price but also in terms of cost.

The ending inventory at selling price is then applied with the cost ratio in order to get the ending inventory
at cost.

Treatment of items:
a. Purchase discount – deducted from purchases at cost only.
b. Purchase return – deducted from purchases at cost and at retail.
c. Purchase allowance – deducted from purchases at cost only.
d. Freight in – addition to purchases at cost only.
e. Department transfer in or debit – addition to purchases at cost and at retail.
f. Department transfer out or credit – deduction from purchases at cost and retail.
g. Sales discount and sales allowance – disregarded, meaning not deducted from sales.
h. Sales return – deducted from sales. If the account is “sales return and allowance”, the same should
be deducted from sales.
i. Employee discounts – added to sales.

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 Employee discounts are special discounts usually not recorded because they are directly deducted
from the sales price.

j. Normal shortage, shrinkage, spoilage, breakage – this is deducted from goods available for sale at
retail.
k. Abnormal shortage, shrinkage, spoilage, breakage – this is deducted from cost of goods available
for sale at both cost and retail so as not to distort the cost ratio.

34. Domicile Company had the following amounts all at retail:

Beginning inventory 180,000 Purchases 6,000,000

Purchase return 300,000 Net markup 900,000
Abnormal shortage 200,000 Net markdowns 140,000
Sales 3,600,000 Sales return 90,000
Employee discount 80,000 Normal shortage 130,000

What is the ending inventory at retail?

a. 2,720,000 c. 2,880,000
b. 2,800,000 d. 2,920,000

Notes:
→ Ending inventory at retail is computed as goods available for sale at retail minus the net sales and
adjustments (shortage, shrinkage, spoilage and breakage).

→ Approaches in the use of retail inventory method:

a. Conservative or conventional or lower of cost an net realizable value approach
b. Average approach
c. FIFO approach

35. Sublime Company’s inventory records showed the following information on December 31, 2024.
Cost Retail
Inventory, January 1 280,000 700,000
Sales 5,000,000
Purchases 2,480,000 5,160,000
Freight in 75,000
Markup 500,000
Markup cancellation 60,000
Markdown 250,000
Markdown cancellation 50,000
Estimated normal shrinkage is 2% of sales.

The entity used the retail inventory method in estimating the value of its inventory. What is the
estimated cost of inventory on December 31, 2024 at approximate lower of average cost and net
realizable value?
a. 460,000 c. 495,000
b. 450,000 d. 506,000

Notes:
→ The conservative approach includes net markup and excludes net markdown in determining the
cost ratio in order to arrive a conservative cost.

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36. Abscond Company used the retail inventory method to estimate its inventory for interim statement
purposes. Data relating to the computation of the inventory on December 31, 2024 are as follows:

Cost Retail
Inventory, January 1 720,000 1,000,000
Purchases 4,080,000 6,300,000
Markup 700,000
Markdown 500,000
Sales 5,900,000
Normal shoplifting losses 100,000

Under the average cost approach, what is the estimated cost of inventory on December 31, 2024?
a. 1,500,000 c. 960,000
b. 1,024,000 d. 900,000

Note:
→ The average cost approach includes both net markup and net markdown in determining cost ratio.
PAS 2, paragraph 22, provides that the percentage used under the retail inventory method shall
take into consideration inventory that has been marked down to below its original selling price. An
average percentage for each retail department is often used. This means that the average cost
approach shall be applied in conjunction with the retail inventory method.

37. Deadlock Company used the FIFO retail method of inventory valuation. The following information is
available for the current year:

Cost Retail
Beginning inventory 600,000 1,500,000
Purchases 3,000,000 5,500,000
Net additional markup 500,000
Net markdown 1,000,000
Sales 4,500,000

What is the estimated cost of the ending inventory?

a. 1,200,000 c. 1,000,000
b. 1,040,000 d. 960,000

Notes:
→ The FIFO retail approach is similar to the average cost approach in that it considers both net
markup and net markdown in arriving at the goods available for sale at retail to serve as a basis in
computing the cost ratio.

The FIFO approach is based on the assumption that markup an markdown apply to goods
purchased during the year and not to beginning inventory.

38. On January 1, 2024, the inventory of Cavalier Company was P1,000,000 at retail and P560,000 at cost.
During the current year, the entity registered the following purchases:

Cost 4,000,000
Retail price 6,200,000
Original markup 2,200,000

The net sales totaled P5,400,000. The following reductions were made in the retail price:

To meet price competitors 50,000

To dispose of overstock 30,000
Miscellaneous reductions 120,000

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 During the current year, the selling price of a certain inventory increase from P200 to P300. This
additional markup applied to 5,000 items but was later cancelled on the remaining 1,000 items. What is
the inventory on December 31, 2024 using the average cost approach in applying the retail method?
a. 2,000,000 c. 1,240,000
b. 2,400,000 d. 1,200,000

39. When the conventional retail inventory method is used, markdowns are 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 a better approximation of the lower of cost or net realizable value.
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.

40. The retail inventory method would include which of the following in the calculation of the goods
available for sale at both cost and retail?
a. Freight in c. Markups
b. Purchase returns d. Markdowns

41. With regard to the retail inventory method, which of the following statements is the most accurate?
a. Generally, accountants ignore net markups and net markdowns in computing the cost-price
percentage.
b. Generally, accountants exclude both net markups and net markdowns on 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 adaptable to FIFO costing.

42. Which of the following would cause a decrease in the cost ratio as used in the retail inventory method?
a. Higher retail prices
b. Lower net markups
c. More employee discounts granted
d. Higher freight in charges

-END-

Valix, Conrado T., Peralta, Jose F., Valix, Christian Aris M., Intermediate Accounting 1 2022 Edition.

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