Accounting for Inventory Chapter -06

ACCOUNTING FOR INVENTORY

PRACTICE QUESTIONS
1) Nigel has closing inventory which cost $38,750. This includes some damaged items
which cost $3,660. It will cost Nigel $450 to repair these. He will be able to sell them for
$1,500 after the repairs are completed.

What is the correct value of Nigel’s closing inventory?

a) $35,090
b) $36,140
c) $36,590
d) $38,750

2) When she prepared her draft accounts, Wilma included her closing inventory at a value
of $21,870. She has just found out that some items valued at $2,150 had not been
included in this calculation.

How will net profit and net assets be affected when the inventory value is corrected?

Net Profit Net assets

a) Reduced by $2,150 Reduced by $2,150
b) Reduced by $2,150 Increased by $2,150
c) Increased by $2,150 Reduced by $2,150
d) Increased by $2,150 Increased by $2,150

3) Collin made a mistake in his calculations which resulted in the value of his closing
inventory at 30 April 20X4 being overstated by $900. The value was calculated
correctly at 30 April 20X5.

What was the effect of the error on the profit reported in Collin’s accounts for each of the two years?

20X4 20X5
a) Overstated by $900 Not affected
b) Overstated by $900 Understated by $900
c) Understated by $900 Not affected
d) Understated by $900 Overstated by $900

4) Kieron is an antiques dealer. His inventory includes a clock which cost $15,800. Kieron
expects to spend $700 on repairing the clock which will mean that he will be able to sell
it for $26,000. To replace the same item of inventory would cost $25,500.

At what value should the clock be included in Kieron’s inventory?

a) $15,100
b) $15,800
c) $25,300
d) $26,000
Accounting for Inventory Chapter -06

5) LMN plc has just published its financial statements, which show a gross profit for the
year of $3.2 million. A major error in the inventory valuation has just been discovered.
The opening inventory is overstated by $1.3 million, and the closing inventory has been
understated by $1.6 million. What should be LMN plc’s correct gross profit for the
year?
a) $3.5 m
b) $6.1m
c) $6.8m
d) $9.4m

6) What is the unit cost of the following item?

$
Raw Materials 5.00
Labour 3.00
Manufacturing overheads 1.00
Variable administrative overheads 2.50

a) $5.00
b) $8.00
c) $9.00
d) $11.50

7) What is the net realizable value of the following item?

$
Selling price 20.00
Packaging costs 2.00
Delivery costs 3.00 15
License fee paid after delivery 2.50

8) A company includes in the valuation of its closing inventory some goods that were
received before the year end, but for which invoices were not received until after the
year end.
This is in accordance with:
a) The historical cost convention
b) The accruals concept
c) The consistency concept
d) The materiality concept

9) Suresh & Co sell three products – Basic, Super and Luxury. The following information
was available at the yearend:

Basic Super Luxury

$ per unit $ per unit $ per unit
Original cost 6 9 18
Estimated selling price 9 12 15
Selling and distribution costs 1 4 5

Units held 200 250 150

Accounting for Inventory Chapter -06

The value of the inventory at the yearend should be:

a) $4,200
b) $4,700
c) $5,700
d) $6,150

10) At 30 November 20X1 Kim’s inventory was valued at its cost of $22,700. This includes
items costing $1,300 which have been superseded by an updated design. Kim will be
able to sell these items through an agent for $700. The agent’s commission will be 10%
of selling price.
What is the value of closing inventory on 30 November 20X1?

22030

11) If a business chooses to change the basis for inventory valuation in order to manipulate
its profits this year, which of the following concepts is breached?
a) Accruals
b) Consistency
c) Prudence
d) Going concern

12) In times of rising prices, the FIFO method of inventory valuation, when compared to
the average cost method of inventory valuation, will usually produce:
a) A higher profit and lower closing inventory value
b) A higher profit and a higher closing inventory value
c) A lower profit and a lower closing inventory value
d) A lower profit and a higher closing inventory value

13) During September, your organization had sales of $148,000, which made a gross profit
of $40,000. Purchases amounted to $100,000 and opening inventory was $34,000.
The value of closing inventory was $______________________
26000

14) What adjustment would be made to closing inventory if it was discovered that goods
with a cost of $5,000 and a net realizable value of $3,000 had been omitted from the
year-end inventory account?
a) An increase of $5,000
b) An increase of $3,000
c) An increase of $2,000
d) A decrease of $2,000

15) Lavinia valued her inventory at 31st December 20X2 at its cost of $11,480. This includes
some items which cost $975 which have been hard to sell. Lavinia intends to have these
items repacked at a cost of $225. This will allow her to sell them for $450.
The value of closing inventory at 31st December 20X2 is $__________________.
10730
Accounting for Inventory Chapter -06

16) A fire on 30 September 20X2 destroyed some of a company’s inventory and its
inventory records.
$
Inventory 1 September 20X2 318,000
Sales for September 20X2 612,000
Purchases for September 20X2 412,000
Inventory in good condition at 30 September 20X2 214,000

Standard gross profit percentage on sales is 25%

Base on this information, what is the value of the inventory lost?
a) $96,000
b) $271,000
c) $26,400
d) $57,000

17) Which of the following costs may be included when arriving at the cost of finished
goods inventory for inclusion in the financial statements of a manufacturing company?
1. Carriage inwards
2. Carriage outwards
3. Depreciation of factory plant
4. Finished goods storage costs
5. Factory supervisors’ wages

a) 1 and 5 only
b) 2, 4 and 5 only
c) 1, 3 and 5 only
d) 1, 2, 3 and 4 only

18) The closing inventory at cost of a company at 31 January 20X3 amounted to $284,700.
The following items were included at cost in the total:
i. 400 coats, which had cost $80 each and normally sold for $150 each. Owing to a defect in
manufacture, they were all sold after the statement of financial position (balance sheet) date at 50%
of their normal price. Selling expenses amounted to 5% of the proceeds. 28500
ii. 800 skirts, which had cost $20 each. These too were found to be defective. Remedial work in
February 20X3 cost $5 per skirt, and selling expenses for the batch totaled $800. They were sold for
$28 each.
What should the inventory value be according to IAS 2 inventories after considering the above
items?
a) $281,200
b) $282,800
c) $329,200
d) none of these
Accounting for Inventory Chapter -06

19) A company values its inventory using the first in, first out (FIFO) method. At 1 May
20X2 the company had 700 engines in inventory, valued at $190 each.

During the year ended 30 April 20X3 the following transactions took place:

20X2
1 July Purchased 500 engines at $220 each
1 November Sold 400 engines for $160,000
20X3
1 February Purchased 300 engines at $230 each
15 April Sold 250 engines for $125,000

What is the value of the company’s closing inventory of engines at 30 April 20X3?
a) $188,500
b) $195,500
c) $166,000
d) None of these figures

20) Which of the following statements about the value of inventory are correct, according
to IAS2 inventories?
1. Inventory items are normally to be valued at the higher of cost and net realizable value.
2. The cost of goods manufactured by an entity will include materials and labour only. Overhead
costs cannot be included.
3. LIFO (last in, first out) cannot be used to value inventory.
4. Selling price less estimated profit margin may be used to arrive at cost if this gives a reasonable
approximation to actual cost.

a) 1, 3 and 4 only
b) 1 and 2 only
c) 3 and 4 only

21) A company with an accounting date of 31st October carried out physical check of
inventory on 4 November 20X3, leading to an inventory value at cost at this date of
$483,700.

Between 1st and 4th November 20X3 the following transactions took place:
1. Goods costing $38,400 were received from suppliers
2. Goods that had cost $14,800 were sold for $20,000.
3. A customer returned, in good condition, some goods which had been sold to him in October for
$600 and which had cost $400.
4. The company returned goods that had cost $1,800 in October to the supplier, and received a
credit note for them.

What figure should appear in the company’s financial statements at 31 October 20X3 for closing
inventory based on this information?
a) $458,700
b) $505,700
c) $508,700
d) $461,500
Accounting for Inventory Chapter -06

22) In preparing its financial statements for the current year, a company's closing
inventory was understated by $300,000.

What will be the effect of this error if it remains uncorrected?

a) The current year's profit will be overstated and next year's profit will be understated
b) The current year's profit will be understated but there will be no effect on next year's profit
c) The current year's profit will be understated and next year's profit will be overstated
d) The current year's profit will be overstated but there will be no effect on next year's profit

23) At 30 September 20X3 the closing inventory of a company amounted to $386,400. The
following items were included in this total at cost:
1. 1,000 items which had cost $18 each. These items were all sold in October 20X3 for $15 each,
with selling expenses of $800. 14200
2. Five items which had been in inventory since 1973, when they were purchased for $100 each, sold
in October 20X3 for $1,000 each, net of selling expenses.

What figure should appear in the company's statement of financial position (balance sheet) at 30
September 20X3 for inventory?
a) $382,600
b) $384,200
c) $387,100
d) $400,600

24) Appleby buys and sells inventory during the month of August as follows :
Opening inventory 100 units $2.52/unit FIFO: 417
4 August Sales 20 units
WAM: 397.5
8 august Purchases 140 units $2.56 / unit
10 August Sales 90 units
18 august Purchases 200 units $2.78 / unit
20 august Sales 180 units

The periodic weighted average for the month is calculated as follows:

Total value of inventory (Opening inventory plus purchase costs during the month) divided by total
units (Opening inventory plus purchase costs during the month).

Which of the following statements is true?

a) Closing inventory is $19.50 higher when using the FIFO method instead of the periodic weighted
average.
b) Closing inventory is $19.50 lower when using the FIFO method instead of the periodic weighted
average.
c) Closing inventory is $17.50 higher when using the FIFO method instead of the periodic weighted
average.
d) Closing inventory is $17.50 lower using the FIFO method instead of the periodic weighted average
Accounting for Inventory Chapter -06

25) In the year ended 31 August 20X4, Aplus’ records show closing inventory of 1,000 units
compared to 950 units of opening inventory. Which of the following statements is true
assuming that prices have fallen throughout the Year?
a) Closing inventory and profit are higher using FIFO rather than AVCO.
b) Closing inventory and profit are lower using FIFO rather than AVCO.
c) Closing inventory is higher and profit lower using FIFO rather than AVCO.
d) Closing inventory is lower and profit higher using FIFO rather than AVOC.

26) Which of the following statement about the treatment of inventory and work in
progress in financial statements are correct?
(1) Inventory should be valued at the lower of cost , net realizable value and replacement cost.
(2) In valuing work in progress , materials costs, labour costs and variable and fixed production
overheads must be included.
(3) Inventory items can be valued using either first in, first out (FIFO) or weighted average cost.
(4) A company’s financial statements must disclose the accounting policies used in measuring
inventories.

a) All four statements are correct

b) 1,2 and 3 only
c) 2,3 and 4 only
d) 1 and 4 only

27) Kiera’s interior design business received a delivery of fabric on 29 June 20X6, which
was included in inventory at 30 June 20X6. The invoice for the goods was recorded in
July 20X6.

What effect will this have on the business ?

1 Profit for the year ended 30 June 20X6 will be overstated.
2 Inventory at 30 June 20X6 will be understated.
3 Profit for the year ended 30 June 20X7 will be overstated.
4 Inventory at 30 June 20X6 will be overstated.

a) 1 and 2
b) 2 and 3
c) 1 Only
d) 1 and 4

28) What journal entry is required to record goods taken from inventory by the owner of a
business?
a) Dr Drawings Cr Purchases
b) Dr Sales Cr Drawings
c) Dr Drawings Cr Inventory
Accounting for Inventory Chapter -06

29) A business had an opening inventory of $180,000 and a closing inventory of $220,000
in its financial statements for the year ended 31 December 20X5.
Which of the following entries for these and closing inventory figures are made when completing the
financial records of the business?
Debit Credit
$ $
a) Inventory account 180,000
Income statement 180,000
Income statement 220,000
Inventory account 220,000
b) Income statement 180,000
Inventory account 180,000
Inventory account 220,000
Income statement 220,000
c) Inventory account 40,000
Purchases account 40,000
d) Purchases account 40,000
Inventory account 40,000

30) Inventory movements for product X during the last quarter were as follows:
January Purchases 10 items at $19.80 each
February Sales 10 items at $30 each SALES: 450
March Purchases 20 items at $24.50 COGS:180+115
Sales 5 items at $30 each

Opening inventory at 1 January was 6 items valued at $ 15 each.

Gross profit for the quarter, using the continuous weighted average cost method, would be:
a) $135.75
b) $155.00
c) $174.00
d) $483.00

31) Your Firm values inventory using the weighted average cost method. At 1 October
20X8, there were 60 units in inventory valued at $12 each. On 8 October, 40 units were
purchased for $15 each, and a further 50 units were purchased for $18 each on 14
October. On 21 October, 75 units were sold for $1,200.
The value of closing inventory at 31 October 20X8 was:
a) $ 900
b) $1,020
c) $1,125
d) $1,110

32) What would be the effect on a company’s profit of discovering inventory with cost of
$1,250 and a net realizable value of $1,000, assuming that the same inventory had not
been included in the original inventory count?
a) An increase of $1,250
b) An increase of $1,000
c) A decrease of $250
d) No effect at all
Accounting for Inventory Chapter -06

33) In times of rising prices, the valuation of inventory using the first in first out method,
as opposed to the Weighted Average Cost method, will result in which ONE of the
following combinations?
Cost of sales Profit Closing inventory
a) Lower Higher Higher
b) Lower Higher Lower
c) Higher Lower Higher
d) Higher Higher Lower