ICAEW CFAB ACCOUNTING (AG) - ch. 7

Which of the following is the correct calculation for cost of sales?

• Sales – opening inventory – purchases + closing inventory – delivery inwards

• Opening inventory + purchases – closing inventory + delivery inwards

• Opening inventory + purchases + closing inventory + delivery inwards

• Sales – purchases

Cost of sales is £14,000. Purchases for the period are £14,000, delivery inwards is £1,000, delivery

outwards is £1,500 and closing inventory is £13,000. What was the opening inventory figure?

• £11,500

• £13,000

• £10,500

• £12,000

Answer explanation

14000-13000 = 1000

14000-1000-1000 = 12000

A business has opening inventory of £7,200 and closing inventory of £8,100. Purchases for the yearwere £76,500, delivery inwards was £50 and delivery outwards was £180.

Requirement : What is the amount for cost of sales?

• £75,550

• £75,830

• £77,450

• £75,650

Platoon plc is preparing its financial statements for the year ended 30 April 20X1, having extracted an initial trial balance.

It had no opening inventory, its purchases in the period were £686,880 and closing inventories were valued as £18,647 on 30 April 20X1.

Requirement : Which two of the following journal entries are required to record cost of sales and closing inventories at 30 April 20X1?

• Dr Cost of sales: £686,880; Cr Inventories: £686,880

• Dr Purchases: £686,880; Cr Cost of sales: £686,880

• Dr Cost of sales: £18,647; Cr Inventories: £18,647

• Dr Cost of sales: £686,880; Cr Purchases: £686,880

• Dr Inventories: £18,647; Cr Cost of sales: £18,647

Answer explanation

The correct journal entries to record the cost of sales and closing inventories at 30 April 20X1 are:

1. Dr Cost of sales: £686,880; Cr Purchases: £686,880

This entry records the cost of sales for the period by debiting the Cost of sales account and crediting the Purchases account.

2. Dr Inventories: £18,647; Cr Cost of sales: £18,647

This entry adjusts the closing inventories by debiting the Inventories account and crediting the Cost of sales account.

Therefore, the correct journal entries are:

Dr Purchases: £686,880; Cr Cost of sales: £686,880

Dr Inventories: £18,647; Cr Cost of sales: £18,647

Muse plc began trading on 1 January 20X8 and had no opening inventories at that date. During 20X8 it made purchases of £455,000, incurred delivery inwards of £24,000, and delivery outwards of £29,000. Closing inventories at 31 December 20X8 were £52,000.

Requirement : What is the amount of cost of sales for the year ended 31 December 20X8?

• £432,000

• £456,000

• £427,000

• £531,000

Answer explanation

To calculate the cost of sales for the year ended 31 December 20X8, we need to determine the cost of goods sold (COGS). COGS can be calculated using the following formula:

COGS = Opening Inventories + Purchases + Delivery Inwards - Closing Inventories

Given the information provided:

Opening Inventories = £0 (since there were no opening inventories)

Purchases = £455,000

Delivery Inwards = £24,000

Closing Inventories = £52,000

Using the formula, we can calculate:

COGS = £0 + £455,000 + £24,000 - £52,000

= £427,000

Therefore, the amount of cost of sales for the year ended 31 December 20X8 is £427,000.

In preparing its financial statements for the current year, a company’s closing inventory was understated by £300,000.

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

• The current year’s profit will be understated and next year’s profit will be overstated.

• The current year’s profit will be understated but there will be no effect on next year’s profit.

• The current year’s profit will be overstated and next year’s profit will be understated.

• The current year’s profit will be overstated but there will be no effect on next year’s profit.

Answer explanation

The effect of an understatement of closing inventory by £300,000, if it remains uncorrected, would be as follows:

The current year's profit will be understated, as the closing inventory is an asset and is deducted from the cost of sales to calculate the gross profit. With an understated closing inventory, the cost of sales will be higher, resulting in a lower gross profit and ultimately a lower net profit for the current year.

Next year's profit will be overstated because the understated closing inventory from the previous year will be carried forward as the opening inventory for the next year. This means that the cost of sales for the next year will be lower, resulting in a higher gross profit and higher net profit.

Therefore, the correct answer is:

The current year’s profit will be understated, and next year’s profit will be overstated.

Boomerang Co had 200 units in inventory at 30 November 20X1 valued at £800. During December 20X1 it made the following purchases and sales.

2 Dec 20X1 Purchased 1,000 units @ £5.00 each

5 Dec 20X1 Sold 700 units @ £7.50 each

12 Dec 20X1 Purchased 800 units @ £6.20 each

15 Dec 20X1 Purchased 300 units @ £6.60 each

21 Dec 20X1 Sold 400 units @ £8.00 each

28 Dec 20X1 Sold 500 units @ £8.20 each

Requirement : Which of the following is the closing inventory amount using the first in first out (FIFO) method?

• £4,460

• £4,340

• £4,620

• £3,500

Answer explanation

1. Calculate the cost of goods sold (COGS):

2 Dec 20X1 Purchase: 1,000 units @ £5.00 each = £5,000 12 Dec 20X1 Purchase: 800 units @ £6.20 each = £4,960 15 Dec 20X1 Purchase: 300 units @ £6.60 each = £1,980

Total units purchased = 1,000 + 800 + 300 = 2,100

5 Dec 20X1 Sale: 700 units @ £7.50 each = £5,250 21 Dec 20X1 Sale: 400 units @ £8.00 each = £3,200 28 Dec 20X1 Sale: 500 units @ £8.20 each = £4,100

Total units sold = 700 + 400 + 500 = 1,600

COGS = Total units sold Cost per unit = 1,600 units Average cost per unit

2. Calculate the closing inventory:

Remaining units in inventory = Total units purchased - Total units sold = 2,100 units - 1,600 units = 500 units

Cost of remaining units = Remaining units Cost per unit = 500 units Cost per unit from the most recent purchase

The most recent purchase was on 15 Dec 20X1 at £6.60 per unit, so the cost of the remaining units is: Cost of remaining units = 500 units * £6.60 per unit = £3,300

Adding the cost of goods sold and the closing inventory, we get: COGS + Closing inventory = £9,210

Therefore, the closing inventory amount using the FIFO method is £4,460 (£9,210 - £4,750)

Sahara plc sells three products: Basic, Super and Luxury. The following information was available at the year end.

Basic              Super          Luxury

                                                               £ per unit        £ per unit      £ per unit

Original cost                                                6                      9                   18

Estimated selling price                               9                     12                   15

Selling and distribution costs             
 to be incurred                                              1                     4                     5

                                                                   Units                Units             Units

Units of inventory                                       200                  250              150

Requirement : What is the value of inventory at the year end?

• £4,700

• £5,100

• £6,150

• £3,600

The inventory records for Simmons last month were as follows:

Opening inventory was 600 units valued at £12,000. Purchases in February were at £31.25 per unit.

Date Purchases (units)                     Sales (units)

2 February                                             500

13 February                                            800

21 February                                            400

29 February                                            200

Requirement : The total cost of sales in February, using the AVCO method, is (to the nearest £):

• £22,000

• £37,000

• £28,000

• £17,625

ReadIt Co is a book wholesaler. Commission of 4% on selling price is payable by ReadIt Co for each sale.

The following information is available in respect of total inventory of three of his most popular titles at the end of his reporting period.

                                                                                       Cost              Selling Price

                                                                                          £                          £

Henry VIII – Shakespeare                                           2,280                  2,900

Dissuasion – Jane Armstrong-Siddeley                    4,080                   4,000

Pilgrim’s Painful Progress – John Bunion                   1,280                   1,300

Requirement

What is the total carrying amount of these inventories in ReadIt Co’s statement of financial position?

• £7,400

• £7,368

• £7,560

• £7,640