DAILY QUIZ AND PRACTICE - INVENTORY

If Cost of goods sold is Rs.80,700; Opening Inventory is Rs. 5,800 & Closing Inventory is Rs. 6,000 Purchases will be Rs.80,900.

• TRUE

• FALSE

Answer explanation

To find Purchases, use the formula: Purchases = COGS + Closing Inventory - Opening Inventory. Here, Purchases = 80,700 + 6,000 - 5,800 = 80,900. Thus, the statement is TRUE.

1. Periodic Inventory System is more suitable for small enterprises.

• TRUE

• FALSE

Answer explanation

TRUE. The Periodic Inventory System is simpler and less costly to implement, making it more suitable for small enterprises with limited resources and inventory management needs.

1. Closing inventory = Opening inventory + Purchases + Direct expenses + Cost of goods sold.

• TRUE

• FALSE

Answer explanation

The statement is FALSE because the correct formula for closing inventory is: Closing inventory = Opening inventory + Purchases + Direct expenses - Cost of goods sold.

1. A building is considered inventory in a construction business.

• TRUE

• FALSE

Answer explanation

TRUE. In a construction business, a building under construction is considered inventory as it represents a product that is being developed for sale.

If the profit is 25% of cost then it is 20% of Sales

• TRUE

• FALSE

Answer explanation

If profit is 25% of cost, then profit = 0.25 * cost. Sales = cost + profit = cost + 0.25 * cost = 1.25 * cost. Thus, profit as a percentage of sales = (0.25 * cost) / (1.25 * cost) = 20%. Therefore, the statement is TRUE.

1. Inventories are stocks of goods and materials that are maintained for mainly the purpose of revenue generation.

• TRUE

• FALSE

Answer explanation

TRUE is correct because inventories are indeed stocks of goods and materials held primarily to generate revenue through sales.

1. When closing inventory is overstated, net income for the accounting period will be understated.

• TRUE

• FALSE

Answer explanation

When closing inventory is overstated, it increases the cost of goods sold, leading to lower net income. Therefore, the statement is FALSE; net income is actually understated when inventory is understated.

Under FIFO, value of closing inventory is calculated considering that inventory most recently purchased has not been sold

• TRUE

• FALSE

Answer explanation

TRUE. Under FIFO (First-In, First-Out), the closing inventory is valued based on the assumption that the most recently purchased items remain unsold, reflecting their current cost in the inventory valuation.

Valuing inventory at cost or net releasable value whichever is lower is based on which principle of Conservatism

• TRUE

• FALSE

Answer explanation

The principle of conservatism dictates that inventory should be valued at the lower of cost or net realizable value. This approach ensures that potential losses are recognized promptly, making the statement TRUE.

Under inflationary trend, FIFO method will show highest value of inventory

• TRUE

• FALSE

Answer explanation

Under inflation, the FIFO (First-In, First-Out) method values inventory based on the cost of the oldest items, which are cheaper. Thus, the remaining inventory, which consists of newer, more expensive items, results in a higher overall inventory value.