Inventories

Brooker paid £130,800 to credit suppliers during the year ended 31 December 20X5. At the beginning of the year trade payables totalled £11,750 and at the end they totalled £12,750. The value of closing inventory was £8,200. Cash purchases were £2,800. The cost of sales for the year was £148,000. What was the value of opening inventory?

• £21,600
• £24,400
• £22,400
• £23,200

In the year ended 31 December 20X8 Vulcan plc, a retailer, had sales totalling £4,200,000. The mark-up was 25% of cost. Inventories at 1 January 20X8 had a cost of £600,000 and at 31 December 20X8 of £680,000. What was the total of the company's purchases during the year ended 31 December 20X8?

• £3,280,000
• £3,360,000
• £3,440,000
• £3,830,000

Your firm values inventory using the average cost (AVCO) method. At 1 June 20X7 there were 100 units in inventory valued at £10 each. On 12 June, 50 units were purchased for £12 each, and a further 50 units were purchased for £15 each on 20 June. On 21 June, 160 units were sold for £20.00 each. What is the value of closing inventory at 30 June 20X7?

• £470
• £2,350
• £493
• £1,880

A business had inventory at 1 July comprising 15 units at a cost of $3.00 each. The following inventory movements occurred in July: 3 July 20X4 5 units sold at $3.30 each 8 July 20X4 10 units bought at $3.50 each 12 July 20X4 8 units sold at $4.00 each What was the value of closing inventory at 31 July, if the FIFO method of inventory valuation is used?

• 31.5
• 36
• 39
• 41

Answer explanation

The closing inventory of 12 items (15 – 5 + 10 – 8) comprise

If an entity uses the periodic weighted average cost method to value closing inventory, which of the following statements is true?

• Unit average cost is recalculated each time there is a purchase of inventory
• Unit average cost is recalculated each time there is a sale of goods
• Unit average cost is calculated once only at the end of an accounting period
• Unit average cost is recalculated each time there is a purchase or a sale

Answer explanation

In contrast, if continuous weighted average cost per unit is calculated, a new cost per unit is calculated each time a purchase is made.

From a financial reporting perspective, why should an entity maintain continuous and period end inventory records?

• They help to determine the average cost of a unit of inventory
• They help to identify variances between the expected usage and actual usage of inventory in an accounting period
• They help to determine the quantity and cost of inventory for inclusion in the financial statements
• They help management to make decisions regarding the selling price of products

Answer explanation

The alternative answers deal with aspects of management accounting. Option B deals with financial accounting and reporting which requires that inventory is quantified and valued at each accounting year end for inclusion in the financial statements.

Inisca plc is unclear as to whether the following items should be included when calculating the net realisable value of inventory held at the end of its reporting period: (1) Trade discounts given to customers (2) Cash discounts received from suppliers (3) Costs to completion (4) Selling costs Which should be included in the calculation of net realisable value of inventory?

• (1), (2) and (3) only
• (2), (3) and (4) only
• (1), (2) and (4) only
• (1), (3) and (4) only

Answer explanation

The NRV of inventory is the amount for which it should be sold after deducting the additional costs that must still be incurred to get it ready for sale and to sell it. Hence trade discounts, costs to completion and selling costs should be included when calculating NRV. Cash discounts received from suppliers would impact in cost of inventory rather than its NRV and should not be included.

What would be the effect on an entity’s profit for the year of discovering that inventory with cost of $1,250 and a net realisable value of $1,000 had been omitted from the original inventory valuation?

• An increase of $1,250
• An increase of $1,000
• A decrease of $250
• No effect at all

Answer explanation

Tutorial note: If the inventory was not included in the original valuation of closing inventory, closing inventory will be increased by $1,000 (the lower of cost and net realisable value). Since closing inventory is $1,000 higher, cost of sales is $1,000 lower and profit $1,000 higher.

The cost of inventory shown in Electra plc's statement of financial position at 28 February 20X2, valued on an average cost (AVCO) basis, was £9,250. Had the inventory been valued on a first in, first out (FIFO) basis it would have been £10,560. What would be the effect of adopting the FIFO valuation on Electra plc's financial statements for the reporting period ended 28 February 20X2?

• Increase profits and decrease current assets less current liabilities by £1,310
• Increase net assets and decrease losses by £1,310
• Increase capital and decrease current assets by £1,310
• Increase current assets and increase losses by £1,310

Answer explanation

Closing inventory is an asset in the statement of financial position and is deducted from cost of sales (and hence added to profit) in the statement of profit or loss. An increase of inventory from £9,250 to £10,560 would therefore increase net assets and increase profit (decrease losses) by £1,310 (10,560 – 9,250).

In preparing its financial statements for the current year, a company's closing inventory was understated by £50,000. What will be the effect of this error if it remains uncorrected?

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

Answer explanation

If closing inventory is understated, cost of sales will be overstated so profits will be understated. Next year opening inventory will be understated and cost of sales will be understated so profits will be overstated.