Chapter 7

Question 1

For the year ended 31 October 20X3 a company carried out a physical count of inventory on 4
November 20X3, leading to an inventory cost at this date of £483,700.
The following transactions took place between 1 November 20X3 and 4 November 20X3:
(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.
Requirement
What amount should be shown in the company’s financial statements at 31 October 20X3 for closing
inventory, based on this information?
A £458,700
B £505,900
C £508,700
D £461,500

Answer 1

D - READ QUESTION - look at dates !!!

Question 2

Bouncy Balls plc has 40 units of its special spongy balls in inventory as at 30 November 20X7. The
product costs £5 per unit to manufacture and can be sold for £15 per unit. Half of the units in
inventory at the year end have been damaged and will require rectification work costing £10 per unit
before they can be sold. Selling costs are £1 per unit.
Requirement
What is the value of inventory at 30 November 20X7?
A £160
B £180
C £200
D £600

Answer 2

Correct answer(s):
B £180
(20 × £5) + (20 × (£15 – 10 – 1)) = £180

Question 3

8 Mickey Ltd has calculated the cost of inventory using the average cost (AVCO) method. At 1 June
20X8, there were 60 units in inventory at a cost of £12 each. On 8 June, 40 units were purchased for
£15 each, and a further 50 units were purchased for £18 each on 14 June. On 21 June, 75 units were
sold for £20.00 each.
Requirement
What is the carrying amount of closing inventory at 30 June 20X8?
A £1,110
B £1,010
C £900
D £1,125

Answer 3

Correct answer(s):
A £1,110

Question 4

11 Which two of the following may be included when arriving at the cost of finished goods inventory for
inclusion in the financial statements of a manufacturing company?
A Delivery inwards
B Delivery outwards
C Depreciation of delivery vehicles
D Finished goods storage costs
E Production line wages

Answer 4

11 Correct answer(s):
A Delivery inwards
E Production line wages
(B) and (C) are distribution costs and (D) is not incurred in arriving at the cost of finished goods.

Question 5

12 Which of the following statements about inventory for the purposes of the statement of financial
position is correct?
A Average cost (AVCO) and last in first out (LIFO) are both acceptable methods, under IAS 2,
Inventories, of arriving at the cost of inventories.
B The cost of inventories of finished goods may include labour and materials cost only, without
including overheads.
C Inventories should be included at the lowest of cost, net realisable value and replacement cost.
D It may be acceptable for the cost of inventories to be based on selling price less estimated profit
margin.

Answer 5

12 Correct answer(s):
D It may be acceptable for the cost of inventories to be based on selling price less estimated profit
margin.
Selling price less an estimated profit margin is an acceptable method of arriving at the cost of
inventory. It is a frequently used method in the retail industry. Regarding (A), LIFO is not an
acceptable inventory valuation method. Overheads should be included in cost (B), and under IAS 2,
inventories should be included in the SOFP at the lower of cost and NRV, replacement cost (C) is not
relevant.