Chapter 7: Cost of sales and inventories

Question 1

True or false: In a period of rising prices, applying the FIFO method to determine the cost of inventories will give a lower gross profit figure than the AVCO method

Answer 1

False: If prices are rising, the charge to cost of sales will be higher if AVCO is used. Gross profit will therefore be lower under this method.

Question 2

True or false: Closing inventory is a debit in the statement of profit or loss

Answer 2

False: Closing inventory is a debit in the statement of financial position and a credit in the statement of profit or loss

Question 3

True or false: A van for sale by a dealer is shown as a non-current asset in its statement of financial position

Answer 3

False: It is current asset inventory

Question 4

True or false: Import duties are included in the cost of inventory

Answer 4

True: Import duties should be included in inventory cost

Question 5

True or false: AVCO and LIFO are both acceptable methods, under IAS 2, Inventories, of arriving at the cost of inventories

Answer 5

False: LIFO is not an acceptable inventory valuation method

Question 6

True or false: The cost of inventories of finished goods may include labour and materials cost only, without including overheads

Answer 6

False: Overheads should be included in cost

Question 7

True or false: Inventories should be included at the lowest of cost, net realisable value, and replacement cost

Answer 7

False: Under IAS 2 inventories should be included in the statement of financial position at the lower of cost and NRV, replacement cost is not relevant

Question 8

True or false: It may be acceptable for the cost of inventories to be based on selling price less estimated profit margin

Answer 8

True: Selling price less an estimated profit margin is an acceptable method of arriving at the cost of inventory and is a frequently used method in the retail industry