qsi got wrong 7 Flashcards
1 A business has opening inventory of £7,200 and closing inventory of £8,100. Purchases for the year
were £76,500, delivery inwards was £50 and delivery outwards was £180.
Requirement
What is the amount for cost of sales?
A £75,550
B £75,650
C £75,830
D £77,450
2 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?
A Dr Cost of sales: £686,880; Cr Inventories: £686,880
B Dr Purchases: £686,880; Cr Cost of sales: £686,880
C Dr Cost of sales: £686,880; Cr Purchases: £686,880
D Dr Inventories: £18,647; Cr Cost of sales: £18,647
E Dr Cost of sales: £18,647; Cr Inventories: £18,647
F Dr Inventories: £18,647; Cr Purchases: £18,647
2 Correct answer(s):
C Dr Cost of sales: £686,880; Cr Purchases: £686,880
D Dr Inventories: £18,647; Cr Cost of sales: £18,647
Applying the cost of sales equation, cost of sales = opening inventories + purchases – closing
inventories, purchases made in the year are transferred to cost of sales at the year-end by debiting
cost of sales and crediting purchases (C). Closing inventories are recorded as a current asset by
debiting inventories and crediting cost of sales (D).
7 Indicate whether the following statements are true or false.
Requirements
In a period of rising prices, applying the first in first out (FIFO) method to determine the cost of
inventories will give a lower gross profit figure than the average cost (AVCO) method.
True A
False B
Closing inventory is a debit in the statement of profit or loss.
True C
False
7 Correct answer(s):
False B
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.
Correct answer(s):
False D
Closing inventory is a debit in the statement of financial position and a credit in the statement of
profit or loss.
CHECK THIS, WHY IS IT 4.80
9 Morgan plc’s direct production cost of each unit of inventory is £46. Production overheads are £15
per unit. Currently the goods can only be sold if they are modified at a cost of £17 per unit. The
selling price of each modified unit is £80 and selling costs are estimated at 10% of selling price.
Requirement
At what amount should each unmodified unit of inventory be included in the statement of financial
position?
A £48
B £55
C £64
D £61
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.
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.
13 A company’s closing inventory at 31 January 20X3 amounted to £284,700.
The following items were included, at cost, in the total:
(1) 400 coats, which had cost £80 each and are normally sold for £150 each. Owing to a defect in
manufacture, they were all sold after 31 January 20X3 at 50% of their normal selling price.
Selling expenses amounted to 5% of the proceeds.
(2) 800 skirts, which had cost £20 each. These too were found to be defective. Remedial work in
February 20X3 cost £5 per skirt, and selling expenses were £1 per skirt. They were sold for £28
each.
Requirement
What should be the inventory value after considering the above items?
A £281,200
B £282,800
C £329,200
D £284,700
