Maintaining Financial Records (FA2) Total Marks:

50
Test 1 (Inventories) Instructor: Bazgha
Waqar

1. Omission of opening inventory from financial statements may results,

a. Understated current asset

b. Understated cost of sales
c. Overstated cost of sales
d. No impact

2. Prisha has not kept accurate accounting records during the financial year. She had
opening inventory of $6,700 and purchased goods costing $84,000 during the year. At the
year end she had $5,400 left in inventory. All sales are made at a mark up on cost of 20%.

What is Prisha's gross profit for the year?

$ ___________ 17,060
3. A business had an opening inventory of $180,000 and a closing inventory of $220,000 in
its financial statements for the year ended 31 December 2005.

Which of the following entries for these opening and closing inventory figures are made
when completing the financial records of the business?

a. Debit Inventory account 180,000 Credit Statement of profit or loss 180,000 Debit
Statement of profit or loss 220,000 Credit Inventory account 220,000
b. Debit Statement of profit or loss 180,000 Credit Inventory account 180,000 Debit
Inventory account 220,000 Credit Statement of profit or loss 220,000
c. Debit Inventory account 40,000 Credit Purchases account 40,000
d. Debit Purchases account 40,000 Credit Inventory account 40,000

4. Which of the following statements is correct regarding opening inventory?

a. Opening inventory is brought forwarded from previous year’s statement of financial

position & remain as current asset in current year.
b. Opening inventory is brought forwarded from previous year’s statement of financial
position & transferred to trading account in current year.
c. Both of 1 & 2 are correct
d. Both of 1 & 2 are incorrect

5. State the effect of closing inventory in Financial Statements.

a. It increases sales revenue

b. It increases cost of sales
c. It decreases cost of sales
d. None of the above.
6. Commissions paid to sales representative need to be included in cost of purchase.

a. True
b. False

7. A company values its inventory using the FIFO method. At 1 May 20X5 the company
had 700 engines in inventory, valued at $190 each. During the year ended 30 April 20X6
the following transactions took place:

20X5
1 July Purchased 500 engines at $220 each
1 November Sold 400 engines for $160,000
20X6
1 February Purchased 300 engines at $230 each

15 April Sold 250 engines for $125,000

What is the value of the company's closing inventory of engines at 30 April 20X6?
$ ___________ 188,500

8. Which of the following are correct?

 The value of inventory in the statement of financial position should be as close as
possible to net realisable value.
 The valuation of finished goods inventory must include production overheads.
 Production overheads included in valuing inventory should be calculated by reference
to the company’s normal level of production during the period.
 In assessing net realisable value, inventory items must be considered separately, or in
groups of similar items, not by taking the inventory value as a whole.

a. 1 and 2 only
b. 2 and 4 only
c. 1 and 3 only
d. 2, 3 and 4

9. What should be done regarding inventory valuation, if expected selling price of an item
falls below its purchase price?

a. Do not show any inventory. Hence no valuation needed.

b. Should’ve been valued at purchase price
c. Should’ve been valued at expected selling price
10. For Morgan the direct cost of production of each unit of inventory is $46 (including
carriage inwards of $11 and import duties of $1 on the raw materials element). Production
overheads amount to $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. At what value should each unmodified
unit of inventory be included in the statement of financial position?

a. $61
b. $55
c. $46
d. $80

11. The closing inventory at cost of a company at 31 January 20X3 amounted to $284,700.
The following items were included at cost in the total:
 400 coats, which had cost $80 each and normally sold for $150 each. Owing to a
defect in manufacture, they were all sold after the reporting date at 50% of their
normal price. Selling expenses amounted to 5% of the proceeds.
 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 for the batch totalled
$800. They were sold for $28 each.

What should the inventory value be according to IAS 2 “Inventories” after considering
the above items?

a. $281,200
b. $282,800
c. $329,200
d. None of these

12. State which of the followings are true;

 If there are relatively small amount of inventory, they should be counted every day.
 It is difficult to count large amount of inventory with different types. So they should be
counted once in a year.

a. 1
b. 2
c. 1&2
d. None of them

13. Which of the following is one of a main purpose to keep an inventory card?

a. To determine the quantity of inventory

b. Recording the quantity of sold item only
c. To calculate cost of sales
d. It’s just an administrative procedure
14. Boomerang Co had 200 units in inventory at 30 November 20X1 valued at $800. During
December it made the following purchases and sales.

2/12 Purchased 1,000 @ $5 each

5/12 Sold 700 @ $7.50 each

12/12 Purchased 800 @ $6.20 each

15/12 Purchased 300 @ $6.60 each

21/12 Sold 400 @ $8.00 each

28/12 Sold 500 @ $8.20 each

Calculate the value of closing inventory using FIFO and AVCO

a. FIFO $4460 AVCO $4094

b. FIFO $4640 AVCO $4904
c. FIFO $4400 AVCO $4400
d. FIFO $4600 AVCO $4900

15. The inventory counters of Crocodile Co inform you that there are 6,000 items of product
A, and 2,000 of product B, these cost $10 and $5 respectively. They also tell you the
following information:

Product A – 500 of these were found to be defective and would be sold at a cut price of $8.
Product B – 100 of these were also to be sold for $4.50 with selling expenses of $1.50 each.

What figure should appear in Crocodile's statement of financial position for inventory?

a. $68,800
b. $59,000

16. W is registered for sales tax. The managing director has asked four staff in the accounts
department why the output tax for the last quarter does not equal 17.5% of sales (17.5% is
the rate of tax). Which one of the following four replies she received was not correct?

a. The company had some exports that were not liable to sales tax
b. The company made some sales of zero-rated products
c. The company made some sales of exempt products
d. The company sold some products to businesses not registered for sales tax
17. A business in its first period of trading charges $4,000 of sales tax on its sales and suffers
$3,500 of sales tax on its purchases which include $250 sales tax on business entertaining.
What is the amount owed to tax authorities?

a. $750
b. $500

18. A sales tax registered trader has recorded the following transactions during the accounting
period.
 Standard rated sales 200,000
 Purchases 150,000

Included in purchases are the purchases of a motor car for $20,000, a photocopier for $8,000
and entertaining expenses of $5,000. Sales tax is not recoverable on the motor car or
entertainment expenses. All figures are given inclusive of sales tax at 17.5%.

How much input tax can be reclaimed by the trader?

a. $19,650
b. $18,617

19. Is each of the following statements about sales tax true or false?

Sales tax is an expense to the ultimate consumer of the goods purchased True/False

Sales tax is recorded as income in the accounts of the entity selling the goods True/False

20. The inventory value for the financial statements of Global Co for the year ended 30 June
20X3 was based on a inventory count on 7 July 20X3, which gave a total inventory value
of $950,000. Between 30 June and 7 July 20X3, the following transactions took place.
$

Purchase of goods 11,750

Sale of goods (mark up on cost at 15%) 14,950
Goods returned by Global Co to supplier 1,500

What figure should be included in the financial statements for inventories at 30 June 20X3?

$_______ 952,750

21. S sells three products – Basic, Super and Luxury. The following information was
available at the year end.
 Basic Super Luxury
$ per unit $ per unit $ per unit
Original cost 6 9 18
Estimated selling price 9 12 15
Selling and distribution costs 1 4 5
units units units
Units of inventory 200 250 150

What is the value of inventory at the year end?

a. $4,200
b. $4,700
c. $5,700
d. $6,150

22. A company has decided to switch from using the FIFO method of inventory valuation to
using the average cost method (AVCO).

In the first accounting period where the change is made, opening inventory valued by the
FIFO method was $53,200. Closing inventory valued by the AVCO method was $59,800.

Total purchases and during the period were $136,500. Using the continuous AVCO method,
opening inventory would have been valued at $56,200.

What is the cost of materials that should be included in the statement of profit or loss for the
period?

a. $129,900
b. $132,900
c. $135,900
d. $140,100

23. Which one of the following statements about the use of a continuous inventory system is
INCORRECT?

a. In a retail organisation, a continuous inventory system can be used to keep track of

the quantity of each stock item available in its distribution centres.
b. Under continuous inventory, the cost of each receipt of inventory and the cost of each
issue from inventory is recorded individually.
c. A continuous inventory system removes the need for periodic physical inventory
counts.
d. Both the FIFO and average cost (AVCO) methods of pricing inventory may be used
within a continuous inventory system.

24. In preparing its financial statements for the current year, a company's closing inventory
was understated by $300,000.
What will be the effect of this error if it remains uncorrected?

a. The current year's profit will be overstated and next year's profit will be understated.
b. The current year's profit will be understated but there will be no effect on next year's
profit.
c. The current year's profit will be understated and next year's profit will be overstated.
d. The current year's profit will be overstated but there will be no effect on next year's
profit.

25. The inventory value for the financial statements of Q for the year ended 31 December
20X4 was based on an inventory count on 4 January 20X5, which gave a total inventory
value of $836,200.

Between 31 December and 4 January 20X5, the following transactions took place:
$
Purchases of goods 8,600
Sales of goods (profit margin 30% on sales) 14,000
Goods returned by Q to supplier 700

What adjusted figure should be included in the financial statements for inventories at 31
December 20X4?

a. $838,100
b. $853,900
c. $818,500
d. $834,300