ACCA FA · Chapter 5
Inventory (IAS 2) MCQs with Answers
10 multiple-choice questions on Inventory (IAS 2) for ACCA FA Financial Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
According to IAS 2 Inventories, how should inventories be measured?
- A) At the higher of cost and net realisable value
- B) At the lower of cost and net realisable value
- C) At cost
- D) At expected selling price
Show answer & explanation
Answer: B) At the lower of cost and net realisable value
IAS 2 requires inventories to be measured at the lower of cost and net realisable value (NRV). NRV is the estimated selling price less the estimated costs of completion and the estimated costs necessary to make the sale. This prevents inventory from being carried at more than it is expected to realise.
Question 2
Which of the following costs should NOT be included in the cost of inventory under IAS 2?
- A) Wages of production staff
- B) Import duties on goods purchased
- C) Cost of delivering goods to customers
- D) Carriage inwards on raw materials
Show answer & explanation
Answer: C) Cost of delivering goods to customers
The cost of inventory includes all costs of purchase, costs of conversion and other costs incurred in bringing inventories to their present location and condition. Carriage inwards, import duties and production labour all qualify. Delivery costs to customers are selling (distribution) costs and must be expensed.
Question 3
A business holds 40 units of an item that cost $850 each. The items can be sold for $900 each, but each unit first needs modifications costing $70, and a sales commission of 5% of the selling price will be payable. At what value should these items be included in inventory?
- A) $33,200
- B) $34,000
- C) $31,400
- D) $36,000
Show answer & explanation
Answer: C) $31,400
NRV per unit = $900 - $70 - ($900 x 5%) = $900 - $70 - $45 = $785. This is below cost of $850, so inventory is valued at NRV: 40 x $785 = $31,400. Ignoring the commission gives $830 per unit ($33,200), which is still below cost but overstates NRV.
Question 4
A business has three product lines in inventory at its year end: Product X: cost $2,400, NRV $3,100 Product Y: cost $5,600, NRV $4,900 Product Z: cost $1,800, NRV $1,750 At what amount should inventory be shown in the statement of financial position?
- A) $9,050
- B) $9,750
- C) $9,100
- D) $9,800
Show answer & explanation
Answer: A) $9,050
The lower of cost and NRV must be applied to each item or group of similar items separately: X $2,400 + Y $4,900 + Z $1,750 = $9,050. Comparing totals (cost $9,800 v NRV $9,750) and taking $9,750 is not permitted, because it lets gains on one product offset losses on another.
Question 5
A business had the following inventory movements in March: 1 March: opening inventory 100 units at $5.00 4 March: purchased 200 units at $5.50 15 March: sold 180 units 20 March: purchased 150 units at $6.00 28 March: sold 170 units Using the FIFO method, what is the value of closing inventory at 31 March?
- A) $556
- B) $600
- C) $500
- D) $570
Show answer & explanation
Answer: B) $600
Closing units = 100 + 200 - 180 + 150 - 170 = 100 units. Under FIFO the oldest units are sold first, so the 100 units remaining are from the most recent purchase on 20 March at $6.00: 100 x $6.00 = $600. The other figures come from averaging methods or from valuing at the oldest cost.
Question 6
A business uses the continuous weighted average cost (AVCO) method. Its inventory movements in March were: 1 March: opening inventory 100 units at $5.00 4 March: purchased 200 units at $5.50 15 March: sold 180 units 20 March: purchased 150 units at $6.00 28 March: sold 170 units What is the value of closing inventory at 31 March, to the nearest $?
- A) $600
- B) $570
- C) $540
- D) $556
Show answer & explanation
Answer: B) $570
After 4 March: 300 units costing $500 + $1,100 = $1,600, average $5.3333. 15 March sale removes 180 x $5.3333 = $960, leaving 120 units at $640. After 20 March: 270 units costing $640 + $900 = $1,540, average $5.7037. 28 March sale removes 170 x $5.7037 = $969.63, leaving 100 units at $570.37, which rounds to $570. A periodic average ($2,500 / 450 x 100 = $556) is not the continuous method.
Question 7
A company's year end is 31 December. Its inventory count took place on 7 January and valued inventory at cost of $48,300. Between 1 January and 7 January, goods costing $2,700 were received from suppliers and sales of $6,000 were made at a mark-up of 25% on cost. What is the value of inventory at 31 December?
- A) $46,200
- B) $50,100
- C) $50,400
- D) $51,600
Show answer & explanation
Answer: C) $50,400
Cost of the goods sold after the year end = $6,000 x 100/125 = $4,800. These were in inventory at 31 December, so they are added back; the goods received after the year end were not, so they are deducted: $48,300 + $4,800 - $2,700 = $50,400. Treating 25% as a margin gives a cost of $4,500 and $50,100, and using the selling price gives $51,600.
Question 8
Closing inventory at the end of 20X5 was overstated by $5,000. This error was not discovered and the opening inventory for 20X6 was brought forward at the same incorrect amount. What is the effect on reported profit?
- A) Profit for 20X5 is understated by $5,000 and profit for 20X6 is overstated by $5,000
- B) Profit for 20X5 is overstated by $5,000 and profit for 20X6 is unaffected
- C) Profit for 20X5 is overstated by $5,000 and profit for 20X6 is understated by $5,000
- D) Profit for both 20X5 and 20X6 is overstated by $5,000
Show answer & explanation
Answer: C) Profit for 20X5 is overstated by $5,000 and profit for 20X6 is understated by $5,000
Overstating closing inventory reduces cost of sales and overstates 20X5 profit by $5,000. The same figure becomes opening inventory in 20X6, increasing cost of sales and understating 20X6 profit by $5,000. Over the two years the error reverses, so cumulative profit is correct by the end of 20X6.
Question 9
What is the double entry to record closing inventory at the end of an accounting period?
- A) Debit Purchases; Credit Inventory
- B) Debit Inventory (statement of financial position); Credit Cost of sales (statement of profit or loss)
- C) Debit Inventory; Credit Revenue
- D) Debit Cost of sales; Credit Inventory
Show answer & explanation
Answer: B) Debit Inventory (statement of financial position); Credit Cost of sales (statement of profit or loss)
Closing inventory is an asset carried forward, so it is debited to the inventory account in the statement of financial position. The credit reduces cost of sales, because these goods have not yet been sold. In the next period the opening inventory is transferred back to cost of sales.
Question 10
A company's inventory at cost is $64,000. This includes damaged items that cost $3,200. These items can be sold for $2,100 after repairs costing $400. At what amount should total inventory be stated?
- A) $62,500
- B) $61,900
- C) $62,900
- D) $60,800
Show answer & explanation
Answer: A) $62,500
NRV of the damaged items = $2,100 - $400 = $1,700, which is below cost of $3,200, so a write-down of $3,200 - $1,700 = $1,500 is needed. Inventory = $64,000 - $1,500 = $62,500. Ignoring the repair costs gives a write-down of $1,100 and $62,900; removing the items entirely gives $60,800.