ACCA FR · Chapter 4
Inventories and agriculture MCQs with Answers
6 multiple-choice questions on Inventories and agriculture for ACCA FR Financial Reporting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Under IAS 2 Inventories, how should inventories be measured?
- A) At the higher of cost and net realisable value
- B) At fair value less costs to sell
- C) At replacement cost
- D) At the lower of cost and net realisable value
Show answer & explanation
Answer: D) At the lower of cost and net realisable value
IAS 2 measures inventories at the lower of cost and net realisable value (NRV). NRV is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs needed to make the sale. Measuring at fair value less costs to sell applies to biological assets under IAS 41, not to inventory in general.
Question 2
At the year end Avalon Co holds 1,000 units of a product that cost $50 each. The normal selling price is $60 a unit, but each unit needs a modification costing $8 before it can be sold, and a sales commission of 5% of the selling price is payable. At what amount should the inventory be shown?
- A) $50,000
- B) $49,000
- C) $52,000
- D) $57,000
Show answer & explanation
Answer: B) $49,000
NRV per unit = selling price $60 - modification $8 - commission ($60 x 5% = $3) = $49. NRV is below cost of $50, so inventory is measured at NRV: 1,000 x $49 = $49,000.
Question 3
Which of the following costs can be included in the cost of inventory under IAS 2?
- A) Fixed production overheads allocated on the basis of normal production capacity
- B) Abnormal amounts of wasted materials and labour
- C) Selling and distribution costs
- D) Administrative overheads that do not contribute to bringing the inventory to its present location and condition
Show answer & explanation
Answer: A) Fixed production overheads allocated on the basis of normal production capacity
Cost of inventory includes purchase costs, conversion costs (direct labour and a systematic allocation of fixed and variable production overheads, with fixed overheads based on normal capacity) and other costs of bringing the inventory to its present location and condition. Abnormal waste, selling costs and unrelated administrative overheads must be expensed when incurred.
Question 4
Ibis Co's fixed production overheads were $600,000 for the year. Normal capacity is 200,000 units, but output was only 150,000 units because of a strike. Variable production cost is $7 per unit. Closing inventory is 20,000 units. What is the value of closing inventory, and how are the remaining fixed overheads treated?
- A) $200,000; $150,000 of unallocated overhead expensed
- B) $220,000; all fixed overhead absorbed into units produced
- C) $140,000; all $600,000 of fixed overhead expensed
- D) $200,000; $150,000 of unallocated overhead carried forward as a prepayment
Show answer & explanation
Answer: A) $200,000; $150,000 of unallocated overhead expensed
Fixed overheads are absorbed on the basis of normal capacity: $600,000 / 200,000 = $3 per unit. Unit cost = $7 + $3 = $10, so closing inventory = 20,000 x $10 = $200,000. Overhead absorbed by actual output = 150,000 x $3 = $450,000, and the unallocated $150,000 is expensed in the period because low production must not inflate the unit cost.
Question 5
Under IAS 41 Agriculture, how should a biological asset be measured at each reporting date, assuming fair value can be measured reliably?
- A) At cost less accumulated depreciation
- B) At fair value less costs to sell, with changes recognised in other comprehensive income
- C) At fair value less costs to sell, with changes recognised in profit or loss
- D) At the lower of cost and net realisable value
Show answer & explanation
Answer: C) At fair value less costs to sell, with changes recognised in profit or loss
IAS 41 requires biological assets to be measured at fair value less costs to sell, both on initial recognition and at each reporting date. Gains and losses go to profit or loss for the period. Cost less depreciation is used only in the rare case where fair value cannot be measured reliably on initial recognition.
Question 6
At 1 January Meadow Farm Co owned a dairy herd of 100 cows with a fair value of $900 each. At 31 December their fair value was $1,000 each. During the year 10 calves were born, each with a fair value of $300 at 31 December. Costs to sell are $20 per animal at all dates. No animals were bought or sold. What gain should be recognised in profit or loss for the year under IAS 41?
- A) $13,000
- B) $12,800
- C) $10,000
- D) $100,800
Show answer & explanation
Answer: B) $12,800
Opening herd at FV less costs to sell = 100 x ($900 - $20) = $88,000. Closing herd = 100 x ($1,000 - $20) + 10 calves x ($300 - $20) = $98,000 + $2,800 = $100,800. Gain = $100,800 - $88,000 = $12,800. The gain on the new calves is recognised as part of this figure.