CAF-5 · Chapter 1

Inventory Valuation MCQs with Answers

10 multiple-choice questions on Inventory Valuation for CAF-5 Management Accounting. Try each one before revealing the answer and explanation.

1. Question 1

   During the material procurement process, which document is prepared by the Store / Warehouse and sent to the Procurement / Purchase Department to initiate the buying process?

   • A) Material Requisition
   • B) Purchase Order
   • C) Goods Received Note
   • D) Purchase Requisition
   Show answer & explanation

   Answer: D) Purchase Requisition

   The Store / Warehouse raises a Purchase Requisition to the Procurement / Purchase Department when stock needs to be replenished. A Material Requisition is raised by Production to the Store, and a Purchase Order is raised by Procurement to the Supplier.

2. Question 2

   Which of the following documents is used to record the transfer of raw materials from the warehouse to the production department?

   • A) Goods Dispatch Note (GDN)
   • B) Goods Issue Note (GIN)
   • C) Goods Received Note (GRN)
   • D) Material Requisition
   Show answer & explanation

   Answer: B) Goods Issue Note (GIN)

   When the store issues raw materials to the production department for manufacturing, the warehouse prepares a Goods Issue Note (GIN).

3. Question 3

   What is the primary purpose of maintaining a "bin card" by the storekeeper?

   • A) To record the financial value of the inventory in the general ledger.
   • B) To track the net realizable value of the stock.
   • C) To record the quantities of items received and issued, while maintaining a running balance.
   • D) To issue a formal request to the supplier for new materials.
   Show answer & explanation

   Answer: C) To record the quantities of items received and issued, while maintaining a running balance.

   A bin card is maintained for each raw material item by the storekeeper. It only tracks quantities (receipts, issues, and a running balance) to help ensure stock does not fall below the re-order level.

4. Question 4

   According to IAS 2, at what value should an entity carry its inventories in the financial statements at the end of a reporting period?

   • A) At the lower of historical cost or replacement cost
   • B) At the lower of cost or net realisable value
   • C) Strictly at historical cost
   • D) At the higher of cost or net realisable value
   Show answer & explanation

   Answer: B) At the lower of cost or net realisable value

   According to IAS 2, an entity is required to evaluate its inventories at the end of each reporting period and value them at the lower of cost or Net Realisable Value (NRV).

5. Question 5

   How is the Net Realisable Value (NRV) of an inventory item calculated?

   • A) Estimated selling price plus estimated cost to complete.
   • B) Estimated selling price less estimated cost to complete and estimated selling expenses.
   • C) Original purchase price less accumulated depreciation.
   • D) Current replacement cost less estimated selling expenses.
   Show answer & explanation

   Answer: B) Estimated selling price less estimated cost to complete and estimated selling expenses.

   Net realisable value is defined as the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated cost necessary to make the sale.

6. Question 6

   A manufacturing company has partially completed Work-in-Process (WIP) inventory. The historical cost incurred to date is Rs. 16,000. The estimated final selling price of the completed product is Rs. 14,000. It will cost an additional Rs. 1,500 to complete the product, and selling costs will be Rs. 200. At what value should this WIP inventory be recorded?

   • A) Rs. 16,000
   • B) Rs. 14,000
   • C) Rs. 12,300
   • D) Rs. 12,500
   Show answer & explanation

   Answer: C) Rs. 12,300

   Inventory must be valued at the lower of Cost (Rs. 16,000) or NRV. NRV = Estimated Selling Price (14,000) - Cost to Complete (1,500) - Selling Cost (200) = Rs. 12,300. Since NRV (12,300) is lower than Cost (16,000), it should be valued at Rs. 12,300.

7. Question 7

   In a manufacturing account, how is "Prime Cost" calculated?

   • A) Direct materials consumed + Direct labour + Factory overheads
   • B) Purchases of raw materials + Direct labour
   • C) Cost of materials consumed + Direct labour + Other direct expenses
   • D) Total production cost + Opening Work in Process
   Show answer & explanation

   Answer: C) Cost of materials consumed + Direct labour + Other direct expenses

   In the manufacturing account format, Prime Cost represents the total of all direct costs, which includes the cost of materials consumed, direct labour (wages), and other direct expenses.

8. Question 8

   Which of the following formulas correctly calculates the "Cost of Goods Manufactured"?

   • A) Prime Cost + Factory Overheads + Opening WIP – Closing WIP
   • B) Prime Cost + Factory Overheads + Opening Finished Goods – Closing Finished Goods
   • C) Cost of materials consumed + Direct labour + Factory Overheads
   • D) Sales Revenue – Gross Profit
   Show answer & explanation

   Answer: A) Prime Cost + Factory Overheads + Opening WIP – Closing WIP

   The Cost of Goods Manufactured is derived by taking the Prime Cost, adding Factory Overheads (which gives the total manufacturing cost), and then adjusting for the movement in Work in Progress (adding Opening WIP and deducting Closing WIP).

9. Question 9

   In the absence of specific information regarding inventory valuation policy in a manufacturing scenario, which basis is generally assumed for closing inventory valuation?

   • A) Last-In-First-Out (LIFO)
   • B) First-In-First-Out (FIFO)
   • C) Weighted Average Cost (AVCO)
   • D) Standard Cost
   Show answer & explanation

   Answer: B) First-In-First-Out (FIFO)

   The study text explicitly states that in the absence of specific information, we always assume the "first in-first out" (FIFO) basis for closing inventory valuation.

10. Question 10

    A business has Opening Finished Goods of Rs. 160,000. During the period, the Cost of Goods Manufactured is calculated as Rs. 967,000. If the Closing Finished Goods are valued at Rs. 120,000, what is the Cost of Goods Sold?

    • A) Rs. 1,127,000
    • B) Rs. 1,007,000
    • C) Rs. 967,000
    • D) Rs. 1,247,000
    Show answer & explanation

    Answer: B) Rs. 1,007,000

    Cost of Goods Sold = Opening Finished Goods + Cost of Goods Manufactured - Closing Finished Goods. Calculation: Rs. 160,000 + Rs. 967,000 - Rs. 120,000 = Rs. 1,007,000.