ICAEW AF · Chapter 9
Inventory MCQs with Answers
9 multiple-choice questions on Inventory for ICAEW AF Accounting Fundamentals. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Under IAS 2 Inventories, at what amount should inventories be measured?
- A) Replacement cost at the reporting date
- B) Selling price less the normal profit margin
- C) The lower of cost and net realisable value
- D) The higher of cost and net realisable value
Show answer & explanation
Answer: C) 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 in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. This ensures that inventory is not carried at more than it is expected to realise.
Question 2
Which of the following costs should NOT be included in the cost of inventories under IAS 2?
- A) Carriage inwards on goods purchased
- B) Purchase price less trade discounts
- C) Import duties on goods purchased
- D) Costs of delivering goods to customers
Show answer & explanation
Answer: D) Costs of delivering goods to customers
The cost of inventories includes all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Import duties, carriage inwards and the purchase price net of trade discounts are therefore included. Selling and distribution costs, such as delivering goods to customers, are expensed as incurred.
Question 3
At the year end, a business holds an item of inventory that cost £4,200. The item is damaged and will need repairs costing £650 before it can be sold for £4,500. A sales commission of 5% of the selling price will be payable. At what amount should the item be included in inventory?
- A) £4,200
- B) £3,625
- C) £3,850
- D) £4,275
Show answer & explanation
Answer: B) £3,625
NRV = selling price £4,500 - repair costs £650 - commission (5% x £4,500 = £225) = £3,625. NRV is below cost of £4,200, so the item is measured at £3,625, a write-down of £575.
Question 4
A business holds three product lines at its year end: Product X: cost £2,400, net realisable value £3,100 Product Y: cost £1,850, net realisable value £1,500 Product Z: cost £3,700, net realisable value £4,100 At what total amount should inventory be stated?
- A) £8,700
- B) £8,300
- C) £7,950
- D) £7,600
Show answer & explanation
Answer: D) £7,600
IAS 2 requires the lower of cost and NRV to be applied item by item (or to groups of similar items), not to the total. X: £2,400, Y: £1,500 (NRV below cost), Z: £3,700. Total = £7,600. Comparing totals (£7,950 cost against £8,700 NRV) would hide the loss on product Y.
Question 5
A business had opening inventory of 200 units at £5 each. During the period it bought 300 units at £6 each and then 400 units at £6.50 each. It sold 650 units. What is the value of closing inventory using the first-in, first-out (FIFO) method?
- A) £1,300
- B) £1,625
- C) £1,250
- D) £1,500
Show answer & explanation
Answer: B) £1,625
Units in closing inventory = 200 + 300 + 400 - 650 = 250. Under FIFO, the earliest units are assumed to be sold first, so the 250 units remaining come from the most recent purchase at £6.50. Closing inventory = 250 x £6.50 = £1,625.
Question 6
A business uses the weighted average cost method, recalculating the average after each purchase. Its inventory movements for the month were: Opening inventory: 100 units at £10.00 Purchase: 300 units at £12.00 Sale: 250 units Purchase: 250 units at £13.10 Sale: 220 units What is the value of closing inventory?
- A) £2,181
- B) £2,160
- C) £2,250
- D) £2,358
Show answer & explanation
Answer: C) £2,250
After the first purchase: 400 units costing £1,000 + £3,600 = £4,600, average £11.50. After selling 250: 150 units at £11.50 = £1,725. After the second purchase: 400 units costing £1,725 + £3,275 = £5,000, average £12.50. Closing inventory = 180 units x £12.50 = £2,250.
Question 7
A business overstated its closing inventory at the end of year 1. The error was not discovered and the year 2 closing inventory was correct. What is the effect on reported profits?
- A) Year 1 profit is overstated and year 2 profit is understated
- B) Year 1 profit is overstated and year 2 profit is unaffected
- C) Both year 1 and year 2 profits are overstated
- D) Year 1 profit is understated and year 2 profit is overstated
Show answer & explanation
Answer: A) Year 1 profit is overstated and year 2 profit is understated
Overstating closing inventory reduces cost of sales, so year 1 profit is overstated. Year 1 closing inventory becomes year 2 opening inventory, which increases year 2 cost of sales and understates year 2 profit by the same amount. Over the two years combined, the error reverses.
Question 8
A business's year ended on 31 December, but its inventory count took place on 7 January, when inventory at cost was valued at £48,300. Between 1 and 7 January: - goods with a selling price of £3,600 were sold; the business sells at a mark-up of 20% on cost. - goods costing £2,150 were received from suppliers. What was the value of inventory at cost at 31 December?
- A) £47,450
- B) £49,750
- C) £49,030
- D) £49,150
Show answer & explanation
Answer: D) £49,150
Work back from the count to the year end. Goods sold after the year end were in inventory at 31 December, so add their cost: £3,600 x 100/120 = £3,000. Goods received after the year end were not in inventory at 31 December, so deduct £2,150. Inventory = £48,300 + £3,000 - £2,150 = £49,150.
Question 9
The following figures relate to a business's year: Opening inventory £12,600 Purchases £84,300 Carriage inwards £1,900 Carriage outwards £2,700 Purchase returns £3,100 Closing inventory £14,250 What is the cost of sales?
- A) £87,650
- B) £79,550
- C) £81,450
- D) £84,150
Show answer & explanation
Answer: C) £81,450
Cost of sales = opening inventory + purchases + carriage inwards - purchase returns - closing inventory = £12,600 + £84,300 + £1,900 - £3,100 - £14,250 = £81,450. Carriage inwards is part of the cost of acquiring goods, but carriage outwards is a distribution cost and is excluded.