Secondary 4 Principles of Accounts Inventory Costing Quiz

Answer Key - Secondary 4 Principles of Accounts Quiz (Inventory Costing)

1. Basis of Valuation

• Lower of cost and net realisable value (NRV). (1)

2. Prudence Concept

• The principle that assets and income should not be overstated, and liabilities and expenses should not be understated. (1)
• In inventory, this ensures that if the market value drops below cost, the loss is recognized immediately. (1)

3. Net Realisable Value (NRV)

• The estimated selling price in the ordinary course of business (1) minus the estimated costs of completion and the estimated costs necessary to make the sale. (1)

4. Expenditure Classification

• Capital expenditure (as it is a direct cost of bringing the inventory to its present location and condition). (1)

5. FIFO Advantage

• Closing inventory is valued at the most recent prices, making the Statement of Financial Position more reflective of current market values. (1)

6. Cost of Sales Calculation

• Working: $4,500 (Op) +$22,000 (Pur) - $1,200 (Ret) +$800 (CI) - $3,100 (Cl)
• Calculation: $26,100 -$3,100 = $23,000. (3)
• Answer: $23,000

7. Gross Profit Calculation

• Working: $45,000 (Revenue) -$23,000 (COS)
• Answer: $22,000. (2)

8. Inventory Turnover Rate

• Formula: $120,000 /$15,000
• Answer: 8 times. (2)

9. Inventory Holding Period

• Formula: 365 days / 4 times
• Answer: 91.25 days. (2)

10. NRV Valuation

• Cost = $1,200; NRV =$1,000 - $150 =$850.
• Lower of $1,200 and$850 is $850. (2)
• Answer: $850

11. FIFO Closing Inventory

• Total units = 30. Sold = 15. Remaining = 15.
• FIFO assumes first 10 units ($5) and 5 units from the next batch ($6) were sold.
• Remaining: 15 units from the Jan 10 batch @ $6 each.
• Calculation: 15 * $6 =$90. (3)
• Answer: $90

12. AVCO Closing Inventory

• Total Cost = (10 * 5) + (20 * 6) = $50 +$120 = $170.
• Total Units = 30.
• Average Cost = $170 / 30 =$5.666...
• Remaining units = 15.
• Calculation: 15 * $5.666... =$85. (3)
• Answer: $85

13. Effect on Profit

• Closing inventory overstated $\rightarrow$ Cost of Sales understated $\rightarrow$ Net Profit overstated. (1)
• Answer: Net Profit is overstated.

14. Effect on Assets

• Closing inventory is a current asset. (1)
• Answer: Current Assets are overstated.

15. Inventory Turnover Rate

• Average Inventory = ($12,000 +$8,000) / 2 = $10,000.
• Turnover = $80,000 /$10,000 = 8 times. (2)
• Answer: 8 times.

16. FIFO vs AVCO (Rising Prices)

• FIFO assumes the oldest (cheaper) items are sold first. (1)
• Therefore, the closing inventory consists of the newest (more expensive) items. (1)
• FIFO results in a higher closing inventory value than AVCO. (1)

17. Closing Inventory and Gross Profit

• Closing inventory is subtracted from the cost of goods available for sale to find Cost of Sales. (1)
• A higher closing inventory value leads to a lower Cost of Sales. (1)
• A lower Cost of Sales results in a higher Gross Profit. (1)

18. Efficiency Commentary

• Firm X (12 times) has a much higher turnover than Firm Y (3 times). (1)
• This indicates Firm X sells and replaces its stock much faster. (1)
• Firm X is more efficient in managing its inventory, reducing holding costs and the risk of obsolescence. (2)

19. Falling Prices Switch (AVCO to FIFO)

• In falling prices, the newest stock is the cheapest. (1)
• FIFO assumes the oldest (more expensive) stock is sold first. (1)
• This leads to a higher Cost of Sales compared to AVCO. (1)
• Consequently, the Net Profit

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# Answer Key - Secondary 4 Principles of Accounts Quiz (Inventory Costing)

**1. Basis of Valuation**
- Lower of cost and net realisable value (NRV). (1)

**2. Prudence Concept**
- The principle that assets and income should not be overstated, and liabilities and expenses should not be understated. (1)
- In inventory, this ensures that if the market value drops below cost, the loss is recognized immediately. (1)

**3. Net Realisable Value (NRV)**
- The estimated selling price in the ordinary course of business (1) minus the estimated costs of completion and the estimated costs necessary to make the sale. (1)

**4. Expenditure Classification**
- Capital expenditure (as it is a direct cost of bringing the inventory to its present location and condition). (1)

**5. FIFO Advantage**
- Closing inventory is valued at the most recent prices, making the Statement of Financial Position more reflective of current market values. (1)

**6. Cost of Sales Calculation**
- Working: $4,500 (Op) + $22,000 (Pur) - $1,200 (Ret) + $800 (CI) - $3,100 (Cl)
- Calculation: $26,100 - $3,100 = $23,000. (3)
- Answer: $23,000

**7. Gross Profit Calculation**
- Working: $45,000 (Revenue) - $23,000 (COS)
- Answer: $22,000. (2)

**8. Inventory Turnover Rate**
- Formula: $120,000 / $15,000
- Answer: 8 times. (2)

**9. Inventory Holding Period**
- Formula: 365 days / 4 times
- Answer: 91.25 days. (2)

**10. NRV Valuation**
- Cost = $1,200; NRV = $1,000 - $150 = $850.
- Lower of $1,200 and $850 is $850. (2)
- Answer: $850

**11. FIFO Closing Inventory**
- Total units = 30. Sold = 15. Remaining = 15.
- FIFO assumes first 10 units ($5) and 5 units from the next batch ($6) were sold.
- Remaining: 15 units from the Jan 10 batch @ $6 each.
- Calculation: 15 * $6 = $90. (3)
- Answer: $90

**12. AVCO Closing Inventory**
- Total Cost = (10 * 5) + (20 * 6) = $50 + $120 = $170.
- Total Units = 30.
- Average Cost = $170 / 30 = $5.666...
- Remaining units = 15.
- Calculation: 15 * $5.666... = $85. (3)
- Answer: $85

**13. Effect on Profit**
- Closing inventory overstated $\rightarrow$ Cost of Sales understated $\rightarrow$ Net Profit overstated. (1)
- Answer: Net Profit is overstated.

**14. Effect on Assets**
- Closing inventory is a current asset. (1)
- Answer: Current Assets are overstated.

**15. Inventory Turnover Rate**
- Average Inventory = ($12,000 + $8,000) / 2 = $10,000.
- Turnover = $80,000 / $10,000 = 8 times. (2)
- Answer: 8 times.

**16. FIFO vs AVCO (Rising Prices)**
- FIFO assumes the oldest (cheaper) items are sold first. (1)
- Therefore, the closing inventory consists of the newest (more expensive) items. (1)
- FIFO results in a higher closing inventory value than AVCO. (1)

**17. Closing Inventory and Gross Profit**
- Closing inventory is subtracted from the cost of goods available for sale to find Cost of Sales. (1)
- A higher closing inventory value leads to a lower Cost of Sales. (1)
- A lower Cost of Sales results in a higher Gross Profit. (1)

**18. Efficiency Commentary**
- Firm X (12 times) has a much higher turnover than Firm Y (3 times). (1)
- This indicates Firm X sells and replaces its stock much faster. (1)
- Firm X is more efficient in managing its inventory, reducing holding costs and the risk of obsolescence. (2)

**19. Falling Prices Switch (AVCO to FIFO)**
- In falling prices, the newest stock is the cheapest. (1)
- FIFO assumes the oldest (more expensive) stock is sold first. (1)
- This leads to a higher Cost of Sales compared to AVCO. (1)
- Consequently, the Net Profit will decrease. (1)

**20. Non-Accounting Factors**
- (Any two of the following):
  - Lead time from suppliers (how long it takes to receive new stock).
  - Storage capacity/warehouse space.
  - Perishability of goods (expiry dates).
  - Market demand volatility/seasonal trends.
  - Relationship with suppliers (bulk discounts vs. storage costs). (4)