PRC-4 Introduction to Accounting Chapter-7 Inventories

Chapter 7
Inventories
1 In preparing its financial statements for the current year, a company's closing inventory was
understated by Rs. 200,000.
What will be the effect of this error if it remains uncorrected?

(a) The current year's profit will be overstated and next year's profit will be understated
(b) The current year's profit will be understated and next year's profit will be overstated
(c) The current year's profit will be understated but there will be no effect on next year's
profit
(d) The current year's profit will be overstated but there will be no effect on next year's
profit

2 Which of the following cost should be deducted from Revenue to arrive at gross profit and what is
accounting concept behind this?

(a) Cost of goods purchased AND Prudence concept

(b) Cost of goods produced AND Matching concept
(c) Cost of goods sold AND Prudence concept
(d) Cost of goods sold AND Matching concept

3 Which of the following is included in the cost of purchases?

(a) Administrative Salaries

(b) Abnormal loss
(c) Freight in
(d) Rent of store

4 At 01 December 2018 Nida had opening inventory of Rs. 20,000 and at 31 December 2018 Nida had
closing inventory of Rs. 35,000.
Which of the following entries are required to account for opening and closing inventory when
preparing financial statements of the business?

(a) Dr Cost of sales Rs. 20,000 Cr Inventory Rs. 20,000 and Dr Inventory Rs. 35,000 Cr
Cost of sales Rs. 35,000
(b) Dr Cost of sales Rs. 35,000 Cr Inventory Rs. 35,000 and Dr Inventory Rs. 20,000 Cr
Cost of sales Rs. 20,000
(c) Dr Cost of sales Rs. 20,000 Dr Inventory Rs. 20,000 and Dr Inventory Rs. 35,000 Dr
Cost of sales Rs. 35,000
(d) Cr Cost of sales Rs. 35,000 Cr Inventory Rs. 35,000 and Cr Inventory Rs. 20,000 Cr
Cost of sales Rs. 20,000

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PRC-4 Introduction to Accounting Chapter-7 Inventories

5 Maria had opening inventory of 900 units at Rs. 5 unit at 01 January 2019. During the month she
made following purchases and sales transactions:

5-Jan Purchased 1,000 units at Rs. 6 per unit

9-Jan Sold 1,250 units at Rs. 7.5 per unit
15-Jan Purchased 600 units at Rs. 7 per unit
28-Jan Sold 550 units at Rs. 7.75 per unit

Maria uses periodic weighted average cost method for inventory valuation. What is value of closing
inventory at 31 January 2019?

(a) Rs. 4,800

(b) Rs. 4,116
(c) Rs. 6,468
(d) None of the above

6 The accounting concept that requires valuation of Inventory at lower of cost and net realisable value
is?

(a) Accrual
(b) Materiality
(c) Prudence
(d) Going concern

7 Which of the following costs are included in conversion costs?

(a) Commission of selling staff

(b) Carriage in
(c) Carriage outwards
(d) Supervisor's wages

8 What is impact on closing inventory if an item having cost of Rs. 2,500 and a net realizable value of
Rs. 3,000 has been omitted from year - end inventory count?

(a) Understated by Rs. 2,500

(b) Understated by Rs. 3,000
(c) Overstated by Rs. 2,500
(d) Understated by Rs. 500

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PRC-4 Introduction to Accounting Chapter-7 Inventories

9 If closing inventory is accounted for as Rs.240,000 instead of Rs.180,000 then;

(a) Gross profit as well as net profit will be exaggerated

(b) Gross profit and net profit would both be understated
(c) Gross profit will be exaggerated, and net profit understated
(d) Gross profit will be exaggerated but net profit correctly reported

10 An organization had opening inventory of 35,000 units @Rs. 3.5 per unit. During the month it made
purchases of 40,000 units @Rs. 5 per unit. Sales were 50,000 units.
What is value of cost of goods sold during the month if the company uses periodic weighted average
method for inventory valuation?

(a) Rs. 107,500

(b) Rs. 215,000
(c) Rs. 197,500
(d) Rs. 75,000

11 After preparing draft accounts, Saima reviews her closing inventory. She discovers that some items
included at cost of Rs. 2,600 can be sold for Rs. 2,550 after incurring selling costs of Rs.65.

What effect will any required adjustment have on Saima's profits?

(a) Profit decreases by Rs. 65

(b) Profit decreases by Rs. 115
(c) No change to profit
(d) Profit decreases by Rs. 50

12 Ali had opening inventory of Rs. 1,500,000. Purchases made during the period were Rs. 2,550,000.
Sales during the period were Rs. 4,500,000 and he had closing inventory of Rs. 1,000,000.

Gross profit for the period was?

(a) Rs. 1,950,000 Profit

(b) Rs. 450,000 Profit
(c) Rs. 1,450,000 Profit
(d) Rs. 550,000 Loss

13 What is correct entry for goods taken by owner for personal use?

(a) Cr Purchases account and Dr Drawings account with the cost price of the goods.
(b) Cr Opening Inventory account and Dr Drawings account with cost price of the goods.
(c) Cr Trading account and Dr Drawings account with the selling price of the goods.
(d) Cr Sales account and Dr Drawings account with the sale price of the goods.

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PRC-4 Introduction to Accounting Chapter-7 Inventories

14 Tasweeb Corporation sells three products - Alpha, Beta and Gamma. The following information was
available at the year end:

Alpha Beta Gama

………………………….Rs. per unit…………………….
Original cost 10 13 15
Estimated selling price 15 14 14
Selling and distribution costs 3 5 2

Inventory: units held 300 380 240

The value of inventory at the end of year should be?

(a) Rs. 8,300

(b) Rs. 5,700
(c) Rs. 9,300
(d) Rs. 6,150

15 The following information is related to a mobile dealer about his inventory at year end.

Mobile Set Cost value (Rs.) Net realisable value (Rs.)

A 5,000 3,300
B 13,000 13,500
C 14,200 13,900
D 14,900 15,000

What value of inventory should be shown in his Statement of Financial Position prepared at the year
end?

(a) Rs. 39,800

(b) Rs. 45,900
(c) Rs. 40,000
(d) Rs. 45,100

16 On 1st July 2018, Imad had opening inventory of 50 units at a cost of Rs. 60 per unit. During July
2018 he has made following purchases and sales:

9-Jul 120 units purchased at a cost of Rs. 65 per unit

16-Jul 65 units sold
24-Jul 45 units purchased at a cost of Rs. 67 per unit
30-Jul 100 units sold

What is the value of inventory at 31 March using the FIFO method?

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PRC-4 Introduction to Accounting Chapter-7 Inventories

17 During August, Anum had sales of Rs. 158,000, which made a gross profit of Rs. 45,000. Purchases
amounted to Rs. 101,000 and opening inventory was Rs. 34,000.
The value of closing inventory was?

18 The closing stock of Daniel amounts to Rs. 130,200. But later on it was discovered that some
damaged items were included having cost of Rs. 25,000. Total repair cost is expected to be Rs. 3,500.
After repair these could be sold for Rs. 18,000.
What is the correct value of Daniel inventory?

19 Following is the detail of inventory of Hamid at December 31, 2018:

Product Cost value (Rs. ) Net realisable value (Rs. )

A 15,000 17,000
B 12,000 10,000
C 13,500 11,000
D 12,600 14,000
Total 53,100 52,000

What value of inventory should be shown by the corporation in its Statement of Financial Position at
year end?

20 Tahir and Taha are doing partnership business. The net profit earned by their business during the year
ended Dec 31 2008 is Rs. 250,000. In subsequent year it was realized that the ending inventory of
year 2007 was overstated by Rs. 10,000.
By what amount the profit for the year 2008 is understated / overstated ?

21 Which of the following cost models is not permitted under IAS 2?

(a) First in, First out ('FIFO')

(b) Last in, Last out ('LIFO')
(c) Weighted Average
(d) Actual cost

22 Which of the following items are excluded from the scope of IAS 2 - Inventories?

(a) Inventories that are stated at Net Realisable Value

(b) Assets held for sale in the ordinary course of business
(c) Inventories whose fair value is more than the cost
(d) Agricultural produce at the point of harvest

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PRC-4 Introduction to Accounting Chapter-7 Inventories

23 Which of the following is not permitted as a cost of inventory?

(a) Non-recoverable taxes

(b) Storage costs
(c) Shipping
(d) Fixed manufacturing overheads

24 Which of the following items should be disclosed as per the requirements of IAS 2?

(a) Average holding period of inventories of the entity as at the end of the reporting period
(b) List of major customers to whom the inventories were sold during the reporting period
(c) Carrying amount of inventories pledged as security for liabilities
(d) Average lead time of procurement for major classes of inventories

25 A company sold goods of worth Rs.1 million, the manufacturing cost of the goods were Rs.600,000.
The carriage outwards is Rs.50,000 and commission paid to agent were also Rs.50,000. What is the
gross and net profit?

(a) Gross profit = 600,000 and net profit = 250,000

(b) Gross profit = 300,000 and net profit = 200,000
(c) Gross profit = 400,000 and net profit = 300,000
(d) Gross profit = 350,000 and net profit = 300,000

26 Bazuka Limited (BL) manufacturers and sells office equipment for workplaces. The stock of
equipment was included in the closing inventory as of 31 December 2019 at a cost of Rs.50,000 per
equipment.

During the final audit, the auditors noted that the subsequent selling price for the inventory at 15th
January 2020 was Rs.40,000 per item. Furthermore, inquiry reveals that during the physical stock
take, a water leakage has damaged the equipment. Accordingly, in the following week, BL spent a
total of Rs.15,000 per equipment for repairing the equipment.

The net realizable value and inventory write-down (loss) amount to?

(a) Rs. 40,000 and Rs.10,000 respectively

(b) Rs. 25,000 and Rs. 25,000 respectively
(c) Rs. 40,000and Rs. 25,000 respectively
(d) Rs. 25,000 and Rs.15,000 respectively

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PRC-4 Introduction to Accounting Chapter-7 Inventories

27 Which of the following is allowed as a cost of inventory?

(a) Abnormal waste

(b) Storage costs
(c) Selling costs
(d) Variable manufacturing overheads

28 Spice Limited, imported raw materials from China worth Rs.10 million. They paid Rs.800,000 as
import duties and Rs.200,000 as import taxes (the import taxes were subsequently refunded by the
government). They paid Rs.150,000 for transportation of the materials from China and another
Rs.200,000 as port handling charges for loading the materials at China. Marketing expenses were
Rs.100,000 and the general administrative overheads amounted to Rs.200,000.

What will be the value of inventories?

(a) Rs.11,600,000
(b) Rs.11,400,000
(c) Rs.11,150,000
(d) Rs.10,950,000

29 Any amount of write-down of inventories to net realisable value should?

(a) Treated as a deferred expense and written off based on the average inventory holding
period
(b) Recognised as an expense in the period in which the write-down occurs
(c) Recognised as an expense in the subsequent period in which such write-down is
warranted
(d) Recognized as a current liability in the statement of financial position

30 Phill Morris Limited (PML) is in the business of procuring a specific type of machine and sells them
to international markets. During the year, PML bought four machines costing Rs.12million ,Rs.14
million, Rs.13 million and Rs.10 million respectively. During the year it sold only one machine for
Rs.14 million and follows the FIFO method of valuation.

Which of the following statements is TRUE?

(a) The cost of Inventory is Rs.37 million and the cost of sales is Rs.10 million
(b) The cost of Inventory is Rs.39 million and the cost of sales is Rs.14 million
(c) The cost of Inventory is Rs.37million and the cost of sales is Rs.12 million
(d) The cost of Inventory is Rs.37 million and the cost of sales is Rs.13 million

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PRC-4 Introduction to Accounting Chapter-7 Inventories

31 The estimated selling price in the ordinary course of business less estimated cost of completion and
estimated cost of sale is called

(a) Market value

(b) Fair value
(c) Net realisable value
(d) Current value

32 Which of the following costs must be expensed?

(a) Costs of purchase that are paid to the suppliers of raw materials
(b) Import duties on raw materials that are paid to the authorities
(c) Variable production overheads that are allocated to each unit based on actual usage
(d) Distribution cost

33 A business has opening inventory of Rs. 7,200 and closing inventory of Rs. 8,100. Purchases for the
year were Rs. 76,500, delivery inwards was Rs. 50 and delivery outwards was Rs. 180.

What is the correct amount for cost of sales?

(a) Rs. 75,550

(b) Rs. 75,650
(c) Rs. 75,830
(d) Rs. 77,450

34 Platoon plc is preparing its financial statements for the year ended 30 April 20X1, having extracted
an initial trial balance. It had no opening inventory, its purchases in the period were Rs. 686,880 and
closing inventories were valued as Rs. 18,647 on 30 April 20X1.
Which two of the following journal entries are required to record cost of sales and closing inventories
at 30 April 20X1?

(a) Dr Cost of sales Rs. 686,880;

Cr Inventories Rs. 686,880
Dr Purchases Rs. 686,880;
Cr Cost of sales Rs. 686,880
(b) Dr Cost of sales Rs. 686,880;
Cr Purchases Rs. 686,880
Dr Inventories Rs. 18,647;
Cr Cost of sales Rs. 18,647
(c) Dr Cost of sales Rs. 18,647;
Cr Inventories Rs. 18,647
Dr Inventories Rs. 18,647;
Cr Purchases Rs. 18,647

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PRC-4 Introduction to Accounting Chapter-7 Inventories

35 Muse plc began trading on 1 January 20X8 and had zero inventories at that date. During 20X8 it
made purchases of Rs. 455,000, incurred delivery inwards of Rs. 24,000, and delivery outwards of
Rs. 29,000. Closing inventories at 31 December 20X8 were Rs. 52,000.

What is the correct amount for cost of sales for the year ended 31 December 20X8?

(a) Rs. 456,000

(b) Rs. 427,000
(c) Rs. 432,000
(d) Rs. 531,000

36 Boomerang Co had 200 units in inventory at 30 November 20X1 valued at Rs. 8.00. During
December it made the following purchases and sales.

12-Feb Purchased 1,000 @ Rs. 5.00 each

12-May Sold 700 @ Rs. 7.50 each
12-Dec Purchased 800 @ Rs. 6.20 each
15-Dec Purchased 300 @ Rs. 6.60 each
21-Dec Sold 400 @ Rs. 8.00 each
28-Dec Sold 500 @ Rs. 8.20 each
Which of the following is the closing inventory amount using FIFO?

(a) Rs. 4,460

(b) Rs. 4,340
(c) Rs. 4,620
(d) Rs. 3,500

37 The following information relates to Camberwell plc's year-end inventory of finished goods.

Direct costs Production

Inventory Expected selling and
of materials overheads
category distribution overheads
and labour incurred
Rs
1 2,470 2,100 480
2 9,360 2,730 150
3 1,450 850 190
Total 13,280 5,680 820

At what amount should finished goods inventory be stated in the company's statement of financial
position?

(a) Rs. 13,280

(b) Rs. 18,960
(c) Rs. 18,760
(d) Rs. 19,580

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PRC-4 Introduction to Accounting Chapter-7 Inventories

38 At its year end Crocodile plc has 6,000 items of product A, and 2,000 of product B, costing Rs. 10
and Rs. 5 respectively. The following information is available: Product A - 500 are defective and can
only be sold at Rs. 8 [Link] B - 100 are to be sold for Rs. 4.50 each with selling expenses of
Rs. 1.50 each.
What figure should be shown in Crocodile plc's statement of financial position for inventory?

(a) Rs. 57,000

(b) Rs. 68,950
(c) Rs. 68,800
(d) Rs. 70,000

39 Indicate whether the following statements are true or false.

In a period of rising prices, applying the FIFO method to determine the cost of inventories will give a
lower gross profit figure than the AVCO method.

(a) True
(b) False
Closing inventory is a debit in the statement of profit or loss.

(c) True
(d) False

40 Mickey Ltd has calculated the cost of inventory using AVCO. At 1 June 20X8 there were 60 units in
inventory at a cost of Rs. 12 each. On 8 June, 40 units were purchased for Rs. 15 each, and a further
50 units were purchased for Rs. 18 each on 14 June. On 21 June, 75 units were sold for Rs. 20.00
each.
What is the cost of closing inventory at 30 June 20X8?

(a) Rs. 1,110

(b) Rs. 1,010
(c) Rs. 900
(d) Rs. 1,125

41 Morgan plc's direct production cost of each unit of inventory is Rs. 46. Production overheads are Rs.
15 per unit. Currently the goods can only be sold if they are modified at a cost of Rs. 17 per unit. The
selling price of each modified unit is Rs. 80 and selling costs are estimated at 10% of selling price.

At what amount should each modified unit of inventory be included in the statement of financial
position?

(a) Rs. 48
(b) Rs. 55
(c) Rs. 64
(d) Rs. 61

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PRC-4 Introduction to Accounting Chapter-7 Inventories

42 Indicate whether the following statements are true or false.

A van for sale by a dealer is shown as a non-current asset in its statement of financial position.

(a) True
(b) False
Import duties are included in the cost of inventory.
(c) True
(d) False

43 Which two of the following may be included when arriving at the cost of finished goods inventory for
inclusion in the financial statements of a manufacturing company?

(a) Delivery inwards

(b) Delivery outwards
(c) Depreciation of delivery vehicles
(d) Finished goods storage costs
(e) Production line wages

44 Which of the following statements about inventory for the purposes of the statement of financial
position is correct?

(a) AVCO and LIFO are both acceptable methods, under IAS 2, Inventories, of arriving at
the cost of inventories.
(b) The cost of inventories of finished goods may include labour and materials cost only,
including overheads.
(c) Inventories should be included at the lowest of cost, net realisable value.
(d) It may be acceptable for the cost of inventories to be based on selling price less
estimated profit margin.

45 A company's closing inventory at 31 January 20X3 amounted to Rs. 284,700. The following items
were included, at cost, in the total:

1 400 coats, which had cost Rs. 80 each and normally sold for Rs. 150 each. Owing to a
defect in manufacture, they were all sold after 31 January 20X3 at 50% of their normal
price. Selling expenses amounted to 5% of the proceeds.
2 800 skirts, which had cost Rs. 20 each. These too were found to be defective. Remedial
work in February 20X3 cost Rs. 5 per skirt, and selling expenses were Rs. 1 per skirt.
They were sold for Rs. 28 each.
What should be the inventory value after considering the above items?

(a) Rs. 281,200

(b) Rs. 282,800
(c) Rs. 329,200
(d) Rs. 284,700

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PRC-4 Introduction to Accounting Chapter-7 Inventories

46 Sahara plc sells three products - Basic, Super and Luxury. The following information was available at
the year end.

Basic Super Luxury

Rs. per unit
Original cost 6 9 18
Estimated selling price 9 12 15
Selling and distribution costs to be
1 4 5
incurred
Units of inventory 200 250 150
What is the value of inventory at the year end?

(a) Rs. 3,600

(b) Rs. 4,700
(c) Rs. 5,100
(d) Rs. 6,150

47 A company uses the FIFO method to arrive at its inventory cost. At 1 May 20X2 the company had
700 engines in inventory, valued at Rs. 190 each.
During the year ended 30 April 20X3 the following transactions took place:

20X2
1/July/20X2 Purchased 500 engines at Rs. 220 each
1/Sep/20X2 Sold 400 engines for Rs. 160,000

20X3
2/Jan/20X3 Purchased 300 engines at Rs. 230 each
15/March/20X3 Sold 250 engines for Rs. 125,000

What is the cost of the company's closing inventory of engines at 30 April 20X3?

(a) Rs. 188,500

(b) Rs. 195,500
(c) Rs. 161,500
(d) Rs. 167,500

48 An inventory record card shows the following details.

February 1 50 units in inventory at a cost of Rs. 40 per unit

7 100 units purchased at a cost of Rs. 45 per unit
14 80 units sold
21 50 units purchased at a cost of Rs. 50 per unit
28 60 units sold
What is the cost of inventory at 28 February using the FIFO method?

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PRC-4 Introduction to Accounting Chapter-7 Inventories

(a) Rs. 2,450

(b) Rs. 2,500
(c) Rs. 2,700
(d) Rs. 2,950

49 The Boxwood Company sells blankets for Rs. 60 each. The following was taken from the inventory
records during May. The company had no beginning inventory on May 1.

Date Blankets Units Cost

3-May Purchases 5 20
10 Sales 3
17 Purchases 10 24
20 Sales 6
23 Sales 3
30 Purchases 10 30

Assuming that the company uses the perpetual inventory system, determine the Closing stock for the
month of May using the Fifo inventory cost method.

(a) Rs. 364

(b) Rs. 300
(c) Rs. 368
(d) Rs. 372

50 In preparing its financial statements for the current year, a company's closing inventory was
understated by Rs. 300,000.
What will be the effect of this error if it remains uncorrected?

(a) The current year's profit will be overstated and next year's profit will be understated.
(b) The current year's profit will be understated but there will be no effect on next year's
profit.
(c) The current year's profit will be understated and next year's profit will be overstated.
(d) The current year's profit will be overstated but there will be no effect on next year's
profit.

51 At 30 September 20X3 the closing inventory of a company amounted to Rs. 386,400. The following
items were included in this total at cost:

1 1,000 items which had cost Rs. 18 each. These items were all sold in October 20X3 for
Rs. 15 each, with selling expenses of Rs. 800.

2 Five items which had been in inventory for many years and which had been purchased
for Rs. 100 each, sold in October 20X3 for Rs. 1,000 each, net of selling expenses.

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PRC-4 Introduction to Accounting Chapter-7 Inventories

What figure should appear in the company's statement of financial position at 30 September 20X3 for
inventory?

(a) Rs. 382,600

(b) Rs. 390,200
(c) Rs. 368,400
(d) Rs. 400,600

52 Nelson Corporation sells three different products. The following information is available on
December 31

Inventory Item Units Cost per unit Market value per unit
X 300 4 3.5
Y 600 2 1.5
Z 1500 3 4
When applying the lower of cost or market rule to each item, what will Nelson's total ending
inventory balance be?

(a) 6,900
(b) 6,450
(c) 7,950
(d) 6,600

53 The closing inventory of Epsilon amounted to Rs. 284,000 at cost at the year end of 30 September
20X1. This total includes the following two inventory lines.

1 500 items which had cost Rs. 15 each and which were included at Rs. 7,500. These
items were found to have been defective at the date of the statement of financial
position. Remedial work after that date cost Rs. 1,800 and they were then sold shortly
afterwards for Rs. 20 each. Selling expenses were Rs. 400.
2 100 items which had cost Rs. 10 each. After the date of the statement of financial
position they were sold for Rs. 8 each, with selling expenses of Rs. 150.

What amount should be shown in Epsilon's statement of financial position for inventory?

(a) Rs. 283,650

(b) Rs. 284,350
(c) Rs. 284,650
(d) Rs. 291,725

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54 Lamp makes the following purchases in the year ending 31 December 20X9.

[Link] Date Units Rs. /unit Total Rs

1 21-Jan 100 12 1,200
2 30-Apr 300 12.5 3,750
3 31-Jul 40 12.8 512
4 1-Sep 60 13 780
5 11-Nov 80 13.5 1,080

At the year end 200 units are in inventory but 8 are damaged and are only worth Rs. 10 per unit.
These are identified as having been part of the [Link].2009 delivery. Lamp operates a FIFO system
for arriving at the cost of inventory.

What is the correct figure for inventories at 31 December 20X9?:

(a) Rs. 2,450

(b) Rs. 2,525
(c) Rs. 2,594
(d) Rs. 2,700

55 Bouncy Balls plc has 40 units of its special spongy balls in inventory as at 30 November 20X7. The
product costs Rs. 5 per unit to manufacture and can be sold for Rs. 15 per unit. Half of the units in
inventory at the year end have been damaged and will require rectification work costing Rs. 10 per
unit before they can be sold. Selling costs are Rs. 1 per unit.

What is the value of inventory at 30 November 20X7?

(a) Rs. 160

(b) Rs. 180
(c) Rs. 200
(d) Rs. 600

56 The closing inventory of Stacks plc amounted to Rs. 58,200 excluding the following two inventory
lines:

1 200 items which had cost Rs. 15 each. These items were found to be defective at the
year-end date. Rectification work after that date amounted to Rs. 1,200 for the batch,
after which they were sold for Rs. 17.50 each, with selling expenses totalling Rs. 300
for the batch.
2 400 items which had cost Rs. 2 each. All were sold after the year-end date for Rs. 1.50
each, with selling expenses of Rs. 200 for the batch.

What amount for inventory should be shown in the statement of financial position of Stacks plc?

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PRC-4 Introduction to Accounting Chapter-7 Inventories

(a) Rs. 62,000

(b) Rs. 61,600
(c) Rs. 60,600
(d) Rs. 61,000

57 Fenton plc is a manufacturer of PCs. The company makes two different models, the M1 and M2, and
has 100 of each in inventory at the year end.
Costs and related data for a unit of each model are as follows:

M1 M2
Rs. Rs.
Costs to date 230 350
Selling price 400 500
Modification costs to enable sale 110 0
Delivery outwards 65 75
What figure for inventory should be shown in the statement of financial position at the year end?

(a) Rs. 57,500

(b) Rs. 58,000
(c) Rs. 65,000
(d) Rs. 65,500

58 When calculating the cost of inventory, which of the following shows the correct method of arriving
at cost?

Include inward delivery costs Include production overhead

(a) Yes No
(b) No Yes
(c) Yes Yes
(d) No No

59 A trader who sets her selling prices by adding 50% to cost actually achieved a mark-up of 45%.

Which of the following factors could account for the shortfall?

(a) Sales were lower than expected.

(b) The value of the opening inventories had been overstated.
(c) The closing inventories of the business were higher than the opening inventories.
(d) Goods taken from inventories by the proprietor were recorded by debiting drawings and
crediting purchases with the cost of the goods.

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60 The gross profit margin is 20% where:

(a) cost of sales is Rs. 100,000 and sales are Rs. 120,000
(b) cost of sales is Rs. 100,000 and sales are Rs. 125,000
(c) cost of sales is Rs. 80,000 and gross profit is Rs. 16,000
(d) cost of sales is Rs. 80,000 and sales are Rs. 96,000

61 Which of the following factors could cause a company's gross profit margin to fall below the
expected level?

(a) Overstatement of closing inventories

(b) The incorrect inclusion in purchases of invoices relating to goods supplied in the
following period
(c) The inclusion in sales of the proceeds of sale of non-current assets
(d) Increased cost of delivery borne by the company on goods sent to customers

62 An extract from a business's statement of profit or loss is as follows:

Rs. Rs.
Revenue 115,200
Opening inventory 21,000
Purchases 80,000
Closing inventory (5,000) (96,000)
Gross profit 19,200

What mark-up has the business applied?

(a) 14.80%
(b) 16.70%
(c) 20.00%
(d) 83.30%

63 Franz plc is a manufacturer. Its 12-month reporting period ends on 31 July and it adopts the average
cost (AVCO) method of inventory usage and valuation. At 1 August 20X4 it held inventory of 2,400
units of the material Zobdo, valued at Rs. 10 each. In the year to 31 July 20X5 there were the
following inventory movements of Zobdo:

14 November 20X4 Sales 900 units

28 January 20X5 Purchase 1,200 units for Rs. 20,100
7 May 20X5 Sales 1,800 units

What was the cost of Franz plc's closing inventory of Zobdo at 31 July 20X5?

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(a) Rs. 11,700

(b) Rs. 9,000
(c) Rs. 15,075
(d) Rs. 35,100

64 For many years Wrigley plc has experienced rising prices for raw material X, and has kept constant
inventory levels. It has always used the AVCO method to arrive at the cost of inventory.

What would the result be if Wrigley plc had always used the FIFO method in each successive year's
financial statements?

(a) Lower cost of sales and higher closing inventory

(b) Lower cost of sales and lower closing inventory
(c) Higher cost of sales and lower closing inventory
(d) Higher cost of sales and higher closing inventory

65 During the year ended 31 March 20X4 Boogie plc suffered a major fire at its factory, in which
inventory that had cost Rs. 36,000 was destroyed. An insurance payment of 80% of the cost has been
agreed but not received at the year end.

Which of the following correctly completes the journal entry to take account of these matters if
company is following perpetual inventory system?

Debit other receivables with Rs. 28,800 and:

(a) Debit Administrative expenses Rs. 36,000, Credit Purchases Rs. 28,800, Credit
Revenue Rs. 36,000
(b) Debit Abnormal loss Rs. 7,200, Credit Purchases Rs. 36,000
(c) Debit Administrative expenses Rs. 36,000, Credit Purchases Rs. 36,000, Credit Other
income Rs. 28,800
(d) Debit Abnormal loss Rs. 7,200, Credit Inventory Rs. 36,000

66 Percy plc started trading on 1 April 20X4. The cost of inventory shown in Percy plc's statement of
financial position at 31 March 20X5, using the AVCO basis, was Rs. 6,420. Had the FIFO basis been
used, the cost would have been Rs. 8,080.

What is the effect of adopting the FIFO basis on Percy plc's financial statements for the year ended 31
March 20X5?

(a) increase profits and decrease current assets by Rs. 1,660

(b) increase current assets and decrease losses by Rs. 1,660
(c) increase capital and decrease current assets by Rs. 1,660
(d) increase current assets and increase losses by Rs. 1,660

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67 Kane Ltd has completed its inventory count for the period ended 30 June 20X8. The inventory count
concluded that there were inventories costing Rs. 32,340 of which Rs. 1,280 were found to be
damaged and so had a net realisable value of nil.

Debit Credit
(a) Cost of sales Rs. 32,340
Inventories Rs. 32,340
(b) Inventories Rs. 32,340
Cost of sales Rs. 32,340
(c) Cost of sales Rs. 31,060
Inventories Rs. 31,060
(d) Inventories Rs. 31,060
Cost of sales Rs. 31,060

68 An item of inventory was purchased for Rs. 500. It is expected to be sold for Rs. 1,200 although Rs.
250 will need to be spent on it in order to achieve the sale. To replace the same item of inventory
would cost Rs. 650.

At what value should this item of inventory be included in the financial statements?

69 Appleby buys and sells inventory during the month of August as follows:

No. of units Rs./unit

Date
Opening inventory 100 2.52
4-Aug Sales 20
8-Aug Purchases 140 2.56
10-Aug Sales 90
18-Aug Purchases 200 2.78
20-Aug Sales 180

Which one of the following statements is true?

(a) Closing inventory is Rs. 19.50 higher when using the FIFO method instead of the
periodic weighted average.
(b) Closing inventory is Rs. 19.50 lower when using the FIFO method instead of the
periodic weighted average.
(c) Closing inventory is Rs. 17.50 higher when using the FIFO method instead of the
periodic weighted average.
(d) Closing inventory is Rs. 17.50 lower when using the FIFO method instead of the
periodic weighted average.

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70 In the year ended 31 August 20X4, Aplus' records show closing inventory of 1,000 units compared to
950 units of opening inventory.

Which of the following statements is true assuming that prices have fallen throughout the year?

(a) Closing inventory and profit are higher using FIFO rather than AVCO
(b) Closing inventory and profit are lower using FIFO rather than AVCO
(c) Closing inventory is higher and profit lower using FIFO rather than AVCO
(d) Closing inventory is lower and profit higher using FIFO rather than AVCO

71 David performs an inventory count on 30 December 20X6 ahead of the 31 December year end. He
counts 1,200 identical units, each of which cost Rs. 50. On 31 December, David sold 20 of the units
for Rs. 48 each.
What figure should be included in David's statement of financial position for inventory at 31
December 20X6?

72 Which of the following statements about the treatment of inventory and work in progress in financial
statements are correct?

1 Inventory should be valued at the lower of cost, net realisable value and replacement
cost.
2 In valuing work in progress, materials costs, labour costs and variable and fixed
production overheads must be included.
3 Inventory items can be valued using either first in, first out (FIFO) or weighted average
cost.
4 An entity's financial statements must disclose the accounting policies used in measuring
inventories.

(a) All four statements are correct

(b) (1), (2) and (3) only are correct
(c) (2), (3) and (4) only are correct
(d) (1) and (4) only are correct

73 Kiera's interior design business received a delivery of fabric on 29 June 20X6 and was included in the
inventory valuation at 30 June 20X6. As at 30 June 20X6, the invoice for the fabric had not been
accounted for.
Based upon the available information, what effect(s) will this have on Kiera's profit for the year
ended 30 June 20X6 and the inventory valuation at that date?

1 Profit for the year ended 30 June 20X6 will be overstated.

2 Inventory at 30 June 20X6 will be understated.
3 Profit for the year ended 30 June 20X7 will be overstated.
4 Inventory at 30 June 20X6 will be overstated.

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(a) (1) and (2)

(b) (2) and (3)
(c) (1) only
(d) (1) and (4)

74 What journal entry is required to record goods taken from inventory by the owner of a business for
personal use if company uses periodic inventory system?

(a) Dr Drawings Cr Purchases

(b) Dr Sales Cr Drawings
(c) Dr Drawings Cr Inventory
(d) Dr Inventory Cr Drawings

75 A business had an opening inventory of Rs. 180,000 and a closing inventory of Rs. 220,000 in its
financial statements for the year ended 31 December 20X5.
Which of the following accounting entries are required to account for opening and closing inventory
when preparing the financial statements of the business?

Debit Credit
Rs.
(a) Inventory account 180,000
Statement of P/L 180,000
Inventory account 220,000
Statement of P/L 220,000
(b) Statement of P/L 180,000
Inventory account 180,000
Inventory account 220,000
Statement of P/L 220,000
(c) Inventory account 40,000
Purchases account 40,000
(d) Purchases account 40,000
Inventory account 40,000

76 Reeves Company is taking a physical inventory on March 31, the last day of its fiscal year. Which of
the following must be included in this inventory count?

(a) Goods in transit to Reeves, FOB destination

(b) Goods that Reeves is holding on consignment for Parker Company
(c) Goods in transit that Reeves has sold to Smith Company, FOB shipping point
(d) Goods that Reeves is holding in inventory on March 31 for which the related Accounts
Payable is 15 days past due

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77 Inventory movements for product X during the last quarter were as follows: Opening inventory at 1
January was 6 items valued at Rs. 15 each.

January Purchases 10 items at Rs. 19.80 each

February Sales 10 items at Rs. 30 each
March Purchases 20 items at Rs. 24.50
Sales 5 items at Rs. 30 each

What was gross profit for the quarter, if inventory is valued using the continuous weighted average
cost method?

78 Goods held on consignment are

(a) never owned by the consignee.

(b) included in the consignee’s ending inventory.
(c) kept for sale on the premises of the consignor.
(d) included as part of no one’s ending inventory.

79 Percy Pilbeam is a book wholesaler. On each sale, commission of 4% is payable to the selling agent.
The following information is available in respect of total inventories of three of his most popular
titles at his financial year-end:
Cost Selling price
…………...Rupees………..
Henry VII - Shakespeare 2,280 2,900
Dissuasion - Jane Armstrong-Siddeley 4,080 4,000
Pilgrim's Painful Progress - John Bunion 1,280 1,300
What is the value of these inventories in Percy's statement of financial position?

(a) Rs. 7,368

(b) Rs. 7,400
(c) Rs. 7,560
(d) Rs. 7,640

80 An organisation's inventory at 1 July was 15 units at a cost of Rs. 3.00 each. The following
movements occur:

3 July 20X4 5 units sold at Rs. 3.30 each

8 July 20X4 10 units bought at Rs. 3.50 each 12 July 20X4
8 units sold at Rs. 4.00 each
What was the value of closing inventory at 31 July, if the FIFO method of inventory valuation is
used?

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(a) Rs. 31.50

(b) Rs. 36.00
(c) Rs. 39.00
(d) Rs. 41.00

81 What would be the effect on an entity's profit for the year of discovering that inventory with cost of
Rs. 1,250 and a net realisable value of Rs. 1,000 had been omitted from the original inventory
valuation?

(a) An increase of Rs. 1,250

(b) An increase of Rs. 1,000
(c) A decrease of Rs. 250
(d) No effect at all

82 Inventory costing methods place primary reliance on assumptions about the flow of

(a) Goods
(b) Costs
(c) Resale prices
(d) Values

83 In times of rising prices, the valuation of inventory using the first in, first out method, as opposed to
the weighted average cost method, will result in which ONE of the following combinations?

COS Profit Closing inventory

(a) Lower Higher Higher
(b) Lower Higher Lower
(c) Higher Lower Higher
(d) Higher Higher Lower

84 If an entity uses the periodic weighted average cost method to value closing inventory, which of the
following statements is true?

(a) Unit average cost is recalculated each time there is a purchase of inventory
(b) Unit average cost is recalculated each time there is a sale of goods
(c) Unit average cost is calculated once only at the end of an accounting period
(d) Unit average cost is recalculated each time there is a purchase or a sale

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85 If an entity uses the continuous weighted average cost method to value closing inventory, which of
the following statements is true?

(a) Unit average cost is recalculated each time there is a purchase of inventory
(b) Unit average cost is calculated once only at the end of an accounting period
(c) Unit average cost is recalculated each time there is a sale of goods
(d) Unit average cost is recalculated each time there is a purchase or a sale

86 If an entity uses the continuous weighted average cost method to value closing inventory, what is the
value of closing inventory based upon the following information?

2-Feb Purchased 10 units at a cost of Rs. 5.00 per unit

5-Feb Sold 6 units at a price of Rs. 8 per unit
7-Feb Purchased 10 units at a cost of Rs. 6.50 per unit

87 If an entity uses the periodic weighted average cost method to value closing inventory, what is the
value of closing inventory based upon the following information?

12-Apr Purchased 10 units at a cost of Rs. 5.00 per unit

15-Apr Sold 6 units at a price of Rs. 8 per unit
17-Apr Purchased 10 units at a cost of Rs. 6.50 per unit

88 Using the periodic weighted average cost method to value closing inventory, what is the value of cost
of sales for April based upon the following information?

1-Apr Opening inventory 4 units at a cost of Rs. 4.00 per unit

12-Apr Purchased 10 units at a cost of Rs. 5.00 per unit
15-Apr Sold 6 units at a price of Rs. 8 per unit
17-Apr Purchased 10 units at a cost of Rs. 6.00 per unit 25 Apr
25-Apr Sold 8 units at a price of Rs. 8.50 per unit

89 Using the continuous weighted average cost method to value closing inventory, what is the value of
cost of sales for April based upon the following information?

1-Apr Opening inventory 4 units at a cost of Rs. 4.00 per unit

12-Apr Purchased 10 units at a cost of Rs. 5.00 per unit
15-Apr Sold 6 units at a price of Rs. 8 per unit
17-Apr Purchased 10 units at a cost of Rs. 6.00 per unit 25 Apr
25-Apr Sold 8 units at a price of Rs. 8.50 per unit

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90 After preparing draft accounts, Arooba reviews her closing inventory. She discovers that some items
included at cost of Rs. 2,000 can be sold for Rs. 1,550 after incurring selling costs of Rs. 105.
What effect will any required adjustment have on Saima’s profits?

(a) Profit decreases by Rs. 65

(b) Profit decreases by Rs. 555
(c) No change to profit
(d) Profit decreases by Rs. 50

91 Tabish Corporation sells three products – Alpha, Bravo and charlie. The following information was
available at the yearend:

Alpha Bravo Charlie

Rs. per unit
Original cost 40 55 65
Estimated selling price 47 58 70
Selling and distribution costs 12 8 5
Inventory: units held 400 350 200

The value of inventory at the end of year should be?

(a) Rs. 44,300

(b) Rs. 44,700
(c) Rs. 44500
(d) Rs. 44,150

92 The following information is related to Jewelry dealer about his inventory at year end.

Jewerly Cost value (Rs.) Net realisable value (Rs.)

A 7,000 6,700
B 12,400 13,500
C 16,700 17,000
D 20,500 18,000

What value of inventory should be shown in his Statement of Financial Position prepared at the year
end?

(a) Rs. 39,800

(b) Rs. 45,900
(c) Rs. 50,000
(d) Rs. 53,800

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93 The closing stock of Rashid amounts to Rs. 749,800. But later on it was discovered that some
damaged items were included having cost of Rs. 75,000. Total repair cost is expected to be Rs. 7,500.
After repair these could be sold for Rs. 38,000.

What is the correct value of Daniel inventory?

Rs. __________________

94 Following is the detail of inventory of Hamid at December 31, 2018:

Product Cost value (Rs. ) Net realisable value (Rs. )

Alpha 17,900 17,000
Beta 12,000 14,000
Charlie 16,500 11,000
Delta 12,600 16,000
Total 53,100 52,000

What value of inventory should be shown by the corporation in its Statement of Financial Position at
year end?
Rs.__________________

95 An entity sold goods of worth Rs.7 million, the manufacturing cost of the goods were Rs. 1,000,000.
The carriage outwards are Rs. 78,000 and commission paid to agent were also Rs. 100,000. What is
the gross and net profit?

(a) Gross profit = 600,000 and net profit = 250,000

(b) Gross profit = 300,000 and net profit = 200,000
(c) Gross profit = 6,000,000 and net profit = 5,822,000
(d) Gross profit = 350,000 and net profit = 300,000

96 Kamran is an antiques dealer. His inventory includes a clock which cost Rs. 158,000. Kamran expects
to spend Rs. 7,000 on repairing the clock which will mean that he will be able to sell it for Rs.
260,000. To replace the same item of inventory would cost Rs. 255,000. At what value should the
clock be included in Kamran’s inventory?

(a) Rs. 151,000

(b) Rs. 158,000
(c) Rs. 253,000
(d) Rs. 260,000

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97 What is the unit cost of the following item?

Raw Materials Rs. 500
Labour Rs. 300
Manufacturing overheads Rs. 100
Variable administrative overheads Rs. 250

(a) Rs. 500

(b) Rs. 800
(c) Rs. 900
(d) Rs. 1,150

98 Jazib Associates has 40 units of inventory, out of which 10 units are damaged. The cost per unit is Rs.
2,554 and normal selling price is Rs. 2,900. The damaged units are expected to be sold at 60% of
normal selling price. The selling cost of Rs. 150 are incurred on each unit sold, whether normal or
damaged. What is the amount of write down of inventory, if any?

(a) Rs. 964

(b) Rs. 9,640
(c) Rs. 92,520
(d) Rs. Nil

99 Ghalib Associates has 20 units of Product C4 at cost of Rs. 3,660 each. The product has been sold at
Rs. 4,000 per unit and Rs. 150 commission is paid on each unit sold.

A new product has been introduced by a competitor. It is similar to product C4 and is being marketed
at Rs. 3,200 per unit. Ghalib is of the opinion that in future, it will also have to reduce the price to Rs.
3,500 per unit. Calculate NRV per unit of Product C4.

(a) Rs. 3,510

(b) Rs. 3,850
(c) Rs. 3,050
(d) Rs. 3,350

100 Arma Associates has 40 units of inventory, out of which 10 units are damaged. The cost per unit is
Rs. 2,000 and normal selling price is Rs. 3,000. The damaged units are expected to be sold at 80% of
normal selling price. The selling cost of Rs. 100 are incurred on each unit sold, whether normal or
damaged. What is the amount of write down of inventory, if any?

(a) Rs. 600

(b) Rs. 6,000
(c) Rs. 80,000
(d) Rs. Nil

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101 In preparing its financial statements for the current year, an entity’s closing inventory was overstated
by Rs. 700,000.

What will be the effect of this error if it remains uncorrected?

(a) The current year’s profit will be overstated and next year’s profit will be understated
(b) The current year’s profit will be understated and next year’s profit will be overstated
(c) The current year’s profit will be understated but there will be no effect on next year’s
profit
(d) The current year’s profit will be overstated but there will be no effect on next year’s
profit

102 Huzaim had opening inventory of 1000 units at Rs. 5 units at 01 January 2019. During the month she
made following purchases and sales transactions:

5-Jan Purchased 500 units at Rs. 5 per unit

9-Jan Sold 1,250 units
15-Jan Purchased 1000 units at Rs. 10 per unit
28-Jan Sold 550 units
Maria uses periodic weighted average cost method for inventory valuation. What is value of closing
inventory at 31 January 2019?

(a) Rs. 5800

(b) Rs. 5833
(c) Rs. 5000
(d) None of the above

103 What is impact on closing inventory if an item having cost of Rs. 2,500 and a net realizable value of
Rs. 3,000 has been written uncounted in year - end inventory count?

(a) Understated by Rs. 2,500

(b) Understated by Rs. 3,000
(c) Overstated by Rs. 2,500
(d) Understated by Rs. 500

104 If closing inventory is accounted for as Rs.140,000 instead of Rs.180,000 then;

(a) Gross profit as well as net profit will be exaggerated

(b) Gross profit and net profit would both be understated
(c) Gross profit will be exaggerated, and net profit understated
(d) Gross profit will be exaggerated but net profit correctly reported

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105 An organization had opening inventory of 45,000 units @Rs. 5 per unit. During the month it made
purchases of 70,000 units @Rs. 8 per unit. Sales were 40,000 units.
What is value of cost of goods sold during the month if the entity uses continuous weighted average
method for inventory valuation?

(a) Rs. 273,500

(b) Rs. 273,044
(c) Rs. 273,500
(d) Rs. 275,000

106 On 1st July 2018, Imad had opening inventory of 50 units at a cost of Rs. 60 per unit. During July
2018 he has made following purchases and sales:

9-Jul 120 units purchased at a cost of Rs. 65 per unit

16-Jul 65 units sold
24-Jul 45 units purchased at a cost of Rs. 67 per unit
30-Jul 100 units sold

What is the value of inventory at 31 March using the FIFO method?

Rs.__________________

107 The following information relates to Shazim Enterprise (SE) for the month of March 2020:

1-Mar Opening inventory of 400 units @ Rs. 100 each = Rs. 40,000
8-Mar Purchased 100 units @ Rs. 150 each = Rs. 15,000
24-Mar Purchased 300 units @ Rs. 200 each = Rs. 60,000

No units were sold during March 2020. What would be cost of closing inventory per unit of SE as at
31 March 2020 valued on weighted average (perpetual)?

(a) Rs. 110 per unit

(b) Rs. 143.75 per unit
(c) Rs. 150 per unit
(d) Rs. 187.5 per unit

108 The following information relates to Shazil Enterprise (SE) for the month of March 2020:

1-Mar Opening inventory of 400 units @ Rs. 100 each = Rs. 40,000
8-Mar Purchased 300 units @ Rs. 200 each = Rs. 60,000
24-Mar Purchased 100 units @ Rs. 150 each = Rs. 15,000

No units were sold during March 2020. What would be cost of closing inventory per unit of SE as at
31 March 2020 valued on weighted average (periodic)?

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(a) Rs. 110 per unit

(b) Rs. 143.75 per unit
(c) Rs. 150 per unit
(d) Rs. 187.5 per unit

109 Which of the following is NOT a disclosure requirement of IAS 2?

(a) The accounting policies adopted in measuring inventories

(b) The cost formula used
(c)
The amount of any write-down of inventories recognised as an expense in the period
(d) Location of each place where entity keeps its inventory

110 Super electronics bought 10 air conditioners for Rs. 50,000 each. Two of these were installed in
office, three have been sold to customers at a profit margin and remaining are held in stock for resale.
Which of the following represents correct accounting treatment?

(a) Cost of sales Rs. 100,000; Inventory Rs. 400,000

(b) Cost of sales Rs. 500,000; Inventory Rs. 400,000
(c) Cost of sales Rs. 150,000; Inventory Rs. 350,000
(d) Cost of sales Rs. 150,000; Inventory Rs. 250,000

111 Hulk Building Materials used 500 cement bags from inventory for constructing parking area of their
office building. How these 500 cement bags should be accounted for?

(a) It should remain included in inventory at cost

(b) It should remain included in inventory at lower of cost and NRV
(c) It should be charged as an expense when used
(d) It should be allocated to building asset in which it has been used

112 Which TWO of the following are recognised as expense under IAS 2?

(a) Inventory sold during the period

(b) Inventory remained unsold at the end of period
(c) Inventory pledged with the bank as security for the loan financing
(d) Amount of write down to NRV

113 Bulk Building Materials used 500 cement bags from inventory for constructing parking area of their
office building. How these 500 cement bags should be accounted for under periodic inventory
recording system?

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(a) Debit Inventory & Credit Purchases

(b) Debit Non-Current assets & Credit Inventory
(c) Debit Non-Current assets & Credit Purchases
(d) Debit Inventory & Credit Non-current assets

114 If trial balance includes “purchase” and “purchase return” account, it is an indication of:

(a) Weighted average method

(b) FIFO method
(c) Perpetual inventory recording system
(d) Periodic inventory recording system

115 In which TWO of the following circumstances, a periodic inventory system might be more suitable?

(a) Large size items

(b) High value items
(c) Low value items
(d) Where inventory movements are frequent

116 In which TWO of the following circumstances, a perpetual inventory system might be more suitable?

(a) Large size items

(b) High value items
(c) Low value items
(d) Where inventory movements are frequent

117 An entity uses periodic inventory system, which of the following TWO are correct for recoding a
credit sales transaction?

(a) Debit Receivables & Credit Sales

(b) Debit Cost of sales & Credit Purchases
(c) Debit Cost of sales & Credit Inventory
(d) No other entry is required

118 An entity uses perpetual inventory system, which of the following is required to incorporate closing
year inventory at the time of preparing financial statements?

(a) Debit Inventory & Credit Cost of sales

(b) Debit Cost of sales & Credit Inventory
(c) Debit Cost of sales & Credit purchases
(d) No adjustment is required

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119 An entity uses periodic inventory system, which of the following is required to incorporate normal
loss of inventory?

(a) Debit Loss & Credit Inventory

(b) Debit Loss & Credit Purchases
(c) Debit Loss & Credit Cost of sales
(d) No journal entry is required

120 An entity uses periodic inventory system, which of the following TWO are correct for recoding a
credit sales return transaction?

(a) Debit Sales Return & Credit Receivables

(b) Debit Inventory & Credit Cost of sales
(c) Debit Cost of sales & Credit Inventory
(d) No other entry is required

121 Kind General Mills gave 1000 bags of flour to flood affected community for free. What is correct
journal entry to record this transaction under perpetual inventory method?

(a) No entry is required

(b) Debit Drawings & Credit Purchases
(c) Debit Expenses & Credit Inventory
(d) Debit Expenses & Credit Purchases

122 Jaffer Associates sold a generator to Sajid Enterprises for Rs. 1,440,000. This price is net of Rs.
60,000 special discount. Jaffer Associates normally sells items at 25% mark-up and uses perpetual
inventory system to record its inventory. Which of the following entry is correct to update the
inventory?

(a) Debit Cost of Sales Rs. 1,152,000 & Credit Inventory Rs. 1,152,000
(b) Debit Cost of Sales Rs. 1,200,000 & Credit Inventory Rs. 1,200,000
(c) Debit Cost of Sales Rs. 1,104,000 & Credit Inventory Rs. 1,104,000
(d) Debit Inventory Rs. 1,500,000 & Credit Cost of sales Rs. 1,500,000

123 An entity uses perpetual inventory system, which of the following TWO are correct for recoding a
credit sales return transaction?

(a) Debit Sales Return & Credit Receivables

(b) Debit Inventory & Credit Cost of sales
(c) Debit Cost of sales & Credit Inventory
(d) No other entry is required

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124 An entity uses perpetual inventory system, which of the following TWO are correct for recoding a
credit sales transaction?

(a) Debit Receivables & Credit Sales

(b) Debit Cost of sales & Credit Purchases
(c) Debit Cost of sales & Credit Inventory
(d) No other entry is required

125 What does FIFO mean?

(a) Finished stock In Finished stock out

(b) Fabrications Inward Fabrications Outward
(c) Final Input Final Output
(d) First In First Out

126 Regardless of how long it takes to produce and sell inventory, inventory is always considered to be a?

(a) Current asset

(b) Current liability
(c) Long-term asset
(d) Stockholder's equity

127 The inventory that is purchased at first goes first.

(a) Average
(b) LIFO
(c) FIFO
(d) Perpetual

128 An increase in inventories indicates that?

(a) More merchandise was purchased then the amount sold to customer
(b) Less merchandise was purchased then sold to the customer
(c) Not all purchases were cash
(d) Cash payments were more than purchases on account

129 Which type of inventory system is updated modern inventory system?

(a) Periodic inventory system

(b) Contingency inventory system
(c) LIFO
(d) Perpetual inventory system

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PRC-4 Introduction to Accounting Chapter-7 Inventories

(a) The physical substance of the asset

(b) The acquisition cost of the asset
(c) The nature of the company’s activity, which determines the purpose for which the asset
is held
(d) The moment in the accounting period when the asset is acquired

131 Which of the following method is suitable for calculating the cost of inventory when costs of
individual units of merchandise can be determined from the accounting records?

(a) FIFO Method

(b) LIFO Method
(c) Specific Identification Method
(d) Average Method

132 Which one of the following methods for inventory valuation may not be misleading when item cannot
be distinguised on indivisual cost basis.

(a) FIFO Method

(b) LIFO Method
(c) Weighted avg method
(d) None

133 During September, Khan had sales of 148,000, which made a gross profit of 40,000. Purchases
amounted to 100,000 and opening inventory was 34,000. The value of closing inventory was?

(a) Rs. 24,000

(b) Rs. 26,000
(c) Rs. 42,000
(d) Rs. 54,000

134 Which type of inventory system requires updating the inventory balance at the end of the accounting
period?

(a) Periodic inventory system

(b) LIFO
(c) Perpetual inventory system
(d) FIFO

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PRC-4 Introduction to Accounting Chapter-7 Inventories

135 The inventory method that will always produce the same amount for cost of goods sold in a periodic
inventory system as in a perpetual inventory system would be?

(a) FIFO
(b) LIFO
(c) Weighted average
(d) None of these

136 Inventory does not include?

(a) Materials used in the production of goods to be sold

(b) Finished goods intended to be sold in the normal course of business
(c) Equipment used in the manufacturing are sold
(d) Work in progress currently in production for normal sales

137 Net Purchases equal the invoice amount and?

(a) Plus freight-in, plus discounts

(b) Less purchase returns, plus purchase allowances
(c) Plus freight-in, less purchase discounts
(d) Plus discounts, less purchase returns

138 In FIFO method of inventory valuation?

(a) Closing stock is at latest price

(b) Issue of stocks to production is at earliest price
(c) Both (a) & (b)
(d) Neither (a) nor (b)

139 The average inventory costing method which results in a changed unit inventory cost after each
successive purchase?

(a) Weighted average

(b) Moving average
(c) Specific cost
(d) Simple average

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PRC-4 Introduction to Accounting Chapter-7 Inventories

140 Sales revenues are usually considered earned when?

(a) Cash is received from credit sales

(b) An order is received
(c) Goods have been transferred from the seller to the buyer
(d) Adjusting entries are made

141 A retail firm would normally use an inventory account titled?

(a) Finished Goods Inventory

(b) Merchandise Inventory
(c) Goods in Process Inventory
(d) Raw Materials Inventory

142 In a perpetual inventory system

(a) LIFO cost of goods sold will be the same as in a periodic inventory system.
(b) average costs are based entirely on unit cost simple averages.
(c) a new average is computed under the average cost method after each sale.
(d) FIFO cost of goods sold will be the same as in a periodic inventory system.

143 Company Y has the following inventory data:

1-Aug Beginning inventory 20 units at $10

8 Purchases 130 units at $15
17 Sale 80 units
25 Purchases 30 units at $20
30 Sale 60 units

Assuming that a perpetual inventory system is used, what is ending inventory (rounded) under the
average cost method for August? (DO NOT ROUND INTERMEDIATE CALCULATIONS).

(a) 641.33
(b) 611.11
(c) 800
(d) 500

144 Simpson Inc. purchased inventory as follows:

Jan. 5 500 units at $10.00

Jan. 15 1,000 units at $15.00
Jan. 25 200 units at $20.00

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PRC-4 Introduction to Accounting Chapter-7 Inventories

What is the average unit cost of inventory?

(a) 14.12
(b) 15
(c) 13
(d) 15.83

145 Delightful Discs has the following inventory data:

Nov. 1 Inventory 30 units @ Rs.6.00 each

8 Purchase 120 units @ Rs.6.45 each
17 Purchase 60 units @ Rs.6.30 each
25 Purchase 90 units @ Rs.6.60 each

A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand.
Ending inventory under FIFO periodic inventory system is

(a) Rs.657
(b) Rs.632
(c) Rs.1269
(d) Rs.1295

146 Peoples Inc. purchased and sold inventory as follows:

Jan. 12 Purchase 200 units at Rs.5.00

Jan. 22 Purchase 500 units at Rs.10.00
Jan. 27 Purchase 800 units at Rs.15.00

Assuming the FIFO method is used. And closing stock is 500.

What is the amount of closing inventory

(a) Rs.13000
(b) Rs.4000
(c) Rs.7500
(d) Rs.5000

147 Baker Bakery Company just began business and made the following four inventory purchases in
June:
1-Jun 150 units 1,040
10-Jun 200 units 1,560
15-Jun 200 units 1,680
28-Jun 150 units 1,320
5,600

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PRC-4 Introduction to Accounting Chapter-7 Inventories

A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand. Using
the FIFO periodic inventory method, the amount allocated to ending inventory for June is

(a) 1456
(b) 1508
(c) 1824
(d) 1848

148 At December 31, 2019 Mohling Company’s inventory records indicated a balance of Rs. 632,000.
Upon further investigation it was determined that this amount included the following:

● Rs. 112,000 in inventory purchases made by Mohling shipped from the seller 27
December 2019 terms FOB destination, but not due to be received until January 2nd
2020
● Rs. 74,000 in goods sold by Mohling with terms FOB destination on December 27th.
The goods are not expected to reach their destination until January 6th
● Rs. 6,000 of goods received on consignment from Dollywood Company

What is Mohling’s correct ending inventory balance at December 31, 2019?

(a) 520,000
(b) 626,000
(c) 440,000
(d) 514,000

Prepared by: ARM, KSM & AA