Paper: FA-02 Name __________________________________

Topic: Inventory SKANS ID _______________________

Time allocated: 1.5 hours Total Marks:

Identify the correct option. No marks for cutting/overwriting, pencil & red pen

Question 01:
Camila has following products in inventory at year end.

Product Quantity Cost Selling price Selling cost

A 1000 $40 $55 $8
B 2500 $15 $25 $4
C 800 $23 $27 $5
At what amount should total inventory be stated in statement of financial
position?
A. $95,900
B. $103,100
C. $95,100
D. 105,100

Question 02:
Which of the following is NOT TRUE regarding IAS-2 inventories?
A. Fixed production overheads must be allocated to items of inventory on the basis of
normal level of production
B. Plant lying idle will lead to higher fixed overhead allocation to each unit
C. Variable production overheads are allocated to each unit on the basis of actual usage
of production facilities
D. Unallocated overheads must be recognized as an expense in the period in which they
are incurred

Question 03:
Ali is preparing final accounts for a business. The cost of items in closing inventory is
$41,875. This includes some items which cost $1,960 and which were damaged in transit.
Ali has estimated that it will cost $360 to repair the items, and they can then be sold for
$1,200.
What is the correct inventory valuation for inclusion in the final accounts?
A. $39,915
B. $40,755
C. $41,515
D. $42,995

Lamiyah Fawad Khan

Question 04:
Daisy uses the continuous weighted average cost method of inventory valuation. At 1st
February 20X4 she had 60 units in inventory at total value of $1,320. The inventory
movements during February 20X4 were as follows:
Receipts 14 Feb 180 units at $23.00 per unit
Sales 18 Feb 90 Units at $30.00 per unit
What is the value of Daisy’s inventory at 28 Feb, 20X4?
A. $3,300.00
B. $3,390.00
C. $3,412.50
D. $3,450.00

Question 05:
Linda has published its financial statements, which shows a gross profit for the year of
$6.5 million. A major error in the inventory valuation has just been discovered. The
opening inventory is overstated by $1.3 million and closing inventory has been
understated by $1.6 million.
What should be Linda’s correct gross profit for the year?
A. $3.5 million
B. $6.2 million
C. $6.8 million
D. $9.4 million

Question 06:
Omission of opening inventory from financial statements may result in?
A. Understated current assets
B. Understated cost of sales
C. No impact
D. Overstated cost of sales

Question 07:
A business had an opening inventory of $180,000 and a closing inventory of $220,000 in
its financial statements for the year ended 31st December 2005
Which of the following entries for these opening and closing inventory figures are
made when completing the final records of the business?
A. Debit inventory account SOFP $180,000, Credit SPL $180,000, Debit SPL $220,000,
Credit inventory account SOFP $220,000
B. Debit inventory account $40,000, Credit purchases account $40,000
C. Debit purchases account $40,000, Credit inventory account $40,000

Lamiyah Fawad Khan

D. Debit SPL $180,000, Credit inventory account SOFP $180,000, Debit inventory
account SOFP $220,000, Credit SPL $220,000

Question 08:
In preparing financial statements for the year ended 31st March 20X6, the inventory
count was carried out on 4th April, 20X6. The value of inventory counted was $36million.
Between 31st March and 4th April goods with a cost of $2.7 million were received into
inventory and sales of $7.8 million were made at a markup on cost of 30%.
At what amount should inventory be stated in the statement of financial position
as at 31st March 20X6?
A. $32.7 million
B. $39.3 million
C. $38.76 million
D. $33.24 million

Question 09:
At 31st March Tesla had 12000 units of product W32 in inventory, included at cost of $6
per unit. During April and May 20X7 units of W32 were being sold at price of $5.40 each,
with sales staff receiving a 15% commission on the sales price of the product.
At what amount should inventory of product W32 be recognized in the financial
statements of Tesla as at 31st March 20X7?
A. $55,080
B. $72,000
C. $64,800
D. $61,200

Question 10:
In which of the following situations is the net realizable value of an item of
inventory likely to be lower than cost?
A. The production cost of an item has been falling
B. The selling price of an item has been rising
C. The item is becoming obsolete
D. Demand for the item is increasing

Question 11:
Which of the following statements about IAS-2 inventories are CORRECT?
1. Production overheads should be included in cost on the basis of a company’s actual
level of activity in the period
2. In arriving at the net realizable value of inventories, settlement discounts must be
deducted from the expected selling price

Lamiyah Fawad Khan

3. In arriving at the cost of inventories, FIFO, LIFO and weighted average cost formulas
are acceptable
4. It is permitted to value finished goods inventories at material plus labor cost only,
without adding production overheads.
A. 1 only
B. 1 and 2
C. 3 and 4
D. None of them

Question 12:
Tom has recently commenced trading. The material he uses in his business are subject
to regular price rises. He is unsure how to value his inventory and is trying to decide
whether to use FIFO or continuous weighted average.
Which of the following statement is correct?
A. Tom’s profit will be unaffected by the method of inventory valuation
B. FIFO will lead to the higher reported profit
C. continuous weighted average will lead to the higher reported profit
D. The profit will be more accurate if FIFO is used

Question 13:
The entries required to correctly reflect inventory and cost of sales in the financial
accounts for the first year of trading are?
A. Dr. inventory- closing inventory, Credit trading account-closing inventory
Dr. Trading account-opening inventory, Credit Inventory-Opening inventory
B. Dr. Trading account- closing inventory, Credit Inventory-closing inventory
Dr. Inventory-opening inventory, Credit Trading Account-Opening inventory
C. Dr. Inventory-Closing inventory, Credit Payables-Closing inventory
D. Dr. Inventory-Closing inventory, Credit trading account-Closing inventory

Question 14:
For Morgan the direct cost of production of each unit of inventory is $46 (including
carriage inwards of $11 and import duties of $1 on the raw materials element).
Production overheads amount to $15 per unit. Currently the goods can only be sold if
they are modified at a cost of $17 per unit. The selling price of each modified unit is $80
and selling costs are estimated at 10% of selling price.
At what value should each unmodified unit of inventory be included in the
statement of financial position?

Lamiyah Fawad Khan

A. $46
B. $61
C. $55
D. $80

Question 15:
Lavender Limited had inventory with the cost of $10,000 at the end of financial period,
31st December 2013. It is estimated that NRV of this month inventory was $9,000 at 31st
December. One week later the inventory was sold for $7,000. If their financial statements
were finalized on 14th February, what value should be assigned to inventory?
$ 7,000

Lamiyah Fawad Khan