Q: Which formula correctly calculates Net Realisable Value (NRV) of inventory?

$$\text{NRV} = \text{expected selling price} - \text{costs expected to be incurred to make the sale}$$

Q: Which equation correctly calculates the cost price from a selling price with a mark-up percentage?

$$\text{Cost price} = \text{Selling price} \times \frac{100}{100 + \text{Mark-up percentage}}$$

Question 1

According to IAS 2, how should inventory be valued in the financial statements?

Accepted Answer

At the lower of its cost and its net realisable value (NRV).

Question 2

A business has 100 units of Product X in inventory at year end. Each unit cost £27. All units are damaged and require £5 repair per unit before they can be sold for £30 each. What value should be placed on the inventory in the financial statements?

Accepted Answer

£2,500

Question 3

Which of the following costs should NOT be included in the cost of inventory for a manufacturing business?

Accepted Answer

Carriage outwards

Question 4

A business sets all its selling prices to achieve a margin of 40%. If the expected selling price of inventory is £980, what is the cost of inventory?

Accepted Answer

£588

Question 5

Which inventory valuation method is NOT permitted under IAS 2?

Accepted Answer

LIFO (Last In, First Out)

Question 6

A business has 100 units of Product Y in inventory at year end, cost £99 each. The selling price has fallen to £130 per unit. Sales commission is 20% and distribution costs are £12 per unit. What is the inventory write-down required?

Accepted Answer

£700

Question 7

Which formula correctly calculates Net Realisable Value (NRV) of inventory?

Accepted Answer

$$	ext{NRV} = 	ext{expected selling price} - 	ext{costs expected to be incurred to make the sale}$$

Question 8

A business uses FIFO. On 1 May, it has 10 units at £8 each. On 7 May, it buys 10 units at £9 each. On 14 May, it buys 10 units at £11 each. On 21 May, it sells 14 units. What is the value of closing inventory at 31 May?

Accepted Answer

£164

Question 9

Which of the following best describes the impact of inventory write-downs on gross profit?

Accepted Answer

Inventory write-downs decrease gross profit by increasing cost of goods sold.

Question 10

A business’s financial year ends on 31 December. The stocktake is done on 7 January, counting inventory at £28,850. Purchases between 31 Dec and 7 Jan were £2,370 at cost. Sales were £3,800 at selling price, with a 25% mark-up. Returns inwards were £350 at selling price, with a 25% mark-up. What is the value of inventory at 31 December?

Accepted Answer

£29,240

Question 11

Under the AVCO method, a business has 20 units at £7 each. It sells 10 units, then buys 20 units at £10 each, then sells 10 units. What is the value of closing inventory (20 units) at the end of the period?

Accepted Answer

£180

Question 12

Which of the following is a reason why the NRV of inventory may fall below its cost?

Accepted Answer

A competitor introduces a similar product at a lower price.

Question 13

A business sets all its selling prices to achieve a mark-up of 40%. If the expected selling price of inventory is £980, what is the cost of inventory?

Accepted Answer

£700

Question 14

Which of the following statements about inventory held on a ‘sale or return’ basis is correct?

Accepted Answer

Goods held by the retailer on a sale or return basis should be included in the manufacturer’s inventory.

Question 15

If a business switches between FIFO and AVCO methods each year, which accounting concept is violated?

Accepted Answer

Consistency

Question 16

A business’s inventory at year end includes items with cost £1,900, but their NRV is only £700. What is the inventory write-down required?

Accepted Answer

£1,200

Question 17

Which equation correctly calculates the cost price from a selling price with a mark-up percentage?

Accepted Answer

$$	ext{Cost price} = 	ext{Selling price} 	imes \frac{100}{100 + 	ext{Mark-up percentage}}$$

Question 18

Which of the following is NOT a category of inventory typically held by a manufacturing business?

Accepted Answer

Accounts receivable

Question 19

A business’s financial year ended on 31 May, but the stocktake was done on 5 June. Inventory counted was £73,100. Purchases after 31 May were £2,300 at cost, and sales after 31 May were £6,000 at selling price. The business uses a gross profit margin of 30%. What was the closing inventory on 31 May?

Accepted Answer

£75,000

Question 20

Which of the following statements about the FIFO method is correct?

Accepted Answer

FIFO assumes the oldest items are sold first.

Inventory Valuation: Concepts, Methods, and Applications (IAS 2)

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