Q: A retailer sets all selling prices to achieve a gross profit margin of 30%. If the expected selling price of inventory is £1,000, what is the cost price of the inventory?

£700, because $$1,000 \times (1 - 0.3) = 700$$

Question 1

Which of the following best describes the net realisable value (NRV) of inventory?

Accepted Answer

The expected selling price of inventory minus any costs expected to be incurred to make the sale.

Question 2

A business has 200 units of Product Z in inventory at the end of its financial year. Each unit originally cost £40. Due to market changes, the expected selling price is now £38 per unit, and packaging costs to sell each unit are £3. According to IAS 2, at what value should the inventory be recorded?

Accepted Answer

£35 per unit, because $$38 - 3 = 35 is $$the NRV, which is lower than cost.

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 has the following inventory at year end:
- Item A: Cost £50, NRV £60
- Item B: Cost £80, NRV £70
- Item C: Cost £40, NRV £45
What is the total value of inventory to be reported in the financial statements?

Accepted Answer

£160

Question 5

A retailer sets all selling prices to achieve a gross profit margin of 30%. If the expected selling price of inventory is £1,000, what is the cost price of the inventory?

Accepted Answer

£700, because $$1,000 	imes (1 - 0.3) = 700$$

Question 6

A business uses the FIFO method for inventory valuation. On 1 March, it has 10 units at £5 each. On 5 March, it buys 15 units at £6 each. On 10 March, it sells 12 units. What is the value of closing inventory?

Accepted Answer

£78

Question 7

Which inventory valuation method is NOT permitted under IAS 2 for financial statements?

Accepted Answer

LIFO (Last In, First Out)

Question 8

A business counted inventory on 5 June, valued at £50,000 at cost. Its financial year ended on 31 May. Between 1 and 5 June, purchases at cost were £2,000 and sales at selling price were £6,000. The business uses a mark-up of 20%. What is the value of closing inventory at 31 May?

Accepted Answer

£49,200

Question 9

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

Accepted Answer

£700

Question 10

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

Accepted Answer

Goods held by a business on a sale or return basis should be excluded from its inventory until purchased or sold.

Question 11

A business uses the AVCO method. On 1 July, it has 20 units at £8 each. On 10 July, it buys 30 units at £10 each. On 15 July, it sells 25 units. What is the value of closing inventory?

Accepted Answer

£230

Question 12

Which accounting concept is most closely associated with the rule that inventory should be valued at the lower of cost and net realisable value?

Accepted Answer

Prudence

Question 13

A business has three types of inventory: finished goods, work in progress, and raw materials. Which type would a sportswear retailer most likely NOT have?

Accepted Answer

Work in progress

Question 14

A business purchased goods for £20,000 during the year. Opening inventory was £5,000, and closing inventory is £6,000. What is the cost of goods sold?

Accepted Answer

£19,000

Question 15

If a business switches from FIFO to AVCO in a period of rising prices, what is the likely effect on reported profit?

Accepted Answer

Profit will decrease because AVCO averages prices, resulting in a lower closing inventory value than FIFO.

Question 16

A business counted inventory at £28,850 on 7 January. Its year end was 31 December. Purchases between 31 December and 7 January were £2,370, sales were £3,800 (selling price), and returns inwards were £350 (selling price). The business uses a 25% mark-up. What is the inventory value at 31 December?

Accepted Answer

£29,240

Question 17

Which of the following is a reason why the net realisable value of inventory may fall below its cost?

Accepted Answer

A competitor introduces a similar product at a lower price.

Question 18

A business has 50 units of Product M at a cost of £20 each. The expected selling price is £25 per unit, but £6 per unit must be spent on repairs before sale. What is the value of inventory?

Accepted Answer

£950

Question 19

Under the retail method, if the expected selling price of inventory is £200 and the margin percentage is 30%, what is the cost price?

Accepted Answer

£200 	imes (1 - 0.3) = £140

Inventory Valuation: Step by step guide

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