Chapter 7: Cost of sales and inventories

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

What is the correct amount for cost of sales?

A £75,550
B E75,650
C E75,830

D E77,450
LO 1d, 3C

2 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 £686,880 and closing
inventories were valued as £18,647 on 30 April 20X1.
Which two of the following journal entries are requíred to record cost of sales and closing
inventories at 30 April 20X1?
A Dr Cost of sales £686,880; Cr Inventories E686,880
B Dr Purchases E686,880; Cr Cost of sales E686,880
CDrCost of sales £686,880; Cr Purchases E686,880
D Dr Inventories E18,647; Cr Cost of sales £18,647
EDr Cost of sales £18,647; Cr Inventories £18,647
F Dr Inventories E18,647; Cr Purchases £18,647
LO 3c

3 Muse plc began trading on 1 January 20x8 and had zero inventories at that date. During
20X8 it made purchases of £455,000, incurred delivery inwards of £24,000, and delivery
outwards of £29,000. Closing inventories at 31 December 20X8 were £52,000.

What is the correct amount for cost of sales for the year ended 31 December 20X8?
A £456,000

BE427,000
C £432,000

D E531,000

LO 3c

ICAEW 2021 Chapter 7: Cost of sales and inventories

37
 4 Boomerang Co had 200 units in inventory at 30 November 20X1 valued at f(800. During
December it made the following purchases and sales.

2/12 Purchased 1,000 C5.00 each

5/12 Sold 700 7.50 each
12/12 Purchased 800 C6.20 each
15/12 Purchased 300 C6.60 each
21/12 Sold 400 £8.00 each
28/12 Sold 500 £8.20 each
Which of the following is the closing inventory amount using FIFO?

A £4,460
B 4,340
C C4,620

D £3, 500

LO 1d

5 The following information relates to Camberwell plcs year-end inventory of finished

goods.
Direct
Expected
costs of Production selling and
materials overheads distribution Expected
and labour incurred overheads selling price
E
Inventories category 1 2,470 2,100 480 5,800
Inventories category 2 9,360 2,730 150 12,040
Inventories category 3 1,450 850 190 ,560
13,280 5,680 820 20,400
At what amount should finished goods inventory be stated in the company's staterment of
financial position?
A L13,2800
BL18,960
C 18,7600
D 19,580

LO 1d

( Al its year end Crocodile plc has 6,000 tems of product A, and 2,000 of product 8, costing
10 and ( respectivetly. The following information is available

Produt A 500 are defective and can only be sold at £8 each

Product 1 0 0 are to be sold for L4 50 each with selling expernses of (1.50 each

Aunting uestin Bank

 What figure should be shown in Crocodile plc's statement of financial position for

inventory?
A C57,000
B £68,950

C E68,800
D £70,000
LO 1d, 3c

7 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
is debit in the statement of profit or loss.
Closing inventory a

C True

D False
LO 1d, 2a

AVCO. At 1 June 20X8 there were 60

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

A £1,110

B E1,010

C £900

D 1,125
LO 3c

cost of each unit of inventory is £46.

Production overheads
Morgan plc's direct production
can onty be sold if they are modified at a cost of £17
the goods
a r e C15 per unit. Currently
unit is £80 and selling costs are estimated at
per unit. The selling price
of each modif ied
10% of selling price.

7: Cost of sales and inventories 39

ICAEW 2021
Chapter
 unit of inventory be included in the statement of
should each unmodified
At what amount
financial position?

A £48
B £55

C £64

D L61
LO 3C

following statements are true or false.

10 Indicate whether the
A van for sale by a dealer is shown as a non-current asset in its statement of financial

position.
A True

B Falsee
Import duties are included in the cost ofinventory.
C True

D False
LO 3c

11 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
CDepreciation of delivery vehicles
D Finished goods storage costs
EProduction line wages
LO 1d

17 Which of the following statements about inventory for the purposes of the statement of
financial position is correct?
AAVCO And LIFO are both acceptable methods, under IAS 2, Inventories, of arriving at
the cost of
inventories.
The cost of inventories of finished goods may include labour and materials cost only,
without inctuding overheads

Inventories should be included at the lowest of cost, net realisable value and
eplacement cost.
D I may be acceptable for the cost of inventories to be based on setling price less
stimated profit margin

LO 1d

40 AOunting Questio tiank KA W 2021

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

400 coats, which had cost £80 each and normally sold for £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.
be defective. Remedial
2 800 skirts, which had cost £20 each. These too were found to
work in February 20x3 cost £5 per skirt, and selling expenses were £1 per skirt. They
were sold for £28 each.

What should be the inventory value after considering the above items?
A £281,200
B £282,800
C £329,200
D £284,700
LO 1d

14 Sahara plc sells three products - Basic, Super and Luxury. The following information was
available at the year end.
Basic Super Luxury
E per unit £ per unit £ per unit
Original cost 9 18
Estimated selling price 9 12 15
Selling and distribution costs to be incurred 4

Units Units Units

Units of inventory 200 250 150
What is the value of inventory at the year end?
A £3,600
B £4,700
C £5,100
D L6,150
LO 1d

15 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 £190 each.

During the year ended 30 April 20X3 the following transactions took place:

20X2
July Purchased 500 engines at £220 each
1 November Sold 400 engines for £160,000

20x3
1 February Purchased 300 engines at ¬230 each
15 Aprit Sold 250 engines for £125,000

ICAFW 2071
Chapter 7: Cost of sales and inventories 41
 What is the cost of the company's closing inventory of engines at 30 April 20X37

A £188,500

B £195,500

C £161,5000

D E167,500

LO 1d

16 An inventory record card shows the following details.

February 1 50 units in inventory at a cost of £40 per unit
7 100 units purchased at a cost of £45 per unit
14 80 units sold
21 50 units purchased at a cost of £50 per unit
28 60 units sold
What is the cost of inventory at 28 February using the FIFO method?
A ¬2,450
B £2,500
C £2,700
D £2,950
LO 1d

17 For the year ended 31 October 20X3 a company did a physical count of inventory on
4 November 20X3, leading to an inventory cost at this date of £483,700.
Between 1 November 20x3 and 4 November 20X3 the following transactions took place:

Goods costing £38,400 were received from suppliers.

2 Goods that had cost £14,800 were sold for £20,000.

A customer returned, in good condition, some goods which had been sold to him in
3
October for £600 and which had cost £400.
The company returned goods that had cost £1,800 in October to the supplier, and
4
receiveda credit note for them.
financial statements at 31 October 20X3 for
What figure should be shown in the company's
information?
closing inventory, based on this
A C458,700
B C505,900

C C508,700
D LA61,500
LO 3c

ICAEW 2021
a t ioo. (unstion Ran
 company's closing inventory was
preparing its financial statements for the
current year, a
18 In
understated by £300,000.
What will be the effect of this error if it remains uncorrected?

overstated and next year's profit will be understated.

A The current year's profit will be
understated but there will be no effect on next year's
B The current year's profit will be
profit.
The current year's profit will be understated and next year's profit will be overstated.
overstated but there will be no effect on next year's
D The current year's profit will be
profit.
LO 2a

19 At 30 September 20X3 the closing inventory of a company amounted to £386,400.

The following items were included in this total at cost:

1 1,000 items which had cost £18 each. These items were all sold in October 20X3 for
£15 each, with selling expenses of £800.
Five items which had been in inventory for many years and which had been purchased
2
for £100 each, sold in October 20X3 for E1,000 each, net of selling expenses.

What figure should appear in the company's statement of financial position at

30 September 20X3 for inventory?
A E382,600o
B E390,200
C £368,400
D £400,600
LO 3C

20 The cost of inventory in the financial statements of Quebec Ltd for the year ended
31 December 20X4 of £836,200 was based on an inventory count on 4 January 20X5.

Between 31 December 20X4 and 4 January 20X5, the, following transactions took place:

Purchases of goods 3,600

Sales of goods (profit margin 30% on sales) 14,000
Goods returned by Quebec Ltd to a supplier 700

in the financial statements for inventories at

What adjusted figure should be included
31 December 20X4?

A £838,100

B £842,300

C £818,500

D £834,3000
LO 3c

Chapter 7: Cost of sales and inventories 43

ICAEW 2021
 21 The closing inventory of Epsilon amounted to £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 £15 each and which were included at £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 £1,800 and they were then sold shortly afterwards
for E20 each. Selling expenses were £400.

2 100 items which had cost £10 each. After the date of the statement of financial position
they were sold for £8 each, with selling expenses of £150.
What amount should be shown in Epsilon's statement of financial position for inventory?

A £283,650

B E284,350
C £284,650
D £291,725

LO 3c

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

Units E/unit Total (¬)

21.01.X9 100 12.0 1,200
30.04.X9 300 12..50 3,750
3 31.07.X9 40 12..80 512
4 01.09.X9 60 13.00 780
5 11.11.X9 80 13.50 1,080
At the year end 200 units are in inventory but 8 are damaged and are only worth £10 per
unit. These are identified as having been part of the 11.11.X9 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 £2,450

B C2,525

C £2,594

D C2,700
LO 1d

ICAEW 2021
41 Accounting: (uestion Bank
 23 Bouncy Balls plc has 40 units of its special spongy balls in inventory as at 30 November
20X7. The product costs £5 per unit to manufacture and can be sold for £15 per unit. Half of
the units in inventory at the year end have been damaged and will require rectification work
costing E10 per unit before they can be sold. Selling costs are £1 per unit,
What is the value of inventory at 30 November 20X7?

A E160
B £180
C E200
D £6000
LO 1d

24 The closing inventory of Stacks plc amounted to £58,200 excluding the following two
inventory lines:
1 200 items which had cost £15 each. These items were found to be defective at the
year-end date. Rectification work after that date amounted to £1,200 for the batch,
after which they were sold for E17.50 each, with selling expenses totalling £300 for the
batch.
2 400 items which had cost £2 each. All were sold after the year-end date for E1.50 each,
with selling expenses of £200 for the batch.
What amount for inventory should be shown in the statement of financial position of Stacks
plc?
A £62,000
B £61,600

C E60,600
D £61,000
LO 3C

25 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

Costs to date 30 350

400 500
Selling price
Modification costs to enable sale 11
Delivery outwards 65 75
What figure for inventory should be shown in the statement of financial position at the year
end?
A C57,500

B C58,000
C C65,0000
D 65,500
LO 3c

ICAEW 2021 Chapter 7: Cost of sales and inventories 45

 26 When calculating the cost of inventory, which of the following shows the correct method of
arriving at cost?
Include inward delivery costs Include production overheads
A Yes No

B No Yes
Yes Yes
D No No

LO 1d

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

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.
LO 2a

28 The gross profit margin is 20% where:

A cost of sales is E100,000 and sales are £120,000
B cost of sales is £100,000 and sales are £125,000
C cost of sales is £80,000 and gross profit is £16,000
D cost of sales is £80,000 and sales are £96,000
LO 2

29 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
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
LO 1d

46 Accounting: Question Bank ICAEW 2021

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

Revenue 115,200
Opening inventory 21,000
Purchases 80,000
Closing inventory (5,000)
(96,000)
19,200
What mark-up has the business applied?

A 14.8%

16.7%
C 20.0%

D 83.3%
LO 1d

31 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 £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 £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?
A E11,700

B E9,000

C£15,075
D £35,100

LO 1d

32 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

CHigher cost of sales and lower closing inventory

D Higher cost of sales and higher closing inventory

LO 1d, 3a

ICAEW 20721 Chapter 7: Cost of sales and inventories 47

 suffered a major fire at its factory, in
March 20X4 Boogie plc
33 During the year ended 31 was destroyed. An
insurance payment of 80% of the
which inventory that had cost £36,000
end.
not received at the year
cost has been agreed but
the journal entry too take account of these
Which of the following correctly completes
matters?

receivables with £28,800 and:

Debit trade and other

Debit Administrative expenses £36,000,

Credit Purchases £28,800, Credit Revenue
A
£36,000

B Debit Administrative expenses £7,200, Credit Purchases £36,000

C Debit Administrative expenses £36,000, Credit Purchases £36,000, Credit Other

income £28, 800

D Debit Administrative expenses £7,200, Credit Inventory £36,000

LO 2a, 2c

34 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 £6,420. Had
the FIFO basis been used, the cost would have been £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 £1,660
B increase current assets and decrease losses by £1,660

C increase capital and decrease current assets by £1,660

D increase current assets and increase losses by £1,660

LO 1d, 3a, 3c

35 Kane Ltd has completed its inventory count for the period ended 30 June 20X8. The
inventory count concluded that there were inventories costing £32,340 of which £1,280
were found to be damaged and so had a net realisable value of
nil
What is the journal entry to record closing inventories at 30 June 20X8
Dr Cost of sales E32,340, Cr Inventories £32,340
B Dr Inventories C32,340, r Cost of sales E32,340
Dr Cost of sales C31,060, Cr Inventories £31,060

D Dr Inventories £31,060, Cr Cost of sales E31,060

LO 1d

ICAEW 2021
18 Accounting: Qurstion Bank
Chapter 7: Cost of sales and inventories

1 B

Opening inventory 7,200

Purchases 76,500
Delivery inwards 50
Less closing inventory 8,100)
75,650
2 C,D Applying the cost of sales equation, coS = Opening inventories purchases- closing
inventories, purchases made in the year are transferred to cost of sales at the year-end
by debiting cost of sales and crediting purchases (C). Closing inventories are recorded
as a current asset by debiting inventories and crediting cost of sales (D).
3 B Cost of sales includes delivery inwards, which is a cost incurred in bringing inventories
to their present location, but excludes delivery outwards, which is a distribution cost
and included in the statement of profit or loss after calculating gross profit. Closing
inventories should be deducted in arriving at cost of sales.
E
Purchases 455,000
Delivery inwards 24,000
Closing inventories (52,000)
Cost of sales 427,000
SAMPLE EXAM
4 A Closing inventory 200 1,000 800+ 300 700 400 500 = 700 units.

E
FIFO 4006.20 2,480
300 6.60 1,980
700 4,460
5 C Cost includes both direct materials/labour and also
production overheads.
NRV is expected selling price less expected selling costs.
Cost NRV Lower of cost/NRV
E E
Category1 4,570 5,320 4,570
Category2 12,090 11,890 11,890
Category 3 2,300 2,370 2,300
18,960 19,580 18,760
6

ProductA 5,500 x £10 =

55,000
500x £8
Product B 1,900x £5 =
4,000
100 x £3 =
9,500
300
68,800
7B False: if prices are rising, the
charge to cost of sales will be higher if AVCO is used.
Gross profit will therefore be lower under this
method.
D False: closing inventory is a debit in the statement of financial
the statement of profit or. loss. position and a credit in

ICAEW 2021
Chapter 7: Cost of sales and
inventories 187
 8 A
Units Cost Av cost
E £ Value
1.6.X8 60 12 E
8.6.X8 40 15 720
14.6.X8 50 18 600
150 14.80 900
21.6.X8 75) 14.80 2,220
75 (1,110)
1,110
9 B

Cost 46
Production overheads
15
61
Net realisable value E
Sales price 80
Less modification costs
(17)
Less selling costs (80 x 10%) (8)
55
10 B False: it is current asset inventory.
C True: import duties should be included in inventory cost.

11 A,E (B) and (C) are distribution costs and (D) is not incurred in arriving at the cost of
finished goods.

12 D Selling price less an estimated profit margin is an acceptable method of arriving at the
cost of inventory. It is a frequently used method in the retail industry. Regarding (A),
LIFO is not an acceptable inventory valuation method. verheads should be included
in cost (B), and under IAS 2 inventories should be included in the SOFP at the lower of
cost and NRV, replacement cost (c) is not relevant.

13 A
E
Original value 284,700
Coats Cost 400 x £80 (32,000)
- NRV (E75 x 95%) x 400 28,500
281,200
At 31 January 20X3 the skirts were correctly valued at costs incurred to date of £20 per

skirt which was lower than the NRV of £22. Therefore no adjustment required.

14 B
Net Lower
realisable of cost
value & NRV Units Value
Cost
E E

6 8 6 200 1,200
Basic 250 ,000
9 8 8
Super 10 10 150 500
Luxury 18
4,700

ICAEW 2021

188 Accounting: Answer Bank

 15 A

50@£190
9,500
500 £ 2 2 0
110,000
300 £230
69,000
188,500
£45) +
(50 units £50) =
£2,950
(10units
x

16 D

17 D
E
Inventory check balance
483,700
Less goods from suppliers
(38,400)
Add goods sold
14,800
Less goods returned
(400)
Add goods returned to supplier
1,800
461,500
18 C If closing inventory is understated, cost of sales will be overstated and profit will be
understated. Next years opening inventory will be understated and its cost of sales will
be understated, so its profit will be overstated.

19 A
E
Onnginal balance 386,400
Item (1) Cost (18,000)
NRV15,000 800 14,200
Write down (3,800)
Inventory value 382,600
20 A

E
inventory count value 836,200
Less purchases (8,600)
Add sales (14,000x 70/100) 9,800
Add goods returned 700
Inventory figure 838,100
21 A

B/d 284,000
Item 1 No change as NRV exceeds cost
Item 2 (350) Reduce to NRV (1,000 800 150)
283.650
22 C
(20x £12.50) (40 £12.80) (60x £13.00) (72
x x
£13.50) (8 x£10) £2,594
23 B (20x £5)+ (20 (£15 10 1)) = £180
24 C £60, 600
200itemsx £15 £3,000
NRV (200x £17.50) 1,200 300 £2,000
400items = (400 x £1.50) 200 = £400

Total £58,200+£2,000+ £400 £60,600

4 A 100x (E400 £110 £65) + (100 x £350) = £57,500

CAEW 2021
Chapter 7: Cost of sales and inventories 189
 26 C Cost can include both inward delivery costs and production overheads.

27 B A and C would not explain a shortfall and D is the correct treatment for
drawines Jt
does not affect mark-up. B will cause cost of sales to be overstated and so
reduce the
mark-up.
28 B £125,000 x 80% £100,000
29 B Options A and C would increase the gross profit margin. Option D would not affect
gross profit.
30 C 19,200/96,000 x 100% = 20%

31 A

Units Value
E E
8/X4 b/f 2,400 10.00 24,000
11/X4 Sell (900) 10.000 9,000)
1,500 10. 0 15,000
1/X5 Buy 1,200 16.75 20,100
,700 13.0 35,100
5/X5 Sell 1800) 13.00 (23,400)
7/X5 c/f 900 13.00 11,700 SAMPLE EXAM
32 A When raw material prices are rising, AVCO averages the earlier, lower prices with the
later, higher prices, while FIFO just takes the later, higher prices. Thus FIFO would result
in a higher inventory value than AVCO. As inventory quantities are constant, this means
that closing inventory would always be higher than opening inventory. As closing
inventory is a reduction in the cost of sales calculation, all other things being equal this
would result in the overall debit balance of cost of sales being lower under FIFO than
under AVCO: hence lower cost of sales and higher closing inventory value (A).
33 C To calculate cost of sales correctly the purchases figure should only take into
consideration the goods purchased for resale. Therefore it is necessary to reduce
purchases, not inventory, by the cost of the inventory destroyed (Credit Purchases
E36,000). This cost to the business should be shown under administrative expenses in
the statement of profit or loss (Debit Administrative expenses £36,000). The sum due
from the insurance company of £28,800 should be treated as part of other income, not
revenue, as it is from a non-trading source (Credit Other income £28,800).

34 B Closing inventory is an asset in the statement of financial position and is deducted from
cost of sales (and hence added to profit) in the statement of profit or loss. An increase
of inventory from E6,420 to £8,080 would therefore increase net assets and increase
profit (decrease losses) by £1,660 (8,080-6,420).
35 D The damaged inventories should be written down to nil before the closing inventories
are recorded. inventories are included as current assets at the end of the
Closing
period by debiting inventories and crediting cost of sales.

ICAEW 2021
190 Ahccounting: Ansver Bank