1. Opening inventory of a material is 400 units at CU 5.00 each. A further 600 units are received at CU 5.50 each. 700 units are then issued to production. Using FIFO, what is the cost of the issue?

A) CU 3,710
B) CU 3,650
C) CU 3,800
D) CU 3,850

Correct: B difficult IAS 2.25

FIFO issues the earliest receipts first: 400 x CU 5.00 + 300 x CU 5.50 = 2,000 + 1,650 = CU 3,650. If you answered CU 3,800 you used LIFO (600 x 5.50 + 100 x 5.00). If you answered CU 3,710 you used the weighted average price of CU 5.30 (5,300 / 1,000) x 700. If you answered CU 3,850 you priced all 700 units at the latest price of CU 5.50.

2. A store holds 500 units at CU 8 each and receives 300 units at CU 9 each on 5 June. On 10 June 400 units are issued. On 20 June 200 units are received at CU 10 each and on 25 June 350 units are issued. Using LIFO, what is the cost of the 25 June issue?

A) CU 3,050
B) CU 3,033
C) CU 3,200
D) CU 3,500

Correct: C difficult IAS 2.25

Before the 25 June issue the stock under LIFO is 400 units at CU 8 (after the 10 June issue took 300 at CU 9 and 100 at CU 8) plus 200 units at CU 10. The issue takes the latest first: 200 x 10 + 150 x 8 = 2,000 + 1,200 = CU 3,200. If you answered CU 3,050 you used FIFO (100 x 8 + 250 x 9). If you answered CU 3,033 you used cumulative weighted average cost. If you answered CU 3,500 you gave the cost of the first issue (300 x 9 + 100 x 8).

3. A store has 200 units at CU 12. It receives 300 units at CU 14, issues 250 units, receives 150 units at CU 15 and then issues 200 units. Using the cumulative weighted average method, what is the value of the closing inventory?

A) CU 2,775
B) CU 2,400
C) CU 2,723
D) CU 2,950

Correct: A difficult IAS 2.25

After the first receipt: 500 units for CU 6,600, an average of CU 13.20. The issue of 250 units costs CU 3,300, leaving 250 units for CU 3,300. After the second receipt: 400 units for CU 5,550, an average of CU 13.875. The issue of 200 units costs CU 2,775, leaving 200 units for CU 2,775. If you answered CU 2,400 you used LIFO. If you answered CU 2,723 you used a single periodic average (8,850 / 650 = 13.615). If you answered CU 2,950 you used FIFO (150 x 15 + 50 x 14).

4. Prices of a material have risen steadily for several years and inventory levels are stable. Which of the following statements are correct? (1) FIFO gives a higher reported profit than LIFO. (2) LIFO values closing inventory nearer to current replacement cost than FIFO. (3) The cumulative weighted average method gives a cost of sales between FIFO and LIFO. (4) IAS 2 permits LIFO provided the method is applied consistently.

A) (1), (2) and (3) only
B) (2) and (4) only
C) (1), (3) and (4) only
D) (1) and (3) only

Correct: D difficult IAS 2.25

In rising prices FIFO charges older, lower costs to sales, so profit is higher than under LIFO (1). The weighted average method falls between the two (3). Statement (2) is wrong: LIFO leaves the oldest costs in closing inventory, so FIFO is nearer to replacement cost. Statement (4) is wrong: IAS 2 does not permit LIFO. Only (1) and (3) are correct.

5. In a month the materials control account shows opening inventory CU 24,000, purchases CU 180,000, returns to suppliers CU 6,000, returns from production to stores CU 4,000 and closing inventory CU 31,000. What was the cost of materials issued to production?

A) CU 163,000
B) CU 167,000
C) CU 171,000
D) CU 177,000

Correct: C difficult IAS 2.10

Issues = opening 24,000 + purchases 180,000 - returns to suppliers 6,000 + returns from production 4,000 - closing 31,000 = CU 171,000. If you answered CU 163,000 you deducted the returns from production instead of adding them. If you answered CU 167,000 you ignored the returns from production. If you answered CU 177,000 you ignored the returns to suppliers.

6. A direct worker is paid CU 15 an hour for 40 basic hours and 6 overtime hours at time and a half. The overtime was due to general pressure of work. During the week the worker was idle for 5 hours because of a machine breakdown. What is the direct labour cost for the week?

A) CU 660
B) CU 615
C) CU 690
D) CU 735

Correct: B difficult IAS 2.10

Total pay = 40 x 15 + 6 x 22.50 = CU 735. Idle time (5 x 15 = CU 75) and the overtime premium (6 x 7.50 = CU 45) are indirect, so direct labour = 735 - 75 - 45 = CU 615. If you answered CU 660 you removed only idle time. If you answered CU 690 you removed only the premium. If you answered CU 735 you treated all pay as direct.

7. A store has 100 units at CU 9. It receives 200 units at CU 10 on 3 June and 300 units at CU 11 on 12 June. 250 units are issued on 8 June and 150 units on 20 June. What is the total cost of the issues using the cumulative weighted average method?

A) CU 4,000
B) CU 4,100
C) CU 4,133
D) CU 4,038

Correct: D difficult IAS 2.25

On 8 June: 300 units cost CU 2,900, an average of CU 9.667, so the issue costs CU 2,417 and leaves 50 units at CU 483. After the 12 June receipt: 350 units cost CU 3,783, an average of CU 10.809, so the 20 June issue costs CU 1,621. Total = CU 4,038. If you answered CU 4,000 you used FIFO. If you answered CU 4,100 you used LIFO. If you answered CU 4,133 you used a single periodic average of CU 10.333 (6,200 / 600) for all 400 units.

8. A trader buys 100 units at CU 20, then 100 at CU 18, then 100 at CU 16. It then sells 200 units for CU 30 each. Prices are falling. Which statement is correct?

A) Gross profit is CU 2,600 under LIFO, which is CU 400 more than under FIFO
B) Gross profit is CU 2,600 under FIFO, which is CU 400 more than under LIFO
C) Gross profit is CU 2,400 under LIFO, which is the periodic average figure
D) Gross profit is the same under FIFO and LIFO because total purchases are the same

Correct: A difficult IAS 2.25

Sales = 200 x 30 = CU 6,000. FIFO cost of sales = 100 x 20 + 100 x 18 = CU 3,800, profit CU 2,200. LIFO cost of sales = 100 x 16 + 100 x 18 = CU 3,400, profit CU 2,600. The periodic average cost is CU 18, so profit would be CU 2,400. In falling prices LIFO charges the lower recent costs, so profit is higher; the order of the methods is the reverse of rising prices. Over the life of the stock total profit is the same, but not in a period when stock remains.

9. Which TWO of the following would normally be classified as direct costs of a job in a joinery workshop? (1) The hire of a special tool for that job only (2) The wages of the storekeeper (3) Wood that forms part of the finished item (4) Lubricant used on workshop machinery

A) (1) and (2) only
B) (2) and (4) only
C) (1) and (3) only
D) (3) and (4) only

Correct: C difficult IAS 2.10

The tool hired for a single job is a direct expense and the wood that becomes part of the item is direct material. The storekeeper's wages are indirect labour and lubricant used on machinery is an indirect material, both overheads that cannot be traced to a particular job.

10. A job is worked on for 30 basic hours at CU 12 per hour and 10 hours in overtime at time and a half. The overtime was worked at the specific request of the customer. What labour cost should be charged directly to the job?

A) CU 480
B) CU 540
C) CU 600
D) CU 720

Correct: B difficult IAS 2.10

Overtime worked at the specific request of a customer is caused by that job, so the premium is a direct cost: 30 x 12 + 10 x 18 = CU 540. If you answered CU 480 you treated the premium as general overhead (40 x 12). If you answered CU 600 you charged all hours at an average rate of CU 15. If you answered CU 720 you charged all 40 hours at the overtime rate.

11. At the year end three inventory items have cost and net realisable value of: item A, CU 5,000 and CU 6,200; item B, CU 8,400 and CU 7,100; item C, CU 3,000 and CU 2,500. At what value should inventory be included in the statement of financial position?

A) CU 14,600
B) CU 15,800
C) CU 15,900
D) CU 16,400

Correct: A difficult IAS 2.9, 2.28-29

IAS 2.9 requires inventory at the lower of cost and NRV, applied item by item: A 5,000, B 7,100, C 2,500 = CU 14,600. If you answered CU 15,900 you wrote down only item C. If you answered CU 15,800 you used total NRV. If you answered CU 16,400 you used total cost.

12. A wholesaler buys 600 units at CU 5 on 1 January, sells 400 units on 10 January, buys 500 units at CU 6 on 15 January and sells 450 units on 25 January. Prices are rising. What is the difference in the total gross profit for January using FIFO and LIFO?

A) LIFO is CU 200 higher
B) FIFO is CU 450 higher
C) FIFO is CU 250 higher
D) FIFO is CU 200 higher

Correct: D difficult IAS 2.25

FIFO cost of sales = 400 x 5 + (200 x 5 + 250 x 6) = 2,000 + 2,500 = CU 4,500. LIFO cost of sales = 400 x 5 + 450 x 6 = 2,000 + 2,700 = CU 4,700. Profit is higher by CU 200 under FIFO. The difference is the CU 1 price rise on the 200 units of the old stock that FIFO sells instead of the new ones. If you answered CU 450 you applied CU 1 to all units sold on 25 January; CU 250 applies it to the closing units.

13. A company buys 500 units with a list price of CU 20 each, less a 10% trade discount. Delivery to the warehouse is CU 450 and non-recoverable import duty is CU 300. A 2% settlement discount (CU 180) is also taken for early payment. What is the cost per unit of inventory?

A) CU 18.90
B) CU 20.00
C) CU 19.50
D) CU 21.50

Correct: C difficult IAS 2.10-11

IAS 2.11 includes the purchase price less trade discounts, plus transport and non-recoverable duties: 9,000 + 450 + 300 = CU 9,750, or CU 19.50 per unit. The settlement discount is a financing item and is not deducted from cost. If you answered CU 18.90 you left out the duty. If you answered CU 20.00 you used the list price. If you answered CU 21.50 you ignored the trade discount.

14. Which of the following statements about inventory valuation methods are correct? (1) FIFO closing inventory is close to replacement cost. (2) LIFO issue prices are close to current prices. (3) The weighted average issue price is rarely an actual price paid. (4) LIFO is permitted by IAS 2.

A) (1), (2) and (3) only
B) (1) and (4) only
C) (2), (3) and (4) only
D) (1), (2), (3) and (4)

Correct: A difficult IAS 2.25

FIFO leaves the most recent costs in inventory, so closing inventory is near replacement cost (1). LIFO issues the latest cost, close to current prices (2). A weighted average is a computed figure and may not be an actual price (3). IAS 2.25 does not permit LIFO, so (4) is incorrect.

15. During a period of falling prices, four students calculated gross profit using four different methods: FIFO, LIFO, cumulative weighted average and periodic weighted average. Student A recorded CU 9,850, Student B CU 9,300, Student C CU 9,600 and Student D CU 10,150. Which student used FIFO?

A) Student A
B) Student B
C) Student C
D) Student D

Correct: B difficult IAS 2.25

In falling prices FIFO charges the oldest, highest costs to cost of sales, giving the lowest gross profit. LIFO charges the most recent, lowest costs and gives the highest gross profit. The average methods fall between the two. Student B (CU 9,300) used FIFO and Student D (CU 10,150) used LIFO.

16. Opening inventory is 500 units at CU 10. Purchases: 3 March 800 units at CU 11 and 12 March 600 units at CU 12. Sales: 5 March 700 units at CU 20 and 20 March 900 units at CU 21. Using FIFO, what is the gross profit for March?

A) CU 14,900
B) CU 15,216
C) CU 15,500
D) CU 15,292

Correct: C difficult IAS 2.25

Sales = 14,000 + 18,900 = CU 32,900. FIFO cost of sales: 5 March = 500 x 10 + 200 x 11 = 7,200; 20 March = 600 x 11 + 300 x 12 = 10,200. Total CU 17,400, so gross profit = CU 15,500. If you answered CU 14,900 you used LIFO (cost of sales 18,000). If you answered CU 15,292 you used cumulative weighted average. If you answered CU 15,216 you used a single periodic average cost of CU 11.05.

17. A store holds 400 units at CU 5 and then receives 600 units at CU 6. 700 units are issued to production, then 50 of these units are returned to stores. Returns are priced at the original issue price. Using LIFO, what is the closing inventory value?

A) CU 1,500
B) CU 1,750
C) CU 1,800
D) CU 2,100

Correct: C difficult IAS 2.25

LIFO issue of 700 units = 600 x 6 + 100 x 5 = CU 4,100, leaving 300 units at CU 5. The 50 units returned were issued at CU 6 (the latest layer), so they return at CU 6 = CU 300. Closing inventory = 1,500 + 300 = CU 1,800. If you answered CU 1,500 you ignored the return. If you answered CU 1,750 you valued the return at CU 5. If you answered CU 2,100 you used the FIFO closing value (350 units at CU 6).

18. Opening materials were CU 18,000. Purchases were CU 120,000, carriage inwards CU 3,000 and returns to suppliers CU 7,000. Issues to production were CU 96,000 and issues of indirect materials CU 8,000. A year-end count values inventory at CU 26,500. What is the inventory loss?

A) CU 3,500
B) CU 500
C) CU 7,500
D) CU 11,500

Correct: A difficult IAS 2.10

Book inventory = 18,000 + 120,000 + 3,000 - 7,000 - 96,000 - 8,000 = CU 30,000. Count = CU 26,500, so the loss is CU 3,500. If you answered CU 500 you left out carriage inwards. If you answered CU 7,500 you left out carriage inwards and returns to suppliers. If you answered CU 11,500 you left out the indirect issues.

19. Opening inventory is 300 units at CU 8.40, then 500 units are purchased at CU 8.90 and 400 units at CU 9.20. 650 units are issued during the period. Using the periodic weighted average method, what is the cost of the issues?

A) CU 5,635
B) CU 5,905
C) CU 5,769
D) CU 5,980

Correct: C difficult IAS 2.25

Total cost = 2,520 + 4,450 + 3,680 = CU 10,650 for 1,200 units, an average of CU 8.875. Issues = 650 x 8.875 = CU 5,769. If you answered CU 5,635 you used FIFO (300 x 8.40 + 350 x 8.90). If you answered CU 5,905 you used LIFO (400 x 9.20 + 250 x 8.90). If you answered CU 5,980 you used the latest price of CU 9.20 for all issues.

20. A direct worker is paid CU 14 an hour for 40 normal hours and CU 21 an hour for 10 overtime hours. Of the overtime, 4 hours were worked at a customer's specific request on one job and 6 hours because of general pressure of work. The worker was also idle for 3 hours because of a machine breakdown. What is the indirect labour cost in the week's pay?

A) CU 42
B) CU 84
C) CU 70
D) CU 112

Correct: B difficult IAS 2.10

Idle time = 3 x 14 = CU 42 (indirect). The premium on the 6 hours of general overtime = 6 x 7 = CU 42 (indirect). The premium on the 4 hours worked at the customer's request (4 x 7 = CU 28) is direct to that job. Total indirect = CU 84. If you answered CU 42 you included only one item. If you answered CU 70 you treated the whole overtime premium (10 x 7) as indirect. If you answered CU 112 you added idle time to the whole overtime premium.

21. Inventory costing CU 15,000 can be sold for CU 17,000 after further work costing CU 1,200. Selling costs will be CU 2,500. At what value should it be included in the statement of financial position?

A) CU 14,500
B) CU 15,000
C) CU 17,000
D) CU 13,300

Correct: D difficult IAS 2.9, 2.28-30

NRV = selling price 17,000 - completion costs 1,200 - selling costs 2,500 = CU 13,300. This is below cost (CU 15,000), so inventory is valued at CU 13,300 (IAS 2.9). If you answered CU 15,000 you ignored NRV. If you answered CU 14,500 you deducted only selling costs (17,000 - 2,500). If you answered CU 17,000 you used the selling price.

22. Closing inventory at the end of Year 1 was overstated by CU 12,000. No other errors occurred and Year 2 inventory was correct. What is the effect on reported profit?

A) Year 1 profit is understated by CU 12,000 and Year 2 is overstated by CU 12,000
B) Year 1 profit is overstated and Year 2 is not affected
C) Year 1 profit is overstated by CU 12,000 and Year 2 profit is understated by CU 12,000
D) Both years are overstated by CU 12,000

Correct: C difficult IAS 2; IAS 8

Overstated closing inventory reduces cost of sales in Year 1, so profit is overstated. The same overstated figure is the opening inventory of Year 2, which increases Year 2 cost of sales, so Year 2 profit is understated. The error reverses over two years.

23. A company buys goods with a list price of CU 50,000 less a 8% trade discount. It pays freight CU 2,200 and insurance in transit CU 400, and receives a volume rebate of CU 1,500 later. It pays CU 900 to store the goods because a maturing process requires it before further production, and CU 600 of general administration costs relate to the purchase. Refundable VAT is CU 5,800. What is the cost of inventory?

A) CU 48,000
B) CU 47,100
C) CU 48,600
D) CU 53,800

Correct: A difficult IAS 2.10-16

Cost = 46,000 (list less trade discount) + 2,200 + 400 - 1,500 + 900 = CU 48,000. Storage necessary in the production process before a further stage is included (IAS 2.16(b)). General administration is excluded. Refundable VAT is not a cost. If you answered CU 47,100 you excluded storage. If you answered CU 48,600 you added administration. If you answered CU 53,800 you added the refundable VAT.

24. In a period of rising prices, which of the following are correct? (1) LIFO gives a lower reported profit than FIFO. (2) FIFO values closing inventory nearer to replacement cost. (3) The weighted average method gives profit above FIFO.

A) (1) and (3) only
B) (1) and (2) only
C) (2) and (3) only
D) (1), (2) and (3)

Correct: B difficult IAS 2.25

In rising prices LIFO charges the highest recent costs to sales, so its profit is lower (1). FIFO leaves recent costs in inventory so it is nearer to replacement cost (2). The weighted average lies between FIFO and LIFO, so its profit is below FIFO (3 is incorrect).

25. A store holds 200 units at CU 12. It receives 300 units at CU 13.50 and returns 40 of these to the supplier at CU 13.50. 250 units are then issued. Using cumulative weighted average, what is the cost of the issue?

A) CU 3,075
B) CU 3,225
C) CU 3,375
D) CU 3,212

Correct: D difficult IAS 2.25

After the return: 460 units costing 2,400 + 4,050 - 540 = CU 5,910, an average of CU 12.848. Issue = 250 x 12.848 = CU 3,212. If you answered CU 3,225 you ignored the return (6,450 / 500 = 12.90). If you answered CU 3,075 you used FIFO. If you answered CU 3,375 you used LIFO.