Deck 9: Inventories

Question 1

'Net realisable value' of inventory is defined as the net amount that an enterprise expects to realise from the sale of the inventory:

A) in the ordinary course of operations less estimated costs of completion and costs necessary to make the sale;
B) plus the estimated costs of completion plus the estimated costs necessary to make the sale;
C) in a forced sale;
D) plus the estimated costs of completion.

Answer 1

A

Question 2

The measurement rule for inventories, mandated by IAS 2 Inventories, is:

A) lower of fair value and selling price;
B) lower of cost and net realisable value;
C) higher of initial cost and realisable value;
D) higher of completion costs and replacement costs.

Answer 2

B

Question 3

Net realisable value of inventories may fall below cost for a number of reasons including:
I Product obsolescence.
II Physical deterioration of inventories.
III An increase in the expected replacement costs of the inventory,
IV An increase in the estimated costs of completion.

A) I, II and IV only;
B) I, III and IV only;
C) II, III and IV only;
D) I and II only.

Answer 3

A

Question 4

If the selling price of inventory that has been written down to net realisable value in a prior period, subsequently recovers, the:

A) previous amount of the write-down can be reversed;
B) carrying amount of the inventory cannot be adjusted;
C) value adjustment can be recognised immediately in equity;
D) adjustment must be recognised in a 'provision for future inventory write-downs' account.

Question 5

Which of the following statements is correct?

A) The periodic method of accounting for inventory will always result in a higher closing inventory balance than the perpetual method.
B) The periodic method of accounting for inventory will always result in a lower closing inventory balance than the perpetual method.
C) Closing inventory will always be the same under the periodic and perpetual methods.
D) the relationship between the closing inventory balance under the periodic and perpetual methods will depend on whether the FIFO or weighted average method is used to value inventory.

Question 6

When determining the net realisable value of inventory, estimates must be made of the following:
I Estimated costs of completion (if any).
II Expected replacement cost.
III Expected selling price.
IV Estimated selling costs.

A) I, II, III and IV;
B) I, II and III only;
C) II and IV only;
D) I, III and IV only.

Question 7

When an inventory costing formula is changed, the change is required to be applied:

A) prospectively and the adjustment taken through the current profit or loss;
B) retrospectively and the adjustment taken through the opening balance of retained earnings;
C) prospectively and the current period adjustment recognised directly in equity;
D) retrospectively and the adjustment recognised as an extraordinary gain or loss.

Question 8

Under IAS 2 Inventories, items of inventory that are used by business enterprise as components in a self-constructed property asset are required to be:

A) aggregated into the 'cost of goods sold' expense in the period in which the items are used;
B) expensed directly into equity in the period in which the items are used;
C) capitalised and depreciated;
D) added to a 'property construction' provision account.

Question 9

The weighted average inventory costing method is particularly suitable to inventory where:

A) dissimilar products are stored in separate locations;
B) the entity carries stocks of raw materials, work-in-progress and finished goods;
C) goods have distinct use-by dates and the goods produced first must be sold earliest;
D) homogeneous products are mixed together.

Question 10

Commodity broker traders are able to measure their inventories at:

A) replacement cost
B) nominal cost
C) fair value less costs of disposal
D) current cost

Question 11

IAS 2 allows which of the following to be capitalised into the cost of inventory?

A) storage costs for finished goods
B) selling costs
C) normal wastage costs
D) administrative overheads

Question 12

IAS 2 Inventories requires that when inventories are written down to net realisable value, they are written-down:

A) on a class-by-class basis;
B) on the basis of industry segment;
C) on an item-by-item basis;
D) according to geographical segment within the entity.

Question 13

IAS 2 prohibits which of the following from being included in the cost of inventory?

A) trade discounts received
B) freight (where the terms of sale are FOB destination)
C) production overheads
D) import duties

Question 14

Ming Limited had the following items of inventory at reporting date:
The adjustment necessary at reporting date is:

A) DR Inventory $ 50;
B) DR Inventory $100;
C) CR Inventory $ 50;
D) CR Inventory $0.

Question 15

All of the following are common classifications for the disclosure of inventories in a set of financial statements:

A) I;
B) II;
C) III;
D) IV.

Question 16

IAS 2 requires separate disclosure of:

A) where there has been abnormal wastage which has been expensed
B) details of inventory pledged as security for loans
C) interest costs which have been capitalised into the cost of inventory
D) details of key terms of purchase

Question 17

Stock take discrepancies between a count sheet and recorded quantities in the ledger may arise due to:
I Theft of stock during the year
II Stock purchased under FOB destination terms being in transit at period end
III A consignee including consignment stock in their physical count.
IV Sales returns not being processed into the ledger

A) I, II and III
B) II, III and IV
C) I, III and IV
D) I, II and IV

Question 18

Uno Ltd uses a periodic inventory system and rounds the average unit cost to the nearest dollar. The following data relates to Uno Ltd for the year ended 30 June 2014:

A) $1528
B) $1734
C) $1425
D) $1984

Question 19

Duo Ltd uses a periodic inventory system and rounds the average unit cost to the nearest dollar. The following data relates to Duo Ltd for the year ended 30 June 2013:

The cost of ending inventory using the weighted average cost method (rounded to the nearest dollar) is:

A) $459
B) $465
C) $499
D) $483

Question 20

Where the net realisable value of inventory falls below cost, IAS 2 Inventories, requires that:

A) the inventory continue to be carried in the Statement of Financial Position at cost;
B) the inventory be written down to net realisable value;
C) no adjustment be made, but the difference between net realisable value and cost be disclosed in the notes to the financial statements;
D) the difference be added to the carrying amount of the inventory.

Question 21

Which of the following is not recognised as an expense in accordance with IAS 2?

A) Cost of goods sold
B) Write-downs of inventories to net realisable value
C) Reversal of write downs to net realisable value
D) Inventory items used by an entity as components in self-constructed property, plant or equipment.

Question 22

When an entity's operating cycle is not clearly identifiable it is assumed to be:

A) three months;
B) six months;
C) nine months;
D) 12 months.

Question 23

IAS 2 requires disclosure of the following:

A) II and III only
B) I, II and III only
C) II, III and IV only
D) I, II, III and IV

Question 24

Under the periodic inventory approach the cost of goods sold during a period is determined as follows:

A) beginning inventory + net purchases - ending inventory;
B) beginning inventory - net purchases - ending inventory;
C) opening inventory + net purchases + closing inventory;
D) opening inventory - net purchases + closing inventory.

Question 25

IAS 2 Inventories applies to the accounting for:

A) work in progress under construction contracts;
B) financial instruments;
C) biological assets;
D) materials consumed in the manufacture of knitting machines for sale.

Question 26

Under the periodic inventory approach an appropriate journal entry to measure closing inventory is:

A) DR Opening inventory (cost of goods sold expense) CR Inventory (asset);
B) DR Purchases (expense) CR Inventory (asset);
C) DR Inventory (asset) CR Closing inventory (cost of goods sold expense);
D) DR Purchases returns (cost of goods sold expense) CR Inventory (asset).

Question 27

Where inventories in an industry are measured by reference to historical cost which of the following measurement rules applies subsequent to initial measurement?

A) historical cost;
B) discounted cash flow;
C) lower of cost and net realisable value;
D) replacement cost.

Question 28

The terms '2/7' appearing on an invoice for the sale/purchase of inventory means that the buyer:

A) will receive a 2% discount if paid within 7 days of the invoice date;
B) will receive a 7% discount if paid within 2 days of the invoice date;
C) has 7 days from the invoice date to pay or will be charged a 2% surcharge;
D) has 2 days from the invoice date to pay or will be charged a 7% surcharge.

Question 29

Taxes may be included in the costs of inventory unless they are:

A) levied on the entity by a foreign government;
B) in respect to the raw materials component of manufactured inventory;
C) recoverable by the entity from the taxing authority;
D) in the nature of import duties.