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Test your understanding 2
First, the transactions are entered into the ledger accounts, and the
accounts are balanced. Revenue and purchases are then transferred to
the statement of profit or loss.
Capital
$
$
Bal c/f
1,000 Cash
1,000
–––––––
–––––––
1,000
1,000
–––––––
–––––––
Bal
b/f
1,000
Cash
$
$
Capital 1,000
Purchases
800
Sales revenue
900 Balance c/f
1,100
–––––––
–––––––
1,900
1,900
–––––––
–––––––
Balance b/f
1,100
Sales revenue
$
$
Taken to profit or loss
900 Cash
900
–––––––
–––––––
Purchases
$
$
Cash
800 Taken to profit or loss
800
–––––––
–––––––
Inventory
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Next, the closing inventory must be accounted for in the inventory asset
account and the profit or loss account. There is no opening inventory as
this is the first week of trading for the business.
Inventory assets
$
$
Profit or loss
300 Bal c/f
300
––––––
––––––
300
300
––––––
––––––
Bal b/f
300
Inventory (cost of sales)
$
$
Taken to profit or loss
300 Closing inventory
300
––––––
––––––
300
300
––––––
––––––
Statement of profit or loss for Week 1
$
$
Sales revenue
900
Cost of goods sold:
Purchases 800
Less: Closing inventory
(300)
–––––
(500)
–––––
Gross profit
400
–––––
The closing inventory asset in the statement of financial position would be
£300.
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Test your understanding 3
First, the ledger accounts must be written up. You must remember that
there are opening balances on the statement of financial position
accounts (cash and capital) but the profit or loss accounts have no
opening balances as they were transferred to the statement of profit or
loss in Week 1.
Capital
$
$
Bal c/f
1,000 Bal b/f
1,000
–––––––
–––––––
1,000
1,000
–––––––
–––––––
Bal
b/f
1,000
Cash
$
$
Balance b/f
1,100 Purchases
1,100
Sales revenue
1,000 Balance c/f
1,000
–––––––
–––––––
2,100
2,100
–––––––
–––––––
Balance b/f
1,000
Sales revenue
$
$
Taken to profit or loss
1,000 Cash
1,000
–––––––
–––––––
Purchases
$
$
Cash
1,100 Taken to profit or loss
1,100
–––––––
–––––––
The opening inventory must be transferred to the statement of profit or
loss, and the closing inventory entered into the ledger accounts
(inventory and profit or loss) leaving the balance carried forward which
will be included in the statement of financial position.
Inventory
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Inventory
$
$
Balance b/f
300 Cost of sales
300
Cost of sales
500 Bal c/f
500
–––––
–––––
800
800
–––––
–––––
Bal b/f
500
Inventory (cost of sales)
$
$
Opening inventory
300 Closing inventory
500
Taken to profit or loss
200
–––––
–––––
500
500
–––––
–––––
Statement of profit or loss for Week 2
$
$
Sales revenue
1,000
Cost of goods sold:
Opening inventory
300
Purchases 1,100
–––––
1,400
Less: Closing inventory
(500)
–––––
(900)
–––––
Gross profit
100
–––––
The inventory asset on the statement of financial position at the end of
week two will be $500.
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Test your understanding 4
The correct answer is B
X
$7
(cost) × 100 =
$700
Y
$8
(NRV) × 200 =
$1,600
Z
$15
(NRV) × 300 =
$4,500
–––––––
Total
$6,800
Test your understanding 5
Fair value less further costs to sell may be relevant in special cases, such
as where goods are slow-moving, damaged or obsolete. However, items
of inventory will normally be stated at cost if they can be sold at a price
greater than their cost of purchase.
Test your understanding 6
$9,000
IAS 2 requires that inventory is valued at the lower of either cost ($18 per
unit) or fair value less further costs to sell ($24 – $3 = $21 per unit).
Inventory is therefore valued at $18 per unit, giving a valuation for 500
units of $9,000.
Test your understanding 7
$42,000
IAS 2 requires that inventory is valued at the lower of either cost ($30 per
unit) or fair value less further costs to sell ($38 – $10 = $28 per unit).
Inventory is therefore valued at fair value less further costs to sell of $28
per unit, giving a valuation for 1,500 units of $42,000.
Test your understanding 8
The correct answer is C
The other three answers contain items which cannot be included in the
cost of inventory according to IAS 2.
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Test your understanding 9
The correct answer is C
•
Inventory valuation (inventory in hand 2,420 – 1,420 = 1,000 units)
•
FIFO – inventory valued at latest purchase prices
$
440 articles
at
$3.25 1,430
430 articles
at
$3.00 1,290
130 articles
at
$2.75
357
–––––
–––––
1,000
3,077
Calculation of gross profit:
$
$
Sales revenue
7,000
Purchases 6,510
Less:
Closing inventory
(3,077)
(3,433)
Cost of goods sold
–––––
Gross profit
3,567
Test your understanding 10
(a)
Periodic weighted average cost per unit
Date Quantity
Unit
cost
Total
cost
$
$
1 Jul X6 – op inventory
10
8.50
85.00
14 Oct X6
15
9.00 135.00
22 Nov X6
25
9.20 230.00
13 Dec X6
20
9.50 190.00
–––––
70
640.00
–––––
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Therefore, periodic weighted average cost per unit = $640.00/70 units =
$9.14
Closing inventory = 70 units – 50 sold = 20 units × $9.14 = $182.80
(b)
Continuous weighted average cost per unit
Date Quantity
Unit
cost
Total
cost
$
$
1 Jul X6 – op inventory
10
8.50
85.00
23 Aug X6 – sales
(7)
8.50
(59.50)
–––––
–––––
3
25.50
14 Oct X6 – purchases
15
9.00
135.00
–––––
–––––
18
(160.50/
18)
=
8.92
160.50
20 Oct X6 – sales
(10)
8.92
(89.20)
–––––
–––––
8
71.30
22 Nov X6 –
purchases
25
9.20
230.00
–––––
–––––
33
(301.30/
33)
=
9.13
301.30
30 Nov X6 – sales
(15)
9.13
(136.95)
–––––
–––––
18
164.35
13 Dec X6 –
purchases
20
9.50
190.00
–––––
–––––
38
(354.35/
38)
=
9.32
354.35
24 Dec X6 – sales
(18)
9.32
(167.76)
–––––
–––––
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