Tutorial 8 Inventories 1

Tutorial 8 - Accounting for Inventories

Section A: 6. “In time of rising prices, the valuation of inventories using FIFO
method, as opposed to average cost, will result in a lower profit and
1 (a) What are the different categories of inventories? Briefly describe. lower closing inventories amount” Is this statement correct? Comment
(b) How will the closing inventories amount affect the profit for the
period? Explain. Question 7
(c) The inventories valuation rule states that inventories should be
valued at the lower of cost and net realisable value. Explain the TaufooFa Sdn. Bhd. commenced trading on 1 January 2013 and trading
statement. activities during the next five years were as follows:
2. The common methods to calculate the cost of inventories are FIFO and Purchase price Sales price
WAC. Briefly describe and state the advantages and disadvantages of Units purchased Units sold (per unit) (per unit)
each of these methods. RM RM
3. (a) Explain the perpetual and periodic methods of recording the 2013 12,000 6,000 28 40
2014 18,000 12,000 32 46
quantity of inventories.
2015 24,000 18,000 36 54
(b) “Inventories should be valued or stated at their selling price”. Is this 2016 24,000 18,000 40 58
statement correct? Comment. 2017 24,000 48,000 44 60

4. An organisation's inventories as at 1 April are 15 units @ RM3.00 each. TaufooFa Sdn. Bhd. adopted the inventories flow assumption of first-in
The following movements occur: first-out (FIFO) when matching purchases with sales for each of the five
05 April 2018 10 units sold at RM3.30 each years.
11 April 2018 20 units bought at RM3.50 each
18 April 2018 16 units sold at RM4.00 each Required:
What is the value of the closing inventories at 31 April if the FIFO Prepare a trading account for each of the five years.
method of inventory valuation is used?

5. Your organisation uses the weighted average cost method of valuing

Question 8 Section B: Extra exercise questions (for students’ own practice)

Lorenzo runs a workshop which sells several grades of petrol. On 30 April Question 1
2018, the tank containing unleaded petrol was empty. Set out below are the
records for receipts and sales of unleaded petrol during May 2018. The following statement of profit or loss has been extracted from the
Purchase Sales financial statements of Surprise Trading for the year ended 31 December
Litres Price per litre Litres Price per litre 2017.
1 May 75,000 RM0.50
1 May - 7 May 67,500 RM0.60 Extract – Statement of Profit or Loss for the year ended
8 May 75,000 RM0.52
31 December 2017
8 May - 14 May 75,000 RM0.65
15 May 60,000 RM0.54 RM RM
15 May – 21 May 45,000 RM0.68 Sales 500,000
22 May 60,000 RM0.56 Opening stock 40,000
22 May – 28 May 37,500 RM0.70 Purchases 300,000
Less: Closing stock (50,000)
Required: COGS (290,000)
(a) Calculate Lorenzo’s gross profit on his sales of unleaded petrol for the Gross Profit 210,000
month ended 31 May 2018 if he values her inventories on a first-in first- Less: Total expenses (80,000)
out basis. Net Profit 130,000_
(b) Calculate Lorenzo's gross profit using the weighted average basis.
(c) Lorenzo expects the cost of petrol to continue rising. In 4 weeks’ time, As at the year end date, the following errors have been discovered:
at the end of June 2018, he expects the unleaded petrol tank to be full. i. the closing stock was overstated by RM10,000, and
Which inventories valuation method will give him the higher profit for ii. the opening stock was understated by RM20,000.
this period?
Required:
a. Explain the effects of the above errors on the values of cost of goods
sold and net profit of Surprise Trading.
b. Redraft the above Statement of Profit or Loss for the year ended 31
December 2017 to include the corrections of the errors.
Tutorial 8 Inventories 3

Question 2 Question 3
[“Financial Accounting: An Introduction” by Roshayani Arshad & others – [“Principles of Accounts” by Betsy Li – Chapter 13 Question no. A3]
Chapter 11 Question no. 5]
a. Using the following balances taken from the ledger, prepare the Trading
The following statement of financial position has been extracted from the Account for the year ended 31 July 2018:
financial statements of Kayaraya Enterprise for the year ended 31 December $
2017. Stock, 1 August 2017 4,780
Purchases 66,800
Statement of Financial Position extract as at 31 December 2017 Sales 57,390
Returns inwards 450
RM Returns outwards 630
Current assets Duty on purchases 380
Closing stock 40,000 Stock, 31 July 2018 12,470
Debtors 220,000
Cash in hand _10,000 b. Write up the Inventories Account as it would appear in the ledger after
270,000 the preparation of the Trading Account.
Owner’s equity
Capital 200,000
Net profit _70,000
270,000

As at the year end, Kayaraya Enterprise discovered that stock has been
overstated by RM8,000.

Required:
a. Explain the effects of the error on the total current assets and total
owner’s equity of Kayaraya Enterprise.
b. Redraft the above Statement of Financial Position as at 31 December
2017 to include the correction of the error.