Question 1

Under IAS 2 which of the following can be included in the cost of inventories?&#10;A)large spillages&#10;B)cost of maturing stock&#10;C)administrative costs&#10;D)selling costs

Accepted Answer

A

Question 2

For industrial companies,the valuation of inventory includes both direct & indirect overhead costs.

Accepted Answer

This is correct. The valuation of inventory includes both direct costs (such as the cost of materials and labor to produce the item) as well as indirect overhead costs (such as rent, utilities, and depreciation of equipment).

Question 3

Weighted average cost of inventory can be calculated annually rather than periodically.

Accepted Answer

The weighted average cost of inventory can be calculated annually rather than periodically. This is because the weighted average formula takes into account all inventory movements and costs throughout the year, not just during a specific period. However, some businesses may choose to calculate the weighted average cost more frequently, such as monthly or quarterly, to better track their inventory costs and make more informed business decisions.

Question 4

Which of the following costs NOT may be included in the cost of a construction contract?&#10;A)allocation of time of project managers working on multiple projects&#10;B)depreciation of specified material used on contract&#10;C)depreciation of head office equipment&#10;D)allocation of time of staff in technical support staff

Accepted Answer

Depreciation of head office equipment is not directly attributable to a construction contract and therefore is not included in the cost of a construction contract. Costs included should be directly related to the specific contract.

Question 5

An entity starts production of a new product and after selling 2,000 units has closing inventory of 5,000 units.Normal operating capacity is 8000 units.Direct material costs are €3 per unit,direct labour costs are €2 per unit & variable overhead is €1 per unit.Fixed production overhead is €40,000,sales overhead is €30,000 & general overhead is €20,000.What is the value of closing inventory under IAS 2?

A)€72,860
B)€67,500
C)€58,571
D)€55,000

Accepted Answer

Under IAS 2, inventory is valued at the cost of production, which includes direct materials, direct labor, and a portion of fixed production overhead. The cost per unit is €3 (materials) + €2 (labor) + €1 (variable overhead) + (€40,000 fixed overhead / 8,000 normal capacity) = €10 per unit. The closing inventory of 5,000 units is valued at 5,000 units * €10 = €50,000.

Question 6

Exchange gains and losses should be accounted for in the valuation of inventories.

Accepted Answer

Exchange gains and losses are typically recognized in the income statement, not in the valuation of inventories. Inventory is valued at the lower of cost or net realizable value, and adjustments for exchange rate fluctuations are not included in the inventory valuation but are recognized in the financial results of the period in which they occur.

Question 7

Construction contracts are dealt with by IAS 11 because of the problems caused by the requirement in IAS 2 to show work in progress at the lower of cost or NRV.

Accepted Answer

IAS 11 specifically deals with construction contracts, while IAS 2 deals with inventories including work in progress which can lead to problems when it comes to the specific accounting treatment of construction contracts.

Question 8

An entity imports kitchen equipment from China and sells locally.Purchases were; January 20,000 units at €2.5 each,March 25,000 units at €3.0 each,July 30,000 units at €3.5 each.Sales were; May 25,000 units and November 30,000 units.Using FIFO what is the value of inventory?

A)€650
B)€700
C)€750
D)€780

Accepted Answer

According to IAS 2, after sales warranty costs are not included in the cost of inventory. This is because they are considered as separate liabilities and are accounted for separately. However, trade discounts on purchase, import handling costs, and import duties are included in the cost of inventory as per IAS 2.

Question 9

IAS 2 applies to minerals and mineral products but does not apply to commodity brokers.

Accepted Answer

IAS 2 applies to inventories, including minerals and mineral products, regardless of whether they are held by the entity for sale in the ordinary course of business, in the process of production, or for use in the production of goods or services to be provided by the entity. Therefore, commodity brokers who hold inventories of minerals or mineral products would need to apply IAS 2 to those inventories.

Question 10

An entity imports kitchen equipment from China and sells locally.Purchases were; January 20,000 units at €2.5 each,March 25,000 units at €3.0 each,July 30,000 units at €3.5 each.Sales were; May 25,000 units and November 30,000 units.Using FIFO what is the value of inventory?

A)€650
B)€700
C)€750
D)€780

Accepted Answer

The answer of An entity imports kitchen equipment from China...

Deck 17: Inventories and Construction Contracts