Question 1

Inventories are to be measured at the lower of cost or net realisable value. Net realisable value is defined in AASB 102/IAS 2 Inventories as:

Accepted Answer

Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. This means it represents the amount that the inventory is expected to be sold for, less any costs necessary to sell the inventory. Option A is incorrect because it refers to the fair value at purchase date, which may not be relevant to determining the net realisable value at the present time. Option B is incorrect because it refers to the amount paid for the purchase, which is not relevant to the current value of the inventory. Option D is incorrect because it refers to the estimated buying price, which is not relevant to determining the net realisable value of the inventory.

Question 2

The terms '2/10, n/30' appearing on an invoice for the sale/purchase of inventories means that the buyer:

Accepted Answer

The terms '2/10, n/30' mean that the buyer will receive a 2% discount if payment is made within 10 days of the invoice date. If payment is not made within 10 days, the full amount must be paid within 30 days of the invoice date.

Question 3

Which of the following measurement rules applies to inventories subsequent to their initial measurement?

Accepted Answer

The measurement rule that applies to inventories subsequent to their initial measurement is lower of cost and net realisable value (LCNRV). This means that inventory should be recorded at the lower of its cost or net realisable value. Cost refers to the amount paid or incurred to acquire or produce the inventory, while net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and disposal. This rule ensures that inventories are not carried at values higher than their expected realisation in the normal course of business.

Question 4

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

Accepted Answer

The weighted average inventories costing method works well for homogeneous products that are mixed together because it averages the cost of goods available for sale over the total number of units available, making it difficult to distinguish between individual units of inventory.

Question 5

Which of the following statements is correct?

Accepted Answer

The answer of Which of the following statements is correct?
...

Question 6

Taxes may be included in the cost of inventories except for those taxes that are:

Accepted Answer

Taxes that are recoverable by the entity from the taxation authority should not be included in the cost of inventories as they can be claimed back. Other taxes, such as those levied by a foreign government, in the nature of import duties, or imposed on the raw materials component of manufactured inventories, should be included in the cost of inventories as they are part of the cost of acquiring or producing them.

Question 7

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

Accepted Answer

Changing an inventory costing formula requires retrospective application, meaning adjustments are made to the opening balance of retained earnings to reflect what the financial statements would have looked like had the new method been used all along. This ensures comparability across periods.

Question 8

Which of the following is an appropriate journal entry to recognise inventories items that have been stolen? a. DR Inventories (asset) $\quad$CR Provision for inventories losses (liability) b. DR Inventories losses (expense) $\quad$CR Inventories (asset) c. DR Cost of goods sold (expense) $\quad$CR Inventories (asset) d. DR Provision for inventories losses (liability) $\quad$CR Inventories (asset)

Accepted Answer

The answer of Which of the following is an appropriate...

Question 9

AASB 102 Inventories specifies that the measurement rule for inventories is:

Accepted Answer

AASB 102 requires inventories to be measured at the lower of cost and net realisable value. This means that if the net realisable value of the inventory is lower than its cost, the inventory must be written down to its net realisable value.

Question 10

AASB 102 Inventories applies to the accounting for:

Accepted Answer

AASB 102 Inventories applies to the accounting for inventories that are held for sale in the ordinary course of business, are in the process of production for such sale, or are in the form of materials or supplies to be consumed in the production process or in the rendering of services. Materials consumed in the manufacture of lawn mowers for sale fall under this definition and hence, are covered under AASB 102 Inventories. Options A, B, and C are not directly related to the accounting treatment of inventories and hence, are not the best choices.

Question 11

Which of the following is specifically excluded by AASB 102 from the cost of inventories measurement?

Accepted Answer

Freight costs where the terms of sale are FOB destination are specifically excluded by AASB 102 from the cost of inventories measurement because these costs are considered to be related to the delivery of goods rather than the acquisition or production of inventories.

Question 12

Which of the following are common classifications for inventories in the financial statements: $\begin{array}{lllll}&I.&II.&III.&IV\
\text { Raw materials } & \text { No } & \text { Yes } & \text { No } & \text { Yes } \
\text { Finished goods } & \text { Yes } & \text { Yes } & \text { Yes } & \text { Yes } \
\text { Work in progress } & \text { No } & \text { No } & \text { Yes } & \text { Yes } \
\text { Assets held for resale } & \text { Yes } & \text { No } & \text { No } & \text { Yes }
\end{array}$

Accepted Answer

IV is the correct choice because it includes all common classifications for inventories: Raw Materials, Finished Goods, Work in Progress, and Assets Held for Resale. These categories comprehensively cover the types of items that businesses typically hold in their inventory for the production and sale of goods.

Question 13

Stock take discrepancies between a count sheet and recorded quantities in the ledger may arise due to which of the following: I. Stock in transit purchased under FOB destination terms
II. Consignment stock included in the physical count by the consignee 
III. Sales returns not being processed into the ledger 
IV. Theft of stock during the year

Accepted Answer

II, III, and IV can all lead to discrepancies between the physical count and the ledger records. Stock in transit under FOB destination terms is not yet owned by the buyer and thus should not cause a discrepancy.

Question 14

Under the periodic inventories approach, an appropriate journal entry to measure closing inventories would be: a. DR Opening irventories (cost of goods sold expense) $\quad$CR Irventories (asset) b. DR Purchases (expense) $\quad$CR Irventories (asset) c. DR Irventories (asset) $\quad$CR Closing irventories (cost of goods sold expense) d. DR Purchases returns (cost of goods sold expense) $\quad$CR Irventories (asset)

Accepted Answer

The answer of Under the periodic inventories approach, an appropriate...

Question 15

Net realisable value of inventories may fall below cost for a number of reasons including: I. $\quad$Product obsolescence
II. $\quad$Piysical deterioration of irventories
III. $\quad$Arl increase in the expected replacernent costs of the irventories
IV. $\quad$Arl increase in the estirnated costs of completion
V. $\quad$An error in quartities purchased causing overstocking

Accepted Answer

Product obsolescence, physical deterioration, an increase in the estimated costs of completion, and errors in quantities purchased causing overstocking can all lead to the net realisable value of inventories falling below cost. An increase in the expected replacement costs does not directly affect the net realisable value of existing inventories.

Question 16

AASB 102 allows which of the following to be capitalised into the cost of inventories?

Accepted Answer

Normal costs of material wastage can be capitalised into the cost of inventories according to AASB 102, as they are considered to be a part of the costs of production.

Question 17

Under the periodic inventories approach, the cost of goods sold is calculated as:

Accepted Answer

Cost of goods sold is calculated as beginning inventories plus net purchases minus ending inventories under the periodic inventories approach.

Question 18

When an entity's operating cycle is not clearly identifiable it is assumed to have a duration of:

Accepted Answer

The assumption is that an entity's operating cycle lasts for a period of 12 months. This assumption is commonly used in financial reporting when the length of the operating cycle is unknown or cannot be easily determined.

Question 19

White Cotton Ltd uses a periodic inventories system and rounds the average unit cost to the nearest dollar. The following data relates to White Cotton Ltd for the year ended 30 June 2021. $\begin{array}{ll}\text { Opening inventories }&1000 \text { units@average cost of } \$ 20 \text { each }\
\text { January purchases }&2500 \text { units@\$22 each }\
\text { February sales } & 1200 \text { units } \
\text { March sales returns } & 50 \text { units } \
\text { June sales } & 500 \text { units }\
\text { July purchases } & 3000 \text { units @\$25 each } \
\text { August sales } & 2400 \text { units } \
\text { October purchases } & 5000 \text { units @\$24 each } \
\text { November cales } & 4000 \text { units }
\end{array}$ The cost of goods sold for the year using the weighted average method is:

Accepted Answer

The answer of White Cotton Ltd uses a periodic inventories...

Question 20

Trio Ltd uses a periodic inventories system and rounds the average unit cost to the nearest dollar. The following data relates to Trio Ltd for the year ended 30 June 2021. $\begin{array}{ll}\text { Opening inventories }&\text { 150units@average cost of \$32 each }\
\text { January purchases } & 35 \text { units @ \$35 each } \
\text { March purchases } & 18 \text { units @ } \$ 38 \text { each }\
\text { June purchases } & 50 \text { units @ \$30 each } \
\text { September purchases } & 27 \text { units @ \$32 each } \
\text { Ending inventories } & 65 \text { units }
\end{array}$ The cost of ending inventories using the weighted average cost method (rounded to the nearest dollar) is:

Accepted Answer

The total cost of goods available for sale is calculated by summing the cost of opening inventories and all purchases: $ (150 \times 32) + (35 \times 35) + (18 \times 38) + (50 \times 30) + (27 \times 32) = 4800 + 1225 + 684 + 1500 + 864 = 9073 $. The total number of units available is $ 150 + 35 + 18 + 50 + 27 = 280 $. The average cost per unit is $ 9073 / 280 = 32.40 $, rounded to $32. The cost of ending inventories is $ 65 \times 32 = 2080 $. However, the closest option is $2,106, which suggests a rounding or calculation adjustment.

Quiz 4: Inventories