Valuation of inventory: five questions to try now
Real past-paper questions, the answer key from the mark scheme, and the explanation that goes with it. No account needed to answer them.
Question 1
Jameel’s financial year ends on 31 December. On 1 January 2021 he brought down a debit balance on his stationery account.
What does this balance represent?
Answer: D.
A debit balance brought down on an EXPENSE account at the start of a year is something the business still has the benefit of, and for stationery that is the stock of unused stationery carried forward, so D is correct. A describes a credit balance, since an amount owing is a liability. B is wrong because the payments made during 2020 were all debited during that year and then cleared out to the income statement at the year end. C is what was transferred to the income statement as the charge for 2020, and anything transferred there leaves no balance behind.
Question 2
Ariadne prepares her financial statements to 31 December each year. She valued all her inventory at cost on 31 December 2021, even though some inventory with a cost of $500 had a net realisable value of $350.
What was the effect of this error?
Answer: A.
Closing inventory is deducted in arriving at cost of sales, so overstating it by 150 makes cost of sales too small and gross profit too big. A is correct. B has the direction wrong: total assets were OVERSTATED, since inventory is a current asset carried at too high a figure. C misses that the error reverses itself, because this closing inventory becomes the opening inventory of 2022, where too large a figure raises cost of sales and UNDERSTATES that year's profit. D follows from the same reversal: the two errors cancel across the two years, so capital at the end of 2022 is correct.
Question 3
Why would a bakery business not include a value for inventory of stationery in the statement of financial position?
Answer: D.
Materiality decides this. An item is only shown separately if its size could affect the judgement of someone reading the statements, and a bakery's stock of stationery is far too small to matter beside its ingredients, ovens and takings, so D is correct. C is the opposite of a reason to leave it out, since new and unused stationery is exactly the stock that would have a value. A would still leave it a current asset at the year end. B describes how it was bought, and the method of payment has no bearing on whether an asset exists.
Question 4
Why would a bakery business not include a value for inventory of stationery in the statement of financial position?
Answer: D.
Materiality decides this. An item is only shown separately if its size could affect the judgement of someone reading the statements, and a bakery's stock of stationery is far too small to matter beside its ingredients, ovens and takings, so D is correct. C is the opposite of a reason to leave it out, since new and unused stationery is exactly the stock that would have a value. A would still leave it a current asset at the year end. B describes how it was bought, and the method of payment has no bearing on whether an asset exists.
Question 5
Why should inventory be valued at the lower of cost and net realisable value?
Answer: D.
The rule exists because of prudence: a loss that is already foreseeable should be recognised at once, and a profit should never be taken before the goods are sold. Since closing inventory is deducted in arriving at cost of sales, valuing it above what it will fetch would reduce cost of sales and inflate profit, so D is correct. A reverses the aim, since the rule guards against OVERvaluing. B is wrong because historic cost is exactly what the rule overrides when net realisable value falls below it. C names materiality, which decides whether an item is worth showing separately, not what it is worth.
What this practice covers
These questions are drawn from past CIE 0452 Accounting papers and filtered to valuation of inventory. You answer, you find out immediately whether you were right, and you get the reasoning for the correct option and for each distractor. Wrong answers go to a mistakes locker so you can come back to exactly those.
Practice is free. You need an account only so your progress and your mistakes are still there next time.
What examiners see students get wrong here
These are the errors that cost marks on valuation of inventory, taken from our own topic notes. Read them before you practise and you will recognise the traps in the questions.
- Valuing inventory at selling price.
- Applying the lower of cost and net realisable value to the total instead of to each line.
- Forgetting to deduct the costs of selling when calculating net realisable value.
- Including closing inventory in the trial balance.
- Valuing goods taken by the owner at selling price.
- Stating the effect on profit but not on the current assets.
- Forgetting that this year's error reverses into next year's profit.
Revise it first
If any of the above is unfamiliar, work through the notes before practising: Valuation of inventory revision notes.