SHEKHAWAT ACADEMY CA FOUNDATION l ACCOUNTS

Chapter - 4: Inventory
Marks Distribution in past papers
M-18 N-18 M-19 N-19
Marks 0 0 5M 5M
Ques. No. - - 6(c) 6(b) – TH

AS – 2 “Valuation of Inventory” – Refer Chart in Note Book

Theory - Important
Inventory can be defined as assets held:
 for sale in the ordinary course of business, or
 in the process of production for such sale, or
 for consumption in the production of goods or services for sale, including maintenance
supplies and consumables other than machinery spares.

Importance of Valuation of Inventory:

(i) Determination of Income
(ii) Ascertainment of Financial Position
(iii) Liquidity Analysis
(iv) Statutory Compliance

System of Inventory Valuation

Both the systems - Periodic Inventory System and Perpetual Inventory System are not mutually
exclusive and complementary in nature. Distinction between both the systems can be explained
as follows:
Periodic Inventory System Perpetual Inventory System
This system is based on physical It is based on book records.
verification.
This system provides information about It provides continuous information
inventory and cost of goods sold at a about inventory and cost of sales.
particular date.
This system determines inventory and It directly determines cost of goods sold
takes cost of goods sold as residual and computes inventory as balancing
figure. figure.

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Cost of goods sold includes loss of goods Closing inventory includes loss of goods
as goods not in inventory are assumed as all unsold goods are assumed to be in
to be sold. Inventory.
Under this method, inventory control is Under this method, inventory control is
not possible. possible.
This system is simple and less expensive. It is costlier method.
Periodic system requires closure of Inventory can be determined without
business for counting of inventory. affecting the operations of the business.
COGS = Op. Stock (Known) + Purchases COGS = Op. Stock (Known) + Purchases
(Known) + Direct exp (Known) – Cl. (Known) + Direct exp (Known) – Cl.
Inventory (Known). Inventory (Known).

Q1. Distinguish between Periodic Inventory System and Perpetual Inventory System.
(PP-N19)
Inventory Counting Method:
Q2. M/s ABC Limited’s stock register shows the following records:
Date Particulars Rate Quantity
1 Jan
st Opening 25 100
3 Jan
rd Purchase 20 150
5 Jan
th Purchase 18 200
7 Jan
th Purchase 15 100
8 Jan
th Issued - 350
10 Jan
th Purchased 30 300
12 Jan
th Purchased 35 100
15 Jan
h Issued - 250
You are required to calculate Cost of Inventory at the end of day on 15.012019.
Under each of the following case scenario:
a) LIFO b) FIFO c) Simple Average d) Weighted Average

Cost of Inventory Using Adjusted Selling Price Method

Q3. M/s Rai Cotton Ltd. provides you the following details and you are required to calculate the
cost of Inventory:
Cost Retail Price
Opening Inventory 60,000 1,00,000
Purchases 3,15,000 4,00,000

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Sales 3,80,000

Q4. M/s X, Y and Z are in retail business, following information are obtained from their records
for the year ended 31st March, 2016 (ICAI SM):
Goods received from suppliers 15,75,500
(subject to trade discount and taxes)
Trade discount 3% and sales tax 11%
Packaging and transportation charges 87,500
Sales during the year 22,45,500
Sales price of closing inventories 2,35,000
Find out the historical cost of inventories using adjusted selling price method.

Q5. From the following information, calculate the historical cost of inventories using adjusted
selling price method (ICAI-SM):
Sales during the year 2,00,000 Opening inventory Nil
Cost of purchases 2,00,000 Closing inventory at selling price 50,000

Q6. Raigad Ltd provide you the following method, calculate the cost of Inventory using the
adjusted selling price Method, the gross profit rate for the year is 30%:
Opening Inventory 60,000 Carriages Inward 20,000
Purchase 2,92,000 Wages 40,000
Purchase Return 12,000 Sales Return 35,000
Royalty 20,000 Sales 6,35,000

Cost of Inventory Using Standard Cost Method

Q7. SS Ltd. provides with following standard cost structure of Product A of which 20,000 units
are in stock. The standard cost calculated at beginning of year:
Direct Material 20 p.u. Direct expense 15 p.u.
Direct Labor 15 p.u. Direct Overhead Exp 10 p.u.

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Verification of Closing Stock on date other than balance sheet date
Q8. Raj Ltd. prepared their accounts for financial year ended on 31st March 2019. Due to
unavoidable Circumstances actual stock has been taken on 10 th April 2019, when it was
ascertained at Rs. 1,25,000 It has been found that:
(i) Sales are entered in the Sales Book on the day of dispatch and return inwards in the
Returns Inward Book on the day of the goods received back.
(ii) Purchases are entered in the Purchase Book on the day the Invoices are received.
(iii) Sales between 1st April 2019 to 9th April 2019 amounting to 20,000 as per Sales Day Book.
(iv) Free samples for business promotion issued during 1st April 2019 to 9th April 2019
amounting to 4,000 at cost.
(v) Purchases during 1st April 2019 to 9th April 2019 amounting to 10,000 but goods amount
to 2,000 not received till the date of stock taking.
(vi) Invoices for goods purchased amounting to 20,000 were entered on 28 th March 2019 but
the goods were not included in stock.
Rate of Gross Profit is 25% on cost. Ascertain the value of Stock as on 31st March 2019 (PP-M19).

Q9. X who was closing his books on 31.3.2016 failed to take the actual stock which he did only on
9th April, 2016, when it was ascertained by him to be worth Rs. 2,50,000.
It was found that sales are entered in the sales book on the same day of dispatch and return
inwards in the returns book as and when the goods are received back. Purchases are entered in
the purchases day book once the invoices are received.
It was found that sales between 31.3.2016 and 9.4.2016 as per the sales day book are Rs. 17,200.
Purchases between 31.3.2016 and 9.4.2016 as per purchases day book are Rs. 1,200, out of
these goods amounting to Rs. 500 were not received until after the stock was taken
Goods invoiced during the month of March, 2016 but goods received only on 4th April, 2016
amounted to Rs. 1,000. Rate of gross profit is 33-1/3% on cost. (ICAI-SM)

Q10. A trader prepared his accounts on 31st March, each year. Due to some unavoidable
reasons, no inventory taking could be possible till 15th April, 2017 on which date the total cost of
goods in his godown came to Rs. 5,00,000. The following facts were established between 31st
March and 15th April, 2017.
a) Sales Rs. 4,10,000 (incl. cash sales Rs. 1,00,000)
b) Purchases Rs. 50,340 (incl. cash purchases Rs. 19,900)
c) Sales Return Rs. 10,000.
Goods are sold by the trader at a profit of 20% on sales.
You are required to ascertain the value of inventory as on 31st March, 2017. (ICAI-SM)

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Q11. The Profit and loss account of Hanuman showed a net profit of Rs. 6,00,000, after
considering the closing stock of Rs. 3,75,000 on 31st March, 2016. Subsequently the following
information was obtained from scrutiny of the books:
i. Purchases for the year included Rs. 15,000 paid for new electric fittings for the shop.
ii. Hanuman gave away goods valued at Rs. 40,000 as free samples for which no entry was
made in the books of accounts.
iii. Invoices for goods amounting to Rs. 2,50,000 have been entered on 27th March, 2016, but
the goods were not included in stock.
iv. In March, 2016 goods of Rs. 2,00,000 sold and delivered were taken in the sales for April,
2016.
v. Goods costing Rs. 75,000 were sent on sale or return in March, 2016 at a margin of profit
of 33.33% on cost. Though approval was given in April, 2016 these were taken as sales for
March, 2016.
Calculate the value of stock on 31st March, 2016 and the adjusted net profit for the year ended
on that date. (ICAI-SM)

Q12. Physical verification of stock in a business was done on 23rd June, 2016. The value of the
stock was Rs. 48,00,000. The following transactions took place between 23 rd June to 30th June,
2016:
i. Out of the goods sent on consignment, goods at cost worth Rs. 2,40,000 were unsold.
ii. Purchases of Rs. 4,00,000 were made out of which goods worth Rs. 1,60,000 were
delivered on 5th July, 2016.
iii. Sales were Rs. 13,60,000, which include goods worth Rs. 3,20,000 sent on approval. Half of
these goods were returned before 30th June, 2016, but no information is available
regarding the remaining goods.
Goods are sold at cost plus 25%. However, goods costing Rs. 2,40,000 had been sold for Rs.
1,20,000. Determine the value of stock on 30th June, 2016. (ICAI-SM)

Q13. Stock taking of XYZ Stores for the year ended 31st March, 2019 was completed by 10th
April, 2019, the valuation of which showed a stock figure of Rs. 1,67,500 at cost as on the
completion date. After the end of the accounting year and till the date of completion of stock
taking, sales for the next year were made for Rs. 6,875, profit margin being 33.33 percent on
cost. Purchases for the next year included in the stock amounted to Rs. 9,000 at cost less trade
discount 10 percent. During this period, goods were added to stock of the mark-up price of Rs.
300 in respect of sales returns. After stock taking it was found that there were certain very old
slow-moving items costing Rs. 1,125 which should be taken at Rs. 525 to ensure disposal to an
interested customer. Due to heavy floods, certain goods costing Rs. 1,550 were received from
the supplier beyond the delivery date of customer. As a result, the customer refused to take
delivery and net realizable value of the goods was estimated to be Rs. 1,250 on 31st March,
2019. You are required to calculate the value of stock for inclusion in the final accounts for the
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year ended 31st March, 2019. Closing stock is valued by XYZ Stores on generally accepted
accounting principles. (PP-N19 / RTP-M18)

Abnormal Goods
Q14. From the following particulars ascertain the value of Inventories as on 31st March, 2017:
Inventory as on 1.4.2016 1,42,500
Purchases 7,62,500
Manufacturing Expenses 1,50,000
Selling Expenses 60,500
Administrative Expenses 30,000
Financial Charges 21,500
Sales 12,45,000
At the time of valuing inventory as on 31st March, 2016, a sum of Rs. 17,500 was written off on a
particular item, which was originally purchased for Rs. 50,000 and was sold during the year for
Rs. 45,000. Barring the transaction relating to this item, GP earned was 20% on sales. (ICAI-SM)

Q15. From the following information, ascertain the value of stock as on 31.3.2017:
Particulars Amount
Value of stock on 1.4.2016 7,00,000
Purchases during the period from 1.4.16 to 31.3.17 34,60,000
Manufacturing expenses during the above period 7,00,000
Sales during the same period 52,20,000
At the time of valuing stock on 31.3.2016 a sum of Rs. 60,000 was written off a particular item
which was originally purchased for Rs. 2,00,000 and was sold for Rs. 1,60,000. But for the above
transaction the gross profit earned during the year was 25% on cost. (ICAI-SM)
HOMEWORK
Q16. A manufacturer has the following record of purchases of a condenser, which he uses while
manufacturing radio sets:
Date Qty (units) Price per unit
Dec. 4 900 50
Dec. 10 400 55
Dec. 11 300 55
Dec. 19 200 60
Dec. 28 800 47
a) 1,600 units were issued during the month of December till 18th December using FIFO
b) Calculate cost of Inventory using LIFO Method from the following record of issues:
Date Qty (units)
Dec. 5 500

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Dec. 20 600
Dec. 29 500
Total 1,600
c) 1,600 units were issued during the month of December, calculate Cost of Inventory using
Simple Average Method.
d) 1,600 units were issued during the month of December, calculate cost of Inventory using
Weighted Average Method. (ICAI-SM)

Q17. From the following information ascertain the value of stock as on 31st March, 2016 and
also the profit for the year:
Particulars Amount
Stock as on 1.4.2015 1,42,500
Purchases 7,62,500
Manufacturing expenses 1,50,000
Selling expenses 60,500
Administrative expenses 30,000
Financial charges 21,500
Sales 12,45,000
At the time of valuing stock as on 31.03.2015, a sum of Rs. 17,500 was written off on a particular
item, which was originally purchased for Rs. 50,000 and was sold during the year at Rs. 45,000.
Barring the transaction relating to this item, the gross profit earned during the year. (ICAI-SM)

Q18. Inventory taking for the year ended 31st March, 2016 was completed by 10th April 2016,
the valuation of which showed an inventory figure of Rs. 16,75,000 at cost as on the completion
date. After the end of the accounting year and till the date of completion of inventory taking,
sales for the next year were made for Rs. 68,750, profit margin being 33.33% on cost. Purchases
for the next year included in the inventory amounted to Rs. 90,000 at cost less trade discount
10%. During this period, goods were added to inventory at the mark up price of Rs. 3,000 in
respect of sales returns. After inventory taking it was found that there were certain very old
slow-moving items costing Rs. 11,250, which should be taken at Rs. 5,250 to ensure disposal to
an interested customer. Due to heavy flood, certain goods costing Rs. 15,500 were received from
the supplier beyond the delivery date of customer. As a result, the customer refused to take
delivery and net realizable value of the goods was estimated to be Rs. 12,500 on 31st March.
Compute the value of inventory for inclusion in the final accounts for the year ended 30th
March, 2016. (ICAI-SM)

Q19. A trader prepared his accounts on 31st March, each year. Due to some unavoidable
reasons, no stock taking could be possible till 15th April, 2018 on which date the total cost of
goods in his godown came to Rs. 50,000. The following facts were established between 31st
March and 15th April, 2018.
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a)Sales Rs. 41,000 (including cash sales Rs. 10,000)
b)Purchases Rs. 5,034 (including cash purchases Rs. 1,990)
c)Sales Return Rs. 1,000
d)On 15th March, goods of the sale value of Rs. 10,000 were sent on sale or return basis to a
customer, the period of approval being four weeks. He returned 40% of the goods on 10th
April, approving the rest; the customer was billed on 16th April.
e) The trader had also received goods costing Rs. 8,000 in March, for sale on consignment
basis; 20% of the goods had been sold by 31st March, and another 50% by the 15th April.
These sales are not included in above sales.
f) Goods are sold by the trader at a profit of 20% on sales.
You are required to ascertain the value of Inventory as on 31st March, 2018. (ICAI-SM)

Q20. Sky Ltd. keeps no stock records but a physical inventory of stock is made at the end of each
quarter and the valuation is taken at cost. The company’s year ends on 31st March, 2018 and
their accounts have been prepared to that date. The stock valuation taken on 31st March, 2018
was however, misleading and you have been advised to value the closing stocks as on 31st
March, 2018 with the stock figure as on 31st December, 2017 and some other information is
available to you:
a) The cost of stock on 31st December, 2017 as shown by the inventory sheet was Rs. 80,000.
b) On 31st December, stock sheet showed the following discrepancies:
a. A page total of Rs. 5,000 had been carried to summary sheet as Rs. 6,000.
b. The total of a page had been undercast by Rs. 200.
c) Invoice of purchases entered in the Purchase Book during the quarter from to March,
2018 totaled Rs. 70,000. Out of this Rs. 3,000 related to goods received prior to 31st
December, 2017. Invoices entered in April 2018 relating to goods received in March, 2018
totaled Rs. 4,000.
d) Sales invoiced to customers totaled Rs. 90,000 from January to March, 2018. Of this Rs.
5,000 related to goods dispatched before 31st December, 2017. Goods dispatched to
customers before 31st March, 2018 but invoiced in April, 2018 totaled Rs. 4,000.
e) During the final quarter, credit notes at invoiced value of Rs. 1,000 had been issued to
customers in respect of goods returned during that period. The gross margin earned by
the company is 25% of cost.
You are required to prepare a statement showing the amount of stock at cost as on 31st March,
2018. (RTP-N18)

Q21. Statement with reasons, whether the following statements are True or False:
a) Valuation of inventory at cost or net realizable value is based on principle of Conservatism.
(PP-N19): Ans - True
b) Finished goods are normally valued at cost or market price whichever is higher. (RTP-
M18): Ans - False

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