Inventory Costs Cost to Sales Price Costs to Sell Units in. Item Incurred Complete Inventory N N N N. Theta

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1 CIS FINANCIAL ACCOUNTIG 2.1 CONTACT NUMBER CONTACT HOURS TUESDAYS AND FRIDAY 6PM 7PM. QUESTION WEEK 4- INVENTORY & INTANGIBLE ASSETS VIDEO LECTURE CHAPTER: 6& 7 QUESTION 1 O. Oak manufactures and sells three pro ducts: Theta, Iota and Kappa. The following information is available for the year ended 31 December 2013 (on a per unit basis): Inventory Costs Cost to Sales Price Costs to Sell Units in Item Incurred Complete Inventory N N N N Theta ,750 Iota ,080 Kappa 2.00 Nil ,110 Required: i. Write a brief note on any three of the following terms as they relate to inventory valuation in the financial statements: Cost Net realisable value (NRV) First in - first out (FIFO) Average cost (AVCO). 6 Marks ii. State the principle used to value inventory items for inclusion in the financial statements of a business. 1 Mark iii. Calculate the total value of inventory for inclusion in the financial statements of O. Oak as at 31 December Marks iv. Prepare the journal entry to record closing inventory in the financial statements of O. Oak as at 31 December Marks v. Outline the effect on the Statement of Profit and Loss and Statement of Financial Position if closing Page 1

2 inventory is under-valued. 4 Marks Total 20 Marks Page 2

3 MULTIPLE CHOICE QUESTIONS 1.A business prepares its accounts to 31 December. Insurance premiums paid were: Date paid N January 2006 paid for 6 months to 31 December July 2006 paid for 6 months to 30 June January 2007 paid for 6 months to 31 December March 2007 paid for 6 months to 30 June Which amount should be shown in the profit and loss account for the year ended 31 December 2006? A N1120 B N2060 C N2365 D N An item of stock originally cost N5000, but has deteriorated badly and is written down to its estimated net realizable value of N2000. Which accounting principle has been applied? A consistency B materiality C prudence D substance over form A business has two items in stock which need to be repaired before sale. cost selling price repair costs N N N item item What is the total stock value of these items? A N4900 B N5000 C N5510 D N Page 3

4 4. At the beginning of the financial year stock was valued at N During the year, sales of N and purchases of N were made. Unfortunately, all stock was stolen on the last day of the financial year. Goods are marked up by 50 % to calculate selling price. What is the cost of the stolen stock? A N7 500 B N C N D N The stock records of a business show the following information for product X. amount in units cost per unit N 1 January opening balance January receipts into stock January stock issued What is the value of the stock issued on 8 January using the First In First Out (FIFO) method? A N360 B N380 C N410 D N420 SECTION 1 Which of the following items below could potentially be classified as intangible assets? (i) Market knowledge e.g. customer lists, relationships and loyalty (ii) scientific/technical knowledge (iii) Investment properties (iv) Licenses and quotas (v) Plant and equipment A (i), (ii) and (iii) B (i), (ii) and (v) C (ii), (iii) and (iv) D (i), (ii) and (iv) 2 Sam, a limited liability company, has provided the following information as at 31 December 2006: (i) Project A N50,000 has been spent on the research phase of this project during the year. Page 4

5 (ii) Project B N80,000 had been spent on this project in the previous year and N20,000 this year. The project was capitalized in the previous year however, it has been decided to abandon this project at the end of the year. (iii) Project C N100,000 was spent on this project this year. The project meets the criteria of IAS 38 and thus is to be capitalized. Which of the following adjustments will be made in the financial statements as at 31 December 2006? A Reduce profit by N70,000 and increase non-current assets by N100,000 B Reduce profit by N150,000 and increase non-current assets by N100,000 C Reduce profit by N130,000 and increase non-current assets by N180,000 D Reduce profit by N150,000 and increase non-current assets by N100,000 3 Which of the following statements concerning the accounting treatment of research and development expenditure are true, according to IAS 38 Intangible assets? (i) Research is original and planned investigation undertaken with the prospect of gaining new knowledge and understanding. (ii) Development is the application of research findings. (iii) Depreciation of plant used specifically on developing a new product can be capitalized as part of development costs. (iv) Expenditure once treated as an expense cannot be reinstated as an asset. A. i, ii and iii B. i, ii and iv C. ii, iii and iv D. All of the above 4 Which of the following should be included in a company s statement of financial position as an intangible asset under IAS 38? A Internally developed brands B Internally generated goodwill C Expenditure on completed research D Payments made on the successful registration of a patent. 5 During the year to 31st December 20X8 Co X incurred N200,000 of development costs for a new product, N60,000 on 1st January 20X8 on machinery specifically used to help develop the new product and N40,000 on building the brand identity. Commercial production is expected to start during 20X9. Page 5

6 The machinery is expected to last 4 years with no residual value. At what value should Intangibles appear in the Statement of Financial Position as at 31st December 20X8? A N260,000. B N215,000. C N300,000. D N255, Which of the following criteria must be met before development expenditure is capitalized according to IAS 38: (i) The technical feasibility of completing the intangible asset (ii) The future costs should be greater than the future revenue (iii) The intention to complete and use or sell the intangible asset (iv) Availability of technical and financial resources to complete (v) There is no need for reliable measurement of expenditure A i, ii and iii B i, ii and v C i, iii and iv D i, ii and iv Data for questions 8 and 9 P Ltd had an opening inventory value of N2,640 (300 units valued at N8.80 each) on 1 April. The following receipts and issues were recorded during April: 10 April Receipt 1,000 units N8.60 per unit 23 April Receipt 600 units N9.00 per unit 29 April Issues 1,700 units 7 Using the LIFO method, what was the total value of the issues on 29 April? (A) N14,840 (B) N14,880 (C) N14,888 (D) N15,300 Page 6

7 8 Using the FIFO method, the value of the closing inventory was: (A) N1,680 (B) N1,760 (C) N1,800 (D) N14,840 9 A firm has a high level of inventory turnover and uses the FIFO issue pricing system. In a period of rising purchase prices, the closing inventory valuation is: (A) close to current purchase prices. (B) Based on the prices of the first items received. (C) Much lower than current purchase prices. (D) The average of all goods purchased in the period. 10 Using the FIFO system for pricing issues from stores means that when prices are rising: (A) Product costs are overstated and profits understated. (B) Product costs are kept in line with price changes. (C) Product costs are understated and profits understated. (D) Product costs are understated and profits overstated. 11 During a period of rising prices, which one of the following statements is correct? (A) The LIFO method will produce lower profits than the FIFO method, and lower closing inventory values. (B) The LIFO method will produce lower profits than the FIFO method, and higher closing inventory values. (C) The FIFO method will produce lower profits than the LIFO method, and lower closing inventory values. (D) The FIFO method will produce lower profits than the LIFO method, and higher closing inventory values. Page 7

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