Valuation of Inventory (Copy)
Topic 4.5: Valuation of Inventory – Quiz
O Level and IGCSE Accounting
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Accounting Full Scale Course
1. What is the correct basis for valuing inventory?
A. Highest market price
B. Cost plus profit margin
C. Lower of cost and net realisable value
D. Selling price
2. What is meant by “cost” in inventory valuation?
A. Selling price of the item
B. Market value
C. Amount paid to purchase or produce the item
D. List price of the supplier
3. Net realisable value (NRV) means:
A. Cost price + profit
B. Selling price – selling expenses
C. Cost price – discounts
D. Selling price + inventory losses
4. Why is inventory valued at the lower of cost and NRV?
A. To increase profits
B. To apply the consistency concept
C. To comply with the accrual principle
D. To follow the prudence concept
5. The value of closing inventory affects:
A. Trade receivables
B. Gross profit
C. Non-current assets
D. Capital expenditure
6. If inventory is overvalued, what happens to profit?
A. Profit is overstated
B. Profit is understated
C. No effect
D. Profit is not calculated
7. If cost = $80 and NRV = $75, what is the inventory value?
A. $80
B. $75
C. $155
D. $5
8. Which item should not be included in the cost of inventory?
A. Purchase cost
B. Delivery inwards
C. Admin salary
D. Import duties
9. Under which accounting concept is NRV used?
A. Consistency
B. Matching
C. Going concern
D. Prudence
10. Closing inventory is shown as:
A. An expense in the income statement
B. A current liability in the statement of financial position
C. A current asset in the statement of financial position
D. A non-current asset
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Accounting Full Scale Course
11. Incorrect inventory valuation can affect:
A. Only balance sheet
B. Only income statement
C. Both income statement and balance sheet
D. Cash flow statement only
12. Which cost is not included in inventory valuation?
A. Purchase cost
B. Delivery cost
C. Factory rent
D. Selling commission
13. If closing inventory is understated, profit will be:
A. Overstated
B. Understated
C. Unchanged
D. Doubled
14. If NRV is more than cost, inventory is valued at:
A. NRV
B. Cost
C. Average of cost and NRV
D. Selling price
15. Cost of inventory includes:
A. Advertising costs
B. Administrative costs
C. Cost of purchase and conversion
D. Irrecoverable debts
16. Which of the following is true regarding inventory valuation?
A. Inventory should always be valued at selling price
B. Inventory should be valued at higher of cost and NRV
C. Inventory should be valued at lower of cost and NRV
D. Inventory should be valued at list price
17. If inventory is overvalued by $2,000, gross profit will be:
A. Understated by $2,000
B. Overstated by $2,000
C. Not affected
D. Reduced by $2,000
18. Inventory in the trial balance is:
A. Opening inventory
B. Closing inventory
C. Both
D. Adjustment
19. Which of the following would reduce NRV?
A. Increase in demand
B. Fall in selling price
C. Increase in purchase cost
D. Bulk purchase discount
20. The formula for NRV is:
A. Selling price – cost
B. Cost – selling expenses
C. Selling price – costs to sell
D. Cost + selling expenses
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Accounting Full Scale Course
21. Valuation of inventory impacts which accounting element?
A. Drawings
B. Capital expenditure
C. Net profit
D. Fixed assets
22. Which of the following would increase the cost of inventory?
A. Freight inwards
B. Delivery to customer
C. Bank charges
D. Cash discounts received
23. A fall in NRV below cost leads to:
A. Increase in assets
B. No change
C. A loss
D. Higher gross profit
24. What is the effect of an overstatement of closing inventory?
A. Net profit understated
B. Gross profit understated
C. Net profit overstated
D. No effect
25. Which accounting principle ensures losses are recognized but profits only when realized?
A. Prudence
B. Consistency
C. Accrual
D. Going concern
26. Inventory valuation is necessary to:
A. Prepare income statement
B. Prepare capital account
C. Close ledger accounts
D. Adjust liabilities
27. NRV is lower than cost when:
A. Cost increases
B. Goods are in high demand
C. Selling price drops or goods become obsolete
D. Tax rates increase
28. The value of closing inventory appears in which two statements?
A. Income statement and trading account
B. Income statement and capital account
C. Statement of financial position and trading account
D. Statement of financial position and cash flow statement
29. If inventory is not properly valued, it can lead to:
A. Wrong tax returns
B. Overpayment of wages
C. Errors in supplier accounts
D. Understatement of fixed assets
30. What is the correct journal entry for adjusting inventory at year-end?
A. Dr Inventory, Cr Purchases
B. Dr Purchases, Cr Inventory
C. Dr Income Statement, Cr Inventory
D. Dr Capital, Cr Inventory
Answer key and explanations
Topic 4.5 – Valuation of Inventory
O Level and IGCSE Accounting
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Accounting Full Scale Course
1. Correct Answer: C
Explanation: The principle of prudence states inventory should be valued at the lower of cost and net realisable value to avoid overstating assets or profit.
2. Correct Answer: C
Explanation: Cost refers to the amount paid to purchase or manufacture the goods, including direct costs.
3. Correct Answer: B
Explanation: Net realisable value = Expected selling price – Selling/distribution costs.
4. Correct Answer: D
Explanation: Prudence ensures that losses are recorded when expected, so lower of cost or NRV is used to avoid overstating value.
5. Correct Answer: B
Explanation: Inventory affects cost of goods sold, which directly impacts gross profit.
6. Correct Answer: A
Explanation: Overstated inventory reduces cost of goods sold and overstates profit.
7. Correct Answer: B
Explanation: Use the lower of the two: $75 (NRV) is lower than $80 (cost), so $75 is used.
8. Correct Answer: C
Explanation: Admin salaries are not directly related to bringing the inventory to its current condition and location.
9. Correct Answer: D
Explanation: Prudence concept dictates recognizing expected losses, thus NRV is used when it’s lower than cost.
10. Correct Answer: C
Explanation: Closing inventory is a current asset as it is expected to be sold or used within a year.
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Accounting Full Scale Course
11. Correct Answer: C
Explanation: Inventory valuation impacts both the income statement (profit) and balance sheet (assets).
12. Correct Answer: D
Explanation: Selling commission is a selling expense, not part of inventory cost.
13. Correct Answer: B
Explanation: Understated closing inventory increases cost of sales, lowering profit.
14. Correct Answer: B
Explanation: When NRV exceeds cost, inventory is valued at cost (not NRV) due to prudence.
15. Correct Answer: C
Explanation: Cost includes purchase price and conversion (e.g., labour, overheads).
16. Correct Answer: C
Explanation: Inventory is always valued at the lower of cost and NRV.
17. Correct Answer: B
Explanation: Overstated closing inventory reduces cost of sales and artificially increases profit.
18. Correct Answer: A
Explanation: If inventory appears in the trial balance, it is opening inventory.
19. Correct Answer: B
Explanation: A fall in the expected selling price lowers NRV.
20. Correct Answer: C
Explanation: NRV = Selling price – Costs necessary to complete/sell.
21. Correct Answer: C
Explanation: Inventory affects gross profit → net profit, which impacts equity.
22. Correct Answer: A
Explanation: Freight inwards is a cost incurred to bring inventory to location, hence included.
23. Correct Answer: C
Explanation: When NRV < cost, a loss is recognized in accordance with prudence.
24. Correct Answer: C
Explanation: Overstated inventory decreases cost of sales, artificially increasing profit.
25. Correct Answer: A
Explanation: The prudence principle avoids overstatement of assets or profits.
26. Correct Answer: A
Explanation: Accurate inventory is required to calculate cost of goods sold and thus net profit.
27. Correct Answer: C
Explanation: NRV drops when goods become obsolete or selling price falls.
28. Correct Answer: C
Explanation: Closing inventory appears in both the trading account and the statement of financial position.
29. Correct Answer: A
Explanation: Incorrect inventory leads to errors in profit calculation and tax liabilities.
30. Correct Answer: A
Explanation: Adjusting entry: Dr Inventory (closing), Cr Purchases (or Income Statement).
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Accounting Full Scale Course