Inventory valuation and year-end inventory adjustment

Topic 15: Inventory Valuation and Year-End Inventory Adjustment — 50 Hard MCQs

1. Inventory has a cost of $18 600. It can be sold for $20 000, but selling costs will be $2800.

At what value should inventory be included in the financial statements?

A $17 200
B $18 600
C $20 000
D $21 400

2. A business has the following inventory.

Product	Cost	Net realisable value
A	$12 000	$14 000
B	$15 000	$13 500
C	$9000	$8200

What is the inventory value?

A $33 700
B $34 700
C $35 700
D $36 000

3. Inventory counted on 4 January was $52 000. This included goods costing $6000 purchased after 31 December. Goods costing $4400 had been sold after 31 December and were not included in the count.

What was inventory at 31 December?

A $41 600
B $50 400
C $53 600
D $62 400

4. Inventory counted on 31 December was $80 000. It included goods costing $7000 held on behalf of another business. Goods costing $5000 purchased before 31 December had not yet arrived and were not included in the count.

What is the correct inventory value?

A $68 000
B $78 000
C $82 000
D $92 000

5. Inventory at cost is $96 000. Included in this is damaged inventory costing $12 000 which can be sold for $9000 after repair costs of $1500.

What is the correct inventory value?

A $91 500
B $93 000
C $94 500
D $96 000

6. A business has inventory costing $45 000. Its selling price is $52 000. Selling costs are estimated at $6000.

What is the inventory value?

A $39 000
B $45 000
C $46 000
D $52 000

7. Goods costing $8000 were included in closing inventory. They were sold after the year end for $7600, with delivery costs to the customer of $500.

What adjustment is needed to inventory?

A decrease by $900
B decrease by $400
C increase by $900
D no adjustment

8. Closing inventory was valued at selling price of $75 000. The business earns a gross profit margin of 25%.

What should closing inventory have been valued at?

A $18 750
B $56 250
C $75 000
D $100 000

9. Closing inventory was valued at selling price of $84 000. The business applies a mark-up of 40% on cost.

What should closing inventory have been valued at?

A $50 400
B $60 000
C $84 000
D $117 600

10. A business has opening inventory of $30 000, purchases of $145 000 and closing inventory of $38 000.

What is cost of sales?

A $107 000
B $137 000
C $153 000
D $213 000

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. Sales are $260 000. Gross profit margin is 30%. Opening inventory is $36 000 and purchases are $178 000.

What is closing inventory?

A $32 000
B $68 000
C $78 000
D $104 000

12. Sales are $180 000. Mark-up is 25%. Opening inventory is $22 000 and closing inventory is $28 000.

What are purchases?

A $138 000
B $144 000
C $150 000
D $172 000

13. A business has sales of $400 000 and gross profit margin of 35%. Opening inventory is $52 000 and purchases are $276 000.

What is closing inventory?

A $68 000
B $88 000
C $120 000
D $192 000

14. Opening inventory is $24 000. Purchases are $96 000. Closing inventory is understated by $5000.

What is the effect on profit?

A profit understated by $5000
B profit overstated by $5000
C profit understated by $10 000
D no effect

15. Opening inventory is overstated by $4000 and closing inventory is understated by $3000.

What is the effect on profit?

A profit overstated by $1000
B profit understated by $1000
C profit overstated by $7000
D profit understated by $7000

16. Opening inventory is understated by $2500 and closing inventory is overstated by $4500.

What is the effect on profit?

A profit overstated by $2000
B profit understated by $2000
C profit overstated by $7000
D profit understated by $7000

17. Closing inventory is overstated by $6000.

What is the effect on cost of sales and profit?

A cost of sales overstated and profit understated
B cost of sales understated and profit overstated
C cost of sales overstated and profit overstated
D cost of sales understated and profit understated

18. Opening inventory is understated by $7000.

What is the effect on current year profit?

A profit overstated by $7000
B profit understated by $7000
C profit overstated by $14 000
D no effect

19. Closing inventory at 31 December 2025 is overstated by $10 000.

What is the effect on profit for the year ended 31 December 2026, assuming the error is not corrected?

A 2026 profit overstated by $10 000
B 2026 profit understated by $10 000
C 2026 profit unaffected
D 2026 profit understated by $20 000

20. Closing inventory at 31 December 2025 is understated by $3000.

What is the effect on profit for 2025 and 2026?

A 2025 overstated, 2026 understated
B 2025 understated, 2026 overstated
C both years understated
D both years overstated

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

21. Inventory counted at year end was $64 000. Goods costing $8500 sold before year end were still in the warehouse awaiting collection by the customer. Goods costing $6200 purchased before year end were in transit and not included.

What is the correct inventory value?

A $55 500
B $61 700
C $70 200
D $78 700

22. Inventory counted at year end was $91 000. This included goods costing $14 000 received from a supplier on sale or return, with no decision made by year end. It excluded goods costing $9000 sent to customers on sale or return before year end, with no approval received by year end.

What is correct inventory?

A $68 000
B $86 000
C $95 000
D $114 000

23. A business sends goods costing $5000 to a customer on sale or return before the year end. The customer approves the goods after the year end. The goods were not included in closing inventory.

What adjustment is required at year end?

A add $5000 to inventory
B deduct $5000 from inventory
C record sale at selling price
D no adjustment

24. Goods costing $11 000 were purchased before year end and included in purchases. They were still in transit at year end and excluded from physical inventory.

What adjustment is required?

A add $11 000 to closing inventory
B deduct $11 000 from closing inventory
C deduct $11 000 from purchases
D add $11 000 to sales

25. Goods costing $7000 were included in physical inventory. The invoice for these goods had not been recorded in purchases by year end.

What adjustment is required?

A add $7000 to purchases only
B deduct $7000 from inventory only
C add $7000 to sales
D no adjustment

26. Goods costing $4000 were included in purchases and physical inventory. The goods were returned to the supplier after year end because they were faulty and had no resale value at year end.

What adjustment is required?

A deduct $4000 from inventory
B add $4000 to inventory
C deduct $4000 from purchases only
D no adjustment

27. Inventory cost is $52 000. Included are goods costing $9000 that are obsolete and can only be sold for $2500. Disposal costs will be $400.

What is correct inventory?

A $43 000
B $45 100
C $45 500
D $52 000

28. Inventory cost is $120 000. Included are goods costing $20 000 that can be sold for $17 000 after spending $3000 on repairs and $1000 selling costs.

What is correct inventory value?

A $113 000
B $116 000
C $117 000
D $120 000

29. Inventory at cost was $74 000. Included were goods costing $10 000, selling price $13 000, and selling costs $1500.

What is correct inventory value?

A $72 500
B $74 000
C $75 500
D $85 500

30. Inventory at cost was $66 000. Included were damaged goods costing $8000. These goods can be repaired for $1200 and sold for $6500.

What is correct inventory value?

A $63 300
B $64 500
C $66 000
D $72 500

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

31. A business uses FIFO. Inventory movements are:

Date	Units	Cost per unit
Opening inventory	100	$5
Purchases	200	$6
Purchases	150	$7

During the period, 320 units were sold.

What is the value of closing inventory?

A $650
B $790
C $850
D $910

32. A business uses FIFO. Inventory movements are:

Date	Units	Cost per unit
Opening inventory	80	$12
Purchase	120	$14
Purchase	100	$16

Sales were 210 units.

What is closing inventory?

A $1260
B $1360
C $1440
D $1600

33. A business uses weighted average cost. Inventory movements are:

Date	Units	Cost per unit
Opening inventory	100	$4
Purchases	300	$5

Closing inventory is 160 units.

What is closing inventory value?

A $640
B $720
C $760
D $800

34. A business uses weighted average cost. Opening inventory was 200 units at $9 each. Purchases were 300 units at $11 each. Closing inventory was 150 units.

What is closing inventory value?

A $1350
B $1500
C $1530
D $1650

35. A business uses FIFO during a period of rising prices.

Compared with weighted average cost, FIFO usually gives:

A lower closing inventory and lower profit
B lower closing inventory and higher profit
C higher closing inventory and higher profit
D higher closing inventory and lower profit

36. A business uses FIFO during a period of falling prices.

Compared with weighted average cost, FIFO usually gives:

A lower closing inventory and lower profit
B lower closing inventory and higher profit
C higher closing inventory and higher profit
D higher closing inventory and lower profit

37. Inventory at cost was $58 000. Net realisable value was $54 000. The inventory was incorrectly valued at cost.

What is the effect?

A profit overstated by $4000 and current assets overstated by $4000
B profit understated by $4000 and current assets understated by $4000
C profit overstated by $54 000 and current assets overstated by $54 000
D no effect

38. Inventory with cost $31 000 and NRV $35 000 was incorrectly valued at NRV.

What is the effect?

A profit overstated by $4000 and assets overstated by $4000
B profit understated by $4000 and assets understated by $4000
C profit overstated by $35 000 and assets overstated by $35 000
D no effect

39. Closing inventory is omitted completely from the financial statements.

What is the effect?

A profit and current assets overstated
B profit and current assets understated
C profit understated and liabilities overstated
D profit overstated and current assets understated

40. Opening inventory is omitted completely from the income statement.

What is the effect?

A profit overstated
B profit understated
C current assets overstated
D current liabilities understated

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

41. Opening inventory is $48 000. Purchases are $210 000. Closing inventory is $55 000. Sales are $315 000.

What is gross profit?

A $112 000
B $122 000
C $152 000
D $218 000

42. Gross profit is $90 000. Sales are $300 000. Opening inventory is $40 000 and purchases are $230 000.

What is closing inventory?

A $30 000
B $60 000
C $90 000
D $130 000

43. Sales are $240 000. Gross profit margin is 25%. Purchases are $164 000. Closing inventory is $18 000.

What was opening inventory?

A $26 000
B $34 000
C $38 000
D $62 000

44. A business applies a mark-up of 331/3%. Sales are $160 000. Opening inventory is $22 000. Purchases are $130 000.

What is closing inventory?

A $18 000
B $32 000
C $40 000
D $54 000

45. A business applies a margin of 20%. Sales are $250 000. Opening inventory is $35 000. Closing inventory is $42 000.

What are purchases?

A $193 000
B $207 000
C $215 000
D $242 000

46. Inventory at 31 December was counted as $87 000. Goods costing $5000 had been sold before year end but were still included in the count. Goods costing $3000 bought before year end were omitted from the count.

What is corrected inventory?

A $79 000
B $85 000
C $89 000
D $95 000

47. Inventory was valued at $72 000. It included goods costing $6000 which were damaged. These goods could be sold for $5000 after selling costs of $800.

What is corrected inventory?

A $70 200
B $71 200
C $72 000
D $77 200

48. Closing inventory was overstated by $2500. Opening inventory was understated by $1500.

What is the total effect on profit?

A profit overstated by $1000
B profit overstated by $4000
C profit understated by $1000
D profit understated by $4000

49. Closing inventory was understated by $8000. Opening inventory was overstated by $5000.

What is the total effect on profit?

A profit understated by $3000
B profit understated by $13 000
C profit overstated by $3000
D profit overstated by $13 000

50. Which statement about inventory valuation is correct?

A Inventory is valued at the higher of cost and net realisable value.
B Inventory is valued at lower of cost and net realisable value.
C Inventory is always valued at selling price.
D Inventory is excluded from current assets.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

1. A — $17 200

• Cost = $18 600

• Net realisable value = selling price – selling costs

• NRV = 20 000 – 2800 = $17 200

• Inventory is valued at lower of cost and NRV.

• Correct value = $17 200

2. A — $33 700

• Product A: lower of 12 000 and 14 000 = 12 000

• Product B: lower of 15 000 and 13 500 = 13 500

• Product C: lower of 9000 and 8200 = 8200

• Total inventory = 12 000 + 13 500 + 8200

• = $33 700

3. B — $50 400

• Inventory counted on 4 January = $52 000

• Less goods purchased after 31 December = $6000

• Add goods sold after 31 December but not included in count = $4400

• Inventory at 31 December = 52 000 – 6000 + 4400

• = $50 400

4. B — $78 000

• Inventory counted = $80 000

• Less goods held for another business = $7000

• Add goods purchased before year end but not arrived = $5000

• Correct inventory = 80 000 – 7000 + 5000

• = $78 000

5. A — $91 500

• Damaged goods cost = $12 000

• NRV = 9000 – 1500 = $7500

• Reduction needed = 12 000 – 7500 = $4500

• Correct inventory = 96 000 – 4500

• = $91 500

6. B — $45 000

• Cost = $45 000

• NRV = 52 000 – 6000 = $46 000

• Inventory is valued at lower of cost and NRV.

• Correct value = $45 000

7. A — decrease by $900

• Cost = $8000

• NRV = selling price – delivery cost

• NRV = 7600 – 500 = $7100

• Inventory should be reduced by 8000 – 7100

• = $900

8. B — $56 250

• Selling price = $75 000

• Gross profit margin = 25%

• Cost = 75% of selling price

• Cost = 75 000 × 75%

• = $56 250

9. B — $60 000

• Selling price = $84 000

• Mark-up = 40% on cost

• Selling price = 140% of cost

• Cost = 84 000 / 1.4

• = $60 000

10. B — $137 000

• Cost of sales = opening inventory + purchases – closing inventory

• = 30 000 + 145 000 – 38 000

• = $137 000

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. A — $32 000

• Sales = $260 000

• Gross profit margin = 30%

• Gross profit = 30% × 260 000 = $78 000

• Cost of sales = 260 000 – 78 000 = $182 000

• Closing inventory = opening inventory + purchases – cost of sales

• = 36 000 + 178 000 – 182 000

• = $32 000

12. C — $150 000

• Mark-up = 25%

• Selling price = 125% of cost

• Cost of sales = 180 000 / 1.25 = $144 000

• Purchases = cost of sales – opening inventory + closing inventory

• = 144 000 – 22 000 + 28 000

• = $150 000

13. A — $68 000

• Sales = $400 000

• Gross profit margin = 35%

• Gross profit = 35% × 400 000 = $140 000

• Cost of sales = 400 000 – 140 000 = $260 000

• Closing inventory = 52 000 + 276 000 – 260 000

• = $68 000

14. A — profit understated by $5000

• Closing inventory reduces cost of sales.

• If closing inventory is understated, cost of sales is overstated.

• Therefore, profit is understated by $5000.

15. D — profit understated by $7000

• Opening inventory overstated by $4000:

  • cost of sales overstated

  • profit understated by $4000

• Closing inventory understated by $3000:

  • cost of sales overstated

  • profit understated by $3000

• Total profit understated = 4000 + 3000

• = $7000

16. C — profit overstated by $7000

• Opening inventory understated by $2500:

  • cost of sales understated

  • profit overstated by $2500

• Closing inventory overstated by $4500:

  • cost of sales understated

  • profit overstated by $4500

• Total profit overstated = 2500 + 4500

• = $7000

17. B — cost of sales understated and profit overstated

• Closing inventory is deducted from cost of sales.

• If closing inventory is overstated:

  • cost of sales is understated

  • gross profit and profit are overstated

18. A — profit overstated by $7000

• Opening inventory is added to cost of sales.

• If opening inventory is understated:

  • cost of sales is understated

  • profit is overstated

19. B — 2026 profit understated by $10 000

• Closing inventory of 2025 becomes opening inventory of 2026.

• If opening inventory in 2026 is overstated:

  • cost of sales is overstated

  • profit for 2026 is understated

20. B — 2025 understated, 2026 overstated

• Closing inventory understated in 2025:

  • cost of sales overstated

  • profit understated

• Same figure becomes opening inventory in 2026:

  • opening inventory understated

  • cost of sales understated

  • profit overstated

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

21. B — $61 700

• Inventory count = $64 000

• Goods sold before year end still in warehouse should be excluded = subtract $8500

• Goods bought before year end in transit should be included = add $6200

• Correct inventory = 64 000 – 8500 + 6200

• = $61 700

22. B — $86 000

• Inventory count = $91 000

• Goods received on sale or return not accepted = not owned, subtract $14 000

• Goods sent to customers on sale or return not approved = still owned, add $9000

• Correct inventory = 91 000 – 14 000 + 9000

• = $86 000

23. A — add $5000 to inventory

• Goods sent on sale or return are still owned until customer approval.

• Approval happened after year end.

• At year end, goods should still be inventory.

24. A — add $11 000 to closing inventory

• Goods purchased before year end belong to the business.

• They were included in purchases but not physical inventory.

• Add them to closing inventory.

25. A — add $7000 to purchases only

• Goods are already included in physical inventory.

• The invoice was not recorded.

• Inventory is already correct, but purchases/payables must be recorded.

26. A — deduct $4000 from inventory

• Goods were faulty and had no resale value at year end.

• Inventory should not include them at cost.

• Deduct $4000 from inventory.

27. B — $45 100

• Obsolete goods cost = $9000

• NRV = 2500 – 400 = $2100

• Reduction = 9000 – 2100 = $6900

• Correct inventory = 52 000 – 6900

• = $45 100

28. A — $113 000

• Damaged goods cost = $20 000

• NRV = 17 000 – 3000 – 1000 = $13 000

• Reduction = 20 000 – 13 000 = $7000

• Correct inventory = 120 000 – 7000

• = $113 000

29. B — $74 000

• Goods cost = $10 000

• NRV = 13 000 – 1500 = $11 500

• Lower value = cost, $10 000

• No adjustment needed.

• Correct inventory remains $74 000

30. A — $63 300

• Damaged goods cost = $8000

• NRV = 6500 – 1200 = $5300

• Reduction = 8000 – 5300 = $2700

• Correct inventory = 66 000 – 2700

• = $63 300

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

31. D — $910

• Total units = 100 + 200 + 150 = 450

• Units sold = 320

• Closing units = 130

• FIFO means closing inventory is from most recent purchases.

• Closing inventory = 130 × $7

• = $910

32. C — $1440

• Total units = 80 + 120 + 100 = 300

• Sales = 210 units

• Closing units = 90

• FIFO closing units come from latest purchase.

• Closing inventory = 90 × $16

• = $1440

33. C — $760

• Total cost = 100 × 4 + 300 × 5

• = 400 + 1500 = $1900

• Total units = 400

• Weighted average cost per unit = 1900 / 400 = $4.75

• Closing inventory = 160 × 4.75

• = $760

34. C — $1530

• Total cost = 200 × 9 + 300 × 11

• = 1800 + 3300 = $5100

• Total units = 500

• Weighted average cost = 5100 / 500 = $10.20

• Closing inventory = 150 × 10.20

• = $1530

35. C — higher closing inventory and higher profit

• In rising prices, FIFO closing inventory contains the latest, higher-cost units.

• Closing inventory is higher.

• Cost of sales is lower.

• Profit is higher.

36. A — lower closing inventory and lower profit

• In falling prices, FIFO closing inventory contains the latest, lower-cost units.

• Closing inventory is lower.

• Cost of sales is higher.

• Profit is lower.

37. A — profit overstated by $4000 and current assets overstated by $4000

• Correct inventory value = NRV = $54 000

• Inventory incorrectly valued at cost = $58 000

• Overstatement = $4000

• Closing inventory overstated means profit and current assets overstated.

38. A — profit overstated by $4000 and assets overstated by $4000

• Correct value = lower of cost and NRV = $31 000

• Incorrect value = $35 000

• Inventory overstated by $4000

• Profit and assets overstated by $4000

39. B — profit and current assets understated

• Closing inventory reduces cost of sales.

• If omitted:

  • cost of sales overstated

  • profit understated

  • current assets understated

40. A — profit overstated

• Opening inventory increases cost of sales.

• If opening inventory is omitted:

  • cost of sales understated

  • profit overstated

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

41. A — $112 000

• Cost of sales = opening inventory + purchases – closing inventory

• = 48 000 + 210 000 – 55 000

• = $203 000

• Gross profit = sales – cost of sales

• = 315 000 – 203 000

• = $112 000

42. B — $60 000

• Cost of sales = sales – gross profit

• = 300 000 – 90 000 = $210 000

• Closing inventory = opening inventory + purchases – cost of sales

• = 40 000 + 230 000 – 210 000

• = $60 000

43. B — $34 000

• Sales = $240 000

• Gross profit margin = 25%

• Gross profit = 60 000

• Cost of sales = 240 000 – 60 000 = $180 000

• Opening inventory = cost of sales – purchases + closing inventory

• = 180 000 – 164 000 + 18 000

• = $34 000

44. B — $32 000

• Mark-up = 331/3%, so selling price = 1331/3% of cost.

• Cost of sales = 160 000 × 3/4

• = $120 000

• Closing inventory = opening inventory + purchases – cost of sales

• = 22 000 + 130 000 – 120 000

• = $32 000

45. B — $207 000

• Margin = 20%, so cost of sales = 80% of sales.

• Cost of sales = 250 000 × 80%

• = $200 000

• Purchases = cost of sales – opening inventory + closing inventory

• = 200 000 – 35 000 + 42 000

• = $207 000

46. B — $85 000

• Inventory counted = $87 000

• Goods sold before year end still included = subtract $5000

• Goods bought before year end omitted = add $3000

• Correct inventory = 87 000 – 5000 + 3000

• = $85 000

47. A — $70 200

• Damaged goods cost = $6000

• NRV = 5000 – 800 = $4200

• Reduction = 6000 – 4200 = $1800

• Correct inventory = 72 000 – 1800

• = $70 200

48. B — profit overstated by $4000

• Closing inventory overstated by $2500:

  • profit overstated by $2500

• Opening inventory understated by $1500:

  • cost of sales understated

  • profit overstated by $1500

• Total profit overstated = 2500 + 1500

• = $4000

49. B — profit understated by $13 000

• Closing inventory understated by $8000:

  • profit understated by $8000

• Opening inventory overstated by $5000:

  • cost of sales overstated

  • profit understated by $5000

• Total profit understated = 8000 + 5000

• = $13 000

50. B — Inventory is valued at lower of cost and net realisable value

• Inventory is a current asset.

• Prudence requires inventory to be valued at the lower of cost and NRV.

• This prevents profit and assets being overstated.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.