Inventory valuation, cost of sales, gross profit, net profit, closing inventory adjustments

1. Opening inventory was $12 000. Purchases were $72 500. Purchases returns were $2600. Carriage inwards was $1400. Closing inventory cost was $15 400, but its net realisable value was $14 800. Sales were $103 000 and sales returns were $3500. What was gross profit?

A $30 400
B $31 000
C $31 600
D $32 200

2. A trader completely omitted closing inventory of $18 600 from the financial statements. What was the effect?

A Gross profit overstated and current assets overstated by $18 600
B Gross profit understated and current assets understated by $18 600
C Gross profit overstated and current assets understated by $18 600
D Gross profit understated and current liabilities overstated by $18 600

3. Inventory cost $24 800. Its net realisable value was $23 600. The accountant valued it at cost. What was the effect?

A Profit and assets overstated by $1200
B Profit and assets understated by $1200
C Profit overstated by $24 800 only
D Assets understated by $23 600 only

4. Goods costing $3200 were bought before the year-end. The invoice was recorded, but the goods were in transit and excluded from the physical inventory count. Ownership had passed to the buyer before the year-end. What adjustment is needed?

A Deduct $3200 from purchases
B Add $3200 to closing inventory
C Deduct $3200 from closing inventory
D Add $3200 to sales

5. Goods costing $3000 were sold before the year-end for $5000. The sales invoice was recorded, but the goods were still in the warehouse and were included in closing inventory. What was the effect before correction?

A Profit overstated by $3000 and assets overstated by $3000
B Profit understated by $3000 and assets understated by $3000
C Profit overstated by $5000 and assets overstated by $5000
D Profit understated by $2000 and assets understated by $3000

6. Sales were $70 000. Sales returns were $4000. Opening inventory was $9000. Purchases were $48 000. Purchases returns were $2000. Carriage inwards was $1000. Closing inventory was $12 500. What was gross profit?

A $20 500
B $21 500
C $22 500
D $23 500

7. A trader applies a mark-up of 25% on cost. Net sales were $95 000. Opening inventory was $20 000. Purchases were $76 000. Purchases returns were $3000. What was closing inventory?

A $13 000
B $16 000
C $17 000
D $19 000

8. A trader earns a gross profit margin of 20%. Net sales were $80 000. Opening inventory was $16 000 and closing inventory was $14 000. What were net purchases?

A $60 000
B $62 000
C $66 000
D $78 000

9. Goods costing $700 were withdrawn by the owner for personal use but were not adjusted. They had been included in purchases. What was the effect?

A Gross profit understated and drawings understated by $700
B Gross profit overstated and drawings overstated by $700
C Gross profit understated and drawings overstated by $700
D Net profit unchanged and drawings overstated by $700

10. Goods costing $400 were taken from inventory and used for advertising. They had been included in purchases and no adjustment was made. What correction is needed?

A Debit advertising $400, credit purchases $400
B Debit purchases $400, credit advertising $400
C Debit drawings $400, credit purchases $400
D Debit sales $400, credit inventory $400

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. Carriage inwards of $650 was wrongly treated as carriage outwards. What was the effect?

A Gross profit overstated by $650 and net profit unchanged
B Gross profit understated by $650 and net profit unchanged
C Gross profit unchanged and net profit overstated by $650
D Gross profit overstated and net profit overstated by $650

12. Carriage outwards of $900 was wrongly included in purchases. What was the effect?

A Gross profit overstated by $900 and net profit unchanged
B Gross profit understated by $900 and net profit unchanged
C Gross profit unchanged and net profit understated by $900
D Gross profit understated and net profit understated by $900

13. Closing inventory of $18 000 was omitted from both the income statement and statement of financial position. What was the effect?

A Profit understated, assets understated and capital understated
B Profit overstated, assets overstated and capital overstated
C Profit understated, liabilities overstated and capital overstated
D Profit overstated, assets understated and capital understated

14. Closing inventory was overvalued by $1300. What was the effect?

A Cost of sales overstated and profit understated
B Cost of sales understated and profit overstated
C Cost of sales overstated and assets overstated
D Cost of sales understated and profit understated

15. Opening inventory was understated by $2200. What was the effect on current year profit?

A Profit overstated by $2200
B Profit understated by $2200
C Profit overstated by $4400
D No effect on profit

16. Closing inventory was understated by $1600. What was the effect?

A Current year profit overstated and next year profit understated
B Current year profit understated and next year profit overstated
C Current year profit understated and next year profit understated
D Current year profit overstated and next year profit overstated

17. Inventory details were as follows.

Item A: cost $5000, NRV $5800
Item B: cost $3600, NRV $3200
Item C: cost $4200, NRV $4300
Item D: cost $2700, NRV $2200

What was the correct inventory value?

A $14 600
B $15 000
C $15 400
D $15 500

18. Damaged goods cost $12 000. They can be sold for $11 000 after repair costs of $1400 and selling expenses of $600. At what value should they be included in closing inventory?

A $9000
B $9600
C $11 000
D $12 000

19. Goods cost $9000. They are expected to sell for $9600, but selling expenses will be $800. At what amount should they be valued?

A $8800
B $9000
C $9600
D $9800

20. Closing inventory included goods costing $1500 held on behalf of a supplier. What was the effect?

A Inventory understated and profit understated by $1500
B Inventory overstated and profit overstated by $1500
C Inventory overstated and profit understated by $1500
D Inventory understated and liabilities understated by $1500

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. Goods costing $1800 were sent to a customer on sale or return at a selling price of $2500. The customer had not accepted them by the year-end. The sale had been recorded and the goods were excluded from inventory. What was the effect?

A Profit overstated by $700 and net current assets overstated by $700
B Profit understated by $700 and net current assets understated by $700
C Profit overstated by $2500 and assets overstated by $2500
D Profit understated by $1800 and assets understated by $1800

22. A purchase invoice for $4800 was recorded before the year-end, but the goods were received after the year-end and ownership had not passed by the year-end. No inventory was included. What was the effect before correction?

A Profit understated and liabilities overstated by $4800
B Profit overstated and liabilities understated by $4800
C Profit understated and assets understated by $4800
D Profit overstated and assets overstated by $4800

23. A machine costing $5000 was bought on credit but wrongly recorded in the purchases account. Closing inventory was correctly counted. What was the effect before correction?

A Gross profit understated and non-current assets understated by $5000
B Gross profit overstated and non-current assets overstated by $5000
C Gross profit unchanged and non-current assets understated by $5000
D Gross profit understated and liabilities overstated by $5000

24. Goods costing $600 were returned by a customer before the year-end. The sales return at selling price $900 was recorded, but the goods were not included in closing inventory. What was the effect?

A Gross profit understated by $600
B Gross profit overstated by $600
C Gross profit understated by $900
D Gross profit overstated by $900

25. Goods returned to a supplier, $1200, were recorded in the supplier’s account but omitted from the purchases returns account. What was the effect?

A Gross profit overstated by $1200
B Gross profit understated by $1200
C Purchases understated by $1200
D Closing inventory overstated by $1200

26. Inventory count was $30 000. It included goods costing $2000 sold before the year-end, with the sale recorded. It excluded goods costing $1500 bought before the year-end and owned by the business but still in transit. What was the correct closing inventory?

A $26 500
B $29 500
C $30 500
D $33 500

27. Closing inventory of $14 000 was added instead of deducted when calculating cost of sales. What was the effect on profit?

A Profit overstated by $14 000
B Profit understated by $14 000
C Profit overstated by $28 000
D Profit understated by $28 000

28. Purchases were $80 000. Purchases returns were $4000. Carriage inwards was $2000. Carriage outwards was $3000. Import duty on purchases was $1000. What amount should be included as net purchases/cost of purchases?

A $76 000
B $78 000
C $79 000
D $82 000

29. Sales were $150 000. Sales returns were $8000. Carriage outwards was $2000. Discount allowed was $1000. What was net sales?

A $139 000
B $140 000
C $142 000
D $150 000

30. Gross profit was $32 000. Discount received was $600. Rent paid was $5400. Carriage inwards was $700. Carriage outwards was $900. Wages were $12 000. Discount allowed was $400. What was net profit?

A $13 200
B $13 900
C $14 600
D $15 300

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. Which adjustment increases gross profit?

A Increasing opening inventory
B Increasing purchases
C Increasing closing inventory
D Increasing carriage inwards

32. Closing inventory of $5000 was accidentally recorded twice in the income statement. What was the effect?

A Profit overstated by $5000
B Profit understated by $5000
C Profit overstated by $10 000
D Profit unchanged

33. Goods returned to suppliers, $900, were not recorded. Closing inventory excluded these goods. What was the effect?

A Gross profit overstated by $900 and payables understated by $900
B Gross profit understated by $900 and payables overstated by $900
C Gross profit understated by $900 and receivables overstated by $900
D Gross profit overstated by $900 and payables overstated by $900

34. Goods costing $900 were used as free samples. They were included in purchases and no adjustment was made. What was the effect before correction?

A Gross profit understated by $900 and net profit unchanged
B Gross profit overstated by $900 and net profit overstated by $900
C Gross profit understated by $900 and net profit understated by $900
D Gross profit unchanged and net profit understated by $900

35. Opening inventory was $5400. Purchases were $35 200. Carriage inwards was $800. Purchases returns were $1200. Closing inventory cost was $7000 and NRV was $7450. What was cost of sales?

A $32 750
B $33 200
C $34 100
D $35 200

36. Goods had a list price of $4000 and were bought less 20% trade discount. Transport inward cost $300. Expected selling price was $3300 and selling expenses would be $200. What was the correct inventory value?

A $3100
B $3200
C $3300
D $3500

37. Goods had a list price of $2000. Trade discount was 10%. Settlement discount of 5% was available. Carriage inwards was $100. NRV was $1850. What was the correct inventory value?

A $1710
B $1800
C $1850
D $1900

38. A draft net profit of $9000 was calculated after opening inventory of $4000 had been omitted. What is the corrected net profit?

A $5000
B $9000
C $13 000
D $17 000

39. Closing inventory was valued at selling price $24 000. Goods are normally sold at a mark-up of 50% on cost. What was the effect on profit?

A Profit overstated by $4000
B Profit overstated by $8000
C Profit understated by $8000
D Profit understated by $12 000

40. Inventory was valued at cost $20 000. Expected selling price was $18 000 and selling costs were $1000. What was the effect?

A Profit understated by $2000
B Profit overstated by $2000
C Profit overstated by $3000
D Profit understated by $3000

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 was $15 000. Closing inventory was $12 000. Net purchases were $60 000. Net sales were $90 000. What was the mark-up on cost?

A 30.0%
B 33.3%
C 42.9%
D 70.0%

42. A trader earns a gross profit margin of 25%. Net sales were $120 000. Opening inventory was $18 000 and closing inventory was $22 000. What were net purchases?

A $86 000
B $90 000
C $94 000
D $100 000

43. Net sales were $96 000. Gross profit was 25% of cost. Opening inventory was $12 000. Purchases were $82 000. Purchases returns were $2000. What was closing inventory?

A $13 200
B $15 200
C $17 200
D $20 000

44. Sales were $200 000 and sales returns were $10 000. Gross profit margin was 30%. Opening inventory was $25 000 and net purchases were $120 000. What was closing inventory?

A $7000
B $12 000
C $19 000
D $57 000

45. Closing inventory was undervalued by $500 at the end of year 1. What is the effect, assuming the error is not corrected?

A Year 1 profit overstated by $500 and year 2 profit understated by $500
B Year 1 profit understated by $500 and year 2 profit overstated by $500
C Both year 1 and year 2 profits understated by $500
D Both year 1 and year 2 profits overstated by $500

46. Opening inventory was overvalued by $800 and closing inventory was undervalued by $300. What was the effect on current year profit?

A Profit overstated by $500
B Profit understated by $500
C Profit overstated by $1100
D Profit understated by $1100

47. Purchases were understated by $1000 and closing inventory was understated by $600. What was the net effect on gross profit?

A Gross profit overstated by $400
B Gross profit understated by $400
C Gross profit overstated by $1600
D Gross profit understated by $1600

48. Sales returns of $700 were omitted. The returned goods cost $400 and were also omitted from closing inventory. What was the net effect on gross profit?

A Gross profit overstated by $300
B Gross profit understated by $300
C Gross profit overstated by $1100
D Gross profit understated by $1100

49. Sales were $150 000. Purchases were $100 000. Opening inventory was $20 000 and closing inventory was $25 000. Goods costing $3000 were withdrawn by the owner but not adjusted; they were included in purchases. What was the correct gross profit?

A $55 000
B $58 000
C $60 000
D $63 000

50. Which statement about closing inventory is correct?

A It is added to cost of goods sold because it increases purchases.
B It is deducted from goods available for sale because it has not been sold.
C It is ignored if the business uses the accruals concept.
D It is valued at the higher of cost and net realisable value.

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. B
   Net sales = 103 000 − 3500 = 99 500
   Closing inventory = lower of cost and NRV = 14 800
   Cost of sales = 12 000 + 72 500 − 2600 + 1400 − 14 800 = 68 500
   Gross profit = 99 500 − 68 500 = 31 000

2. B
   Closing inventory reduces cost of sales and appears as a current asset. If omitted, cost of sales is overstated, so gross profit is understated, and current assets are understated.

3. A
   Inventory should be valued at lower of cost and NRV.
   Correct value = 23 600.
   It was valued at 24 800, so assets and profit are overstated by 1200.

4. B
   Ownership had passed, so the goods belong to the business. Since they were excluded from the physical count, add $3200 to closing inventory.

5. A
   The sale was recorded, so the goods no longer belong to the business. Including them in closing inventory overstates inventory and profit by their cost, $3000.

6. C
   Net sales = 70 000 − 4000 = 66 000
   Cost of sales = 9000 + 48 000 − 2000 + 1000 − 12 500 = 43 500
   Gross profit = 66 000 − 43 500 = 22 500

7. C
   Mark-up 25% means sales = 125% of cost.
   Cost of sales = 95 000 / 1.25 = 76 000
   Goods available = 20 000 + 76 000 − 3000 = 93 000
   Closing inventory = 93 000 − 76 000 = 17 000

8. B
   Gross profit margin 20% means GP = 20% of sales.
   GP = 20% × 80 000 = 16 000
   Cost of sales = 64 000
   64 000 = 16 000 + net purchases − 14 000
   Net purchases = 62 000

9. A
   Owner’s drawings of goods should reduce purchases and increase drawings. If not adjusted, purchases/cost of sales are too high, so gross profit is understated, and drawings are understated.

10. A
    Goods used for advertising should be transferred from purchases to advertising.
    Correction: debit advertising, credit purchases.

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
    Carriage inwards should be included in cost of sales. If treated as carriage outwards, gross profit is overstated by $650. Net profit is unchanged because the expense is still included somewhere.

12. B
    Carriage outwards should be an expense, not part of cost of sales. If included in purchases, gross profit is understated by $900, but net profit is unchanged.

13. A
    Closing inventory omitted means cost of sales is overstated, profit understated, assets understated and capital understated.

14. B
    Closing inventory overvalued means cost of sales is too low. Profit is overstated.

15. A
    Opening inventory understated means cost of sales is understated. Profit is overstated by $2200.

16. B
    Closing inventory understated means current year profit is understated. Next year, opening inventory is also understated, so next year profit becomes overstated.

17. A
    Value each item at lower of cost and NRV:
    A = 5000
    B = 3200
    C = 4200
    D = 2200
    Total = 14 600

18. A
    NRV = selling price − repair costs − selling expenses
    NRV = 11 000 − 1400 − 600 = 9000
    Lower of cost and NRV = 9000.

19. A
    NRV = 9600 − 800 = 8800
    Cost = 9000
    Inventory value = 8800.

20. B
    Goods held on behalf of a supplier do not belong to the business. Including them overstates inventory and profit by $1500.

21. A
    Sale or return goods not accepted still belong to the business.
    Wrongly recorded sale increases profit by $2500, but excluding inventory reduces profit by $1800.
    Net profit overstated = 700. Assets are also overstated by 700.

22. A
    Ownership had not passed, so the purchase should not be recorded. Since the purchase invoice was recorded, purchases and payables are overstated. Profit is understated and liabilities overstated.

23. A
    Machinery is a non-current asset. Recording it in purchases overstates cost of sales, so gross profit is understated, and non-current assets are understated.

24. A
    Returned goods should be included in closing inventory at cost, $600. If not included, cost of sales is overstated and gross profit understated by $600.

25. B
    Purchases returns were omitted, so net purchases are too high. Cost of sales is overstated and gross profit understated by $1200.

26. B
    Inventory count = 30 000
    Less goods sold before year-end = 2000
    Add goods owned but in transit = 1500
    Correct closing inventory = 29 500

27. D
    Closing inventory should be deducted. If it is added instead, cost of sales is overstated by twice the inventory value.
    Effect on profit = 14 000 × 2 = 28 000 understated. Absolute menace of a trap.

28. C
    Cost of purchases = purchases − purchases returns + carriage inwards + import duty
    = 80 000 − 4000 + 2000 + 1000 = 79 000
    Carriage outwards is excluded.

29. C
    Net sales = sales − sales returns
    = 150 000 − 8000 = 142 000
    Carriage outwards and discount allowed are expenses, not deductions from sales.

30. B
    Net profit = gross profit + income − expenses
    = 32 000 + 600 − 5400 − 900 − 12 000 − 400
    = 13 900
    Carriage inwards is already included in cost of sales, so do not deduct it again.

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. C
    Increasing closing inventory reduces cost of sales, which increases gross profit.

32. A
    Closing inventory should increase profit once. If recorded twice, profit is overstated by the extra $5000.

33. B
    Purchases returns omitted means net purchases and cost of sales are overstated. Gross profit is understated. The supplier balance is also too high, so payables are overstated.

34. A
    Free samples should be transferred from purchases to advertising. Without adjustment, purchases are too high, so gross profit is understated. Net profit is unchanged because the cost is still an expense.

35. B
    Use cost because cost $7000 is lower than NRV $7450.
    Cost of sales = 5400 + 35 200 + 800 − 1200 − 7000 = 33 200

36. A
    Purchase cost = 4000 − 20% = 3200
    Cost including transport inward = 3200 + 300 = 3500
    NRV = 3300 − 200 = 3100
    Inventory value = lower of cost and NRV = 3100

37. C
    Cost = 2000 − 10% trade discount + carriage inwards
    = 1800 + 100 = 1900
    Settlement discount is ignored.
    NRV = 1850
    Inventory value = 1850.

38. A
    Opening inventory omitted means cost of sales is understated and profit overstated.
    Correct profit = 9000 − 4000 = 5000

39. B
    Selling price = 24 000. Mark-up is 50% on cost, so selling price = 150% of cost.
    Cost = 24 000 / 1.5 = 16 000
    Inventory overstated by 8000, so profit overstated by 8000.

40. C
    NRV = 18 000 − 1000 = 17 000
    Inventory should be 17 000, not 20 000.
    Profit overstated by 3000.

41. C
    Cost of sales = 15 000 + 60 000 − 12 000 = 63 000
    Gross profit = 90 000 − 63 000 = 27 000
    Mark-up = 27 000 / 63 000 × 100 = 42.9%

42. C
    Gross profit margin = 25% of sales
    Gross profit = 30 000
    Cost of sales = 90 000
    90 000 = 18 000 + net purchases − 22 000
    Net purchases = 94 000

43. B
    Gross profit is 25% of cost, so sales = 125% of cost.
    Cost of sales = 96 000 / 1.25 = 76 800
    Goods available = 12 000 + 82 000 − 2000 = 92 000
    Closing inventory = 92 000 − 76 800 = 15 200

44. B
    Net sales = 200 000 − 10 000 = 190 000
    Gross profit = 30% × 190 000 = 57 000
    Cost of sales = 190 000 − 57 000 = 133 000
    133 000 = 25 000 + 120 000 − closing inventory
    Closing inventory = 12 000

45. B
    Closing inventory undervalued in year 1 understates year 1 profit. It becomes opening inventory in year 2, so year 2 profit becomes overstated.

46. D
    Opening inventory overvalued by 800 increases cost of sales, so profit is understated by 800.
    Closing inventory undervalued by 300 also increases cost of sales, so profit is understated by 300.
    Total understatement = 1100.

47. A
    Purchases understated by 1000 makes cost of sales too low, so gross profit is overstated by 1000.
    Closing inventory understated by 600 makes cost of sales too high, so gross profit is understated by 600.
    Net effect = gross profit overstated by 400.

48. A
    Sales returns omitted means net sales are overstated by 700.
    Returned goods omitted from closing inventory means cost of sales is overstated by 400.
    Net gross profit overstated = 700 − 400 = 300.

49. B
    Goods withdrawn should reduce purchases by 3000.
    Correct purchases = 100 000 − 3000 = 97 000
    Cost of sales = 20 000 + 97 000 − 25 000 = 92 000
    Gross profit = 150 000 − 92 000 = 58 000

50. B
    Closing inventory is deducted from goods available for sale because those goods have not been sold. It is valued at the lower of cost and net realisable value.

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.