BFC1010: Fundamentals of Accounting
BFC1010: FUNDAMENTALS OF
ACCOUNTING
DEPARTMENT OF APPLIED ACCOUNTING
INVENTORY
ADDITIONAL STUDENT NOTES AND
QUESTION BANK
2018
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BFC1010: Fundamentals of Accounting
INVENTORY (PERIODIC METHOD)
1. How to calculate the value of inventory on hand at the end of the
financial period?
Do you remember this formula to calculate cost of sales in the Statement of Comprehensive
Income?
Example 1 First-in-First-out method
R’
Sales 100 000
Less: Cost of Sales 80 000
Opening Inventory 5 000
Add: Purchases 115 000
Less: Closing Inventory 40 000
Gross profit 20 000
This chapter focuses on how to value the closing inventory – how do we calculate the
R40 000 in Example 1?
Let us look at the following information – this is how inventory will be carried in our business.
At the start of the financial period we have what is called opening inventory as it is left over
from the previous period – that means it was not sold.
Opening inventory: 250 products at R20 each = R5 000 (250 x 20)
During the current period we buy in new inventory from our suppliers, which we term
purchases.
Purchases:
On 3 October we purchased 1 000 products at R25 each = R25 000 (1 000 x 25)
On 15 October we purchased 800 products at R30 each = R24 000 (800 x 30)
On 24 October we purchased 1 650 products at R40 each = R66 000 (1 650 x 40)
Therefore, we have R120 000 worth of inventory to sell to our customers.
Opening Inventory R 5 000
+ Purchases R115 000 (25 000 + 24 000 + 66 000)
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BFC1010: Fundamentals of Accounting
= Inventory available to sell R120 000
We sell 2 700 products to our customers during the month of October. This means that
there are 1 000 articles left in our business at the end of the month (closing inventory).
Therefore,
Products: Rands:
Opening Inventory 250 5 000
Add: Purchases 3 450 115 000
= Available to sell 3 700 120 000
Less: units Sold 2 700
= Closing inventory 1 000
Do you notice we only have the number of products for closing inventory, 1 000 products are
left at the end of the month. We now need to give these products a value in Rands.
Look at the inventory we had available:
Opening inventory: 250 products at R20 each = R5 000
Purchases:
On 3 October we purchased 1 000 products at R25 each = R25 000
On 15 October we purchased 800 products at R30 each = R24 000
On 24 October we purchased 1 650 products at R40 each = R66 000
If we use the First-in-First out (FIFO) method, the products that were available to sell first
(purchased = in) must be sold first (sales = out).
That means that the 250 products were sold off first, then the 1 000 products, next the 800
products and so on.
The 1 000 products that are left at the end of the month have to come from the batch that
was purchased last, these were valued at R40 each.
Opening inventory: 250 products at R20 each = R5 000
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BFC1010: Fundamentals of Accounting
Purchases:
On 3 October we purchased 1 000 products at R25 each = R25 000
On 15 October we purchased 800 products at R30 each = R24 000
On 24 October we purchased 1 650 products at R40 each = R66 000
1 000 products left from the batch of 1 650 which were
purchased at R40 each
Therefore, closing inventory will be valued at R40 000 (1 000 products x R40).
Example 2 Weighted Average method
R’
Sales 100 000
Less: Cost of Sales 87 567.60
Opening Inventory 5 000
Add: Purchases 115 000
Less: Closing Inventory 32 432.40
Gross profit 12 432.40
This chapter focuses on how to value the closing inventory – how do we calculate the
R32 432.40 in Example 2?
Let us look at the following information – this is how inventory will be carried in our business.
At the start of the financial period we have what is called opening inventory as it is left over
from the previous period – that means it was not sold.
Opening inventory: 250 products at R20 each = R5 000 (250 x 20)
During the current period we buy in new inventory from our suppliers, which we term
purchases.
Purchases:
On 3 October we purchased 1 000 products at R25 each = R25 000 (1 000 x 25)
On 15 October we purchased 800 products at R30 each = R24 000 (800 x 30)
On 24 October we purchased 1 650 products at R40 each = R66 000 (1 650 x 40)
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BFC1010: Fundamentals of Accounting
Therefore, we have R120 000 worth of inventory to sell to our customers.
Opening Inventory R 5 000
+ Purchases R115 000 (25 000 + 24 000 + 66 000)
= Inventory available to sell R120 000
We sell 2 700 products to our customers during the month of October. This means that
there are 1 000 articles left in our business at the end of the month (closing inventory).
Therefore,
Products: Rands:
Opening Inventory 250 5 000
Add: Purchases 3 450 115 000
= Available to sell 3 700 120 000
Less: units Sold 2 700
= Closing inventory 1 000
Do you notice we only have the number of products for closing inventory, 1 000 products are
left at the end of the month. We now need to give these products a value in Rands.
If we use the Weighted Average method we will use the following formula to calculate a
price:
The available to sell in Rands ÷ The available to sell in products
120 000 ÷ 3 700 = R32.4324 per product
Look at our previous workings again:
Products: Rands:
Opening Inventory 250 5 000
Add: Purchases 3 450 115 000
= Available to sell 3 700 120 000
Less: units Sold 2 700
= Closing inventory 1 000
The 1 000 products will be valued at R32.4324 each, therefore 1 000 x 32.4324 =
R32 432.40
QUESTION BANK
QUESTION 1
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BFC1010: Fundamentals of Accounting
Bokke Traders buys and sells goods in bulk. The following transactions took place
during the financial period:
Unit
Units Cost Amount
Opening Inventory
………………. R5.00 R15 000
Purchases
3 October 4 500 R5.80
………………..
16 October 6 000 R6.00
………………..
24 October 12 000 R6.50
………………..
Goods available to sell ……………….. ………………..
Sales
10 October 5 100
units
26 October 17 700
units ………………..
Closing inventory
………………..
The selling price is R8.00 per unit.
REQUIRED:
1.1 Calculate the closing inventory in UNITS.
1.2 Calculate closing inventory (in RANDS) and cost of sales using the FIFO
method of inventory valuation.
1.3 Calculate gross profit for the Bokke Traders.
QUESTION 2
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BFC1010: Fundamentals of Accounting
Savvy Ltd. recorded the following transactions regarding a particular inventory item
for the month of January 2015:
Date: Transaction:
1 Opening inventory 90 units at R50 each
2 Sold 30 units at R63
7 Purchased 60 units at R75 each
15 Purchased 120 units at R100 each
20 Sold 165 units at R94
25 Purchased 135 units at R125 each
30 Sold 36 units at R125
REQUIRED:
1.1 Calculate the closing inventory in UNITS.
1.2 Calculate the VALUE of closing inventory using the following methods of
inventory valuation:
1.2.1 the FIFO method
1.2.2 the Weighted Average method.
1.3 Calculate the gross profit using your answer calculated above.
QUESTION 3
Bay Traders buys and sells goods in bundles. Opening inventory is available on 1 October
of 1 000 units at R2.70 each.
Details of transactions for the period are as follows:
Purchases: Bundle 1 6 000 units @ R2.90 each
Bundle 2 10 000 units @ R3.10 each
Bundle 3 12 000 units @ R2.50 each
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BFC1010: Fundamentals of Accounting
Sales: Bundles 1 14 000 units
Bundle 2 11 000 units
REQUIRED:
3.1 Calculate closing inventory (units and Rand value) using FIFO.
3.2 Calculate cost of sales.
3.3 If the selling price per unit is R5.00 calculate the gross profit.
3.4 If Bay Traders decides to use the weighted average method, calculate their closing
inventory. (Round the price to four decimal places)
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