On this page you will find Inventories Grade 12 Notes Accounting Study Guide
6.1 Inventory systems
A business can decide which of the following two inventory systems to use to record and control their inventory:
| SYSTEM | IMPORTANT POINTS |
| Perpetual |
|
| Periodic |
|
Inventories (trading stock) are goods that are bought in order to be resold at a profit. Stock is always recorded in the books at cost price.
6.2 Inventory valuation methods
A business can decide which of the following two stock valuation methods to use in order to value its inventory:
(The business may not change its stock valuation method unless the business has a very good reason to do so (e.g. the change will ensure that the inventory is better valued).)
| METHOD | IMPORTANT POINTS |
| Specific Identification method |
|
| FIFO |
|
| Weighted average |
|
Worked example 1
You are provided with the information relating to Kima Appliances. The following stock appeared on their stock cards.
Study the template of the number of stock bought at purchase price and the selling price of all the stock sold.
INFORMATION
The items below were in stock and some sold: January to December 2014
| Date | LG | Samsung | Bosch | Total value of stock | |||||||
| No | Cost price | Total | No | Cost price | Total | No | Cost price | Total | |||
| Jan | Opening stock | 2 | @R1 000 | R2 000 | 3 | @R2 000 | R6 000 | 4 | @R3 000 | R12 000 | = R 20 000 |
| April | Purchases | 3 | @R1 200 | R3 600 | 2 | @R2 100 | R4 200 | 2 | @R3 300 | R6 600 | = R 14 400 |
| Value of total stock | R 34 400 | ||||||||||
| No | Cost price | Selling price | No | Cost price | Selling price | No | Cost price | Selling price | |||
| Jan to | Sales | 1 | @R1 000 | R2 000 | 3 | @R2 000 | R12 000 | 3 | @R3 300 | R18 000 | = R 32 000 |
| Dec. | Sales | 2 | @R1 200 | R4 800 | 1 | @R3 000 | R6 600 | = R 11 400 | |||
| Value of total sales | R 43 400 | ||||||||||
*REQUIRED:
Make use of the Specific Identification stock method to calculate:
- Number of unsold units.
- Value of unsold units
- Cost of Sales
- Gross profit
Answers to worked example 1
Number of unsold units:
| LG: | 1 | @ R1 000 (1 sold) |
| LG: | 1 | @ R1 200 (2 sold) |
| Samsung: | 2 | @ R2 100 |
| Bosch: | 1 | @ R3 000 (3 sold) |
| 1 | @ R3 300 (1 sold) | |
| 6 | unsold units |
Value of unsold units:
| LG: | 1 | @ R1 000 (1 sold) | R 1 000 |
| LG: | 1 | @ R1 200 (2 sold) | R 1 200 |
| Samsung: | 2 | @ R2 100 | R 4 200 |
| Bosch: | 1 | @ R3 000 (3 sold) | R 3 000 |
| 1 | @ R3 300 (1 sold) | R 3 300 | |
| 6 | unsold units | R12 700 |
Answers to worked example 1 continued (see page 101)
Cost of Sales (Goods sold at cost price)
| LG: | 1 | @ R1 000 (1 sold) | R 1 000 |
| LG: | 2 | @ R1 200 (2 sold) | R 2 400 |
| Samsung: | 3 | @ R2 100 | R 6 000 |
| Bosch: | 3 | @ R3 000 (3 sold) | R 9 000 |
| 1 | @ R3 300 (1 sold) | R 3 300 | |
| Cost of sales of 10 sold units | R21 700 | ||
Gross profit:
Sales – Cost of Sales = Gross profit
R43 400 – 21 700 = R21 700
Worked example 2
Example adapted from March 2011 NSC question paper.
You are provided with information relating to Energy World for the year ended 28 February 2010. They sell energy drinks to retailers.
Required
Refer to the information relating to the energy drinks and calculate the following:
- Value of the closing stock using the FIFO and weighted-average methods. [14]
- Cost of sales using the FIFO and weighted-average methods. [11]
- Gross profit using the FIFO and weighted-average methods. [6]
Information
| Manager: Dirk | Product: Energy drinks | ||
| Units | Rand | Amount | |
| Sales | 2 720 | R21,20 | R57 664 |
| Opening stock | 320 | R9,00 | R2 880 |
| Purchases | 4 800 | R58 560 | |
| April 2008 | 1 100 | R10,50 | R11 550 |
| October 2009 | 2 500 | R12,42 | R31 050 |
| January 2010 | 1 200 | R13,30 | R15 960 |
| Closing stock | 2 400 | ? | ? |
Answers to worked example 2 (see page 102)
Calculate the value of the closing stock using the FIFO and weighted-average method.
| FIFO | WEIGHTED AVERAGE |
| (Jan 2010) 1 200 units × R13,30 = R15 960 (Oct 2009) 1 200 units × R12,42 = R14 904 2 400 units (closing stock) = R30 864 The most recent stock bought is what is left (closing stock). | Step 1 Opening stock = R2 880 Purchases = R58 560 Total cost = R61 440 Weighted average = R61 440 ÷ (320 + 4 800 units) = R61 440 ÷ 5 120 units = R123 per unit Step 2 2 400 units (closing stock) × R12 = R28 800 |
| Explanation of the calculations above | |
|
|
[14]
Cost of sales using the FIFO and weighted-average method.
| FIFO | WEIGHTED AVERAGE |
| 320 units × R9 = R 2 8803 1 100 units × R10,50 = R11 5503 1 300 units × R12.42 = R16 1463 Cost of sales R30 5763 OR Opening stock R2 880 + Purchases R58 560 – Closing stock (R30 864) = Cost of sales R30 576 | Step 1 3203 units + 4 8003 units – 2 4003 units = 2 7203 units sold Step 2 2 720 units sold × R12 (weighted average) = R32 640 Cost of sales |
| Explanation of the calc ulations above | |
| Using the FIFO method means that the oldest stock has been sold first, that is 320 units of opening stock + 1 100 units purchased in April 2008 + 1 300 units of the 2 500 units purchased in October 2009 making up the total of 2 720 units sold. |
|
[11]
The cost of sales is the cost price of all the goods that have been sold.
Gross profit using the FIFO and weighted-average method.
| FIFO | WEIGHTED AVERAGE |
| Gross profit = sales – cost of sales | |
| R57 664− R30 576 = R27 088 | R57 664 − R32 640 = R25 024 |
| Explanation of the calculations above | |
| The sales figure was given in the question and is the same in both methods. The cost of sales figures were calculated by you in question 2 on page 67. You will notice that the gross profit figure is different in the 2 methods because the cost of sales was calculated differently. | |
[6]
Method to approach examination questions on stock validation
Learners do not know how to extract and record the relevant information from the stock validation question.
Learners usually know how to calculate gross profit and cost of sales, etc. however they cannot apply that knowledge to the information that is given.
The following is found to assist and to make this question in the examination a breeze:
- It is important that you memorise the format of the TRADING ACCOUNT using the periodic stock method
- It doesn’t matter how they present the question in the exam, after drawing up the Trading account with two columns on the debit and on the credit side, just find the opening stock and closing stock and all the other figures and record the figures on your template.
Calculations
| DR TRADING ACCOUNT CR | ||||||
| Amount | Units | Amount | Units | |||
| + Opening stock | Closing stock | = Cost of sales (units) | ||||
| + Purchases (net) | Sales(net) | = gross profit | ||||
| + Carriage on purchases | ||||||
| + Custom Duties | ||||||
| Total amount and snits of all the stock that could be sold | ||||||
- To be able to answer all the questions, you need to draw the Trading account with TWO COLUMNS; ONE FOR THE RAND AMOUNT AND ONE FOR THE UNITS.
- Need to memorise that opening stock
–– plus net purchases (purchases minus Creditors allowances)
–– plus carriage on purchases
–– plus custom duties
–– minus closing stock is equal to COST OF SALES - Need to memorise that Opening stock
–– plus net purchases
–– plus carriage on purchases
–– plus custom duties
–– minus closing stock
–– minus net sales (sales minus debtors allowances)
–– is equal to GROSS PROFIT.
OR Sales (net) – Cost of sales = Gross profit.
Record all the figures from the question in the Trading account and then start to answer the questions.
Draw the following before attempting the question on stock validation
| Dr. Trading account Cr | ||||||||
| R | units | R | units | |||||
| + | Opening stock R10 | 100 | 10 | – | Closing stock (Stock validation is all about the calculation of the closing stock!) | ? | 25 (Number of items in stock) | = Cost of sales (75 units should be sold. Compare it with the Sales units sold to detect if any units were stolen) 10 + 90 – 25 = 75 |
| + | Purchases (net) @R12 @R15 @R20 | 1330 (‘(Net)’ reminds you to subtract returns from the purchases) 480 450 400 | 90 40 30 20 | – | Sales (net) @40 × 75 (Sales minus returns) | 3 000 | 75 | = gross profit |
| + | Carriage on purchases @ R2 p unit × 90 | 180 | ||||||
| + | Custom duties @ 0,50c per unit × 90 | 45 | ||||||
| 1655 (Total value of all the items that can be sold) | 100 (Total units that can be sold are 10 + 90 = 100) | |||||||
| Possible questions: Learn formats and understand | |
| Value of the closing stock: FIFO | 25 units: Start with the stock purchased recently. 20 × R20 = 400 5 × R15 = 75 25 × R2 = 50 Carriage on purchases per unit 25 × R0,50 = 13 (12,50) custom duties per unit Closing stock = R538 |
| Value of closing stock: Weighted Average | Total the debit side’s amount and unit column R1655 ÷ 100 units = R16,55 average price per unit Closing stock is 25 × R16,55 = R413,75 (R414) |
| Cost of sales: Need to memorise the format! FIFO | Opening stock + Purchases(net) + Carriage on purchases + Custom duties – closing stock = Cost of sales 100 + 1330 + 180+45 – 538 = R1117 (FIFO) |
| Gross profit: FIFO | Sales (net) – cost of sales = Gross profit 3 000 – R1117 = R1 883 |
| 5. Mark –up: know the formula Gross profit × 100 = % Cost of sales 1 | 1883 × 100 = 168,58 % 1117 1 Most of the times you need to explain why the profit markup was not achieved of e.g. 200 %. Reason is because of seasonal sales and cash discounts. |
| Rate of stock turnover Cost of sales = times Average stock | 1117 = (100 + 538)/2 1117 = 3,5 times 319 The stock is replaced 3,5 times per year |
| Period of stock on hand Average stock × 365 = days Cost of sales 1 | 319 × 365 = 104,24 days 1117 1 Stock is on the shelf for 104 days before it is sold. This ratio assists a business to determine when to order stock. |
Activity 1
Inventory regulation (35 marks; 20 minutes)
You are provided with information in respect of Magic Soccer Balls Shop for the year ended 28 February 2009. The business is owned by Peter Pule.
The business uses the perpetual inventory system and the FIFO method of valuing stock.
REQUIRED:
2.1 Explain the meaning of the term ‘FIFO’. (2)
2.2 The selling price of soccer balls was kept constant throughout the year. Calculate the selling price per soccer ball. (3)
2.3 The owner, Peter Pule, is aware that some soccer balls were stolen from the storeroom in April 2008. No entry has been made.
- Calculate the number of balls that are missing. (stock stolen from the opening stock @ R110) (5)
- What entry would you make in the books to record this? (2)
2.4 Value the stock on hand at the year-end according to the FIFO method. (7)
2.5 Calculate following:
- Cost of sales (5)
- Gross profit for the year. (3)
2.6 Peter is not sure when to place his next order of soccer balls.
- How long can he expect the closing stock to last? Provide figures or a calculation to support your answer. (4)
- What advice will you offer Peter about his purchases of stock?
Provide two points. (4)
INFORMATION:
Accounting records relating to the soccer balls:
| Details | Date | No. of balls | Unit price | Total |
| Opening stock | 1 March 2008 | 750 | R110 | R 82 500 |
| Purchases | 2 480 | R 340 800 | ||
| 20 May 2008 | 800 | R150 | R 120 000 | |
| 25 October 2008 | 1 200 | R120 | R 144 000 | |
| 16 December 2008 | 480 | R160 | R 76 800 | |
| Closing stock | 28 February 2009 | 1 100 | ? | ? |
| Sales | 1 March 2008 to 28 February 2009 | 2 100 | ? | R 430 500 |
[35]
ANSWER
| 2.1 | Explain the meaning of the term ‘FIFO’. | 2 |
| 2.2 | The selling price of soccer balls was kept constant throughout the year. Calculate the selling price per soccer ball. | 3 (Get all the info from the Trading account) |
| 2.3 (Calculate the total number units that can be sold minus closing stock and compare that with the sales units.) | Calculate the number of balls that are missing. What entry would you make in the books to record this? | 7 |
| 2.4 (The Closing stock will be the stock that you recently bought.) | Value the stock on hand at the end of the year according to the FIFO method. | 7 |
| 2.5 (Opening stock + Purchases (net) + Carriage on purchases + custom duties – closing stock = cost of sales (make sure you memorised the formula) Stock stolen must be taken into account when you calculate the Cost of sales amount.) | Calculate cost of sales. Calculate gross profit for the year. | 8 |
| 2.6 (Stock holding period or called Period of stock on hand) | How long can he expect the closing stock to last? Provide figures or a calculation to support your answer. What advice would you offer Peter about his purchases of stock? Provide two points. | 8 |
TOTAL MARKS:35
Calculations for Activity 1
- Draw the Trading account
- Record the figures from the question in the trading account
- Do you need to calculate on FIFO or weighted average method?
- If Weighted average: add the totals at the bottom for the Rand and units and divide to find the average price to calculate the value of the closing stock
- If FIFO: find number of units of stock and see which stock is last purchased
- If FIFO: need to calculate the carriage on purchases per unit to be added on to the closing stock per unit.
| Trading account for calculation purposes | ||||||||
| R | units | R | units | |||||
| + | Opening stock @ R110 | 82 500 | 750 | – | Closing stock @160 @120 FIFO | 151 200 76 800 74 400 | 1 100 480 620 | Cost of sales 750 + 2 480 – 1 100 = 2 130 units supposed to be sold |
| + | Purchases (net) @R150 @R120 @R160 | 340 800 120 000 144 000 76 800 | 2 480 800 1 200 480 | – | Sales(net) R430 500÷ 2 100 = R205 | 430 500 | 2 100 | = gross profit |
| + | Carriage on purchases @R | |||||||
| + | Custom duties@ | |||||||
| Total units at cost price that can be sold | 423 300 | 3 130 | ||||||
(Any stock stolen? Yes, according to the stock 2 130 must be sold but the Sales shows only 2100 were sold)
Possible format for all the calculations.
The following is part of your rough work and possible calculations
2.1 First in first out
2.2 Sales per unit; R430 500 ÷ 2 100 unit = R205
2.3
- Opening stock units: 750
Purchases units + 2 480
Closing stock units – (1 100)
Equals to the 2 130 units that must be sold however the actual sales were 2 100 units.
So 2 130 – 2 100 = 30 soccer balls stolen. - Debit stolen stock and credit purchases
2.4 1 100 stock on hand: 480 units × R160 = R76 800
1 100 – 480 = 620 units × R120 = R74 400
Value of closing stock = 151 200
2.5 Cost of sales: 82 500 + 340 800 – 151 200 – (30 × 110 = 3 300) = 268 800
Gross profit: 430 500 – 268 800 = 161 700
2.6 Period of stock on hand ratio:
(Most of the time these questions are asked in the examination questions. Therefore: know your formula! See Solutions of this activity.)
ANSWER
QUESTION 2
| 2.1 Explain the meaning of the term ‘FIFO’. First-in first-out OR The oldest soccer balls are the ones that are sold first (2) |
| 2.2 The selling price of soccer balls was kept constant throughout the year. Calculate the selling price per soccer ball. R430 500/2 100 balls = R205 each (3) |
| 2.3 Calculate the number of balls that are missing. Total balls available = 750 + 2 480 – 1 100 = 2 130 balls Number sold = 2 100 balls Number stolen = 30 balls What entry would you make in the books to record this? Debit Trading stock deficit/Loss due to theft R3 300 Credit Trading stock R3 300 (7) |
| 2.4 Value the stock on hand at the end of the year according to the FIFO method. 480 balls at R160 = R 76 800 620 balls at R120 = R 74 400 TOTAL = R151 200 (7) |
| 2.5 Calculate cost of sales Opening stock R 82 500 Purchases 340 800 Stolen – 3 300 Closing stock – 151 200 Cost of sales R268 800 Calculate gross profit for the year. Sales R430 500 Cost of sales –268 800 Gross profit 161 700 3 (8) |
| 2.6 How long can he expect the closing stock to last? Provide figures or a calculation to support your answer. Any valid evidence provided e.g. Figures: On average, 175 balls are sold per month – stock will last 6,3 months OR Cost of sales for the year is R268 800 (R22 400) – final stock is R151 200 – stock could last 6,8 months Closing stock × 365 = days Cost of sales 1 151 200 × 365 = 205 days/6,7 months 268 800 1 What advice will you offer Peter about his purchases of stock? Provide two points. Any two valid points, e.g.
|
Activity 2
Inventory valuation and control (40 marks; 24 minutes)
You are provided with information relating to Banyana Traders, owned by David Hambeck, for the financial year ended 28 February 2009. The business is situated in Johannesburg.
David buys and sells soccer balls and jerseys. The business uses the periodic inventory system.
The soccer balls are bought from South African suppliers, and the soccer jerseys of different clubs and countries are imported from overseas.
David employs salespersons to control each item of stock:
- James controls and sells the soccer balls
- Cyril controls and sells the soccer jerseys
David has decided on the following accounting policies for valuing inventory:
- Soccer balls – Weighted-average method
- Soccer jerseys – First-in-first-out method (FIFO)
REQUIRED:
2.1 Although this business has done well; David is considering closing it down and investing his capital in fixed property. State TWO points that he should consider before making a final decision. (4)
2.2 David suspects that a number of soccer balls have been shoplifted.
Calculate the number of soccer balls stolen. (5)
2.3 Use the relevant information to calculate the closing stock value of:
- Soccer balls (using the weighted-average method) (6)
- Soccer jerseys (using the FIFO method)
Show your workings to earn part-marks. (5)
2.4 Calculate the following for soccer jerseys (you may prepare a Trading Account to calculate these figures):
- Cost of sales
- Mark-up % on cost
- Stock turnover rate
2.5 If David decides to continue with this business, what advice would you offer him? State TWO points and quote financial indicators or specific information from the question to support your answer. (6)
INFORMATION:
- Inventories:
The stocks were valued as follows at the beginning and end of the financial year: Date Soccer balls Soccer jerseys No. of units Per unit Total value No. of units Per unit Total value 01/03/08 1 200 R120 R144 000 520 R320 R166 400 28/02/09 900 ? ? 250 ? ? - Purchases:
During the financial year ended 28 February 2009, the following stock items were purchased:Date of purchases Soccer balls Soccer jerseys No. of units Per unit Total value No. of units Per unit Total value 31/03/08 1 300 R120 R156 000 400 R200 R 80 000 30/06/08 900 R150 R135 000 600 R225 R135 000 30/09/08 1 000 R175 R175 000 1 400 R255 R357 000 02/01/09 200 R180 R 36 000 100 R300 R 30 000 Totals 3 400 R502 000 2 500 R602 000 - Carriage on purchases:
During the year, the business paid a total of R30 200 to transport soccer balls to the shop. The price of the soccer jerseys includes carriage. - Sales:
Items Details Total Soccer balls 3 500 units at R320 each R1 120 000 Soccer jerseys 2 770 units at R400 each R1 108 000 - Financial indicators:
Items Mark-up % on cost Stock turnover rate Soccer balls 48,5% 3,9 times p.a. Soccer jerseys ? ? times p.a.
[40]
Calculations for Activity 2
- Draw the Trading account
- Record the figures from the question in the trading account
- Do you need to calculate on FIFO or weighted average method?
- If Weighted average: add the totals at the bottom for the Rand and units and divide to find the average price to calculate the value of the closing stock
- If FIFO: find number of units of stock and see which stock is last purchased
- If FIFO: need to calculate the carriage on purchases per unit to be added on to the closing stock per unit.
ANSWER SHEET
2.1 Although this business has done well, David is considering closing it down and investing his capital in fixed property.
State TWO points that he should consider before making a final decision. (4)
2.2 Calculate the number of soccer balls stolen. (5)
2.3 Calculate the closing stock value of soccer balls using the weighted average method: (11)
2.4 Calculate the following for Soccer jerseys (you may prepare a Trading Account to calculate these figures):
Calculate cost of sales:
Calculate mark-up% on cost:
Calculate stock turnover rate: (14)
2.5 If David decides to continue with this business, what advice would you offer him? State TWO points and quote financial indicators or specific information from the question to support your answer. (6)
TOTAL MARKS:40
Calculations for Activity 2
| SOCCER BALLS Trading account WEIGHTED AVERAGE | ||||||||
| R | units | R | units | |||||
| + | Opening stock @R | 144 000 | 1 200 | – | Closing stock 900 × R147 | 132 300 | 900 | = Cost of sales Units 1 200 + 3 400 – 900 = 3 700 (SUPPOSED TO BE SOLD) |
| + | Purchases(net) @R120 @R150 @R175 @R180 | 502 000 156 000 135 000 175 000 36 000 | 3 400 1 300 900 1 000 200 | – | Sales (net) @ R320 | 1 120 000 | 3 500 | = gross profit |
| + | Carriage on purchases @R | 30 200 | ||||||
| + | Custom duties @ R | |||||||
| Total units at cost price that can be sold | 676 200 | ÷ 4 600 = R147 weighted average per unit | ||||||
Calculations for Activity 2
| SOCCER JERSEYS Trading account FIFO | ||||||||
| R | units | R | units | |||||
| + | Opening stock @R | 166 400 | 520 | – | Closing stock: @R300 × 100 @R255 × 150 | 68 250 30 000 38 250 | 250 100 150 | = Cost of sales units |
| + | Purchases(net) @R200 @R225 @R255 @R300 | 602 000 80 000 135 000 357 000 30 000 | 2 500 400 600 1 400 100 | – | Sales (net) @R400 × 2 772 | 1 108 000 | 2 772 | = gross profit |
| + | Carriage on purchases @R | – | – | |||||
| + | Custom duties @ | – | – | |||||
| Total units at cost price that can be sold | 768 400 | 3 020 | ||||||
Answers for Activity 2
QUESTION 2
| 2.1 Although this business has done well, David is considering closing it down and investing his capital in fixed property. State TWO points that he should consider before making a final decision. Good answer = 2 marks; Poor answer = 1 mark; Incorrect = 0 marks Any two valid points, e.g. Soccer World Cup will be in SA soon – keep the business operational until then. Property prices are not doing well at the moment – move into this later. Financial implication to the business, future prospects Implications for staff – retrenchment (4) |
| 2.2 Calculate the number of soccer balls stolen. 1 200 + 3 400 – 3 500 – 900 = 200 (5) |
| 2.3 Calculate the closing stock value of soccer balls using the average method: Stock at beginning of year R144 000 1 200 Purchases during the year R502 000 3 400 Carriage on purchases R 30 200 – R676 200 ÷ 4 600 = R147 = 900 × 147 = R132 300 Calculate the closing stock value of soccer jerseys using the FIFO method: 100 × R300 = R30 000 150 × R255 = R38 250 250 R68 250 (11) |
| 2.4 Calculate the following for Soccer jerseys (you may prepare a Trading Account to calculate these figures): Calculate cost of sales: Opening stock 166 400 Purchases 602 000 Less closing stock (68 250) Cost of sales 700 150 Calculate mark-up% on cost: = (1 108 000 – 700 150) × 100 700 150 1 OR 407 850 × 100 700 150 1 = 58,3 % Calculate stock turnover rate: Cost of sales Average stock = 7 00 150 (68 250 + 166 400) / 2 = 700 150 = 5,97 times 117 325 (14) |
| 2.5 If David decides to continue with this business, what advice would you offer him? State TWO points and quote financial indicators or specific information from the question to support your answer. Good answer = 2 marks; Satisfactory answer = 1 mark; Incorrect = 0 marks Appropriate financial indicator/figures = 1 each Any two valid points
|
Below is a list of suggested past examination questions for extra practice:
| Topic | Paper | Question |
| FIFO and weighted average | February/March 2010 | 2 |
| Weighted average calculations | November 2010 | 1.2 |
| FIFO calculations | February/March 2012 | 1.2 |
| Stock validation | November 2013 | 6.2 |