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:

  1. Number of unsold units.
  2. Value of unsold units
  3. Cost of Sales
  4. 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:

  1. Value of the closing stock using the FIFO and weighted-average methods. [14]
  2. Cost of sales using the FIFO and weighted-average methods. [11]
  3. 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 
  • The closing stock is 2 400 units.
  • Using the FIFO method means that 1 200 units bought in January 2010 and 1 200 units of the 2 500 units bought in October 2009 are left in stock, representing the closing stock of 2 400 units.
  • Step 1 is to calculate the weighted average by dividing the total cost of stock purchased by the total number of units purchased.
  • Step 2 uses the weighted average to calculate the value of the closing stock by multiplying the cost per unit by 2 400.

[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.
  • Step 1 is the calculation of the number of units sold.
  • Step 2 uses the weighted average to calculate the value of the stock that has been sold, namely 2 720 units.

[11]
The cost of sales is the cost price of all the goods that have been sold.

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  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

  1. Draw the Trading account
  2. Record the figures from the question in the trading account
  3. Do you need to calculate on FIFO or weighted average method?
  4. 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
  5. If FIFO: find number of units of stock and see which stock is last purchased
  6. 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       
     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

  1. 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.
  2. 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. 

  • Purchase in smaller quantities more often
  • Only order when they reach their minimum stock level (re-order level)
  • They are holding too much stock. (8)

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:

  1. 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 ? ?
  2. 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 
  3. 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.
  4. 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 
  5. 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 3) / 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 

  • Implement tighter control measures over soccer balls – 200 balls were stolen
  • The business is carrying a lot of stock, particularly soccer balls – 900 on hand at end of year
  • Selling price must change if cost increases
  • The stock for soccer balls must be turned over quicker – 3,9 times per annum. (6)

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