• Inventory systems
• Inventory valuation methods

6.1 Inventory systems

A business can decide which of the following two inventory systems to use to record and control their inventory:

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).)

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

*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:

Value of unsold units:

Answers to worked example 1 continued (see page 101)
Cost of Sales (Goods sold at cost price)

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

Answers to worked example 2 (see page 102)
Calculate the value of the closing stock using the FIFO and weighted-average method.

[14]

Cost of sales using the FIFO and weighted-average method.

[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.

[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

• 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

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:

[35]
ANSWER

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.

(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

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

 
Calculations for Activity 2

Answers for Activity 2
QUESTION 2

Below is a list of suggested past examination questions for extra practice: