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5.1 INVENTORY VALUATION Matrix Traders sell three different types of laptops: Lexus, Granite and Vision - NSC Accounting - Question 5 - 2016 - Paper 1
Question 5
5.1 INVENTORY VALUATION Matrix Traders sell three different types of laptops: Lexus, Granite and Vision. They use the periodic inventory system and the specific ide... show full transcript
Worked Solution & Example Answer:5.1 INVENTORY VALUATION Matrix Traders sell three different types of laptops: Lexus, Granite and Vision - NSC Accounting - Question 5 - 2016 - Paper 1
Step 1
Explain the following valuation methods: FIFO
Answer
The FIFO (First-In, First-Out) valuation method assumes that the earliest items purchased are the first to be sold. In this method, stock on hand is valued based on the prices of the most recent purchases. This means that, in times of rising prices, the cost of goods sold will reflect the lower costs of earlier purchases, potentially leading to a higher profit margin in the income statement.
Step 2
Explain the following valuation methods: Specific identification
Answer
The specific identification method tracks the actual cost of each specific item of inventory. This method is suitable for businesses dealing with unique or high-value items, allowing them to provide direct cost linkages to each unit sold. For example, if a specific laptop is sold, its exact purchase price can be identified and recognized in the financial results.
Step 3
Step 4
Calculate the value of the closing stock on 30 September 2016.
Answer
To calculate the closing stock, we consider the opening stock, net purchases, and sales. Using the given figures, we first calculate the opening stock and net purchases:
- Opening stock = R413,000
- Net purchases = R4,374,000
Next, subtract the sales from the total available inventory:
Total available inventory = Opening Stock + Net Purchases Total sold = Total sales from the inventory listed
Calculating closing stock:
Using the preferred method with purchases: