Free Inventory Valuation MCQs with Answers
34 Inventory Valuation MCQs from Accounting, each with the correct answer and a written explanation of why it is correct. Free and unlimited, with no account needed.
Inventory valuation determines the cost of unsold goods and its effect on cost of sales and profit. The work covers inventory counts, included costs, FIFO and weighted-average costing, and the rule that inventory is reported at the lower of cost and net realisable value, not simply at its expected selling price.
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- A. Selling price or cost, whichever is higher
- B. Cost or market value, whichever is higher
- C. Cost or net realisable value, whichever is lower
- D. Net realisable value or profit, whichever is lower
Explanation: IAS 2 applies the prudence principle by carrying inventory at the lower of cost and net realisable value.
Correct answer: Cost or net realisable value, whichever is lower- A. Weighted average method
- B. Specific identification method
- C. Last-in, first-out method
- D. First-in, first-out method
Explanation: The first-in, first-out method assumes the earliest purchases are issued or sold before later purchases.
Correct answer: First-in, first-out method- A. First-in, first-out method
- B. Last-in, first-out method
- C. Specific identification method
- D. Weighted average cost method
Explanation: IAS 2 permits methods such as FIFO and weighted average for ordinarily interchangeable items, but it does not permit LIFO.
Correct answer: Last-in, first-out method- A. Simple average method
- B. Last-in, first-out method
- C. First-in, first-out method
- D. Retail inventory method
Explanation: When prices rise, FIFO leaves the latest and usually more expensive purchases in closing inventory.
Correct answer: First-in, first-out method- A. Rs. 11.00
- B. Rs. 11.50
- C. Rs. 12.33
- D. Rs. 12.00
Explanation: Total cost is Rs. 3,600, calculated as Rs. 1,000 plus Rs. 2,600. Dividing Rs. 3,600 by 300 units gives a weighted average cost of Rs.
Correct answer: Rs. 12.00- A. Estimated selling price less completion and selling costs
- B. Historical cost plus expected profit
- C. Selling price less the original purchase cost
- D. Replacement cost less accumulated depreciation
Explanation: NRV represents the estimated amount expected from selling inventory in the ordinary course of business.
Correct answer: Estimated selling price less completion and selling costs- A. Rs. 8,800
- B. Rs. 8,000
- C. Rs. 9,200
- D. Rs. 9,600
Explanation: FIFO charges the first 400 units at the earliest cost of Rs. 20 each. Thus, cost of goods sold is 400 multiplied by Rs. 20, or Rs. 8,000.
Correct answer: Rs. 8,000- A. Import duties on purchased goods
- B. Direct labour used in production
- C. Abnormal amounts of wasted materials
- D. Freight costs incurred to bring goods to the warehouse
Explanation: Abnormal waste of materials, labour or other production costs is recognised as an expense rather than included in inventory cost.
Correct answer: Abnormal amounts of wasted materials- A. Profit is understated by Rs. 10,000
- B. Profit is overstated by Rs. 10,000
- C. Profit is unaffected in the current year
- D. Profit is understated by Rs. 20,000
Explanation: Cost of goods sold equals opening inventory plus purchases less ending inventory.
Correct answer: Profit is understated by Rs. 10,000- A. Unique items held for particular customer contracts
- B. Interchangeable units purchased throughout the year
- C. Large quantities of identical low-value items
- D. Routine office supplies with frequent usage
Explanation: Specific identification assigns the actual cost to each identifiable item, making it suitable for unique or separately designated goods.
Correct answer: Unique items held for particular customer contracts- A. Recoverable sales tax on purchases
- B. Freight and handling charges on purchases
- C. General administrative office salaries
- D. Advertising costs for finished goods
Explanation: Freight and handling charges are directly attributable to bringing inventory to its present location and condition.
Correct answer: Freight and handling charges on purchases- A. Using the highest possible production level
- B. Using the current selling price of goods
- C. Using normal operating production capacity
- D. Using the quantity sold during the period
Explanation: Fixed production overhead is allocated using the normal capacity of production facilities.
Correct answer: Using normal operating production capacity- A. A direct addition to inventory cost
- B. A deferred production expense
- C. A reduction from trade receivables
- D. An expense of the current period
Explanation: Abnormal wastage is not a normal cost of bringing inventory to its present condition.
Correct answer: An expense of the current period- A. An expense in the period of the write-down
- B. A charge against share capital
- C. A direct increase in retained earnings
- D. A liability payable to customers
Explanation: A write-down recognizes that the inventory is no longer expected to recover its original carrying cost.
Correct answer: An expense in the period of the write-down15. If the net realisable value of inventory later increases, an earlier write-down under IAS 2 may be:
- A. Reversed without any upper limit
- B. Transferred permanently to share capital
- C. Reversed only up to the original cost
- D. Ignored until the inventory is sold
Explanation: IAS 2 permits reversal when the circumstances causing the write-down no longer exist.
Correct answer: Reversed only up to the original cost- A. Each unit keeps its original purchase price
- B. The earliest purchase price applies to every unit
- C. The latest purchase price applies to every unit
- D. All units are valued at an average unit cost
Explanation: The weighted average method combines the cost of available units and divides it by the number of available units.
Correct answer: All units are valued at an average unit cost- A. Rs. 18.00
- B. Rs. 17.00
- C. Rs. 18.50
- D. Rs. 19.00
Explanation: The total cost is Rs. 1,200 plus Rs. 2,400, or Rs. 3,600, for 200 units. The weighted average cost is therefore Rs.
Correct answer: Rs. 18.00- A. Interest on a routine bank overdraft
- B. Import duty paid on purchased materials
- C. Storage after goods are ready for sale
- D. Commission paid to sales representatives
Explanation: Import duties that cannot be recovered are part of the purchase cost of inventory.
Correct answer: Import duty paid on purchased materials- A. Added to the cost of each unit produced
- B. Included in trade discount received
- C. Recognized as an expense of the period
- D. Recorded as a reduction in revenue
Explanation: Fixed overhead is allocated using normal capacity, so unusually low production does not cause excessive overhead to be loaded into…
Correct answer: Recognized as an expense of the period- A. Their purchase price has increased sharply
- B. The production manager expects higher wages
- C. They have been held for more than one year
- D. The related finished goods will sell above their cost
Explanation: Raw materials are not written below cost when the finished products in which they will be used are expected to sell at or above cost.
Correct answer: The related finished goods will sell above their costInventory Valuation MCQs: common questions
Are these Inventory Valuation MCQs free?
Yes. All Inventory Valuation MCQs from Accounting are free on TestUstad, with unlimited attempts and no account needed. Nothing on this page is a sample or a trial.
How many Inventory Valuation MCQs are on this page?
There are 34 Inventory Valuation MCQs in the Accounting bank, shown 20 to a page with the correct answer and an explanation on each.
Does every Inventory Valuation MCQ have an explanation?
Yes. Each Inventory Valuation question shows the correct option and a written explanation of why it is correct, so a wrong answer teaches you something rather than just being marked wrong.
Can I take a timed Inventory Valuation test?
Yes. The practice button on this page starts a free Inventory Valuation test drawn from the Accounting bank. It marks each answer instantly, gives you a score at the end, and can be retaken as many times as you like.