Valuation of inventory

6 Complete the following sentences with the following words: cost; undervalued; saleable;
receipts; assets; overvalued; unsold; less; acquire. [10 marks]

Inventory is a term used to describe goods, purchased for resale by a business, that have remained

. Inventory at cost includes, in addition to price, all those costs necessary to

the inventory and convert it to a condition. Net realisable value

is the difference between estimated from sales of inventory estimated costs

associated with bringing inventory to saleable condition. If closing inventory is overvalued, the

cost of sales will be and therefore the gross profit will be . If inventory is

overvalued, then the total figure in the statement of financial position will be overstated.

15 Sole traders

1 Which statement describes an income statement? 3 The value of Desmond’s owner’s equity at
31 December 2018 is less than its value on
A A business’ income and expenditure for a
1 January 2018. Desmond did not introduce
particular period of time – usually a year.
new capital or make any drawings.
B A list of all the assets, liabilities and
owner’s equity on a particular date. Which term describes the difference in
Desmond’s owner’s equity?
C A list of the balances of all the ledger
accounts of a business on a particular date. A Gross loss

D A summary of a business’ receipts and B Gross profit

payments during a particular period of time C Loss for the year
– usually one year. [1 mark]
D Profit for the year [1 mark]
2 How is cost of sales calculated?
A Closing inventory + opening inventory − 4 Which of the following is operating a trading
purchases business?
B Closing inventory + purchases − opening A A builder
inventory B A chemist
C Closing inventory + purchases + opening C A lawyer
inventory
D A website designer [1 mark]
D Opening inventory + purchases − closing
inventory [1 mark]
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 15 Sole traders

5 Djarak, a sole trader, provides the following information: [1 mark]

$
Cost of sales 50 000
Expenses 4700
Profit for the year 10000

What are Djarak’s sales?

A $14 700 B $54 700 C $60 000 D $64 700

6 Felcy had $56 000 in her capital account on 1 January 2018. During the year she withdrew
$4 500 cash from the business bank account and took inventory for her personal use $1 000.
Her profit for the year was $15 700. Prepare Felcy’s capital account at 31 December 2018. [6 marks]
Felcy’s capital account
Date Details $ Date Details $

7 Sita is a sole trader. Insert the missing words and figures into Sita’s statement of
financial position at 31 December 2019. [14 marks]
Sita
Statement of financial position as at 31 December 2019
ASSETS $ $ $
Accumulated Net book
Depreciation value
Machinery 1 440 690
Motor van 2 400 1 170 1 230
3 840 1 920
Current assets:
Inventory at 31 December 2019 2 380
Trade 4 920
Less: provision for doubtful debts 4680

Other 240
Cash at bank
Cash in hand 1 140 8 650
Total

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 Sole traders

CAPITAL AND LIABILITIES

Balance at 1 March 2018 8 500

Add: profit for the year 2 080
Less: drawings 2 850
7 730
Current :
Trade payables
Other payables 350 2 840
Total capital and liabilities 10 570

8 Sylvester has a hairdressing salon. Insert the missing words and figures into Sylvester’s income
statement for the year ended 30 June 2018. [5 marks]
Sylvester
Income statement for the year ended 30 June 2018
$ $
:
Takings 14 500
Less :
Rates 1 000
Assistant’s salary
Rent 350
Electricity 1 000
Internet 400
Depreciation 500
for the year 9 600

9 Identify whether each of the following statements are true or false by writing the word
‘true’ or ‘false’ in the following table. [5 marks]
True/False
a A service business must prepare a trading account.
b Non-current assets are listed in the statement of financial position in
the order of the length of their economic life.
c Profit for the year decreases the owner’s capital.
d The trading account and the profit and loss account make up the income
statement.
e Carriage outwards is the cost of transporting goods to the customer.

10 Identify the missing figures by completing the following. [5 marks]

Sales Cost of sales Gross profit/loss
$ $ $
a 6 700 2 400
b 3 000 1 100 (profit)
c 3 600 800 (profit)
d 4 900 300 (loss)
e 3 000 500 (loss)

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 15 Sole traders

11 State two advantages and two disadvantages of being a sole trader. [4 marks]
Advantages:

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Disadvantages:

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12 Explain what is meant by an income statement and explain why it is prepared. [4 marks]
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13 Explain what is meant by a statement of financial position and explain why it is prepared. [4 marks]
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14 Explain why gross profit is recorded in the financial statements of a trading business but not in the
financial statements of a service business. [3 marks]
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 Sole traders

15 Leroy is a trader with a financial year end of 31 October. The following balances were extracted from
his books of account on 31 October 2018.
$
Sales 195 600
Sales returns 600
Purchases 87 150
Carriage inwards 450
Rent 12 000
Wages and salaries 25 600
Drawings 4 500
Operating expenses 52 600
Interest 250
Loose tools 400
Motor vehicles 17 000
Fixtures and fittings 8 000
Provision for depreciation of motor vehicles 3 400
Provision for depreciation of fixtures and fittings 2 400
Provision for doubtful debts 260
Inventory at 1 November 2017 22 100
Trade receivables 14 120
Trade payables 14 600
Bank 780 debit
Capital at 1 November 2017 19 290
5% bank loan repayable in 2026 10 000

Additional information at 31 October 2018:

• The value of trade receivables included a debt of $120 which was considered unlikely to be paid.
• The provision for doubtful debts was to be maintained at a rate of 2 per cent.
• Loose tools were valued at $320.
• Depreciation for the year on motor vehicles and fixtures and fittings was yet to be provided. Leroy
depreciates his motor vehicles at the rate of 20 per cent per annum using the reducing balance
method, and depreciates his fixtures and fittings at the rate of 10 per cent per annum using the
straight line method.
• During the year goods costing $2 000 had been taken from the business by Leroy for his own use.
• Inventory at the year end was valued at $19 800.
• Accrued operating expenses at the year end amounted to $1 650. There was also some unpaid
interest on the bank loan.
a Prepare the interest account for the year ended 31 October 2018. Balance the account and bring
down the balance on 1 November 2018. [4 marks]
Interest account
Date Details $ Date Details $

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 15 Sole traders

b Prepare the income statement for the year ended 31 October 2018. [20 marks]

Leroy
Income statement for the year ended 31 October 2018
$ $ $

Workings:

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 Sole traders

c Prepare the statement of financial position at 31 October 2018. [20 marks]

Statement of financial position at 31 October 2018
$ $ $
Cost Accumulated Net book value
depreciation

Workings:

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