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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 iden... 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 FIFO valuation method.
Answer
FIFO stands for 'First In, First Out'. This method assumes that the oldest inventory items are sold first. Consequently, the cost of goods sold (COGS) reflects the costs of the earlier purchased items, while the ending inventory is valued using the costs of the most recently purchased items. This helps in accurately representing the company's financial standing, especially during periods of inflation, as the older, cheaper inventory is recognized as sold.
Step 2
Explain the specific identification valuation method.
Answer
The specific identification method values each item in inventory at its actual cost. This is especially useful for unique or high-value items, where tracking individual costs is feasible. Under this method, when a particular item is sold, its specific cost is removed from inventory, ensuring accuracy in the reflection of both inventory value and COGS.
Step 3
Calculate the cost price per laptop on hand on 1 October 2015.
Answer
To calculate the cost price per laptop on hand on 1 October 2015, we take the opening stock value of R413,000 and divide it by the number of units, which is 118:
Cost Price Per Unit = Total Value / Number of Units = R413,000 / 118 = R3,500.
Step 4
Calculate the value of the closing stock on 30 September 2016.
Answer
The closing stock value can be calculated using the FIFO method. The details of the closing stock are derived from the purchases, returns, and sales throughout the year. Following the calculations:
- Total purchases: R4,374,000 (accounting for returns).
- COGS (using FIFO):
- Sales of Lexus: 118 units at R5,098.52
- Sales of Granite: 356 units at R6,469.63
- Sales of Vision: 512 units at R4,642.72
Using the purchase costs and remaining inventory:
Closing Stock = (R750 x 410) + (R450 x 630) - (R650 x 20) = R704,700.