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Inventories Grade 12 Notes Accounting Study Guide pdf free

Inventory accounting is how a business values its stock on hand, breaks down purchase costs, and stays profitable. Without it, you’ll struggle to achieve the financial visibility you need to make the right decisions at the right time. Inventories Grade 12 Notes Accounting Study Guide

Inventories Grade 12 Notes Accounting Study Guide pdf free

6.1 Inventory systems

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

SYSTEM IMPORTANT POINTS 
Perpetual
  1. Entries are made in a Balance Sheet account called trading stock (an asset account) every time goods are bought and sold.
  2. Cost of sales needs to be calculated and recorded every time goods are sold.
  3. When stock is purchased the trading stock account is debited with the cost price (the asset is increasing).
  4. When stock is sold the trading stock account is credited with the cost price (the asset is decreasing).
  5. Any additional costs when purchasing stock are debited to the trading stock account (e.g. carriage on purchases).
  6. This system is better for the internal control of inventory.
Periodic
  1. Businesses would decide to use this system when it is not always feasible to calculate cost of sales every time goods are sold.
  2. Stock purchases are recorded in a nominal account called purchases (an expense account).
  3. Additional expenses when purchasing stock (e.g. carriage on purchases) are recorded separately in a nominal account called carriage on purchases (an expenses account).
  4. Cost of sales is therefore only calculated periodically by using the formula:
    Opening stock + purchases + carriage on purchases + import duties + customs duties – closing stock = cost of sales.

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).)

METHODIMPORTANT POINTS 
Specific Identification method
  1. This is the simplest form of stock validation, where every item is assigned a specific cost price.
  2. This system is relevant when large commodities are sold and every unit has its own cost price, e.g. vehicles, machinery, etc.
  3. That means that this system requires that the cost price must be identified of every commodity sold or when stocktaking is done.
  4. Specific identification is a more manually intensive method in managing the stock.
  5. So every item in stock will be recorded at the specific price originally bought.
  6. The disadvantage of this method is that the price of a vehicle can be manipulated. For example a red Ford 1.6 was bought at the beginning of the year for R100 000 and during the year the dealer bought a white Ford 1.6 at an increased cost price of R130 000. When the red car got sold the dealers can manipulate the price by recording the cost price as R130 000. So the profit was manipulated by showing a smaller profit than the true profit. The dealers can do the opposite as well when they want to show a higher profit.
FIFO
  1. FIFO stands for First In First Out.
  2. Businesses that sell goods which have a limited shelf life (e.g. milk or cellphones) often prefer to use this system.
  3. This means that the oldest stock is sold first and that the stock left at the end will always be the most recently bought stock.
  4. Under this method the stock on hand will be valued at the most recent prices.
Weighted average
  1. Under this system the value of the stock on hand is not calculated on the most recent prices because all prices on stock purchased are averaged.
  2. Weighted average is calculated by dividing the total cost of stock purchased by the total number of units purchased.
  3. Under this method the stock on hand will not be valued at the most recent prices.

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

DateLG  Samsung   Bosch Total value of stock 
No Cost priceTotal  NoCost priceTotalNoCost priceTotal
JanOpening stock 2@R1 000R2 000 3@R2 000R6 000 4@R3 000R12 000= R 20 000
AprilPurchases 3@R1 200R3 600 2@R2 100R4 200 2@R3 300R6 600= R 14 400
           Value of total stockR 34 400
 No Cost price Selling price No Cost price Selling price No Cost price Selling price 
Jan toSales 1@R1 000 R2 000 3@R2 000R12 000 3 @R3 300R18 000= R 32 000
Dec.Sales 2@R1 200 R4 800 1 @R3 000R6 600= R 11 400
Value of total salesR 43 400

*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:

LG: 1@ R1 000 (1 sold)
 LG: 1 @ R1 200 (2 sold)
Samsung: 2@ R2 100
Bosch: 1@ R3 000 (3 sold)
 1@ R3 300 (1 sold)
 6unsold units

Value of unsold units:

LG: 1@ R1 000 (1 sold)R 1 000
LG: 1 @ R1 200 (2 sold)R 1 200
Samsung: 2@ R2 100R 4 200
Bosch: 1@ R3 000 (3 sold)R 3 000
 1@ R3 300 (1 sold)R 3 300
 6unsold unitsR12 700

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

LG: 1@ R1 000 (1 sold)R 1 000
LG: 2 @ R1 200 (2 sold)R 2 400
Samsung: 3@ R2 100R 6 000
Bosch: 3@ R3 000 (3 sold)R 9 000
 1@ R3 300 (1 sold)R 3 300
Cost of sales of 10 sold unitsR21 700

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

Manager: DirkProduct: Energy drinks
UnitsRandAmount
Sales2 720R21,20R57 664
Opening stock320R9,00R2 880
Purchases4 800R58 560
April 20081 100R10,50R11 550
October 20092 500R12,42R31 050
January 20101 200R13,30R15 960
Closing stock2 400??

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

FIFO  WEIGHTED AVERAGE 
(Jan 2010) 1 200 units × R13,30 = R15 960
(Oct 2009) 1 200 units × R12,42 = R14 904
2 400 units (closing stock)
= R30 864
The most recent stock bought is what is left (closing stock).
Step 1 Opening stock = R2 880
Purchases = R58 560
Total cost = R61 440
Weighted average = R61 440 ÷ (320 + 4 800 units)
= R61 440 ÷ 5 120 units
= R123 per unit
Step 2 2 400 units (closing stock) × R12 = R28 800
Explanation of the calculations above 
  • The closing stock is 2 400 units.
  • Using the FIFO method means that 1 200 units bought in January 2010 and 1 200 units of the 2 500 units bought in October 2009 are left in stock, representing the closing stock of 2 400 units.
  • Step 1 is to calculate the weighted average by dividing the total cost of stock purchased by the total number of units purchased.
  • Step 2 uses the weighted average to calculate the value of the closing stock by multiplying the cost per unit by 2 400.

[14]

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

FIFO WEIGHTED AVERAGE 
320 units × R9 = R 2 8803
1 100 units × R10,50 = R11 5503
1 300 units × R12.42 = R16 1463
Cost of sales R30 5763
OR
Opening stock R2 880
+ Purchases R58 560
– Closing stock (R30 864)
= Cost of sales R30 576
Step 1 3203 units + 4 8003 units – 2 4003 units
= 2 7203 units sold
Step 2  2 720 units sold × R12 (weighted
average)
= R32 640 Cost of sales
Explanation of the calc ulations above 
Using the FIFO method means that the oldest stock has been sold first, that is 320 units of opening stock + 1 100 units purchased in April 2008 + 1 300 units of the 2 500 units purchased in October 2009 making up the total of 2 720 units sold.
  • Step 1 is the calculation of the number of units sold.
  • Step 2 uses the weighted average to calculate the value of the stock that has been sold, namely 2 720 units.

[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.

FIFO WEIGHTED AVERAGE 
Gross profit = sales – cost of sales 
R57 664− R30 576 = R27 088 R57 664 − R32 640 = R25 024
Explanation of the calculations above 
The sales figure was given in the question and is the same in both methods.
The cost of sales figures were calculated by you in question 2 on page 67.
You will notice that the gross profit figure is different in the 2 methods because the cost of sales was calculated differently.

[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

DR TRADING ACCOUNT CR
 Amount Units Amount Units
+ Opening stockClosing stock = Cost of sales (units)
+ Purchases (net)Sales(net) = gross profit
+ Carriage on purchases
+ Custom Duties
Total amount and snits of all the stock that could be sold
  • 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

Dr.                                      Trading account                                      Cr
 Runits Runits
+Opening stock R10100 10Closing stock
(Stock validation is all about the calculation of the closing stock!)
 ?25
(Number of items in stock)
= Cost of sales
(75 units should be sold. Compare it with the Sales units sold to detect if any units were stolen)
10 + 90 – 25 = 75
+Purchases (net)
@R12
@R15
@R20
1330
(‘(Net)’ reminds you to subtract returns from the purchases)
480
450
400
90
40
30
20
Sales (net)
@40 × 75
(Sales minus returns)
3 00075= gross profit
+Carriage on purchases
@ R2 p unit × 90
180
+Custom duties
@ 0,50c per unit × 90
45
1655
(Total value of all the items that can be sold)
100
(Total units that can be sold are 10 + 90 = 100)

 

Possible questions: Learn formats and understand
Value of the closing stock:
FIFO
25 units: Start with the stock purchased recently.
20 × R20 = 400
5 × R15 = 75
25 × R2 = 50 Carriage on purchases per unit
25 × R0,50 = 13 (12,50) custom duties per unit
Closing stock = R538
Value of closing stock:
Weighted Average
Total the debit side’s amount and unit column R1655 ÷ 100 units = R16,55 average price per unit
Closing stock is 25 × R16,55 = R413,75
(R414)
Cost of sales: Need to memorise the format! FIFOOpening stock + Purchases(net) + Carriage on purchases + Custom duties – closing stock = Cost of sales
100 + 1330 + 180+45 – 538 = R1117 (FIFO)
Gross profit: FIFOSales (net) – cost of sales = Gross profit
3 000 – R1117 = R1 883
5. Mark –up: know the formula
Gross profit   × 100 = %
Cost of sales         1
1883 × 100 = 168,58 %
1117      1
Most of the times you need to explain why the profit markup was not achieved of e.g. 200 %. Reason is because of seasonal sales and cash discounts.
Rate of stock turnover
Cost of sales    = times
Average stock
     1117      =
(100 + 538)/2
1117 = 3,5 times
319
The stock is replaced 3,5 times per year
Period of stock on hand
Average stock × 365 = days
Cost of sales      1
 319 × 365 = 104,24 days
1117      1
Stock is on the shelf for 104 days before it is sold. This ratio assists a business to determine when to order stock.

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:

DetailsDateNo. of ballsUnit priceTotal
Opening stock1 March 2008750R110R 82 500
Purchases2 480R 340 800
20 May 2008800R150R 120 000
25 October 20081 200R120R 144 000
16 December 2008480R160R 76 800
Closing stock28 February 20091 100  ? ?
Sales1 March 2008 to 28 February 20092 100 ?R 430 500

[35]
ANSWER

2.1Explain the meaning of the term ‘FIFO’.2
2.2The selling price of soccer balls was kept constant throughout the year. Calculate the selling price per soccer ball.3
(Get all the info from the Trading account)
2.3
(Calculate the total number units that can be sold minus closing stock and compare that with the sales units.)
Calculate the number of balls that are missing.
What entry would you make in the books to record this?
7
2.4
(The Closing stock will be the stock that you recently bought.)
Value the stock on hand at the end of the year according to the FIFO method.7
2.5
(Opening stock + Purchases (net) + Carriage on purchases + custom duties – closing stock = cost of sales (make sure you memorised the formula)
Stock stolen must be taken into account when you calculate the Cost of sales amount.)
Calculate cost of sales.
Calculate gross profit for the year.
8
2.6
(Stock holding period or called Period of stock on hand)
How long can he expect the closing stock to last? Provide figures or a calculation to support your answer.
What advice would you offer Peter about his purchases of stock? Provide two points.
8

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.
Trading account for calculation purposes       
R units R units
+Opening stock @ R11082 500750Closing stock
@160
@120
FIFO
151 200
76 800
74 400
1 100
480
620
Cost of sales
750 + 2 480 – 1 100 = 2 130 units supposed to be sold
+Purchases (net)
@R150
@R120
@R160
340 800
120 000
144 000
76 800
2 480
800
1 200
480
Sales(net)
R430 500÷ 2 100 = R205
430 5002 100= gross profit
+Carriage on purchases @R
+Custom duties@
Total units at cost price that can be sold423 3003 130

(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

2.1 Explain the meaning of the term ‘FIFO’.
First-in first-out
OR
The oldest soccer balls are the ones that are sold first (2)
2.2 The selling price of soccer balls was kept constant throughout the year. Calculate the selling price per soccer ball.
R430 500/2 100 balls = R205 each (3)
2.3 Calculate the number of balls that are missing.
Total balls available = 750 + 2 480 – 1 100 = 2 130 balls
Number sold = 2 100 balls
Number stolen = 30 balls
What entry would you make in the books to record this?
Debit Trading stock deficit/Loss due to theft R3 300
Credit Trading stock R3 300 (7)
2.4 Value the stock on hand at the end of the year according to the FIFO method.
480 balls at R160  = R 76 800
620 balls at R120 = R 74 400
TOTAL = R151 200 (7)
2.5 Calculate cost of sales
Opening stock R 82 500
Purchases 340 800
Stolen – 3 300
Closing stock – 151 200
Cost of sales R268 800
Calculate gross profit for the year.
Sales R430 500
Cost of sales –268 800
Gross profit 161 700 3 (8)
2.6 How long can he expect the closing stock to last? Provide figures or a calculation to support your answer.
Any valid evidence provided e.g.
Figures:
On average, 175 balls are sold per month – stock will last 6,3 months
OR
Cost of sales for the year is R268 800 (R22 400) – final stock is R151 200 – stock could last 6,8 months
Closing stock × 365 = days
Cost of sales       1
151 200 × 365 = 205 days/6,7 months
268 800     1
What advice will you offer Peter about his purchases of stock? Provide two points.
Any two valid points, e.g.

  • Purchase in smaller quantities more often
  • Only order when they reach their minimum stock level (re-order level)
  • They are holding too much stock. (8)

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: DateSoccer balls Soccer jerseys
    No. of unitsPer unitTotal valueNo. of unitsPer unitTotal value
    01/03/081 200R120R144 000520R320R166 400
    28/02/09900??250??
  2. Purchases:
    During the financial year ended 28 February 2009, the following stock items were purchased:

    Date of purchasesSoccer ballsSoccer jerseys
    No. of unitsPer unitTotal valueNo. of unitsPer unitTotal value
    31/03/081 300R120R156 000400R200R 80 000
    30/06/08900R150R135 000600R225R135 000
    30/09/081 000R175R175 0001 400R255R357 000
    02/01/09200R180R 36 000100R300R 30 000
    Totals3 400R502 0002 500R602 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:
    ItemsDetailsTotal
    Soccer balls3 500 units at R320 eachR1 120 000
    Soccer jerseys2 770 units at R400 eachR1 108 000
  5. Financial indicators:
    ItemsMark-up % on costStock turnover rate
    Soccer balls48,5%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

SOCCER BALLS                                                                        Trading account                                                               WEIGHTED AVERAGE
 RunitsRunits
 +Opening stock @R144 0001 200Closing stock
900 × R147
132 300900= Cost of sales
Units
1 200 + 3 400 – 900
= 3 700 (SUPPOSED TO BE SOLD)
 +Purchases(net)
@R120
@R150
@R175
@R180
502 000
156 000
135 000
175 000
36 000
3 400
1 300
900
1 000
200
 –Sales (net) @ R3201 120 0003 500= gross profit
 +Carriage on purchases @R30 200
 +Custom duties @ R
Total units at cost price that can be sold676 200÷ 4 600 = R147 weighted average per unit

Calculations for Activity 2

SOCCER JERSEYS                                                   Trading account                                                                     FIFO
 R unitsRunits
 +Opening stock @R166 400520Closing stock:
@R300 × 100
@R255 × 150
68 250
30 000
38 250
250
100
150
= Cost of sales units
 +Purchases(net)
@R200
@R225
@R255
@R300
602 000
80 000
135 000
357 000
30 000
2 500
400
600
1 400
100
 –Sales (net)
@R400 × 2 772
1 108 0002 772= gross profit
 +Carriage on purchases @R – –
 +Custom duties @ – –
Total units at cost price that can be sold768 4003 020

Answers for Activity 2
QUESTION 2

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.
Good answer = 2 marks; Poor answer = 1 mark; Incorrect = 0 marks
Any two valid points, e.g.
Soccer World Cup will be in SA soon – keep the business operational until then.
Property prices are not doing well at the moment – move into this later.
Financial implication to the business, future prospects Implications for staff – retrenchment (4)
2.2 Calculate the number of soccer balls stolen.
1 200 + 3 400 – 3 500 – 900 = 200 (5)
2.3 Calculate the closing stock value of soccer balls using the average method:
Stock at beginning of year R144 000 1 200
Purchases during the year R502 000 3 400
Carriage on purchases R 30 200 –
R676 200 ÷ 4 600 = R147
= 900 × 147 = R132 300
Calculate the closing stock value of soccer jerseys using the FIFO method:
100 × R300 = R30 000
150 × R255 =   R38 250
250                 R68 250        (11)
2.4 Calculate the following for Soccer jerseys (you may prepare a Trading Account to calculate these figures):
Calculate cost of sales:
Opening stock 166 400
Purchases 602 000
Less closing stock (68 250)
Cost of sales 700 150
Calculate mark-up% on cost:
= (1 108 000 – 700 150) × 100
700 150                 1
OR
407 850 × 100
700 150      1
= 58,3 %
Calculate stock turnover rate:
Cost of sales
Average stock
=        7 00 150
(68 250 + 166 400) / 2
= 700 150 = 5,97 times
117 325           (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.
Good answer = 2 marks; Satisfactory answer = 1 mark; Incorrect = 0 marks
Appropriate financial indicator/figures = 1 each
Any two valid points

  • Implement tighter control measures over soccer balls – 200 balls were stolen
  • The business is carrying a lot of stock, particularly soccer balls – 900 on hand at end of year
  • Selling price must change if cost increases
  • The stock for soccer balls must be turned over quicker – 3,9 times per annum. (6)

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

Topic  Paper  Question 
FIFO and weighted averageFebruary/March 2010 2
Weighted average calculationsNovember 2010 1.2
FIFO calculationsFebruary/March 2012 1.2
Stock validationNovember 2013 6.2

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