10/27/24, 7:24 PM Section | 8.

1 Inventory | ACCA Study Hub

For Exams from September 2024 to August 2025 – (FA-FFA) Financial Accounting   
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k Chapters

Sections Table of Contents Confidence Levels Notes Bookmarks Highlights

g Flashcards
8.1.1 Inventory Overview

v Quizzes

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  Content 0 3 4 7 6

 Search Rate Your Confidence

1.1 Inventory Overview
High

Medium
1.1.1 Inventory Classification
Low
Inventory is the term used to describe the goods, materials and
supplies held at the accounting period end that have been
purchased by a business and are either ready for sale or used in Continue 
the production of completed products for sale. Common
classifications of inventories include: Category

Goods purchased for resale (For example, by a wholesaler or 8.1 Inventory

retailer)
Raw materials and components purchased for manufacturing
into goods for sale
Products and services in intermediate stages of completion
(Work-in-progress)
Finished goods

Activity 1 Show

Inventory is an asset in the Statement of Financial Position.

What is the future economic benefit that the business will

derive from selling the goods held as inventory?

*Please use the notes feature in the toolbar to help formulate

your answer.

1.1.2 Accruals Accounting

Accruals accounting requires that business expenses be matched
to the related business income. This means that the statement of
profit or loss needs to ensure that the sales income generated in
the year matches the trading costs associated with those sales.

Inventory purchases not sold during the year make up part of the
closing inventory at the financial year-end. Furthermore, sales
generated during the year may be for items purchased in the
previous year that are held as opening inventory.

The Statement of Profit or Loss needs to be adjusted to apply

accruals accounting. To correctly account for inventory according to
the accruals concept, the Statement of Profit or Loss records the
cost of goods sold instead of items purchased.

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10/27/24, 7:24 PM Section | 8.1 Inventory | ACCA Study Hub

For Exams from September 2024 to August 2025 – (FA-FFA) Financial Accounting   
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8.1.2 Accounting for Inventories

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1.2 Accounting for Inventories
High

Businesses will purchase raw materials and goods for resale Medium
throughout an accounting period. These purchases are recorded in
Low
the Purchases account (expense) at the point of the purchase.

At year-end, the total purchases appear in the Statement of Profit or Continue 

Loss under the heading Cost of sales (or cost of goods sold). To
determine the final Cost of sales figure, the business must adjust
Category
for opening and closing inventory.
8.1 Inventory
The Cost of sales is the cost of the inventory sold during the
accounting period.

 Key Point

Cost of Sales = Opening inventory + Cost of goods purchased −

Closing inventory

Opening inventory = value of inventory held at the start of the

accounting period.

Closing inventory = value of inventory held at the accounting

period’s end.

Cost of goods purchased = Purchase cost of the goods for resale or

all the direct costs such as materials, supplies and wages needed
to make the goods.

Example 1

Amit runs a shop that sells computer ink cartridges to local

offices. He is preparing financial statements for his year-end of
30 November 20X9. Amit has recorded the following:

- During this period, he sold 4,100 cartridges.

- On 1 December 20X8, his inventory consisted of 1,600
cartridges valued at $67,500.
- During the year, he purchased 3,500 cartridges for $129,600.
- On 30 November 20X9, he held 1,000 cartridges in inventory,
valued at $34,800.

Cost of sales for the year = Opening inventory + Cost of goods

purchased − Closing inventory

Units $

Opening inventory 1,600 67,500

Add: Cost of goods (purchases) 3,500 129,600

Less: Closing inventory (1,000) 34,800

Cost of sales 4,100 162,300

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10/27/24, 7:24 PM Section | 8.1 Inventory | ACCA Study Hub

For Exams from September 2024Example 1 2025 – (FA-FFA) Financial Accounting 

to August   
The above table shows that 4,100 units of cartridges were sold
k Chapters
during the year. The cost of sales of the 4,100 units is recorded
Flashcards
in Amit’s Statement of Profit or Loss for the year ended 30
g
November 20X9 as $162,300.
v Quizzes

r Practice
1.2.1 Inventory Journals
 Search
The record of inventory and cost of goods sold are made at the end
of the year using journals. The objective of the double entries is to:

- Ensure the Inventory account reflects the closing inventory

valuation
- Cost of goods sold account is created and reflects the correct
amount

To achieve these objectives, there are three double-entry steps to

make:

1. Remove the Opening Inventory

Opening inventories are removed and transferred to the Cost of

goods sold account. This entry is necessary because the opening
inventories are now used to generate sales in the current
accounting period.

General Category Explanation

Ledger
Account

DR Cost of goods Expense Opening inventory cost now

sold included as expenses

CR Inventory Asset Inventory (asset) decreased

The cost of opening inventories is reflected as a current-year

expense in the Statement of Profit or Loss.

2. Close off the Purchases Account

A business makes purchases for inventory for resale. The cost is

debited to the Purchases account and credited to cash/payables at
the point of purchase. At year-end, the amount in the Purchases
account is closed off and transferred to the Cost of Goods Sold.

General Ledger Category Explanation

Account

DR Cost of goods Expense Purchases (expense) is

sold transferred to COGS

CR Purchases Expense Purchases (expense) is

closed off

3. Post the Closing Inventory

The balance in the inventory account at year-end should reflect the

value of closing inventory. The closing balance is presented in the
statement of financial position as a current asset.

Since closing inventories are items purchased that are not sold in
the accounting period, their cost should not be reflected as an
expense in the Cost of goods sold account (SPL). Therefore, the
value of closing inventory is transferred out of expenses and
reflected as Closing inventory in the Statement of Financial
Position.

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10/27/24, 7:24 PM Section | 8.1 Inventory | ACCA Study Hub

Individual
For Exams from September 2024Category Explanation
to August 2025 – (FA-FFA) Financial Accounting    
Account
k Chapters
DR Inventory Asset Inventory (asset)
Flashcards increased
g
CR Cost of goods sold Expense Costs (expense)
v Quizzes
decreased

r Practice
The value of closing inventory will be next year’s opening inventory
 Search value.

Activity 2 Show

For each statement below, state if they are True or False.

1. The opening inventory of $45,000 will be in the inventory

account as a debit balance.
2. To record the closing inventory balance of $54,000, the
journal entry is:

DR Cost of sales $54,000

CR Inventory account $54,000

3. The opening inventory increases the Cost of sales in the

Statement of Profit or Loss, and the closing inventory
reduces it.
4. The closing inventory of $54,000 is recognised in the
Statement of Financial Position as a Non-current asset.

*Please use the notes feature in the toolbar to help formulate

your answer.

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10/27/24, 7:24 PM Section | 8.1 Inventory | ACCA Study Hub

For Exams from September 2024 to August 2025 – (FA-FFA) Financial Accounting   
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Sections Table of Contents Confidence Levels Notes Bookmarks Highlights

g Flashcards
8.1.3 Inventory Quantity

v Quizzes

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  Content 0 3 4 7 6

 Search Rate Your Confidence

1.3 Inventory Quantity
High

Businesses need to know the inventory volume/quantity to attribute Medium

a value to the opening and closing inventory. This allows the
Low
business to calculate the cost of sales, which will be included in
their statement of profit or loss.
Continue 
Inventory management is also crucial for businesses to track their
inventory levels at different time stages. This allows a smooth
Category
process of purchasing further inventory to meet sales.
8.1 Inventory

1.3.1 The Continuous Approach

In this approach, each product sold by a business has its inventory
record, either on a manual card or a computer record.

The card records quantities of purchases and sales of that product.

It is set up to keep a running total of the amount of inventory as
each new transaction (either sales or purchases) takes place. The
record identifies how much inventory the business holds at any
time.

This system uses the following principle: Opening Inventory +

Purchases − Sales = Closing Inventory

1.3.2 The Periodic Approach

In this approach, there are no record cards. Inventory is physically
counted at the end of the year (inventory count), and their quantities
are recorded in a list.

The inventory count is usually performed on the last day of the

accounting period when the business is closed with no inventory
movements occurring.

Keeping continuous records can be time-consuming for businesses

with multiple lines of products to sell, even if they are computerised.
A business typically performs an inventory count at year-end, even
when continuous records are kept. It may also carry out inventory
counts on specific items during the year to keep a check on the
card records.

Where year-end inventory is based on the valuation of balances

extracted from continuous inventory records, the recorded
quantities must be shown to be accurate and up to date.
Businesses may require an inventory-management system, which
includes:

A test-counting program designed to cover all product/line items

at least once a year.
The investigation and correction of differences between the
ledger and physical quantities.

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10/27/24, 7:24 PM Section | 8.1 Inventory | ACCA Study Hub

 Key
For Exams Point
from September 2024 to August 2025 – (FA-FFA) Financial Accounting    
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If the stock-checking system is ineffective, a complete physical
k
count may be required for financial reporting.
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10/27/24, 7:24 PM Section | 8.2 Inventory Valuation | ACCA Study Hub

For Exams from September 2024 to August 2025 – (FA-FFA) Financial Accounting   
 

k Chapters

Sections Table of Contents Confidence Levels Notes Bookmarks Highlights

g Flashcards
8.2.1 IAS 2 Inventories

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  Content 0 3 4 7 6

 Search Rate Your Confidence

2.1 IAS 2 Inventories
High

Under IAS 2 Inventories, inventories are valued at the lower of cost Medium
or net realisable value (NRV).
Low

2.1.1 Cost
Continue 
The cost of inventory includes the cost of bringing the inventories to
their current location and condition. The below flowchart illustrates
Category
the components that make up the cost of inventories.
8.2 Inventory Valuation

If the business manufactures the goods, the inventory cost includes

raw materials purchases plus the cost of converting the material
into the finished product (for example, wages and overheads).

IAS 2 stipulates several costs that are excluded in calculating the

cost of inventory, as illustrated in the diagram below:

The cost is determined using applicable pricing valuation methods

(FIFO, continuous weighted average or periodic weighted average).

Activity 3 Show

For each of the costs below, state whether they should be

included in the inventory cost.

1. Purchase of fruit
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2. Delivery to customers (Carriage outwards)
For Exams fromofSeptember
3. Cost 2024was
rotten fruit that to August 2025 – (FA-FFA) Financial Accounting 
thrown away   
4. Labour cost for those working on the production line
k Chapters
5. Cost of labels for the tin
Flashcards
6. Delivery of fruit to the factory (Carriage inwards)
g
*Please use the notes feature in the toolbar to help formulate
v Quizzes your answer.

r Practice
2.1.2 Net Realisable Value (NRV)
 Search
The net realisable value (NRV) of an item of inventory is its selling
price after all further costs to complete and sell the item have been
considered.

Selling expenses include expenses in getting the inventories from

the business premises to the customer, including delivery costs that
the business will incur.

NRV = Estimated selling price − Estimated future costs of

completion − Estimated future selling expenses (if inventory is still
in production)

Activity 4 Show

1. Hiroto has carried out an inventory count and has 10,000 toy
cars in his warehouse. He has established the following
information on the potential inventory value of each toy car.

Cost $5.00

Selling price $6.00

Selling expenses $0.75

Trade discount received 0%

What is the correct valuation of the inventory per IAS 2?

a) $50,000
b) $52,500
c) $60,000
2. Hiroto has carried out an inventory count and has 20,000 toy
cars in his warehouse. He has established the following
information on the potential inventory value of each toy car.

Cost before trade discount $7.00

Selling price $7.00

Selling expenses $0.25

Trade discount received 5%

What is the correct valuation of the inventory per IAS 2?

a) $133,000
b) $135,000
b) $140,000
3. Hiroto has carried out an inventory count and has 5,000 toy
cars in his warehouse. He has established the following
information on the potential inventory value of each toy car.

Cost $7.00

Selling price $7.00

Selling expenses $0.25

Settlement discount received 5%

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a) $33,250
For Exams from September 2024 to August 2025 – (FA-FFA) Financial Accounting 
b) $33,750
  
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c) $35,000
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*Please use the notes feature in the toolbar to help formulate
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your answer.

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For Exams from September 2024 to August 2025 – (FA-FFA) Financial Accounting   
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Sections Table of Contents Confidence Levels Notes Bookmarks Highlights

g Flashcards
8.2.2 Pricing Valuation Methods

v Quizzes

r Practice
  Content 0 3 4 7 6

 Search Rate Your Confidence

2.2 Pricing Valuation Methods
High

The cost price of each item is called the unit cost. If this stays the Medium
same throughout the accounting period, then it is simple to
Low
determine the price per item in the inventory. However, inventory
prices may rise or fall over the accounting period. Therefore, the
order of sold inventory needs to be established to determine the Continue 

value of closing inventory.

Category
There are two methods of calculating the cost of inventory:
8.2 Inventory Valuation
First In-First Out (FIFO)
This method assumes that inventories that are purchased first
are sold first.
Average Cost (AVCO)
The average cost (AVCO) is calculated by determining the
average cost for items held in the opening inventory and
purchased during the period. There are two main methods of
calculating average cost.
- The first is where the calculation is done on a periodic (such
as monthly) basis, known as the periodic weighted
average.
- The other method is where an average value for inventory is
calculated before every issue from inventory and is known as
the cumulative weighted average.

FIFO and AVCO calculate the cost of inventory, which is then

compared to the net realisable value to determine which is lower
and should be presented as the inventory value in the statement of
profit or loss.

After obtaining the opening and closing value, the cost of sales is
calculated and recorded in the statement of profit or loss.

Cost of sales = Opening inventory + Cost of goods − Closing

inventory

2.2.1 First In-First Out (FIFO)

FIFO assumes that inventory leaves the warehouse in the same
order as its receipt. Therefore, the inventories remaining in the
warehouse at the end of the accounting period are the most
recently purchased and should be valued at the most recent
purchase price.

Example 2

Tariq's Lighting Supplies Co. had the following inventory

transactions during the first week of April 20X5:

Date Quantity in Unit Total

units cost $ cost $

1 April Opening 500 5.00 2,500

inventory

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For Exams from September 2024Example 2 2025 – (FA-FFA) Financial Accounting 

to August   
Chapters
2 April Purchase 250 5.10 1,275
k
3 April Purchase 300 5.20 1,560
g Flashcards

4 April Issue 400

v Quizzes
5 April Purchase 200 5.30 1,060
r Practice
6 April Issue 500
 Search
7 April Closing 350
inventory

These logs show that inventory has left the warehouse because
of customer sales. Inventory leaving the warehouse is called an
issue.

Using the FIFO method of valuation, the missing figures are

calculated as follows:

1. 4 April Issue
Using the FIFO principle, it is assumed that the 400 items
sold are the first to have been purchased. These are 400 of
the 500 items in inventory on 1 April. Each item is valued at
$5.00, so the total value of the 4 April issue is (400 units × $5)
= $2,000
2. 6 April Issue
Applying the FIFO principle, it is assumed that the 500 items
are the remaining 100 from 1 April, 250 from the 2 April
purchase, and 150 from the 3 April purchase. The value is
calculated as (100 units × $5) + (250 units × $5.10) + (150
units × $5.20) = $2,555
3. 7 April Closing Inventory
The 350 items of closing inventory will be valued as the last
items that have been purchased and are unsold. These would
be 200 units from the 5 April purchase plus the remaining 150
units from the 3 April purchase. The value of the inventory is
(200 × $5.30) + (150 × $5.20) = $1,840
4. The Cost of Sales
Cost of sales = Opening $2,500 + Cost of goods ($1,275 +
$1,560 + $1,060) − Closing $1,840 = $4,555

Activity 5 Show

Aarav is a sole trader who sells office supplies to businesses.

The inventory schedule of issues and purchases of pens for the
month of June 20X3 is available. Aarav is confident that the

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10/27/24, 7:25 PM Section | 8.2 Inventory Valuation | ACCA Study Hub
pens will be sold for more than he paid. This means that the
For Exams from September 2024 to August 2025 – (FA-FFA) Financial Accounting 
inventory will be measured at cost.
  

k Chapters 1. Calculate and enter the missing figures in the inventory

schedule and the missing unit costs in the space below,
g Flashcards labelled (a), (b), and (c).

v Quizzes Date Quantity in Unit Total

units cost $ cost $
r Practice
1 June Opening 1,000 0.75
 Search inventory

12 June Purchase 500 0.80

13 June Purchase 1,200 0.85

20 June Issue 1,300 (a)

25 June Purchase 200 0.99

29 June Issue 900 (b)

30 June Closing 700 (c)

inventory

2. Calculate the cost of sales.

3. Record the double entry of the closing inventory in the
general ledger.

*Please use the notes feature in the toolbar to help formulate

your answer.

2.2.2 Periodic Weighted Average

With this inventory valuation method, the business totals the value
of purchases of raw materials at the end of the reporting period.
Then it divides the value by the number of units acquired.

This provides an average cost used to value the cost of goods sold
and the inventory at the period end.

Example 3

Tariq's Lighting Supplies Co. had the following inventory

transactions during the first week of April 20X5:

Date Quantity in Unit Total

units cost $ cost $

1 April Opening 500 5.00 2,500

inventory

2 April Purchase 250 5.10 1,275

3 April Purchase 300 5.20 1,560

4 April Issue 400

5 April Purchase 200 5.30 1,060

6 April Issue 500

7 April Closing 350

inventory

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10/27/24, 7:25 PM Section | 8.2 Inventory Valuation | ACCA Study Hub

For Exams from September 2024Example 3 2025 – (FA-FFA) Financial Accounting 

to August   
Using the periodic weighted average method of valuation, the
k Chapters
missing figures are calculated as follows:

g Flashcards 1. Closing Inventory

First, sum up the total cost: $2,500 + $1,275 + $1,560 +
v Quizzes
$1,060 = $6,395
Then, add up all the purchases in units: (500 + 250 + 300 +
r Practice
200) = 1,250 units
Search The average cost per unit is: $6,395 ÷ 1,250 units = $5.12 per

unit
The closing inventory: 350 units at $5.12 each = $1,792

Date Quantity in Unit Total

units cost $ cost $

1 April Opening 500 5.00 2,500

inventory

2 April Purchase 250 5.10 1,275

3 April Purchase 300 5.20 1,560

4 April Issue (400)

5 April Purchase 200 5.30 1,060

6 April Issue (500)

Total for the $6,395

period

7 April Closing 350

inventory

2. Cost of Sales
The cost of the issues is calculated as the number of units
sold x the unit cost
Cost of Sales = (400 units + 500 units) × $5.12 = $4,608

2.2.3 Cumulative Weighted Average

With this inventory valuation method, calculate the average unit
price of the inventory after each purchase. The average is therefore
adjusted throughout the period.

Example 6

Tariq's Lighting Supplies Co. had the following inventory

transactions during the first week of April 20X5:

Date Quantity in Unit Total

units cost $ cost $

1 April Opening 500 5.00 2,500

inventory

2 April Purchase 250 5.10 1,275

3 April Purchase 300 5.20 1,560

4 April Issue 400

5 April Purchase 200 5.30 1,060

6 April Issue 500

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For Exams from September 2024Example 6 2025 – (FA-FFA) Financial Accounting 

to August   
Chapters
7 April Closing 350
k
inventory
g Flashcards
Using the Cumulative Weighted Average method of valuation, the
Quizzes missing figures are calculated as follows:
v
1. 4 April Issues
r Practice
Determine the average cost per unit after 3 April ($2,500 +
Search
$1,275 + $1,560) ÷ (500 + 250 + 300 units) = $5,335/1,050

units = $5.08/unit)
The unit cost for the 4 April issues = 400 units × $5.08 =
$2,032
Finally, subtract the 4 April issue from the totals already
calculated to arrive at the new quantity in units and the new
total cost.
Note that the average cost is used to value the remaining
inventory.

Date Quantity Unit Total Average

in units cost cost $ cost per
$
unit $

1 April 500 5.00 2,500

Opening
inventory

2 April 250 5.10 1,275

Purchase

3 April 300 5.20 1,560

Purchase

Total 1,050 5,335 $5,335 ÷

1,050 =
$5.08

4 April Issue (400) 5.08 (2,032)

650 5.08 3,303

2. 6 April Issues
The revised totals for the quantity in units and the total cost
for the 6 April issues should be calculated according to the
previous step.

Date Quantity Unit Total Average

in units cost cost $ cost per
$ unit $

Total 650 5.08 3,303

5 April 200 5.30 1,060

Purchase

Total 850 4,363 $4,363 ÷

850 = $5.13

6 April (500) 5.13 (2,565)

Issue

3. Closing Inventory
The closing inventory is $5.13 × 350 = $1,796
4. Cost of Sales

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10/27/24, 7:25 PM Section | 8.2 Inventory Valuation | ACCA Study Hub

For Exams from September 2024Example 6 2025 – (FA-FFA) Financial Accounting 

to August   
The cost of sales Opening $2,500 + Purchases ($1,275 +
k Chapters
$1,560 + $1,060) − Closing $1,796 = $4,599

g Flashcards

v Quizzes Activity 6 Show

r Practice Match the statement to the corresponding pricing valuation

method below.
 Search

First In-First Out Net realisable value

The valuation of closing Values closing inventory at the

inventory when it is sold average purchase price paid
for below cost. for the inventory items.

Average Cumulative Values closing inventory at the

Weighted Average most recent purchase prices
Method paid for the inventory items.

*Please use the notes feature in the toolbar to help formulate

your answer.

2.2.4 Impact of Pricing Methods on Profit and Assets

The different methods of valuing inventory affect the profit and
asset amount reported in the financial statements.

The closing inventory is reported as the inventory asset amount in

the statement of financial position. At the same time, the cost of
goods sold is an expense which reduces the profit figure in the
statement of profit or loss.

Example 4

Under different pricing valuation methods, the closing inventory

and cost of sales of Tariq's Lighting Supplies Co are:

Inventory Cost of
valuation sales
($) ($)

FIFO 1,840 4,555

AVCO - periodic method 1,792 4,608

AVCO – cumulative weighted 1,798 4,597

average method

FIFO has the lower cost of sales figure. Therefore, it will show
a higher profit. This will always be the case if the purchase
costs rise throughout the period. However, if the purchase
costs were falling through the accounting period, using the
AVCO periodic method would give a higher profit figure.

Ethical issues must be considered when determining which

valuation method a business should use.

Businesses should consistently apply the FIFO or AVCO

methods from one year to the next. This prevents businesses
from using valuation methods to report a better profit figure that
may not represent their financial standing fairly.

If a change is made, the previous year's financial statements

must be restated so that results are comparable year-on-year.
However, if the method is used consistently and reflects how the

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10/27/24, 7:25 PM Section | 8.2 Inventory Valuation | ACCA Study Hub

For Exams from September 2024Example 4 2025 – (FA-FFA) Financial Accounting 

to August   
inventory is used, it should be fine, as there is no intention to
k Chapters
mislead.

g Flashcards

v Quizzes Activity 7 Show

r Practice Kavita oversees buying jewellery in small batches for Emeralds

and Diamonds Co. She buys the jewellery from different
 Search
suppliers to take advantage of the lowest prices available.
Kavita puts the inventory on display in the order of when it was
purchased. All the inventory is sold at a profit; therefore, the
NRV is greater than the cost.

1. Should Kavita use the FIFO or AVCO system to calculate

the inventory value?
2. Complete the inventory schedule below:

3. What is the cost of sales?

*Please use the notes feature in the toolbar to help formulate

your answer.

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10/27/24, 7:25 PM Section | 8.2 Inventory Valuation | ACCA Study Hub

For Exams from September 2024 to August 2025 – (FA-FFA) Financial Accounting   
 

k Chapters

Sections Table of Contents Confidence Levels Notes Bookmarks Highlights

g Flashcards
8.2.3 Inventory Disclosures

v Quizzes

r Practice
  Content 0 3 4 7 6

 Search Rate Your Confidence

2.3 Inventory Disclosures
High

Medium
2.3.1 Disclosure Requirements
Low
For businesses that manufacture goods, the disclosure should
include the accounting policy for inventory and a breakdown of
inventory into appropriate classifications such as materials, work-in- Continue 
progress and finished goods.
Category
The business is also required to disclose the following in the
8.2 Inventory Valuation
financial statements:

The valuation method it has used in valuing its inventories

How the business has applied those methods to calculate the
inventory value

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