Inventory Management

When closing stock is understated, profit is reduced by Rs. 15,500 and opening stock overstated by Rs. 20,500 further reduces the profits by Rs. 20,500. Thus, overall profit is understated by Rs. 36,000.

Operating expenses and sales are not the part of COGS. However, it includes direct expenses which are the part of the production process.

When closing stock is understated, profit is reduced by Rs. 15,500 and opening stock overstated by Rs. 20,500 further reduces the profits by Rs. 20,500. Thus, overall profit is understated by Rs. 36,000.

Inventory is valued at cost or market price whichever is lower.

Understated opening stock by 10% i.e. correct value is 99000* 100/90 = Rs.1,10,000.
Thus, profit is overstated by Rs.11,000 as expenses are shown with less amount. Accordingly, the actual value of closing stock is 96,000* 100/80 = Rs.1,20,000 i.e. profit is understated by Rs. 24,000. Thus, overall profits are understated with Rs.13,000. All other options will give incorrect answers.

As goods purchased in the last are issued first in LIFO method, thus issues represent the current prices.
In FIFO method, goods purchased first are issued first and thus issue represents historic price while stock in hand is valued at current prices. In average method, average price is the basis of issue while in weighted average method, weights are also considered.

Perpetual system is the method where record is updated after each receipt and issue; it ensures greater accuracy.
Standard valuation is the method of recording material issue at pre-determined standard price while in market value system; they are recorded at market price.
In periodic inventory system, periodic record of inventory is maintained.

Profit = 20% of sales = 1/5 of sales = 1/4 of cost or
Let sales be Rs.100, Profit = Rs.20, Then cost = Rs.80, so profit/cost = 20/80 =1/4 of cost.
If you wrongly assume cost = Rs.100, then you may get it 16.67%

COGS = opening stock + Purchases - closing stock
Let closing stock = X, So opening stock = X + 2X = 3X
85,000 = 3X + 60,000 - X
X = closing stock = Rs.12,500
Opening stock is thus Rs.37,500.
If you wrongly assume opening stock = 2X, then closing stock = Rs.25,000 and opening stock Rs.75,000.

Profit = 25% of cost = 1/5 of sales = Rs. 24,000
Thus, COGS = Sales- G.P. = Rs. 96,000
Opening stock + purchases - closing stock = 96,000
Putting the value, we get opening stock - closing stock = 36,000
If we wrongly assume profit = 25% of sales, then this difference is 30,000

Profit = 30/130 of 6500 = 1500. Thus, COGS = Sales - G.P. = Rs. 5,000
If you calculate 6500 + 1950 = Rs. 8450,
            6500 - 1950 = Rs. 4550,
            6500 + 1500 = Rs. 8000 are incorrect answers.

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As goods purchased in the beginning are issued first in FIFO method it will show the least amount.
The LIFO method will show the issue at highest price; average price and weighted average methods will show in between the least and highest.

Issue on 11 April i.e. 300 units from 10 April and 100 from 8 April
= 3005.50 + 1005 = 2150
(A) 1004 + 3005.50 = 2050    (B) 4005 = 2000 (D) 9005 = 4500 are incorrect answers.

It only provides the periodic figures at the end of a particular period.

The difference in the quantity refers to consumption/usage of goods.
In perpetual system, it may be considered as loss by theft.
It can never be taken as closing stock.

Stock as on 5^th April - Purchases + Cost of sales during the period 1^st to 5^th April.
Cost of sales = 20,000 - 4000 (i.e. 1/5^th of 20,000) = Rs. 16,000
Thus, 95750 - 15000 + 16000 = 96750
(A) 95750 - 15000 + 20000 = 100750
(B) 95750 + 15000 - 20000 = 90750
(C) 95750 + 15000 - 16000 = 94750 are incorrect answers.

When prices are rising, goods are recorded at previous prices i.e. lower prices. Thus, they show lower value of cost of production.

It is not based on physical verification. Rather book records are used.
Periodic inventory system is based on physical verification.

In services, goods are produced and used simultaneously.
In manufacturing or trading, normally there is a gap between production and consumption.

As goods purchased in the last are issued first in LIFO method, thus it will show the maximum amount for the closing stock.
The FIFO method will show the stock at least price, average price and weighted average methods will show in between the least and highest.

Let sales be Rs. 100, COGS = Rs. 50. Thus, G.P= Rs. 50 and G.P/ sales ratio =100%
It is 50% of sales while sales/G.P. ratio is 200%

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