Write short notes on: (i) Adjusted Selling Price method of determining cost of stock. (ii) Principal methods of ascertainment of cost of inventory.…
CA Foundation · Accounting · MTP · September 2024
Write short notes on: (i) Adjusted Selling Price method of determining cost of stock. (ii) Principal methods of ascertainment of cost of inventory. OR Classify the following expenditures as capital or revenue expenditure: (i) Amount spent on making a few more exists in a Cinema Hall to comply with Government orders. (ii) Travelling expenses of the directors for trips abroad for purchase of capital assets. (iii) Amount spent to reduce working expenses. (iv) Amount paid for removal of stock to a new site. (v) Cost of repairs on second-hand car purchased to bring it into working condition.
Suggested Answer and Working Notes:
(i) Adjusted selling method is also called retail inventory method. It is used widely in retail business or in business where the inventory comprises of items, the individual costs of which are not readily ascertainable. The historical cost of inventory is estimated by calculating it in the first instance at selling price and then deducting an amount equal to the estimated gross margin of profit on such stocks. (ii) The specific identification method, First-In–First-Out (FIFO) and weighted average cost formulae are the principal methods of ascertaining the cost of inventory. The cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects should be assigned by specific identification of their individual costs under the specific identification method. OR / Alternative Solution: (i) Revenue Expenditure. (ii) Capital Expenditure. (iii) Capital Expenditure. (iv) Revenue Expenditure. (v) Capital Expenditure.
Topics: Capital and Revenue Expenditures and Receipts
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