Chapter 5 ordering and accounting inventory (f2 acca)

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Chapter 5: Ordering and Accounting

for Inventory Exam

Prepared for Students August 12, 2025

1 Part 1: Questions

This section contains 35 multiple-choice questions on Chapter 5 content Each question may require selecting one correct answer, all that apply, or other formats Students should answer

on separate answer sheets

1 Which department would normally be responsible for completing a standard purchase requisition for goods in a service organisation?

A. The goods inwards department

B. The purchasing (buying) department

C. The department that requires the goods

D. The accounting department

2 Details on a purchase invoice should agree with which TWO of the following?

A. A purchase requisition

B. A goods despatched note

C. A purchase order

D. A goods received note

E. A materials requisition note

3 Which TWO of the following documents would be received from a supplier?

A. A goods despatched note

B. A purchase order

C. A delivery note

D. A goods received note

E. A purchase invoice

F. A purchase requisition

4 The following data relates to a raw material during August:

Date Units Unit cost ($)

Value ($)

500

275

300

Using the LIFO method, what is the value of the issue on 29 August?

A. $420

B. $410

C. $395

D. $350

5 Using the cumulative weighted average method, what is the cost per unit of the issue on

29 August (to the nearest cent)?

A. $5.47

B. $5.37

C. $5.50

D. $6.00

6 The FIFO method assumes that:

A. The most recent inventory is issued first

B. The earliest inventory is issued first

C. Costs are averaged across all inventory

D. Inventory is valued at replacement cost

7 The economic order quantity (EOQ) model is used to:

A. Determine the optimal order size to minimize total inventory costs

B. Calculate the cost of goods sold

C. Track inventory turnover rates

D. Set the reorder point

8 A purchase requisition is typically:

A. Sent to the supplier

B. An internal document requesting goods

C. A record of goods received

D. A supplier’s invoice

9 True or False: A goods received note is prepared by the supplier

A. True

B. False

10 Which of the following is a benefit of Just-In-Time (JIT) inventory management? (Select all that apply)

A. Reduced holding costs

B. Increased storage requirements

C. Improved production efficiency

D. Higher risk of stockouts

11 The reorder point is determined by:

A. Annual demand and holding cost

B. Lead time and average demand during lead time

C. Order cost and unit cost

D. Carrying cost and reorder quantity

12 Under the perpetual inventory system, inventory records are:

A. Updated periodically

B. Updated continuously with each transaction

C. Only updated at year-end

D. Not maintained

13 Which inventory valuation method results in the highest cost of goods sold during inflation?

A. FIFO

B. LIFO

C. Weighted average

D. Specific identification

14 The cost of holding inventory includes: (Select all that apply)

A. Storage costs

B. Purchase price of goods

C. Insurance costs

D. Obsolescence costs

15 True or False: The periodic inventory system requires physical stock counts to update records

A. True

B. False

16 The purpose of a materials requisition note is to:

A. Order goods from a supplier

B. Authorize the release of materials from stores to production

C. Confirm receipt of goods

D. Invoice the buyer

17 Which of the following is true about the EOQ formula?

A. It assumes constant demand and lead time

B. It maximizes holding costs

C. It ignores ordering costs

D. It is used for perishable goods only

18 A delivery note typically includes:

A. Payment terms

B. Details of goods shipped

C. Internal requisition details

D. Cost of goods

19 The inventory turnover ratio measures:

A. The number of times inventory is sold and replaced

B. The cost of holding inventory

C. The time taken to receive goods

D. The reorder point

20 True or False: LIFO results in higher inventory valuation during inflation compared to FIFO

A. True

B. False

21 The purchasing department’s role includes:

A. Receiving goods

B. Negotiating with suppliers

C. Preparing goods received notes

D. Issuing materials to production

22 Which document confirms the quantities and condition of goods received?

A. Purchase order

B. Goods received note

C. Purchase invoice

D. Materials requisition note

23 In a periodic inventory system, cost of goods sold is calculated:

A. With each sale

B. At the end of the period

C. Using weighted average costs only

D. Without physical counts

24 The safety stock is maintained to:

A. Reduce ordering costs

B. Prevent stockouts during lead time

C. Maximize holding costs

D. Increase inventory turnover

25 Which of the following is a disadvantage of JIT inventory? (Select all that apply)

A. Increased risk of stockouts

B. Higher storage costs

C. Dependency on reliable suppliers

D. Reduced production flexibility

26 The cost of ordering inventory includes:

A. Storage and insurance costs

B. Administrative and shipping costs

C. Purchase price of goods

D. Obsolescence costs

27 True or False: The weighted average cost method smooths out price fluctuations

A. True

B. False

28 The purpose of a purchase order is to:

A. Request goods internally

B. Authorize the purchase of goods from a supplier

C. Record goods received

D. Bill the buyer

29 Which inventory method is most affected by price changes?

A. FIFO

B. LIFO

C. Weighted average

D. All are equally affected

30 The lead time is the time between:

A. Placing an order and receiving the goods

B. Issuing materials and production

C. Selling goods and restocking

D. Ordering and paying the supplier

31 In a perpetual inventory system, a physical count is used to:

A. Update records daily

B. Verify inventory records periodically

C. Calculate cost of goods sold

D. Determine reorder points

32 Which of the following is true about safety stock? (Select all that apply)

A. It increases holding costs

B. It reduces the risk of stockouts

C. It is unnecessary in JIT systems

D. It is calculated based on demand variability

33 The inventory carrying cost is expressed as:

A. A fixed cost per unit

B. A percentage of inventory value

C. The cost of goods sold

D. The reorder cost

34 True or False: A purchase invoice is an internal document

A. True

B. False

35 The EOQ model balances:

A. Ordering costs and holding costs

B. Purchase costs and sales revenue

C. Lead time and demand

D. Safety stock and stockouts

36 Which document is used to track the movement of goods within an organisation?

A. Purchase invoice

B. Materials requisition note

C. Delivery note

D. Purchase order

37 The following data relates to a raw material during September:

Value ($)

Balance b/f 1 September 200 4.00

800

450

Using the FIFO method, what is the value of the issue on 20 September?

A. $320

B. $360

C. $340

D. $400

2 Part 2: Answers and Detailed Explanations

This section is for instructors Each answer includes an explanation based on fundamental inventory management concepts

1 C The department that requires the goods Explanation: The department needing

goods initiates the purchase requisition in a service organisation Purchasing processes it, goods inwards receives deliveries, and accounting handles payments

2 C, D Explanation: A purchase invoice matches the purchase order (order details) and

goods received note (delivery confirmation) Requisitions are internal, goods despatched notes are supplier-internal, and materials requisition notes are for internal transfers

3 C, E Explanation: Suppliers provide delivery notes (with shipped goods) and purchase

invoices (billing) Goods despatched notes are supplier-internal, while purchase orders, requisitions, and goods received notes are buyer-generated

4 B $410 Explanation: LIFO issues the most recent inventory first After 13 August (40

units issued), 60 units @ $5.00 remain Receipts: 50 units @ $5.50 (14 August), 50 units

@ $6.00 (26 August) For 70 units on 29 August: 50 @ $6.00 = $300, 20 @ $5.50 = $110, total = $410

5 A $5.47 Explanation: Cumulative weighted average: After 13 August, 60 units @ $5.00

= $300 After 14 August, 110 units, $300 + $275 = $575, cost = $575 / 110 = $5.2273 After 26 August, 160 units, $575 + $300 = $875, cost = $875 / 160 = $5.46875 � $5.47

6 B The earliest inventory is issued first Explanation: FIFO (First-In, First-Out)

assumes the earliest inventory is used first, leaving newer inventory in stock

7 A Determine the optimal order size to minimize total inventory costs

Expla-nation: EOQ balances ordering and holding costs to find the optimal order quantity.

8 B An internal document requesting goods Explanation: A purchase requisition is

an internal request to initiate purchasing, not sent to suppliers or related to receiving

9 B False Explanation: Goods received notes are prepared by the buyer’s receiving

depart-ment, not the supplier

10 A, C, D Explanation: JIT reduces holding costs (A), improves efficiency (C), but risks

stockouts (D) It reduces storage needs (B is false)

11 B Lead time and average demand during lead time Explanation: Reorder point =

lead time demand, ensuring stock arrives before depletion

12 B Updated continuously with each transaction Explanation: Perpetual systems

update inventory with every transaction, unlike periodic systems

13 B LIFO Explanation: In inflation, LIFO uses higher recent costs for issues, increasing

cost of goods sold compared to FIFO

14 A, C, D Explanation: Holding costs include storage, insurance, and obsolescence

Pur-chase price is not a holding cost

15 A True Explanation: Periodic systems rely on physical counts to update inventory and

calculate cost of goods sold

16 B Authorize the release of materials from stores to production Explanation:

Materials requisition notes control internal material transfers, not external ordering or receiving

17 A It assumes constant demand and lead time Explanation: EOQ assumes stable

demand and lead time, not maximizing costs or ignoring ordering costs

18 B Details of goods shipped Explanation: Delivery notes list shipped items, not

pay-ment terms, internal requisitions, or costs

19 A The number of times inventory is sold and replaced Explanation: Inventory

turnover measures how often inventory is sold and restocked

20 B False Explanation: In inflation, LIFO values inventory at older, lower costs, resulting

in lower inventory valuation than FIFO

21 B Negotiating with suppliers Explanation: Purchasing negotiates with suppliers, not

receiving, preparing notes, or issuing materials

22 B Goods received note Explanation: Goods received notes confirm quantities and

condition of delivered goods

23 B At the end of the period Explanation: Periodic systems calculate cost of goods sold

at period-end using physical counts

24 B Prevent stockouts during lead time Explanation: Safety stock buffers against

demand or lead time variability

25 A, C Explanation: JIT risks stockouts (A) and relies on suppliers (C) It reduces storage

costs (B) and increases flexibility (D)

26 B Administrative and shipping costs Explanation: Ordering costs include

adminis-trative and shipping expenses, not purchase price or holding costs

27 A True Explanation: Weighted average smooths price fluctuations by averaging costs

after each receipt

28 B Authorize the purchase of goods from a supplier Explanation: Purchase orders

formally request goods from suppliers

29 B LIFO Explanation: LIFO is most sensitive to price changes, using recent costs for

issues

30 A Placing an order and receiving the goods Explanation: Lead time is the duration

from ordering to delivery

31 B Verify inventory records periodically Explanation: Perpetual systems use physical

counts to confirm records, not for daily updates

32 A, B, C, D Explanation: Safety stock increases holding costs (A), reduces stockouts (B),

is minimal in JIT (C), and is based on demand variability (D)

33 B A percentage of inventory value Explanation: Carrying cost is typically a

percent-age of inventory value, covering storpercent-age, insurance, etc

34 B False Explanation: Purchase invoices are external, issued by suppliers.

35 A Ordering costs and holding costs Explanation: EOQ minimizes the sum of ordering

and holding costs

36 B Materials requisition note Explanation: Materials requisition notes track internal

goods movement to production

37 A $320 Explanation: FIFO issues earliest inventory first After 10 September (50 units

issued), 150 units @ $4.00 remain For 20 September (80 units): 80 @ $4.00 = $320