We all know that inventory valuation is the process of finding the value of stock held by a business at a specific date. We all know that it includes raw materials, work in progress, and finished goods. A proper inventory valuation is very important because it has a major effect on profit calculation, financial statements, and business decisions. Since this is an inevitable part of accounting and finance, most interviewers pick this topic to ask in interviews.
List of Inventory Valuation Questions
There are several important inventory valuation questions, and the answers are discussed below:
1. What is Inventory Valuation?
Inventory valuation is the method used to calculate the value of goods held in stock by a business. It includes materials, partially finished goods, and completed products. Correct valuation helps in showing true profit and financial position.
2. Why is inventory valuation important?
Inventory valuation is important because it affects the profit and loss of a business. It helps present accurate figures in the balance sheet. Proper valuation also supports better inventory planning and control.
3. What is inventory?
Inventory refers to goods held by a business for sale or production. It mainly includes certain raw materials, work-in-progress, and finished goods. Inventory is treated as a current asset in accounting.
4. What are the main types of inventory?
The main types of inventory are raw materials, work-in-progress, and finished goods. Raw materials are used in production. Finished goods are ready for sale to customers.
5. What is the cost price in inventory valuation?
Cost price is the amount paid to acquire or produce inventory. It includes purchase price and direct expenses like freight. It does not include selling or office expenses.
6. What is net realizable value (NRV)?
Net realizable value is the estimated selling price of inventory. Selling expenses are deducted from the selling price. NRV shows how much the business can actually realize from stock.
7. What is the lower of cost or NRV rule?
This rule states that inventory should be valued at cost or NRV, whichever is lower. It avoids overvaluation of assets. This rule follows the conservatism principle of accounting.
8. What is the FIFO method?
FIFO stands for First In First Out. It means that the oldest stock is sold first. Closing stock is valued at the latest purchase price.
9. What is the LIFO method?
LIFO stands for Last In First Out. It assumes that the most recent stock is sold first. Closing stock is valued at older prices.
10. What is the weighted average method?
The weighted average method calculates the average cost per unit. It divides the total cost by the total quantity available. This is a method that reduces the effect of price fluctuations.
11. How does inventory valuation affect profit?
Higher inventory value reduces the cost of goods sold. Lower cost of goods sold increases profit. Wrong valuation can misstate business performance.
12. What is opening stock?
Opening stock is the inventory available at the beginning of the accounting period. It is the closing stock of the previous year. So, it plays a key role in cost calculation.
13. What is closing stock?
Closing stock is the inventory remaining at the end of the accounting period. It appears on the balance sheet and directly affects profit calculations.
14. What is the cost of goods sold?
Cost of goods sold is the cost of inventory sold during the period. It includes opening stock, purchases, and direct expenses. Closing stock is deducted to calculate it.
15. What expenses are included in inventory cost?
Inventory cost includes purchase cost and direct expenses. Freight, customs duty, and loading charges are included. Selling and office expenses are excluded.
16. What is abnormal loss of inventory?
Abnormal loss occurs due to fire, theft, or accidents. It is not included in the inventory cost. The loss is charged directly to the profit and loss account.
17. What is obsolete inventory?
Obsolete inventory is stock that cannot be sold or used. It may be outdated or damaged. Such stock is valued at scrap value or written off.
18. What is inventory write-down?
Inventory write-down means reducing the value of inventory. It happens when NRV is lower than cost. This prevents overstatement of assets.
19. What is inventory write-off?
Inventory write-off means removing the inventory value completely. It happens when goods become unusable. The amount is treated as an expense.
20. What is a perpetual inventory system?
A perpetual inventory system records inventory continuously. Every purchase and sale is updated immediately. It helps maintain accurate stock records.
21. What is a periodic inventory system?
A periodic inventory system updates inventory at the end of the period. Physical stock is counted to find the closing stock. It is simpler but less accurate.
22. What is physical stock verification?
Physical stock verification is the process of counting the actual items kept in the store or warehouse. It helps check whether the stock records are correct and shows if there is any shortage or extra stock.
23. What is the inventory turnover ratio?
The inventory turnover ratio tells us how many times the stock is sold within a certain period. It shows how well a business is managing its inventory.
24. Why is inventory turnover important?
It helps find items that are not selling fast. Better turnover means less money blocked in stock and helps in making smarter buying decisions.
25. What is slow-moving inventory?
Slow-moving inventory takes a long time to sell. It increases storage and holding costs and may need discounts to clear.
26. What is fast-moving inventory?
Fast-moving inventory sells quickly. It improves cash flow and also reduces storage costs and risk.
27. What is safety stock?
Safety stock is extra inventory kept as backup. It prevents stock shortages and also ensures smooth business operations.
28. What is a stock-out?
Stock-out occurs when inventory is not available. It results in loss of sales. Customer satisfaction may be affected.
29. What is dead stock?
Dead stock has no demand in the market. It blocks working capital and should be disposed of quickly.
30. What is the standard cost method?
The standard cost method uses predetermined costs. It helps compare actual cost with standard cost. Differences are analyzed as variances.
31. What is the replacement cost method?
The replacement cost method values inventory at the current purchase price. It reflects current market conditions and is not accepted for final accounts.
32. What is the market price method?
The market price method values inventory at market value. It shows current selling conditions and is also rarely used independently.
33. What is the gross profit method?
The gross profit method estimates the inventory value. It uses the previous gross profit ratio. This is useful when physical stock is unavailable.
34. What is the retail inventory method?
Retail method values inventory using the selling price. Gross margin is deducted to find the cost. It is commonly used in retail stores.
35. What is consignment inventory?
Consignment inventory belongs to the consignor. It is held by the consignee, but it is not treated as the consignee’s stock.
36. What are goods-in-transit?
Goods-in-transit are goods purchased but not yet received. Ownership determines valuation. Remember, if ownership is transferred, they are included in inventory.
37. What is damaged inventory?
Damaged inventory cannot be sold at the normal price. It is valued at NRV. Loss is recorded separately.
38. How are raw materials valued?
Raw materials are valued at cost or NRV. Generally, cost is used. NRV is applied if materials are damaged.
39. How is work-in-progress valued?
Work-in-progress is valued at production cost. It includes materials, labor, and overhead. But the Profit is not included.
40. How are finished goods valued?
Finished goods are valued at the total production cost. It includes materials, labor, and overhead. Note that selling expenses are excluded.
41. What is inventory control?
Inventory control ensures proper stock levels. It avoids inventory excess or shortages and improves efficiency and cost control.
42. What is EOQ?
EOQ stands for Economic Order Quantity. It shows the ideal quantity to order, which will minimize the combined costs of ordering and holding inventory.
43. What is ABC analysis?
ABC analysis classifies inventory based on value. A items are of high value, B items are of medium value, and C items are of low value. It improves control over important items.
44. What is inventory shrinkage?
Inventory shrinkage is the loss due to theft or errors. It reduces actual stock and also affects business profit.
45. What is spoilage?
Spoilage refers to waste during production. Normal spoilage is included in the cost. Abnormal spoilage is treated as a loss.
46. What is consistency in inventory valuation?
Consistency is using the same method every year, which helps in comparing results, and it also improves the reliability of financial statements.
47. Can the inventory valuation method be changed?
Yes, the method can be changed if justified. The reason must be disclosed. Its effect on profit should be shown.
48. Which accounting principle applies to inventory?
The conservatism principle applies to inventory valuation. Losses are recognized early. Profits are not anticipated.
49. What happens if inventory is overvalued?
Profit will be overstated. Assets will appear higher. Future profits may be affected.
50. What happens if inventory is undervalued?
Profit will be understated. Assets will appear lower. Future profits may increase.
Conclusion
By learning these important inventory valuation questions and answers clearly, students can confidently appear in accounting job interviews. Inventory valuation is an inevitable part of accounting and financial reporting. Therefore, employers widely choose this topic for job aspirants in interviews. So it is your duty to regularly practice these questions to improve your subject knowledge. Gaining subject knowledge will only make you shine in the main accounting job roles. This clarity would reflect in your day-to-day accounting work, moulding you into a successful working professional.
If you feel less confident in this area, you can anytime join one of the accounting courses in Malappuram provided by Finprov Learning. Choosing the right learning option decides your future. So choose it wisely and get a thriving accounting career.
