EPFO APFC 2023 General Studies · Question 80 of 120

Correct — C, (c) ₹ 10,600. The first thing to do is put the rows into date order, because the table prints them as January 1, 8, 25, 6 and 9, and a perpetual system prices every issue at the moment it happens. In chronological order the movements are: opening stock on January 1 of 200 units at ₹ 7; an issue of 100 on January 6; a purchase of 1,100 at ₹ 8 on January 8; an issue of 200 on January 9; and a purchase of 300 at ₹ 9 on January 25. Now apply last-in-first-out at each issue. On January 6 the only stock in hand is the opening lot, so the 100 units go out at ₹ 7, costing ₹ 700 and leaving 100 units at ₹ 7. The purchase on January 8 adds 1,100 units at ₹ 8. On January 9 the most recent lot in hand is that ₹ 8 purchase, so the 200 units issued are priced at ₹ 8, costing ₹ 1,600 and leaving 100 at ₹ 7 and 900 at ₹ 8. The purchase on January 25 then adds 300 units at ₹ 9, and no further issue takes place. Closing stock on January 31 is therefore 100 units at ₹ 7, 900 at ₹ 8 and 300 at ₹ 9, which is ₹ 700 plus ₹ 7,200 plus ₹ 2,700, that is ₹ 10,600. The figure can be checked from the other direction. Total goods available cost ₹ 12,900, being 200 at ₹ 7, 1,100 at ₹ 8 and 300 at ₹ 9; the 300 units issued cost ₹ 700 plus ₹ 1,600, that is ₹ 2,300; and ₹ 12,900 less ₹ 2,300 is ₹ 10,600. The two routes agree, which is the standard check on any stores ledger.

• (a)₹ 6,600 — This figure is impossible on the data whatever cost formula is used, and it can be rejected by a bound that takes only a few seconds to establish. The goods available for the month cost ₹ 12,900 in all. Only 300 units were issued, and under a perpetual system both issues occurred before the January 25 purchase, so those 300 units can only have been priced at ₹ 7 or ₹ 8; the cost of the issues therefore lies between ₹ 2,200 and ₹ 2,400. Closing stock must consequently lie between ₹ 10,500 and ₹ 10,700, and ₹ 6,600 is nowhere near that range. Bounding the answer before computing it is a valuable habit on inventory questions, because the options are usually spread widely and the arithmetic of the correct method is the longest part of the work. If only one option falls inside the feasible band, the ledger becomes a confirmation rather than a search.
• (b)₹ 8,600 — This also falls outside the feasible band of ₹ 10,500 to ₹ 10,700 established above, so it cannot be right on any recognised cost formula. It is worth seeing where such a number can come from: ₹ 8,600 is exactly 200 units at ₹ 7 plus 900 units at ₹ 8, which is the stock sheet of a candidate who has left the opening lot untouched by the January 6 issue and has also omitted the January 25 purchase of 300 units at ₹ 9. Two separate rows of the table have gone missing from the working, which is a common consequence of the way the table is printed, with its last two rows out of date order. Redraw the movements as a dated list before pricing anything; a ledger written in date order makes an omitted row visible in a way that working directly off a scrambled table does not.
• (d)₹ 12,000 — This is larger than the highest closing value the data can support. The whole of the goods available cost ₹ 12,900 and 300 units have gone out, so the closing figure must be lower than ₹ 12,900 by at least the cost of 300 units, which is at least ₹ 2,200 even at the cheapest rates in stock. A value of ₹ 12,000 implies that only about ₹ 900 of stock left the store, which would be the case only if a single issue of 100 units had been priced at the ₹ 9 rate of the last purchase and the second issue of 200 units had been forgotten altogether. The option is there for the candidate who reads the table's printed order literally, notices only the issues that catch the eye, and prices them off the latest purchase without asking whether that purchase had even been made on the date of the issue.

An inventory valuation has two independent dimensions, and this question turns on both. The first is the record-keeping system. Under a perpetual system the stores ledger is written up at every receipt and every issue, so each issue is priced from the stock actually in hand at that moment. Under a periodic system the count is taken only at the end of the period and the cost formula is applied to the whole period's movements at once. The second dimension is the cost formula: first-in-first-out prices issues from the oldest lots, last-in-first-out from the newest, and weighted average from a running or period average. The two dimensions interact, and last-in-first-out is the case where the interaction matters most. Under perpetual last-in-first-out, an issue can only be priced from lots already received, so a purchase made after the issue is irrelevant to it; under periodic last-in-first-out, the latest purchases of the whole period are treated as issued first regardless of when they arrived. On these figures the two produce different answers, ₹ 10,600 and ₹ 10,200, which is precisely why the stem specifies the system as well as the formula. It is also worth knowing that last-in-first-out is not permitted for financial reporting under the Indian accounting standards on inventories, which allow first-in-first-out and weighted average; it survives in examinations and in internal costing as a teaching device for the effect of a cost formula on reported profit.

The paper's accountancy block sets one or two table-based computations, and their difficulty is almost always in the reading rather than in the arithmetic. Here the table prints its rows in the order January 1, January 8, January 25, January 6 and January 9, so the last two rows are out of chronological sequence, and that dislocation is the whole design of the question. A perpetual system prices each issue against the stock in hand at that date, so the rows must be re-sorted before anything is priced; a candidate who works down the table as printed will issue from the January 25 purchase for issues that occurred on January 6 and January 9, before that stock existed. There is a useful confirmation that this reading is wrong, and it comes from the option set itself. Processing the rows in printed order gives ₹ 10,200, and so does the periodic version of last-in-first-out, but ₹ 10,200 is not among the four options. When a plausible method produces a figure that the paper does not offer, that is a signal to re-examine the method rather than the arithmetic. The practical discipline for questions of this kind is to copy the movements out as a dated list before touching the rates, and then to check the answer by the complementary route of total cost less cost of issues.

• Under a perpetual inventory system each issue is priced from the stock actually in hand on the date of the issue, so purchases made after an issue cannot be used to price it; the table's rows must be sorted into date order first.
• In chronological order the movements are 200 units at ₹ 7 on January 1, an issue of 100 on January 6, a purchase of 1,100 at ₹ 8 on January 8, an issue of 200 on January 9, and a purchase of 300 at ₹ 9 on January 25.
• Under perpetual last-in-first-out the January 6 issue is priced at ₹ 7 and the January 9 issue at ₹ 8, so the issues cost ₹ 700 and ₹ 1,600, and closing stock is 100 at ₹ 7, 900 at ₹ 8 and 300 at ₹ 9, that is ₹ 10,600.
• The check from the other direction gives the same answer: goods available cost ₹ 12,900 in all and the issues cost ₹ 2,300, leaving ₹ 10,600.
• Periodic last-in-first-out on the same data gives ₹ 10,200, because it treats the latest purchases of the whole period as issued first regardless of date, which is why the stem specifies the system as well as the cost formula.
• Last-in-first-out is not a permitted cost formula for financial reporting under the Indian accounting standards on inventories, which allow first-in-first-out and weighted average cost.

• Working down the table in printed order when the last two rows are out of date order; the issues of January 6 and January 9 precede the purchase of January 25 and cannot be priced from it
• Applying periodic last-in-first-out when the stem specifies a perpetual system; on these figures the two give ₹ 10,200 and ₹ 10,600 respectively
• Forgetting that the January 6 issue can only come from the opening lot, since it is the only stock in hand on that date
• Omitting a row of the table from the working, which is easy when the rows are not in date order and produces a figure well outside the feasible range
• Failing to bound the answer before computing; closing stock here must lie between ₹ 10,500 and ₹ 10,700, which leaves only one option standing

Inventory valuation appears in the accountancy block as a small table of receipts and issues with a cost formula and a system named in the stem, and the setter's usual device is to make the reading of the table part of the difficulty — rows out of date order, an issue that precedes the first purchase, or a rate column left blank on the issue lines. The arithmetic is deliberately light so that a candidate who reads correctly can finish quickly. Expect the same block to ask which cost formula gives the higher profit in a period of rising prices, what the accounting standard permits, and how closing stock is valued at the lower of cost and net realisable value. The technique that generalises is to rewrite any such table as a dated list of movements before pricing anything, and to verify the result by computing total cost of goods available less the cost of issues.

No directly related past PYQ was found.

• practice — not a real PYQ

  Under a perpetual inventory system, an issue of goods is priced with reference to

  • (a)the stock in hand at the date of the issue
  • (b)the total purchases of the whole accounting period
  • (c)the latest purchase of the period, whenever it was made
  • (d)the physical count taken at the end of the period

  Answer(a) the stock in hand at the date of the issue — a perpetual system writes up the stores ledger at every receipt and issue, so each issue is costed against the lots actually held at that moment and a later purchase cannot be used to price an earlier issue. A periodic system, by contrast, applies the cost formula to the whole period's movements after a physical count, which is why periodic and perpetual last-in-first-out can give different closing values on the same data.

• practice — not a real PYQ

  In a period of steadily rising prices, the use of the FIFO cost formula rather than LIFO will ordinarily result in

  • (a)a lower closing inventory value and a lower reported profit
  • (b)a higher closing inventory value and a higher reported profit
  • (c)no difference in either closing inventory or reported profit
  • (d)a higher closing inventory value but a lower reported profit

  Answer(b) a higher closing inventory value and a higher reported profit — first-in-first-out issues the oldest and therefore cheapest units first, so the cost of goods sold is lower and the stock left on hand is valued at the most recent and highest prices. Last-in-first-out reverses both effects. This is the standard comparison examined alongside computational items, and it also explains why the choice of cost formula is a matter of accounting policy requiring disclosure.