EPFO EO/AO 2023 General Ability Test · Question 78 of 120

Correct — C, (c) ₹ 10,700. Two things have to be done before any arithmetic: put the rows into date order, and count the units. The table is printed January 1, 8, 25, 6, 9 — the last two rows are out of chronological order exactly as the booklet has them. In date order the month runs: January 1, opening inventory 200 units at ₹ 7; January 6, issued for sale 100; January 8, purchased 1,100 at ₹ 8; January 9, issued for sale 200; January 25, purchased 300 at ₹ 9. Units first, because it costs nothing and fixes the scale of the answer. Received 200 + 1,100 + 300 = 1,600; issued 100 + 200 = 300; on hand at 31 January, 1,300 units. Now run the perpetual record on First-In-First-Out, which means every issue is taken from the oldest layer still on hand. January 1 — 200 at ₹ 7 = ₹ 1,400. January 6 — issue 100. The oldest layer is the opening 200 at ₹ 7, so 100 at ₹ 7 goes out and 100 at ₹ 7 remains, ₹ 700. January 8 — buy 1,100 at ₹ 8. On hand: 100 at ₹ 7 and 1,100 at ₹ 8. January 9 — issue 200. FIFO takes the whole remaining ₹ 7 layer, 100 units, and then 100 units from the ₹ 8 layer. On hand: 1,000 at ₹ 8 = ₹ 8,000. January 25 — buy 300 at ₹ 9 = ₹ 2,700. Closing inventory on 31 January = 1,000 at ₹ 8 plus 300 at ₹ 9 = ₹ 8,000 + ₹ 2,700 = ₹ 10,700, and the unit count agrees at 1,300. There is a check that disposes of the other three options in one line. Whatever method is used, 1,300 units bought at ₹ 7, ₹ 8 and ₹ 9 must be worth somewhere between 1,300 × 7 = ₹ 9,100 and 1,300 × 9 = ₹ 11,700. Options (a) and (b) fall below that floor and option (d) rises above that ceiling, so only ₹ 10,700 is even arithmetically possible. Its implied average rate of ₹ 8.23 sits exactly where a stock of 1,000 units at ₹ 8 and 300 at ₹ 9 should sit. One further point about the method. Under FIFO the closing valuation is the same whether the record is kept perpetually or the calculation is done at the period end, because the layers left over are the latest ones either way — 300 at ₹ 9 and 1,000 at ₹ 8. The word 'perpetual' in the stem is therefore not a trap on this question, though it would be under LIFO or weighted average, where the two systems give different answers.

• (a)₹ 6,700 — Too small to value the stock that is actually there. The closing quantity is 1,300 units and the cheapest rate anywhere in the question is ₹ 7, so the least the closing inventory can possibly be worth is ₹ 9,100. At ₹ 6,700 the implied average rate is ₹ 5.15 a unit, which is below every rate in the table. An answer can be rejected on this ground before the FIFO layers are worked out at all, and doing that count first is the single most useful habit in stock-valuation questions.
• (b)₹ 8,700 — Also below the floor, though less obviously. ₹ 8,700 spread over 1,300 units is an average of ₹ 6.69, and no unit in this question cost less than ₹ 7. Even valuing the entire closing stock at the opening rate of ₹ 7 would give ₹ 9,100. The figure is close enough to the true answer to survive a glance, which is why the unit count has to be done deliberately rather than eyeballed: the gap between ₹ 8,700 and ₹ 10,700 is 250 units at ₹ 8.
• (d)₹ 12,000 — Above the ceiling. Valuing all 1,300 units at the dearest rate in the question, ₹ 9, gives only ₹ 11,700, so ₹ 12,000 implies an average of ₹ 9.23 a unit — dearer than anything bought. What produces it is failing to deduct the issues: the total cost of everything received during the month is ₹ 1,400 + ₹ 8,800 + ₹ 2,700 = ₹ 12,900, and ₹ 12,000 is what a partial deduction from that leaves. The 300 units issued for sale have gone, and their cost belongs in cost of goods sold, not in closing stock.

First-In-First-Out assumes that goods are consumed in the order they were acquired, so the units remaining at the end are the most recently bought ones and the closing inventory is valued at the latest prices. That is why FIFO produces a balance-sheet stock figure close to current cost and, in a period of rising prices, a lower cost of goods sold and a higher reported profit than the alternatives. A perpetual inventory system records every receipt and every issue as it happens, so the stock figure is available continuously; a periodic system counts at the end and works backwards. Under FIFO the two systems always agree on the closing valuation, because the identity of the layers left over does not depend on when the calculation is performed. Under weighted average they differ — the perpetual system recomputes an average after each receipt, the periodic system strikes one average for the whole period — and under LIFO they differ too, which is one reason LIFO is not permitted under AS 2. The disciplined way to work any of these questions is to lay out a three-column stock ledger of receipts, issues and balance, in date order, and to reconcile the unit column before touching the money column.

This is one of only two questions in the paper that carries a figure, and the figure is an ordinary four-column stock table whose contents are reproduced in the stem. What makes it more than an arithmetic drill is the printing: the rows are given out of date order, so a candidate who works straight down the table is being invited to make an error. EPFO's accountancy block is aimed at officers who will examine records, and reordering a table before using it is exactly the habit that job requires.

• Closing quantity = 200 opening + 1,100 + 300 purchased − 100 − 200 issued = 1,300 units.
• In date order the transactions are: 1 Jan opening 200 at ₹ 7; 6 Jan issue 100; 8 Jan purchase 1,100 at ₹ 8; 9 Jan issue 200; 25 Jan purchase 300 at ₹ 9.
• Under FIFO the 6 January issue takes 100 units from the ₹ 7 layer, and the 9 January issue takes the remaining 100 at ₹ 7 plus 100 at ₹ 8.
• Closing inventory = 1,000 units at ₹ 8 + 300 units at ₹ 9 = ₹ 8,000 + ₹ 2,700 = ₹ 10,700.
• FIFO gives the same closing valuation under a perpetual and a periodic system; LIFO and weighted average do not.
• Total cost of goods available during the month = ₹ 1,400 + ₹ 8,800 + ₹ 2,700 = ₹ 12,900 for 1,600 units.
• Any valuation of 1,300 units at rates between ₹ 7 and ₹ 9 must lie between ₹ 9,100 and ₹ 11,700 — a check that eliminates every wrong option here.
• AS 2 permits specific identification, FIFO and weighted average cost formulas; LIFO is not permitted.

• Working straight down the printed table. The rows run January 1, 8, 25, 6, 9 — the issues have to be put back in date order first.
• Skipping the unit reconciliation. 1,300 units at rates of ₹ 7 to ₹ 9 must be worth between ₹ 9,100 and ₹ 11,700, which alone settles this question.
• Valuing the closing stock at the oldest rates. FIFO leaves the newest layers in stock; it is the issues that are priced at the oldest rates.
• Assuming 'perpetual' changes the FIFO answer. It does not — but it would change a weighted average or LIFO answer.

Stock-valuation items in EO/AO give a short table of receipts and issues and ask for a closing figure under a named method, occasionally with the rows or the dates arranged awkwardly. Practise laying the data out as a dated stock ledger and reconciling units before value; that single routine answers every version of the question and catches every printing trap in it.

No directly related past PYQ was found.

• practice — not a real PYQ

  Under the First-In-First-Out method of inventory valuation, the closing stock is valued at :

  • (a)The earliest purchase prices
  • (b)The most recent purchase prices
  • (c)The weighted average of all purchase prices
  • (d)The lowest purchase price of the period

  Answer(b) The most recent purchase prices

• practice — not a real PYQ

  Which one of the following cost formulas is NOT permitted by Accounting Standard-2 for the valuation of inventories ?

  • (a)Specific identification
  • (b)First-In-First-Out
  • (c)Weighted average cost
  • (d)Last-In-First-Out

  Answer(d) Last-In-First-Out