Adjust inventory and depreciation in draft statements
Move closing inventory and the current depreciation charge to the correct expense and asset balances before finalising statements.
Exam scope and assessment notes
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. These lessons cover objective 1.5.1 only: adjustments to draft financial statements. Sole traders (1.5.2), partnerships (1.5.3) and limited companies (1.5.4) remain to be mapped. Practice is self-checked, not an official Cambridge grade; the separately published 2029 syllabus, timed papers and human subject-teacher review remain outstanding.
Before you begin
- Use double-entry and accrual concepts from Topics 1.2 and 1.4. Each adjustment must update the correct statement-of-profit-or-loss and statement-of-financial-position accounts.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
Where is closing inventory shown at year-end?
What you will learn
- Calculate a closing-inventory adjustment
- Record the current depreciation expense and accumulated balance
- Explain the effects on profit and the statement of financial position
Include the closing inventory in the right period
Closing inventory represents goods still held at the reporting date. It is included as a current asset and is deducted when calculating cost of sales. Use the valuation basis and evidence stated in the question; where a cost and net realisable value comparison is required, do not report inventory above the lower supported amount.
Inventory valuation must also reflect damage, obsolescence, ownership and cut-off. A physical quantity count is evidence for units present, not automatically for their value or ownership.
A stock count identifies quantity, not necessarily value or ownership. Check cut-off for receipts and dispatches, damage or obsolescence, and whether goods belong to the business before finalising the figure.
Record depreciation for the period
Depreciation for the current period is an expense in the statement of profit or loss. Accumulated depreciation increases and reduces the carrying amount of the non-current asset in the statement of financial position.
If the charge has already been recorded, do not add it again. Use the depreciation method and dates from the question, and separate the current-period charge from accumulated depreciation brought forward.
Pause and explain
An omitted $900 depreciation charge is recorded. What is its effect before tax?
Worked example
Opening inventory is $6,400, purchases $31,000 and closing inventory is valued at $7,250. Depreciation for the year is $1,800 and has not been recorded. Calculate cost of sales before other adjustments and state the statement effects.
Show the worked solution
- Cost of sales = opening inventory + purchases − closing inventory = 6,400 + 31,000 − 7,250 = $30,150.
- Record closing inventory as a $7,250 current asset and include it in the cost-of-sales calculation.
- Record $1,800 depreciation expense and increase accumulated depreciation by $1,800; profit and asset carrying amount fall by the charge.
Answer Cost of sales before other adjustments is $30,150. Show inventory of $7,250 as a current asset and record the omitted $1,800 depreciation charge in profit or loss and accumulated depreciation.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
Opening inventory $2,700; purchases $14,800; closing inventory $3,200. Calculate cost of sales.
Give me a hint
Add goods available for sale, then subtract goods remaining.
Compare my reasoning
- Goods available = 2,700 + 14,800 = $17,500.
- Cost of sales = 17,500 − 3,200.
- Cost of sales is $14,300.
Cost of sales = $14,300.
Look for these in your work
- Opening and purchases added
- Closing inventory deducted
- Arithmetic correct
Equipment cost is $40,000, opening accumulated depreciation $24,000 and current depreciation $4,000. Find closing carrying amount before impairment.
Give me a hint
Update accumulated depreciation before subtracting it from cost.
Compare my reasoning
- Closing accumulated depreciation = 24,000 + 4,000 = $28,000.
- Carrying amount = 40,000 − 28,000.
- The closing carrying amount is $12,000 before impairment.
Closing carrying amount is $12,000 before impairment.
Look for these in your work
- Accumulated balance updated
- Carrying amount correct
- Impairment exclusion noted
A stock count is 100 units below the inventory records. The manager proposes reducing closing inventory by the full amount at last month's purchase price. Explain what else must be checked.
Give me a hint
A count difference alone does not establish the correct adjustment amount.
Compare my reasoning
- Recount and confirm units, condition, ownership and the count date.
- Trace receipts, dispatches and returns around year-end for cut-off errors.
- Value the supported inventory using the valuation basis in the question, including any required damage or net-realisable-value adjustment.
Do not use last month's price automatically. Verify quantity and ownership, investigate movements around the reporting date, then apply the specified valuation basis to the items still held.
Look for these in your work
- Count checked
- Cut-off checked
- Valuation basis applied
Common mistakes
- Adding closing inventory to cost of sales
- Treating a physical quantity count as proof of ownership or valuation
- Deducting accumulated depreciation twice
What can you explain now?
How does closing inventory affect cost of sales?
Compare with the explanation
It is deducted after opening inventory and purchases
Closing inventory remains on hand and is not part of goods sold in the period.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
Give the cost-of-sales formula and the two statement effects of depreciation.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.