June 2026
The 2025 VCE Accounting exam placed heavy emphasis on inventory.
This was not accidental. Inventory is one of the clearest areas where students must combine calculation, accounting assumptions, source document interpretation and business analysis. The exam tested inventory returns, inventory loss, inventory turnover, inventory cost assignment, product costs, net realisable value and inventory write-downs.
These questions showed that inventory is not just an asset sitting in the Balance Sheet.
It affects Cost of Sales, Gross Profit, Net Profit, liquidity, efficiency, customer satisfaction, supplier relationships and the accuracy of financial reports.
In VCE Accounting, inventory questions reward students who understand the full accounting story.
A sales return also affected inventory
Question 1a involved a credit note issued by MainRoad Electrics to a customer for a returned toaster. The business used a 100% mark-up on inventory.
This required more than reversing the sale.
Because the toaster was returned to the business, inventory had to increase and Cost of Sales had to decrease. The selling price was $60 plus GST, but the cost price had to be calculated using the 100% mark-up. Since a 100% mark-up means the selling price is double cost, the cost price was $30.
The correct inventory-related part of the entry was therefore:
- debit Inventory $30
- credit Cost of Sales $30
This is where some students lost marks. The report noted that common errors included reversing Inventory and Cost of Sales or recording the transaction as the wrong type of return.
The key lesson is that a sales return affects both revenue and inventory records.
If the inventory comes back into the business, the accounting treatment must reflect that.
Inventory loss was not only theft
Question 2a concerned Yumm Petfoods. The business had inventory loss of $12,000, compared with the industry average of $4,000. The owner believed the loss was mostly from theft, but the question asked for two other possible reasons.
That wording mattered.
Theft was excluded.
Possible reasons included undersupply by suppliers, oversupply to customers, recording errors, unrecorded wastage or unrecorded damage.
This question tested whether students understood inventory loss as a broader accounting issue. Inventory loss occurs when the physical inventory count is lower than the inventory records suggest. Theft is one possible explanation, but it is not the only one.
For a pet food business, unrecorded damage or wastage could be highly relevant. Inventory may be damaged in storage, become unsaleable, expire, or be incorrectly recorded in the inventory system.
High-scoring responses respected the constraint in the question and identified reasons that would actually reduce inventory on hand compared with the records.
Internal controls had to target inventory theft
Question 2b asked students to describe one internal control procedure to reduce inventory theft, other than security cameras and bag checks already used by the business.
This required students to propose a control that matched the risk.
Examples included security tags, locked display cabinets for valuable items, restricted access to storage areas, regular stocktakes or security guards.
The question asked students to describe the control, not merely name it. For example, security tags could be attached to high-value inventory so that an alarm sounds if the item is removed without being scanned and paid for. This increases the likelihood of detection and discourages theft.
The performance issue was inventory theft. The control had to reduce that risk.
Accounting questions about internal control are not asking students to list generic business ideas. They are asking how a specific procedure protects assets and improves the reliability of records.
Slow inventory turnover affected liquidity
Question 2c asked students to analyse the likely effects on business performance of Yumm Petfoods having an inventory turnover of 90 days, compared with an industry average of 49 days.
This was one of the clearest analysis questions in the paper.
A slower inventory turnover means the business is taking longer to convert inventory into sales. That can create liquidity pressure because cash remains tied up in inventory for longer.
If the business must pay suppliers before the inventory is sold, it may struggle to meet short-term debts. This can place pressure on cash flow and make it harder to pay wages, rent, suppliers and other operating expenses.
The report noted that higher-scoring responses linked slower turnover to business consequences rather than merely defining the ratio.
That is essential.
Inventory turnover is not important because students can calculate it. It is important because it shows how efficiently the business is managing inventory and converting it into cash.
Slow inventory turnover also affected profitability
The same question also required students to consider profitability.
Yumm Petfoods was holding a much higher value of inventory than the industry average: $240,000 compared with $160,000. It also had higher inventory loss and lower net profit than the industry average.
For a pet food business, holding inventory for too long can increase the risk of expiry, damage, wastage or write-downs. This can increase expenses and reduce profit. The business may also incur higher storage and insurance costs while holding excess inventory.
Slow turnover may also indicate weaker sales. If inventory is not moving quickly, the business may be generating less revenue than expected, reducing its ability to cover expenses and earn profit.
This is why the best responses connected several pieces of data. The slow inventory turnover, high inventory on hand, high inventory loss and lower net profit all pointed towards weaker inventory management and weaker business performance.
A ratio rarely stands alone.
It becomes meaningful when connected to the business context.
FIFO was not physical inventory movement
Question 2d asked students to justify the accountant’s suggestion that changing from Identified Cost to FIFO would improve efficiency.
This question exposed one of the most important inventory misunderstandings in VCE Accounting.
FIFO is a cost assignment assumption. It does not necessarily mean the oldest physical inventory is sold first.
For Yumm Petfoods, Identified Cost would require the business to track the cost of each individual inventory item. That may be inefficient for a pet food business selling relatively low-cost, high-volume items. FIFO would likely be more efficient because it assumes the earliest costs are assigned to Cost of Sales first, allowing inventory records to be updated more easily.
The report noted that some students argued FIFO would improve efficiency because it would physically ensure older pet food was sold first and reduce expiry problems.
That was not the point.
A business can physically rotate stock using good inventory management procedures regardless of the cost assignment method. FIFO concerns how costs are assigned in the accounting records.
That distinction is critical.
High-scoring students understand the accounting assumption, not just the everyday meaning of “first in, first out”.
Product costs changed the value of inventory
Question 3a involved Top Sportz purchasing football jumpers. The supplier’s invoice showed 45 jumpers at $80 each plus GST and delivery of $90 plus GST.
The delivery cost had to be included in Inventory.
This is because delivery was a product cost: a cost incurred to get inventory into a condition and location ready for sale, which could be logically allocated to individual units.
The inventory cost was therefore:
- 45 jumpers × $80 = $3,600
- delivery = $90
- total Inventory = $3,690
GST was calculated separately and Accounts Payable was credited because the transaction was on credit.
The report noted that some students recorded delivery separately or treated the transaction as a cash payment. These errors show why students must understand both product costing and source documents.
If a cost is necessary to bring inventory to the business and can be allocated logically, it becomes part of the inventory cost.
That affects later valuation and profit.
Delivery changed the unit cost
The delivery cost in Question 3a also affected Question 3b.
Because the $90 delivery cost was allocated across 45 jumpers, it added $2 to the cost of each jumper. The cost per jumper was therefore $82, not $80.
This mattered when calculating the inventory write-down.
Students who ignored delivery in Question 3a often carried that error into Question 3b. This is a common feature of VCE Accounting exams: one treatment can flow into another.
Accounting questions are often connected. A cost classification error early in a question can affect later calculations, journal entries and business analysis.
High-scoring students keep track of how the information flows.
Inventory write-down required net realisable value
Question 3b asked students to record Memo 63. Top Sportz had 30 football jumpers on hand. These jumpers normally sold for $110 plus GST, but the owner decided to sell them for $75 plus GST because a new style would be introduced next season. In addition, a free coffee cup costing the business $5 would be given away with each jumper sold.
This required students to apply net realisable value.
Inventory should be valued at the lower of cost and net realisable value. The cost per jumper was $82. The revised selling price was $75. Since the business had to give away a coffee cup costing $5 to make each sale, the net realisable value was $70.
The write-down was therefore:
$82 − $70 = $12 per jumper
For 30 jumpers:
30 × $12 = $360
The correct entry was:
- debit Inventory Write-Down $360
- credit Inventory $360
This question tested whether students could apply the valuation rule rather than simply compare original cost with reduced selling price.
The free coffee cup mattered because it reduced the net amount the business expected to realise from selling each jumper.
Inventory write-down was not inventory loss
The report noted that some students recorded the adjustment as an inventory loss.
That was incorrect.
The football jumpers were still physically present. The business had not discovered missing inventory. The issue was that their value had fallen below cost because they would be sold at a reduced price and bundled with a free item.
That is an inventory write-down.
Inventory loss occurs when the physical count is lower than the inventory records. Inventory write-down occurs when inventory is still on hand but its net realisable value is lower than cost.
This distinction matters because the accounting treatment reflects the nature of the event.
In Accounting, similar-looking decreases in inventory can have different causes and different labels.
High-scoring students identify the cause first.
Inventory decisions affected supplier relationships
Question 3c focused on Accounts Payable Turnover, but it also had inventory consequences.
Top Sportz purchased inventory on credit, and the chart showed that the business was increasingly taking longer to pay suppliers, moving outside credit terms.
If this trend continued, suppliers could withdraw credit facilities, demand cash payments, reduce supply or refuse to provide further inventory. This would directly affect Top Sportz’s ability to maintain inventory levels and generate sales.
This shows how inventory management connects to liquidity and supplier relationships.
A business that cannot pay suppliers on time may struggle to access inventory. If it cannot access inventory, sales may fall. If sales fall, profit may decline and cash flow may worsen.
Performance indicators are connected.
Inventory questions are rarely only about inventory.
Inventory affected the reliability of reports
Inventory is one of the most important assets for many trading businesses. If inventory is misstated, several reports are affected.
If ending inventory is overstated, Cost of Sales may be understated and profit overstated. If inventory write-downs are not recorded, assets may be overstated. If inventory loss is not identified, the business may fail to recognise weaknesses in theft prevention, recording systems or stock handling.
The 2025 exam repeatedly showed this.
Accurate inventory records support faithful representation. They also help owners make better decisions about purchasing, pricing, storage, internal controls and supplier management.
Inventory accuracy is not just a technical issue.
It affects the usefulness of accounting information.
What future Accounting students should learn from 2025
The 2025 VCE Accounting exam shows that inventory questions require both technical skill and business reasoning.
Students need to be able to:
- identify when a sales return affects Inventory and Cost of Sales
- apply mark-up information to determine cost price
- distinguish inventory loss from inventory write-down
- explain causes of inventory loss beyond theft
- describe internal controls that reduce inventory theft
- analyse inventory turnover in relation to liquidity and profitability
- understand FIFO as a cost assignment assumption
- include product costs such as delivery in Inventory
- calculate unit cost after delivery allocation
- apply net realisable value correctly
- link inventory management to supplier relationships and business performance
These skills sit at the centre of VCE Accounting.
Inventory affects the records, the reports and the business.
How ATAR STAR approaches inventory in VCE Accounting
At ATAR STAR, inventory is taught as a connected accounting system.
Students learn how inventory movements affect journals, ledgers, Cost of Sales, Gross Profit, net realisable value, write-downs, inventory loss, cash flow and business performance. They also practise explaining inventory issues using precise accounting terminology rather than relying on general business language.
The 2025 Examination Report confirms why this matters. High-scoring responses recognised what had happened to inventory and applied the correct accounting treatment.
They did not just record a number.
They understood the inventory event.