O Level Principles of Accounts Practice Paper 1

TuitionGoWhere Practice Paper - Principles of Accounts O-Level

Answer Key & Marking Scheme

Subject: Principles of Accounts
Level: O-Level (7087)
Paper: Practice Paper 1 (Version 1 of 5)
Topic Focus: Inventory Costing & Control

Section A: Multiple Choice & Short Concepts (10 Marks)

Question 1
Answer: C
Marking: 1 mark for correct option.
Note: Inventory is valued at the lower of cost and NRV to adhere to the prudence concept.

Question 2
Answer: A
Marking: 1 mark for correct option.
Note: In rising prices, FIFO assigns the oldest (cheaper) costs to COGS, leaving the newest (higher) costs in Closing Inventory.

Question 3
Answer: C
Marking: 1 mark for correct option.
Note: Goods on consignment belong to the consignor, not the consignee.

Question 4
Answer:
Net Realisable Value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.
Marking:

• 1 mark for mentioning "estimated selling price".
• 1 mark for deducting "costs to complete/sell".

Question 5
Answer: Any two of the following:

1. It smooths out price fluctuations, providing a more stable cost of sales figure.
2. It is easier to administer than FIFO if there are many similar items and frequent purchases.
3. It is often considered more representative of the current cost of goods sold than FIFO in inflationary periods.
4. It avoids the manipulation of profits that can occur with specific identification.
   Marking: 1 mark per valid reason (max 2).

Question 6
Answer:
Gross Profit will be overstated by $500.
Reasoning:
Cost of Sales = Opening Inventory + Purchases - Closing Inventory.
If Closing Inventory is overstated, Cost of Sales is understated.
Since Gross Profit = Revenue - Cost of Sales, an understated Cost of Sales leads to an overstated Gross Profit.
Marking:

• 1 mark for stating "Overstated".
• 2 marks for correct logical explanation linking Closing Inventory -> COGS -> Gross Profit.

Section B: Calculations & Inventory Records (18 Marks)

Question 7

(a) FIFO Closing Inventory
Workings:
Total Units Available = 100 + 200 + 100 = 400 units.
Total Units Sold = 150 + 120 = 270 units.
Closing Inventory Units = 400 - 270 = 130 units.

Under FIFO, the closing inventory consists of the most recent purchases:

1. From Mar 18 Purchase: 100 units @ $13.00 =$1,300
2. From Mar 5 Purchase: Remaining 30 units @ $12.00 =$360
   (Note: The Mar 5 purchase had 200 units. 150 were sold on Mar 10? No, let's trace carefully.)

Detailed Trace for FIFO:

• Mar 10 Sale (150 units):
  • 100 units from Opening Inv @ $10.00
  • 50 units from Mar 5 Purchase @ $12.00
  • Remaining from Mar 5 Purchase: 200 - 50 = 150 units @ $12.00.
• Mar 25 Sale (120 units):
  • 120 units from remaining Mar 5 Purchase @ $12.00
  • Remaining from Mar 5 Purchase: 150 - 120 = 30 units @ $12.00.
• Closing Inventory Composition:
  • 30 units from Mar 5 Purchase @ $12.00 =$360
  • 100 units from Mar 18 Purchase @ $13.00 =$1,300
  • Total Value: $360 +$1,300 = $1,660

Marking:

• 1 mark for identifying correct units remaining (130).
• 2 marks for correct layering of costs (30 @ $12, 100 @$13).
• 1 mark for final answer $1,660.
• 2 marks for clear workings.

(b) AVCO Closing Inventory
Workings:

1. Mar 1 Balance: 100 units @ $10.00 =$1,000.
2. Mar 5 Purchase: 200 units @ $12.00 =$2,400.
   • Total: 300 units, Value $3,400.
   • New Avg Cost: $3,400 / 300 =$11.3333... -> Round to $11.33 (as per instruction to round at each step, though standard practice often keeps decimals. Let's follow prompt: "Round your average cost per unit to two decimal places at each calculation step").
   • Correction: If we round to $11.33:
3. Mar 10 Sale: 150 units @ $11.33 =$1,699.50.
   • Remaining Units: 150.
   • Remaining Value: 150 * $11.33 =$1,699.50.
4. Mar 18 Purchase: 100 units @ $13.00 =$1,300.
   • Total Units: 150 + 100 = 250.
   • Total Value: $1,699.50 +$1,300 = $2,999.50.
   • New Avg Cost: $2,999.50 / 250 =$11.998 -> Round to $12.00.
5. Mar 25 Sale: 120 units @ $12.00 =$1,440.
   • Remaining Units: 250 - 120 = 130.
   • Closing Inventory Value: 130 units * $12.00 = **$1,560**.

(Note: If student does not round intermediate steps, answer may vary slightly. Accept range $1,559 -$1,561 if workings are consistent.)

Marking:

• 1 mark for first average cost calculation.
• 1 mark for second average cost calculation.
• 2 marks for applying costs to sales correctly.
• 2 marks for final answer $1,560 (or consistent equivalent).

(c) Comparison of Gross Profit
Answer:
FIFO resulted in a higher Gross Profit.
Reason: In a period of rising prices ($10 ->$12 -> $13), FIFO assigns the older, lower costs to Cost of Sales. Lower Cost of Sales results in higher Gross Profit. AVCO averages the costs, resulting in a higher Cost of Sales compared to FIFO in inflationary times.
Marking:

• 1 mark for identifying FIFO.
• 2 marks for explanation linking rising prices, lower COGS, and higher profit.

(d) Inventory Turnover Ratio (FIFO)
Workings:
Cost of Sales (FIFO):
Total Goods Available for Sale = (10010) + (20012) + (100*13) = 1000 + 2400 + 1300 = $4,700. Closing Inventory (FIFO) =$1,660.
Cost of Sales = $4,700 -$1,660 = $3,040.

Average Inventory = (Opening Inv + Closing Inv) / 2
Average Inventory = ($1,000 +$1,660) / 2 = $1,330.

Inventory Turnover = $3,040 /$1,330 = 2.29 times (approx).

Marking:

• 1 mark for correct Cost of Sales ($3,040).
• 1 mark for correct Average Inventory ($1,330).
• 1 mark for final ratio (2.29).

Section C: Analysis & Decision Making (12 Marks)

Question 8

(a) Days Sales in Inventory (2023)
Workings:
Average Inventory = ($45,000 +$55,000) / 2 = $50,000. Inventory Turnover = Cost of Sales / Average Inventory Inventory Turnover =$320,000 / $50,000 = 6.4 times.

Days Sales in Inventory = 365 / Inventory Turnover
Days Sales in Inventory = 365 / 6.4 = 57.03 days.

Marking:

• 1 mark for Average Inventory ($50,000).
• 1 mark for Inventory Turnover (6.4).
• 2 marks for correct final answer (57.03 days).

(b) Efficiency Comparison
Answer:
The business is managing its inventory less efficiently in 2023.
Justification:
In 2022, the turnover was 5.5 times. In 2023, it is 6.4 times.
Wait, higher turnover is generally better.
Let's re-evaluate:
2022 Turnover: 5.5 times.
2023 Turnover: 6.4 times.
An increase in turnover ratio indicates that inventory is sold more quickly. Therefore, the business is managing inventory more efficiently.
(Self-Correction: Ensure student interprets the ratio correctly. Higher turnover = faster sales = better efficiency, usually.)

Revised Answer for Key:
The business is managing its inventory more efficiently.
The Inventory Turnover increased from 5.5 times in 2022 to 6.4 times in 2023. This means the business is selling and replacing its stock faster, which reduces holding costs and the risk of obsolescence.

Marking:

• 1 mark for correct conclusion (More Efficiently).
• 3 marks for justification referencing the increase in turnover ratio and its implication (faster sales/liquidity).

(c) Evaluation of AVCO vs FIFO
Answer Framework:
Advantage of AVCO:

• Smoothing Effect: AVCO smooths out price fluctuations. For electronic components where prices drop rapidly (deflation) or rise (inflation), AVCO prevents extreme swings in Gross Profit from month to month, providing a more stable view of performance for stakeholders.

Disadvantage of AVCO:

• Lag in Current Cost: In a rapidly changing market (like electronics), the weighted average cost may not reflect the current replacement cost of the inventory as accurately as FIFO (which uses recent costs for closing inventory) or specific identification. This might lead to pricing decisions based on outdated cost data.
• Complexity: It can be more computationally complex to maintain than FIFO if not using automated systems, as a new average must be calculated after every purchase.

Marking:

• 2 marks for a valid advantage with explanation.
• 2 marks for a valid disadvantage with explanation.
• Note: Answers must be contextualized to "electronic components" or "fluctuating prices" for full marks. Generic answers get max 3 marks.

END OF MARKING SCHEME