O Level Principles of Accounts Practice Paper 2

TuitionGoWhere Practice Paper - Principles of Accounts O-Level

ANSWER KEY AND MARKING SCHEME

Paper: Practice Assessment - Inventory Costing (Version 2) Total Marks: 60

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Section A: Inventory Valuation Methods (15 marks)

Question 1: FIFO Method (8 marks)

(a) Cost of sales using FIFO (3 marks)

Date	Sales (units)	Cost allocation	Amount ($)
Mar 12	50	40 units @ $120 + 10 units @$125	4,800 + 1,250 = 6,050
Mar 25	70	50 units @ $125 + 20 units @$130	6,250 + 2,600 = 8,850
Total cost of sales			14,900

Marking:

• 1 mark for correct allocation of Mar 12 sales
• 1 mark for correct allocation of Mar 25 sales
• 1 mark for correct total cost of sales ($14,900)

(b) Closing inventory using FIFO (2 marks)

Remaining units: 40 + 60 - 50 + 80 - 70 + 30 = 90 units

Source	Units	Cost per unit ($)	Amount ($)
Mar 18 purchases (remaining)	60	130	7,800
Mar 30 purchases	30	135	4,050
Total closing inventory	90		11,850

Marking:

• 1 mark for identifying remaining units (90)
• 1 mark for correct valuation ($11,850)

(c) Advantage of FIFO (1 mark)

Answer: FIFO values closing inventory at the most recent purchase prices, which reflects current market value more closely. / OR: FIFO is easy to understand and apply as it follows the actual physical flow of goods in most businesses.

Marking: 1 mark for any valid advantage

(d) Gross profit (2 marks)

Revenue = 120 units × $200 =$24,000 Cost of sales = $14,900 Gross profit =$24,000 - $14,900 = **$9,100**

Marking:

• 1 mark for correct revenue calculation
• 1 mark for correct gross profit ($9,100)

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Question 2: AVCO Method (7 marks)

(a) Cost per unit after each purchase (3 marks)

Date	Transaction	Units	Cost ($)	Total units	Total cost ($)	AVCO ($)
Mar 1	Opening	40	4,800	40	4,800	120.00
Mar 5	Purchase	60	7,500	100	12,300	123.00
Mar 12	Sale	(50)	(6,150)	50	6,150	123.00
Mar 18	Purchase	80	10,400	130	16,550	127.31
Mar 25	Sale	(70)	(8,911.70)	60	7,638.30	127.31
Mar 30	Purchase	30	4,050	90	11,688.30	129.87

Marking:

• 1 mark for correct AVCO after Mar 5 purchase ($123.00)
• 1 mark for correct AVCO after Mar 18 purchase ($127.31)
• 1 mark for correct AVCO after Mar 30 purchase ($129.87)

(b) Cost of sales using AVCO (2 marks)

Mar 12 sale: 50 × $123.00 =$6,150.00 Mar 25 sale: 70 × $127.31 =$8,911.70 Total cost of sales = $15,061.70

Marking:

• 1 mark for correct Mar 12 cost of sales
• 1 mark for correct total ($15,061.70)

(c) Closing inventory using AVCO (2 marks)

Closing inventory = 90 units × $129.87 = **$11,688.30**

Marking:

• 1 mark for identifying 90 units
• 1 mark for correct valuation ($11,688.30)

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Section B: Inventory and Financial Statements (15 marks)

Question 3: Cost of Sales and Inventory Adjustments (8 marks)

(a) Net purchases (2 marks)

Total purchases = $85,000 +$15,000 = $100,000 Less: Returns outwards = ($3,000) Add: Carriage inwards = $2,000 Net purchases = **$99,000**

Marking:

• 1 mark for total purchases
• 1 mark for correct net purchases ($99,000)

(b) Cost of sales (3 marks)

Opening inventory: $12,500 Add: Net purchases:$99,000 Less: Closing inventory: $14,800 Cost of sales (before damaged goods adjustment):$96,700

Damaged goods adjustment:

• Cost: $1,200
• NRV: $400 -$150 = $250
• Write-down required: $1,200 -$250 = $950

Adjusted closing inventory: $14,800 -$950 = $13,850 Adjusted cost of sales:$12,500 + $99,000 -$13,850 = $97,650

Marking:

• 1 mark for cost of sales before adjustment ($96,700)
• 1 mark for correct write-down calculation ($950)
• 1 mark for correct adjusted cost of sales ($97,650)

(c) Accounting concept for damaged goods (2 marks)

Answer: The damaged goods should be valued at the lower of cost and net realizable value (NRV), in accordance with the prudence concept. The prudence concept states that assets should not be overstated and expenses should not be understated. Since the NRV ($250) is lower than the cost ($1,200), the inventory should be written down to $250 to avoid overstating assets and profit.

Marking:

• 1 mark for identifying prudence concept / lower of cost and NRV
• 1 mark for explaining how it applies (assets not overstated, write-down required)

(d) Effect on profit if valued at cost (1 mark)

Answer: Profit would be overstated by $950 (the amount of the write-down not recorded).

Marking: 1 mark for correct effect (overstated by $950)

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Question 4: Inventory Turnover Analysis (7 marks)

(a) Inventory turnover ratio (2 marks)

Business A: Average inventory = ($18,000 +$22,000) ÷ 2 = $20,000 Inventory turnover =$120,000 ÷ $20,000 = 6.00 times

Business B: Average inventory = ($25,000 +$20,000) ÷ 2 = $22,500 Inventory turnover =$180,000 ÷ $22,500 = 8.00 times

Marking:

• 1 mark for correct Business A calculation (6.00 times)
• 1 mark for correct Business B calculation (8.00 times)

(b) Days sales in inventory (2 marks)

Business A: 365 ÷ 6.00 = 60.83 days Business B: 365 ÷ 8.00 = 45.63 days

Marking:

• 1 mark for correct Business A (60.83 days)
• 1 mark for correct Business B (45.63 days)

(c) Efficiency comparison (2 marks)

Answer: Business B is managing its inventory more efficiently. Business B has a higher inventory turnover ratio (8.00 times compared to 6.00 times) and lower days sales in inventory (45.63 days compared to 60.83 days), indicating that Business B sells its inventory more quickly and holds inventory for a shorter period.

Marking:

• 1 mark for identifying Business B as more efficient
• 1 mark for valid reason (higher turnover / lower days)

(d) Limitation of inventory turnover ratio (1 mark)

Answer: The inventory turnover ratio does not consider the type of products sold. / OR: Different industries have different norms for inventory holding periods. / OR: The ratio may be affected by seasonal fluctuations in inventory levels.

Marking: 1 mark for any valid limitation

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Section C: Inventory and Business Decisions (15 marks)

Question 5: Inventory Control and Decision-Making (8 marks)

(a) Annual cost savings (2 marks)

Current supplier (Option 1): Monthly purchases: $12,000 Discount: 5$12,000 = $600 (only if above$10,000) Annual cost: ($12,000 -$600) × 12 = $136,800

New supplier (Option 2): Monthly purchases: $12,000 Discount: 8$12,000 = $960 Annual cost: ($12,000 - $960) × 12 =$132,480

Annual savings: $136,800 -$132,480 = $4,320

Marking:

• 1 mark for correct annual cost under each option
• 1 mark for correct savings ($4,320)

(b) Advantage and disadvantage of credit period (2 marks)

Advantage: The shorter credit period of 15 days (compared to 30 days) means the business pays suppliers faster, which may help build a stronger relationship with the new supplier and potentially negotiate better terms in the future.

Disadvantage: The shorter credit period reduces the time available to pay, which may strain the business's cash flow as it has less time to collect cash from customers before paying suppliers.

Marking:

• 1 mark for valid advantage
• 1 mark for valid disadvantage

(c) Recommendation (3 marks)

Recommendation: FreshFoods should switch to the new supplier (Option 2).

Reason 1 (Accounting): The new supplier offers 8% discount compared to 5%, resulting in annual cost savings of $4,320. This will reduce cost of sales and increase gross profit.

Reason 2 (Non-accounting): The new supplier delivers within 2 working days compared to 5 working days. Faster delivery will help reduce the inventory holding period from 45 days closer to the industry average of 30 days, improving freshness of organic vegetables and reducing wastage.

Marking:

• 1 mark for clear recommendation
• 1 mark for valid accounting reason (cost savings)
• 1 mark for valid non-accounting reason (faster delivery, freshness, reduced wastage)

(d) Ethical consideration (1 mark)

Answer: FreshFoods should consider the impact on the current supplier's business and employees if the contract is terminated. / OR: FreshFoods should ensure the new supplier follows ethical labor practices and sustainable farming methods.

Marking: 1 mark for any valid ethical consideration

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Question 6: Inventory Valuation and Profit Effects (7 marks)

(a) Gross profit under both methods (2 marks)

FIFO: $250,000 -$155,000 = $95,000** AVCO:$250,000 - $157,500 = **$92,500

Marking:

• 1 mark for correct FIFO gross profit ($95,000)
• 1 mark for correct AVCO gross profit ($92,500)

(b) Net profit under both methods (2 marks)

FIFO: $95,000 -$60,000 = $35,000** AVCO:$92,500 - $60,000 = **$32,500

Marking:

• 1 mark for correct FIFO net profit ($35,000)
• 1 mark for correct AVCO net profit ($32,500)

(c) Effect on profit when costs are rising (2 marks)

Answer: When inventory costs are rising, changing from FIFO to AVCO will result in lower profit. Under FIFO, closing inventory is valued at higher (more recent) costs, resulting in lower cost of sales and higher profit. Under AVCO, closing inventory is valued at an average cost, which is lower than the most recent costs, resulting in higher cost of sales and lower profit. The difference in this case is $2,500 ($35,000 - $32,500).

Marking:

• 1 mark for stating profit is lower under AVCO
• 1 mark for explaining why (FIFO uses higher recent costs for closing inventory; AVCO averages costs)

(d) Reason to prefer FIFO (1 mark)

Answer: FIFO values closing inventory at the most recent purchase prices, which provides a more current valuation of inventory on the statement of financial position. / OR: FIFO is simpler to apply and understand. / OR: FIFO more closely matches the physical flow of goods in most businesses.

Marking: 1 mark for any valid reason

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Section D: Integrated Inventory Scenario (15 marks)

Question 7: Comprehensive Inventory Problem (15 marks)

(a) Adjusted purchases (2 marks)

Purchases per trial balance: $180,000 Add: Unrecorded purchases (goods received 30 Dec):$2,000 Less: Returns outwards: ($2,500) Add: Carriage inwards:$4,500 Adjusted purchases = $184,000

Marking:

• 1 mark for adding unrecorded purchases ($2,000)
• 1 mark for correct adjusted purchases ($184,000)

(b) Correct closing inventory (4 marks)

Closing inventory per records: $42,000

Adjustments:

1. Damaged goods write-down: $5,000 -$3,800 = ($1,200)
2. Unrecorded purchases: Add $2,000 (goods received but not recorded)
3. Unrecorded sales: Deduct $1,500 (goods sold but included in inventory)

Adjusted closing inventory: $42,000 -$1,200 + $2,000 -$1,500 = $41,300

Verification with physical count: Physical count: $40,500 Add: Goods sold but not recorded:$1,500 Less: Goods received but not recorded: ($2,000) Add back: Damaged goods at cost (already in physical count):$0 (physical count is at cost) Adjusted physical: $40,500 +$1,500 - $2,000 =$40,000 Difference: $41,300 -$40,000 = $1,300 (possible shrinkage or counting error)

Note: The question asks for the correct closing inventory based on adjustments. The adjusted figure of $41,300 is the correct answer based on the information provided.

Marking:

• 1 mark for damaged goods write-down ($1,200)
• 1 mark for adding unrecorded purchases ($2,000)
• 1 mark for deducting unrecorded sales ($1,500)
• 1 mark for correct adjusted closing inventory ($41,300)

(c) Cost of sales section (4 marks)

TechGear Ltd Income Statement (Extract) for the year ended 31 December 2026

	$	$
Opening inventory		35,000
Add: Purchases	184,000
Less: Returns outwards	(2,500)
Add: Carriage inwards	4,500
Net purchases		186,000
		221,000
Less: Closing inventory		(41,300)
Cost of sales		179,700

Marking:

• 1 mark for correct opening inventory
• 1 mark for correct net purchases ($186,000)
• 1 mark for correct closing inventory ($41,300)
• 1 mark for correct cost of sales ($179,700)

(d) Gross profit (2 marks)

Revenue: $320,000 Less: Returns inwards: ($3,000) Net sales: $317,000 Less: Cost of sales: ($179,700) Gross profit = $137,300

Marking:

• 1 mark for correct net sales ($317,000)
• 1 mark for correct gross profit ($137,300)

(e) Prudence concept application (2 marks)

Answer: The prudence concept requires that assets should not be overstated and expenses should not be understated. In this scenario, the damaged goods costing $5,000 have a net realizable value of only$3,800. Applying the prudence concept, the inventory must be written down by $1,200 to reflect the lower value. This ensures that inventory is not overstated on the statement of financial position and that profit is not overstated in the income statement. The concept requires accountants to exercise caution and recognize potential losses immediately.

Marking:

• 1 mark for explaining prudence concept (assets not overstated, caution)
• 1 mark for applying to the scenario (write-down of $1,200 required)

(f) Improvement to inventory management (1 mark)

Answer: TechGear Ltd should improve its inventory recording system to ensure all goods received and sold are recorded promptly. The unrecorded purchases and sales indicate weaknesses in internal controls. / OR: TechGear Ltd should conduct regular inventory counts to identify damaged or obsolete goods earlier.

Marking: 1 mark for any valid improvement suggestion

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Marking Summary

Question	Marks
Q1 (FIFO)	8
Q2 (AVCO)	7
Q3 (Cost of Sales)	8
Q4 (Inventory Turnover)	7
Q5 (Decision-Making)	8
Q6 (Profit Effects)	7
Q7 (Comprehensive)	15
Total	60

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Answer key generated by TuitionGoWhere AI - Version 2 of 5 Based on O-Level Principles of Accounts (7087) examination standards