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O Level Principles of Accounts Practice Paper 2

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Questions

TuitionGoWhere Exam Practice (AI) - Principles of Accounts O-Level

Practice Paper: Inventory Costing (Version 2 of 5)

School: TuitionGoWhere Secondary School (AI)
Subject: Principles of Accounts
Level: O-Level
Paper: Practice Paper 2 (Topic: Inventory Costing)
Duration: 60 minutes
Total Marks: 60
Name: ___________________________
Class: ____________
Date: ____________

Instructions:

Answer all questions in the spaces provided.
Show all workings clearly. Marks are awarded for correct method and final answer.
Use the following abbreviations where needed: FIFO (First In First Out), AVCO (Weighted Average Cost).
Round monetary values to 2 decimal places unless stated otherwise.

Section A: Basic Inventory Calculations (Questions 1–5) [12 marks]

1. [2 marks] Calculate the cost of sales for the month of March 2025 given:

Opening inventory: $4,200
Purchases: $18,500
Closing inventory: $3,800

2. [1 mark] State the formula for ending (closing) inventory using the periodic system.

3. [3 marks] On 31 May 2025, a physical stock count showed goods as follows:

Goods in warehouse: $12,000
Goods in transit to customer (FOB shipping point): $2,500
Goods on consignment (not owned): $1,800
Damaged goods (expected scrap value $300, cost$ 900)

Calculate the ending inventory to be reported.

4. [2 marks] Prepare the Inventory T-account for April 2025. Opening balance $5,000 (dr); Purchases$ 22,000; Cost of sales $20,000. Show balance c/d and b/d.

5. [4 marks] Explain, with an accounting concept, how inventory is valued. (Max 2 sentences for concept, 2 for explanation)

Section B: FIFO and AVCO Methods (Questions 6–11) [20 marks]

6. [3 marks] A business had the following purchases of Product X:

1 Jun: 100 units @ $5.00
10 Jun: 150 units @ $5.40
20 Jun: 120 units @ $5.80
Sales on 25 Jun: 300 units

Using FIFO, calculate the cost of goods sold for June.

7. [3 marks] Using the same data as Q6, calculate the closing inventory value under FIFO.

8. [4 marks] Using AVCO (weighted average cost) for the same data as Q6, calculate: (a) the average cost per unit (2 marks) (b) closing inventory value (2 marks)

9. [3 marks] Explain one reason why FIFO may show higher profit than AVCO during a period of rising prices.

10. [3 marks] The following transactions for Item Y occurred:

Opening: 50 units @ $10
Purchase 1: 100 units @ $12
Sale: 120 units
Purchase 2: 80 units @ $13

Using FIFO, compute cost of goods sold and closing inventory.

11. [4 marks] A store uses AVCO. Opening 200 units @ $4.00. Purchases: 300 units @$ 4.50. Sales: 350 units. Then purchase 100 units @ $5.00. Calculate closing inventory after all transactions using AVCO (round avg cost to 3 dp).

Section C: Analysis and Interpretation (Questions 12–16) [16 marks]

12. [2 marks] Calculate the inventory turnover ratio for 2024 given cost of sales $120,000 and average inventory$ 24,000.

13. [2 marks] Using your answer in Q12, calculate days sales in inventory for 2024 (365 days).

14. [4 marks] Compare the following two years and comment on liquidity effect:

2023: Cost of sales $90,000, Avg inventory$ 30,000
2024: Cost of sales $120,000, Avg inventory$ 24,000 Calculate days sales in inventory for both and state which year is better for cash flow.

15. [4 marks] A company's inventory records show opening $8,000, closing$ 10,000, cost of sales $50,000. Calculate inventory turnover and days sales in inventory. Recommend one action to improve inventory efficiency.

16. [4 marks] Shown below is a bar chart of inventory levels. Interpret the trend and suggest one business measure.

Chart for Q16 (OLEVEL Accounts)

Generated chart for Q16.

Section D: Integrated Scenario and Evaluation (Questions 17–20) [12 marks]

17. [3 marks] A trader uses FIFO. In a period of falling prices, would net profit be higher or lower than AVCO? Explain briefly.

18. [3 marks] Give two limitations of using days sales in inventory for decision-making.

19. [3 marks] A business has closing inventory overstated by $2,000. State the effect on gross profit and on net assets, and explain why.

20. [3 marks] Recommend two measures to reduce excessive inventory holding, with reasons.

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Answers

TuitionGoWhere Exam Practice (AI) - Principles of Accounts O-Level

Practice Paper: Inventory Costing (Version 2 of 5) - Answer Key

Total Marks: 60

Section A: Basic Inventory Calculations

1. [2 marks]

Working: Cost of Sales = Opening Inventory + Purchases − Closing Inventory
= $4,200 +$ 18,500 − $3,800 =$ 19,900
Mark breakdown: 1 mark for formula, 1 mark for correct answer.
Teaching note: Cost of sales is the cost of inventory actually sold. Always use cost, not selling price.

2. [1 mark]

Answer: Closing Inventory = Opening Inventory + Purchases − Cost of Sales (periodic system).
Teaching note: This is the basic inventory identity. Some write it as Physical Count + Adjustments.

3. [3 marks]

Goods in warehouse: $12,000 (include)
Goods in transit (FOB shipping point): $2,500 (include – risk passed to buyer)
Goods on consignment: $1,800 (exclude – not owned)
Damaged goods: report at lower of cost ( $900) or NRV ($ 300) → $300
Ending inventory = 12,000 + 2,500 + 300 = $14,800
Mark breakdown: 1 mark for inclusions/exclusions, 2 marks for correct total.
Common mistake: Including consignment goods or using cost for damaged.

4. [2 marks]

Inventory Account
Dr                              Cr
Opening b/d  5,000
Purchases   22,000    Cost of sales 20,000
                          Bal c/d     7,000
Total       27,000    Total          27,000
Bal b/d      7,000

Mark: 1 for correct T-format and entries, 1 for balance.

5. [4 marks]

Concept: Inventory is valued at lower of cost and net realisable value (LCNRV). [2 marks]
Explanation: Cost is what was paid; NRV is expected selling price less costs to sell. If NRV < cost, write down to avoid overstating assets/profit (prudence). [2 marks]

Section B: FIFO and AVCO Methods

6. [3 marks]

FIFO: first 100 @ $5 =$ 500; next 150 @ $5.40 =$ 810; next 50 @ $5.80 =$ 290. Total COGS = $1,600.
Mark: 3 marks for correct layered calc.

7. [3 marks]

Remaining: 70 units @ $5.80 =$ 406. Closing inventory = $406.
Mark: 3 marks.

8. [4 marks]

(a) Total cost = (100×5)+(150×5.40)+(120×5.80)=500+810+696= $2,006. Total units=370. Avg = 2006/370 =$ 5.4216 ≈ $5.42. [2]
(b) Closing 70 units × $5.4216 =$ 379.51. [2]

9. [3 marks]

In rising prices, FIFO uses older lower costs for COGS, so COGS lower, gross profit higher than AVCO which averages in newer higher costs. [3]

10. [3 marks]

FIFO: COGS = 50@10 + 70@12 = 500+840= $1,340. Closing = 30@12 + 80@13 = 360+1040=$ 1,400. [3]

11. [4 marks]

Open 200@4 = 800. Buy [email protected]=1350. Total 500 units, $2,150, avg=4.30.
Sell 350 → COGS 350×4.30=1505, left 150 units @4.30=645.
Buy 100@5=500 → total 250 units, $1,145, new avg=4.58.
Closing inv = 250×4.58 = $1,145. [4 marks]

Section C: Analysis and Interpretation

12. [2 marks]

ITR = 120,000 / 24,000 = 5 times. [2]

13. [2 marks]

DSI = 365 / 5 = 73 days. [2]

14. [4 marks]

2023: ITR=90k/30k=3; DSI=365/3=121.67 days.
2024: ITR=120k/24k=5; DSI=73 days.
2024 better cash flow: inventory sold faster, less cash tied up. [4]

15. [4 marks]

Avg inv = (8k+10k)/2=9k. ITR=50k/9k=5.56. DSI=365/5.56=65.65 days.
Action: reduce ordering quantities / improve demand forecasting. [4]

16. [4 marks]

From chart: Q2 and Q4 peaks ( $22k,$ 27k); overall rising trend.
Measure: review Q4 buying to avoid overstock; use just-in-time.
Mark: 2 for correct reading of values/trend, 2 for sensible measure.

Section D: Integrated Scenario and Evaluation

17. [3 marks]

Falling prices: FIFO uses older higher costs → COGS higher → net profit lower than AVCO. [3]

18. [3 marks]

(1) Ignores inventory composition/obsolescence; (2) Averages hide seasonal spikes. [3, 1.5 each]

19. [3 marks]

Closing inv overstated by $2k → COGS understated$ 2k → gross profit overstated $2k; net assets overstated$ 2k (inventory asset inflated). [3]

20. [3 marks]

(1) Implement tighter reorder levels – reduces excess stock; (2) Negotiate faster supplier delivery – lower safety stock. [3, 1.5 each]