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O Level Principles of Accounts Practice Paper 3

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O Level Principles of Accounts From Real Exams Generated by Gemma 4 31B Updated 2026-06-03
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Questions

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O-Level Principles of Accounts Quiz - Inventory Costing

Name: ________________________
Class: ________________________
Date: _________________________
Score: ________ / 40

Duration: 60 Minutes
Total Marks: 40 Marks

Instructions:

  • Answer all questions in the spaces provided.
  • Show all necessary workings clearly.
  • Use a calculator where necessary.
  • For ratio calculations, provide answers to two decimal places unless stated otherwise.

Section A: Foundational Calculations (Questions 1-8)

  1. Define the term "Inventory" in the context of a trading business. (1)
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  2. State the accounting principle that requires inventory to be valued at the lower of cost and net realizable value (NRV). (1)
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  3. A business has opening inventory of 4,500,purchasesof4,500, purchases of 12,000, and closing inventory of $3,200. Calculate the cost of sales. (2)
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  4. Explain the difference between the FIFO (First-In, First-Out) and AVCO (Weighted Average Cost) methods of inventory valuation. (2)
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  5. Calculate the ending inventory value if the cost is 1,200andthenetrealizablevalueis1,200 and the net realizable value is 950. (1)
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  6. If the cost of sales for the year is 45,000andtheaverageinventoryis45,000 and the average inventory is 5,000, calculate the inventory turnover ratio. (2)
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  7. A business has a cost of sales of 60,000andanaverageinventoryof60,000 and an average inventory of 8,000. Calculate the days sales in inventory. (2)
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  8. State one reason why a business might choose the FIFO method over the AVCO method. (1)
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Section B: Application and Analysis (Questions 9-15)

Scenario for Questions 9-11: Luxe Gear records the following inventory movements for June 2024:

  • June 1: Opening Inventory: 100 units @ $10 each
  • June 10: Purchase: 200 units @ $12 each
  • June 20: Sale: 150 units
  • June 25: Purchase: 100 units @ $15 each

  1. Calculate the value of the ending inventory as at 30 June 2024 using the FIFO method. (3)
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  2. Calculate the value of the ending inventory as at 30 June 2024 using the AVCO method. (3)
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  3. Compare the effect of FIFO and AVCO on the gross profit when prices are rising. Which method results in a higher profit? (2)
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  4. A business finds that its days sales in inventory has increased from 45 days to 62 days over two years. Explain what this trend indicates about the business's efficiency. (3)
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  5. Explain why the "Prudence Concept" is applied when valuing inventory at the lower of cost and NRV. (2)
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  6. Calculate the cost of sales for a period where:

    • Opening Inventory: $12,000
    • Purchases: $85,000
    • Returns Outwards: $3,000
    • Closing Inventory: $15,000 (2)
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  7. If a business overstates its closing inventory, state the effect on: (a) Gross Profit (1) (b) Current Assets (1)
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Section C: Integrated Problems (Questions 16-20)

  1. Prepare the Inventory T-account for the month of July 2024 based on the following:

    • July 1: Balance b/d $5,000
    • July 15: Purchases $12,000
    • July 31: Balance c/d $6,000 (4)






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  2. A business has the following data for 2023 and 2024:

    • 2023: Cost of Sales = 100,000;AvgInventory=100,000; Avg Inventory = 10,000
    • 2024: Cost of Sales = 120,000;AvgInventory=120,000; Avg Inventory = 15,000 Calculate the days sales in inventory for both years. (4)
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  3. Based on your answer to Question 17, recommend one action the business can take to improve its inventory management. Justify your answer. (3)
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  4. Describe the impact of using the AVCO method on the Statement of Financial Position during a period of falling prices. (2)
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  5. A business has inventory with a cost of 5,000.Itwillcost5,000. It will cost 200 to complete the item and 100tosellit.Theexpectedsellingpriceis100 to sell it. The expected selling price is 4,600. Calculate the value at which this inventory should be recorded. (2)
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Answers

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Answer Key - O-Level Principles of Accounts Quiz (Inventory Costing)

  1. Definition: The goods held by a business for the purpose of resale in the ordinary course of business. (1)
  2. Principle: Prudence Concept. (1)
  3. Calculation: 4,500+4,500 + 12,000 - 3,200=3,200 = 13,300. (2)
  4. Difference: FIFO assumes the oldest stock is sold first; AVCO calculates a weighted average cost for all units available for sale. (2)
  5. Calculation: 950(Lowerof950 (Lower of 1,200 and $950). (1)
  6. Calculation: 45,000/45,000 / 5,000 = 9 times. (2)
  7. Calculation: (365 / (60,000/60,000 / 8,000)) = 365 / 7.5 = 48.67 days. (2)
  8. Reason: It reflects the actual flow of goods for most businesses (older stock sold first) or results in a higher ending inventory value during inflation. (1)
  9. FIFO Calculation:
    • Total units = 100 + 200 + 100 = 400. Sold 150. Remaining = 250.
    • 100 units @ 15(latest)=15 (latest) = 1,500
    • 150 units @ 12(nextlatest)=12 (next latest) = 1,800
    • Total = $3,300. (3)
  10. AVCO Calculation:
    • Total Cost = (10010) + (20012) + (100*15) = 1,000 + 2,400 + 1,500 = $4,900.
    • Total Units = 400.
    • Avg Cost = 4,900/400=4,900 / 400 = 12.25 per unit.
    • Ending Inventory = 250 units * 12.25=12.25 = 3,062.50. (3)
  11. Comparison: FIFO results in a lower cost of sales (older, cheaper stock used) and therefore a higher gross profit. (2)
  12. Analysis: The trend indicates a decrease in efficiency. Inventory is taking longer to sell, which may suggest overstocking, obsolescence, or a drop in demand. (3)
  13. Prudence: To ensure that assets (inventory) and profits are not overstated. By using the lower value, the business prepares for potential losses. (2)
  14. Calculation: 12,000+(12,000 + (85,000 - 3,000)−3,000) - 15,000 = 12,000+12,000 + 82,000 - 15,000=15,000 = 79,000. (2)
  15. Effect: (a) Gross Profit: Overstated (Cost of sales is understated). (1) (b) Current Assets: Overstated. (1)
  16. T-Account: Debit side:
    • July 1 Balance b/d $5,000
    • July 15 Purchases $12,000 Credit side:
    • July 31 Cost of Sales $11,000 (Balancing figure)
    • July 31 Balance c/d $6,000 (4 marks: Correct format, correct entries, correct balancing, correct b/d for next month).
  17. Calculation:
    • 2023: 365 / (100,000/100,000 / 10,000) = 365 / 10 = 36.50 days.
    • 2024: 365 / (120,000/120,000 / 15,000) = 365 / 8 = 45.63 days. (4)
  18. Recommendation: Implement a "Just-in-Time" (JIT) inventory system or offer discounts to clear slow-moving stock. Justification: The days sales in inventory has increased, indicating slower turnover and tied-up capital. (3)
  19. Impact: During falling prices, AVCO will result in a higher ending inventory value compared to FIFO, as the average includes the older, more expensive stock. (2)
  20. Calculation:
    • NRV = Selling Price - (Completion Cost + Selling Cost)
    • NRV = 4,600−(4,600 - (200 + 100)=100) = 4,300.
    • Value = Lower of 5,000and5,000 and 4,300 = $4,300. (2)