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O Level Principles of Accounts Practice Paper 3

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

Practice Paper: Inventory Costing (Version 3 of 5)

School: TuitionGoWhere Exam Practice (AI)
Subject: Principles of Accounts
Level: O-Level
Paper: Practice Paper (Topic: Inventory Costing)
Version: 3
Duration: 60 minutes
Total Marks: 60
Name: ___________________________
Class: ____________
Date: ____________

Instructions:

This practice paper contains 20 questions on Inventory Costing.
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) — 10 marks

1. A trader had opening inventory of $4,200, made purchases of$ 18,500, and had closing inventory of $3,900. Calculate the cost of sales for the period. [1]

2. State the formula for cost of sales. [1]

3. Give two reasons why a business keeps inventory. [2]

4. Calculate the ending inventory at 31 December 2024 from the following: physical stock count $6,400; goods in transit (FOB destination)$ 800; damaged goods (not sellable) $300. [1]

5. Explain the accounting concept used to value inventory at the lower of cost and net realisable value. [1]

Section B: Inventory Methods and T-Accounts (Questions 6–10) — 15 marks

6. The following purchases and issues occurred in January 2024:

1 Jan: Opening balance 100 units @ $5.00
5 Jan: Purchase 200 units @ $5.50
12 Jan: Issue 250 units
20 Jan: Purchase 150 units @ $6.00
28 Jan: Issue 100 units

Using FIFO, calculate the value of closing inventory at 31 January 2024. [3]

7. Using the same data as Q6, calculate the closing inventory value using AVCO (weighted average cost, recalculated after each purchase). [3]

8. Prepare the Inventory Account (T-account) for February 2024:

1 Feb: Balance b/d 150 units valued at $825
10 Feb: Purchase 100 units @ $6.20
18 Feb: Issue 120 units (issued at cost of $5.50/unit average)
25 Feb: Purchase 80 units @ $6.50 Show balance c/d and b/d. [3]

9. Explain one advantage of using FIFO during a period of rising prices. [2]

10. A company uses AVCO. At 1 March, 50 units @ $10. On 5 March, buy 50 units @$ 12. On 10 March, issue 40 units. Calculate the average cost per unit after the 5 March purchase. [3]

Section C: Valuation, Ratios and Analysis (Questions 11–15) — 15 marks

11. Inventory at 1 Jan 2024: $9,000; at 31 Dec 2024:$ 11,000. Cost of sales for 2024: $60,000. Calculate the inventory turnover ratio. [2]

12. Using the data in Q11, calculate days sales in inventory for 2024. Show to two decimal places. [2]

13. Compare the following two businesses' inventory efficiency:

Biz A: Inventory turnover ratio = 6.0
Biz B: Inventory turnover ratio = 4.0 Explain which is more efficient and why. [2]

14. A store's opening inventory was $5,000 and closing inventory$ 7,000. Sales revenue was $50,000 and gross profit margin was 20%. Calculate cost of sales and average inventory. [3]

15. Explain, with an accounting concept, how inventory is valued. [2]

Section D: Structured Scenarios and Decision-Making (Questions 16–20) — 20 marks

16. RM Stores provided the following for 2024:

Opening inventory $8,000
Purchases $42,000
Closing inventory $6,000
Revenue $90,000

(a) Calculate cost of sales. [1]
(b) Calculate gross profit. [1]
(c) Prepare the inventory account for the year. [3]

17. Using the data below, compute closing inventory under FIFO and AVCO.

1 Apr: 100 units @ $4
10 Apr: Buy 200 units @ $4.50
15 Apr: Issue 150 units
22 Apr: Buy 100 units @ $5
28 Apr: Issue 100 units [4]

FIFO: ____________________
AVCO: ____________________

18. A business has closing inventory of $12,000 but$ 2,000 of this is obsolete. Explain the accounting treatment and calculate the correct inventory value. [2]

19. Days sales in inventory for 2023 = 45.00; for 2024 = 60.00 (Cost of sales 2024 = $73,000; opening inv$ 10,000). Calculate closing inventory for 2024. [3]

20. A trader is deciding between FIFO and AVCO. Advise which method shows higher profit in a period of rising prices and explain why with reference to cost flow. [2]

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Answers

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

Practice Paper: Inventory Costing (Version 3) — Answer Key

Total Marks: 60

Section A: Basic Inventory Calculations (10 marks)

1. [1 mark]
Cost of Sales = Opening Inventory + Purchases − Closing Inventory
= $4,200 +$ 18,500 − $3,900 = **$ 18,800**
Teaching note: Cost of sales is the cost of inventory actually sold in the period. Always use cost, not selling price.

2. [1 mark]
Opening Inventory + Purchases − Closing Inventory = Cost of Sales
Teaching note: This is the basic inventory flow formula derived from the accounting equation for trading businesses.

3. [2 marks — 1 each]
Any two of:

To meet customer demand promptly
To avoid stockouts / production delays
To take advantage of bulk purchase discounts
To smooth seasonal fluctuations
Marking: 1 mark per valid reason.

4. [1 mark]
Ending inventory = Physical count $6,400 − goods in transit (FOB destination, not owned)$ 0 − damaged $300 = **$ 6,100**
Note: FOB destination goods are excluded; damaged goods excluded.
Correct: $6,400 −$ 300 = $6,100.

5. [1 mark]
Prudence concept (lower of cost and net realisable value).
Teaching note: Prudence means not overstating assets; inventory is reported at lower of cost or NRV.

Section B: Inventory Methods and T-Accounts (15 marks)

6. [3 marks] FIFO closing inventory:

1 Jan: 100 @ $5 =$ 500
5 Jan: 200 @ $5.50 =$ 1,100
12 Jan: issue 250 → 100@ $5 + 150@$ 5.50 = $1,325; remaining 50@$ 5.50 = $275
20 Jan: 150 @ $6 =$ 900 → total remaining 200 units (50@ $5.50 + 150@$ 6)
28 Jan: issue 100 → from 50@ $5.50 + 50@$ 6 = $275+$ 300 = $575; remaining 100@$ 6 = $600** **Closing inventory =$ 600 (100 units @ $6).
Marking: 1 for layering, 1 for correct issues, 1 for final value.

7. [3 marks] AVCO:

1 Jan: 100@ $5 =$ 500
5 Jan: +200@ $5.50 =$ 1,100 → total 300 units $1,600 → avg$ 5.3333
12 Jan: issue 250 @ $5.3333 =$ 1,333.33 → bal 50 units $266.67
20 Jan: +150@ $6 =$ 900 → total 200 units $1,166.67 → avg$ 5.8333
28 Jan: issue 100 @ $5.8333 =$ 583.33 → bal 100 units $583.33** **Closing =$ 583.33
Marking: 1 recalc avg, 1 issues, 1 final.

8. [3 marks] Inventory T-account Feb:

Inventory
Dr | Cr
1 Feb Bal b/d 150u $825 | 18 Feb Issues 120u $660
10 Feb Pur 100u $620   | 28 Feb Bal c/d 210u $1,585
25 Feb Pur 80u $520    |
                      | 
Total $1,965          | Total $2,245 (error check: $825+$620+$520=$1,965; $660+$1,585=$2,245 -> mismatch; correct: bal c/d = $1,965-$660=$1,305)

Corrected:
Dr: 1 Feb 825, 10 Feb 620, 25 Feb 520 = 1,965
Cr: 18 Feb 660, 28 Feb Bal c/d 1,305
1 Mar Bal b/d 1,305 (210 units)
Marking: 1 format, 1 entries, 1 balance.

9. [2 marks]
FIFO issues oldest (cheaper in rising prices) first → lower cost of sales → higher reported profit; also matches actual physical flow.
1 mark explanation, 1 mark profit effect.

10. [3 marks]
1 Mar: 50@ $10 =$ 500
5 Mar: +50@ $12 =$ 600 → total 100 units $1,100 Avg cost =$ 1,100 ÷ 100 = $11.00/unit
Marking: 1 total cost, 1 total units, 1 avg.

Section C: Valuation, Ratios and Analysis (15 marks)

11. [2 marks]
Avg inv = ( $9,000+$ 11,000)/2 = $10,000 Turnover =$ 60,000 ÷ $10,000 = 6.0 times
1 avg, 1 ratio.

12. [2 marks]
Days = 365 ÷ 6.0 = 60.83 days (2 dp)
1 formula, 1 answer.

13. [2 marks]
Biz A more efficient: higher turnover (6.0 > 4.0) means inventory sold more frequently, less capital tied up.
1 identification, 1 reason.

14. [3 marks]
GP = 20% of $50,000 =$ 10,000
CoS = $50,000 −$ 10,000 = $40,000 Avg inv = ($ 5,000+ $7,000)/2 =$ 6,000
1 GP, 1 CoS, 1 avg.

15. [2 marks]
Inventory valued at lower of cost and net realisable value (prudence concept). Cost = purchase cost; NRV = expected selling price − costs to sell.
1 rule, 1 concept.

Section D: Structured Scenarios (20 marks)

16. [5 marks]
(a) [1] CoS = $8,000+$ 42,000− $6,000 = **$ 44,000**
(b) [1] GP = $90,000−$ 44,000 = ** $46,000** (c) [3] Inventory account: Dr: Bal b/d$ 8,000, Purchases $42,000 =$ 50,000
Cr: CoS $44,000, Bal c/d$ 6,000
Marking: 1 format, 1 entries, 1 balance.

17. [4 marks]
FIFO:

1 Apr 100@ $4; 10 Apr +200@$ 4.50; 15 Apr iss 150 (100@4 [email protected]=625) → bal [email protected]=675
22 Apr +100@5 → 250 units ([email protected]+100@5)
28 Apr iss 100 ([email protected] → [email protected]=450) → bal [email protected]=675 +100@5=500 = $1,175
AVCO:
1 Apr 100@4=400; 10 Apr [email protected]=900 → 300u $1,300 avg 4.3333
15 Apr iss [email protected]=650 → bal 150u $650
22 Apr +100@5=500 → 250u $1,150 avg 4.60
28 Apr iss [email protected]=460 → bal 150u ** $690** FIFO$ 1,175; AVCO $690. 2 each.

18. [2 marks]
Obsolete stock written down to NRV (usually $0). Correct value =$ 12,000 − $2,000 = **$ 10,000**. Prudence concept.
1 treatment, 1 calc.

19. [3 marks]
Days = 365 ÷ (CoS/AvgInv) → 60 = 365 ÷ ( $73,000/((10,000+C)/2))$ 73,000 / ((10,000+C)/2) = 365/60 = 6.0833
(10,000+C)/2 = $73,000/6.0833 =$ 11,990.00
10,000+C = 23,980 → C = $13,980
1 formula, 1 avg, 1 C.

20. [2 marks]
FIFO shows higher profit in rising prices because cheaper older costs matched to sales; AVCO smooths cost.
1 method, 1 reason.