O Level Principles of Accounts Practice Paper 3

TuitionGoWhere Exam Practice (AI) - Answer Key

Practice Paper Set: Inventory Costing (Version 3 of 5)

Subject: Principles of Accounts (7087)
Level: O-Level

Section A: Multiple Choice & Short Concepts [10 Marks]

Question 1
Answer: C
Reasoning: The Prudence Concept requires assets not to be overstated. Therefore, inventory is valued at the lower of cost or net realizable value (NRV).

Question 2
Answer: A
Reasoning: In rising prices, FIFO assigns the older, cheaper costs to Cost of Sales, leaving the newer, higher costs in Closing Inventory. Thus, FIFO yields the highest closing inventory value.

Question 3
Answer: C
Reasoning: Goods on consignment remain the property of the consignor until sold. The consignee (holder) does not own them and must exclude them from their inventory.

Question 4
Answer: B
Workings:
Opening Inventory ($12,000) + Purchases ($45,000) + Carriage Inwards ($1,500) - Closing Inventory ($8,500) = $50,000.
Note: Carriage Inwards is a direct cost of purchase.

Question 5
Answer: B
Reasoning: Valuing damaged goods at cost instead of NRV is an error of principle/valuation. The totals still balance (Debit Inventory, Credit Purchases/Cash happened correctly), so the Trial Balance agrees, but the asset is overstated.

Question 6
Answer:
Net Realizable Value (NRV) 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 (e.g., marketing, distribution).
(1 mark for selling price reference, 1 mark for deduction of costs to sell)

Question 7
Answer:
AVCO smooths out price fluctuations, providing a more stable cost of sales figure. This is useful for perishable goods where specific batch tracking (FIFO) might be administratively difficult or less relevant if goods are mixed in storage.
(Accept: Simpler to administer if goods are indistinguishable/mixed.)

Question 8
Answer:
Carriage Outwards is a selling/distribution expense, not a cost of acquiring the goods. Cost of Sales includes only costs directly attributable to bringing the inventory to its present location and condition (e.g., Carriage Inwards). Carriage Outwards occurs after the goods are ready for sale.
(1 mark for identifying it as selling expense, 1 mark for distinction from acquisition cost)

Section B: Structured Calculations [18 Marks]

Question 9

(a) Closing Inventory Value (FIFO)
Step 1: Track Units
Opening: 100

• Purchase 5 Mar: 200

• Sale 10 Mar: (150)

• Purchase 15 Mar: 100

• Sale 20 Mar: (180)
• Return 25 Mar: (20) [Note: Return reduces the stock from the 5 Mar batch]

Total Units Remaining: $100 + 200 - 150 + 100 - 180 - 20 = 50$ units.

Step 2: Value Remaining Units (FIFO)
Under FIFO, the earliest units are sold first. The remaining 50 units come from the most recent purchases.

1. Purchase 15 Mar: 100 units @ $14.00.
   We have 50 units left. These must come from this batch because:

   • Opening 100 sold.
   • Purchase 5 Mar (200 - 20 return = 180 available).
     • Sale 10 Mar took 50 from Opening (100 left in Opening? No, Opening was 100. Sale 10 Mar 150 units: 100 from Opening, 50 from 5 Mar Purchase).
     • Remaining from 5 Mar Purchase: $180 - 50 = 130$ units.
     • Sale 20 Mar (180 units): Takes remaining 130 from 5 Mar Purchase, and 50 from 15 Mar Purchase.
     • Remaining from 15 Mar Purchase: $100 - 50 = 50$ units.

   Alternative Logic Check:
   Total Units In: $100 + 200 + 100 = 400$.
   Total Units Out (Sales + Return): $150 + 180 + 20 = 350$.
   Ending Units: 50.
   FIFO means ending inventory is the last ones in.
   Last purchase was 15 Mar (100 units @ $14).
   Since we have 50 units left, and the last batch had 100, all 50 come from the 15 Mar batch.

   Value = 50 \text{ units} \times \14.00 = $700$.

Answer: $700
(4 marks for correct logic/tracking, 2 marks for final value)

(b) Gross Profit
Revenue:
Sale 10 Mar: 150 \times \25 = $3,750$Sale 20 Mar:$180 \times $25 = $4,500$Total Revenue =$$8,250$

Cost of Sales (FIFO):
Total Cost of Goods Available for Sale:
Opening: $100 \times 10 = 1,000$
Purch 5 Mar: $200 \times 12 = 2,400$
Purch 15 Mar: $100 \times 14 = 1,400$
Less Return: $20 \times 12 = (240)$
Total Available Cost = 1,000 + 2,400 + 1,400 - 240 = \4,560$

Less Closing Inventory (from part a): $700$
Cost of Sales = 4,560 - 700 = \3,860$

Gross Profit = Revenue - Cost of Sales
Gross Profit = 8,250 - 3,860 = \4,390$

Answer: $4,390
(2 marks for Revenue, 2 marks for COS calculation)

Question 10

(a) Weighted Average Cost after 10 Apr Purchase
Opening: 500 \times \8.00 = $4,000$Purchase:$1,000 \times $9.00 = $9,000$Total Value:$$13,000$Total Units:$1,500$Average Cost =$13,000 / 1,500 = $8.666...$**Answer:**$8.67 (rounded to 2 d.p.)
(2 marks)

(b) Closing Inventory Value (AVCO)
Transaction Log:

1. 15 Apr Sale (800 units):
   Cost = 800 \times \8.666... = $6,933.33$Remaining Units:$1,500 - 800 = 700$Remaining Value:$13,000 - 6,933.33 = $6,066.67$*(Check:$700 \times 8.666... = 6,066.67$)*

2. **22 Apr Purchase (600 units @ $9.50):** New Value Added:$600 \times 9.50 = $5,700$New Total Value:$6,066.67 + 5,700 = $11,766.67$New Total Units:$700 + 600 = 1,300$New Average Cost:$11,766.67 / 1,300 = $9.0512...$

3. 28 Apr Sale (500 units):
   Cost = 500 \times \9.0512... = $4,525.64$Remaining Units:$1,300 - 500 = 800$Remaining Value (Closing Inv):$11,766.67 - 4,525.64 = $7,241.03$*(Alternatively:$800 \times 9.0512... = 7,240.98$due to rounding diffs. Accept range$7,240 - 7,242$)*

   Let's use exact fractions for precision:
   Avg 1: $26/3$
   Rem Val 1: $700 \times (26/3) = 18200/3$
   Add Purch: $5700 = 17100/3$
   Total Val 2: $35300/3$
   Total Units 2: $1300$
   Avg 2: $(35300/3) / 1300 = 353/39 \approx 9.05128$
   Closing Units: $800$
   Closing Val: $800 \times (353/39) = 282400 / 39 \approx 7,241.03$

Answer: $7,241.03
(4 marks: 1 for new avg cost, 1 for tracking units, 2 for final value)

(c) Cost of Sales for April
Method 1: Sum of COS from sales
Sale 1: $6,933.33$
Sale 2: $4,525.64$
Total: $11,458.97$

Method 2: Available - Closing
Available: $4,000 (Op) + 9,000 (P1) + 5,700 (P2) = 18,700$
Closing: $7,241.03$
COS: $18,700 - 7,241.03 = 11,458.97$

Answer: $11,458.97
(2 marks)

Section C: Analysis and Evaluation [12 Marks]

Question 11

(a) Effect on Net Profit (FIFO vs AVCO in rising prices)
In a period of rising prices, FIFO assigns the older, lower costs to Cost of Sales. This results in a lower Cost of Sales compared to AVCO (which averages in the higher recent prices).
Lower Cost of Sales leads to a higher Gross Profit and consequently a higher Net Profit.
(3 marks: 1 for lower COS, 1 for higher Profit, 1 for explanation of mechanism)

(b) Effect on Statement of Financial Position
FIFO leaves the most recent, higher-priced goods in Closing Inventory.
Therefore, Current Assets (specifically Inventory) will be higher under FIFO than under AVCO.
This results in a higher Total Assets and higher Capital/Equity (due to higher retained profits).
(3 marks: 1 for higher inventory value, 1 for link to Current Assets, 1 for overall impact)

Question 12

(a) Inventory Turnover Ratio
Formula: $\text{Cost of Sales} / \text{Average Inventory}$
$\text{Average Inventory} = (\text{Opening} + \text{Closing}) / 2$

2023:
Avg Inv = $(40,000 + 50,000) / 2 = 45,000$
Turnover = $300,000 / 45,000 = 6.67$ times

2024:
Avg Inv = $(50,000 + 70,000) / 2 = 60,000$
Turnover = $400,000 / 60,000 = 6.67$ times

Answer:
2023: 6.67 times
2024: 6.67 times
(4 marks: 2 for each year's correct calculation)

(b) Evaluation
The inventory turnover has remained constant at 6.67 times, which is lower than the industry average of 8.0 times.
This indicates that SmartElectronics is holding inventory for longer than its competitors, which ties up capital and increases the risk of obsolescence (especially for electronics).

Possible Reasons:

1. Overstocking: The business may be purchasing in bulk to obtain discounts, leading to higher average inventory levels without a proportional increase in sales volume.
2. Slow-moving items: The business may be holding obsolete or unpopular models that are not selling, inflating the closing inventory figure.
   (2 marks: 1 for evaluation against benchmark, 1 for valid reason)