O Level Principles of Accounts Practice Paper 4

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O-Level Principles of Accounts Quiz - Inventory Costing

Name: ____________________
Class: ____________________
Date: ____________________
Score: ________ / 40

Duration: 60 Minutes
Total Marks: 40

Instructions:

• Answer all questions in the spaces provided.
• Show all necessary workings clearly.
• For calculation questions, round your answers to two decimal places where applicable.

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Section A: Foundational Calculations (Questions 1–8)

1. Define the term "Closing Inventory". (1 mark)
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2. Calculate the cost of sales for Zenith Trading for the month of March 2024. Opening Inventory: $4,200 Purchases:$15,800 Closing Inventory: $3,900 (1 mark)
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3. A business has opening inventory of $1,200 and closing inventory of$1,800. If the total purchases for the year were $10,000, calculate the cost of sales. (1 mark)
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4. Calculate the ending inventory as at 31 December 2023 given: Opening Inventory: $5,000 Purchases:$22,000 Cost of Sales: $18,500 (1 mark)
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5. State the accounting principle that requires inventory to be valued at the lower of cost and net realizable value. (1 mark)
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6. Explain why the prudence concept is applied when valuing inventory. (2 marks)
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7. Calculate the average inventory for the year ended 30 June 2024. Inventory at 1 July 2023: $6,000 Inventory at 30 June 2024:$8,000 (1 mark)
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8. If the cost of sales for a period is $45,000 and the average inventory is$5,000, calculate the inventory turnover ratio. (1 mark)
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Section B: Inventory Analysis & Ratios (Questions 9–15)

9. Calculate the days sales in inventory for the year ended 31 December 2023. Cost of Sales: $120,000 Average Inventory:$8,000 (2 marks)
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10. Compare the days sales in inventory for the two years ended 30 June 2023 and 30 June 2024. Year 2023: Cost of Sales $200,000; Average Inventory$10,000 Year 2024: Cost of Sales $220,000; Average Inventory$15,000 (4 marks)
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11. A business uses the FIFO method. Explain how this affects the value of closing inventory during a period of rising prices. (2 marks)
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12. Calculate the cost of sales for the month of May 2024. Opening Inventory: $2,100 Purchases:$11,000 Closing Inventory: $2,500 (1 mark)
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13. If the inventory turnover ratio is 6 times, how many days does it take on average to sell the inventory? (2 marks)
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14. Define "Net Realizable Value" (NRV) in the context of inventory. (2 marks)
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15. A business has a high days sales in inventory ratio compared to its competitors. State one possible reason for this. (1 mark)
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Section C: Application & Ledger Work (Questions 16–20)

16. Prepare the inventory account for the month of January 2024. 1 Jan: Balance b/d $3,000 15 Jan: Purchases$5,000 31 Jan: Closing Inventory $3,500 (3 marks)
    
    [Space for T-Account]
    
    
    
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17. Calculate the gross profit for the period. Revenue: $50,000 Opening Inventory:$4,000 Purchases: $20,000 Closing Inventory:$5,000 (2 marks)
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18. Explain the difference between the FIFO and AVCO methods of inventory valuation. (2 marks)
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19. A business discovered that closing inventory was overstated by $1,000. State the effect of this error on the gross profit for the year. (2 marks)
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20. Recommend one action a business can take to reduce its days sales in inventory and explain why. (3 marks)
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Answer Key - O-Level Principles of Accounts Quiz: Inventory Costing

1. Definition: The value of goods remaining unsold at the end of an accounting period. (1 mark)
2. Calculation: $4,200 +$15,800 - $3,900 =$16,100 (1 mark)
3. Calculation: $1,200 +$10,000 - $1,800 =$9,400 (1 mark)
4. Calculation: $5,000 +$22,000 - $18,500 =$8,500 (1 mark)
5. Principle: Prudence Concept. (1 mark)
6. Explanation: Prudence ensures that assets (inventory) and profits are not overstated. By valuing at the lower of cost and NRV, the business accounts for potential losses immediately. (2 marks)
7. Calculation: ($6,000 +$8,000) / 2 = $7,000 (1 mark)
8. Calculation: $45,000 /$5,000 = 9 times (1 mark)
9. Calculation:
   • Turnover Ratio = $120,000 /$8,000 = 15 times
   • Days = 365 / 15 = 24.33 days (2 marks)
10. Comparison:
    • 2023: ($200,000 /$10,000) = 20 times; 365 / 20 = 18.25 days
    • 2024: ($220,000 /$15,000) = 14.67 times; 365 / 14.67 = 24.87 days
    • Comparison: Days sales in inventory increased from 18.25 to 24.87 days. (4 marks)
11. FIFO Effect: During rising prices, the oldest (cheaper) stock is sold first. Therefore, the closing inventory consists of the most recent (more expensive) purchases, resulting in a higher closing inventory value. (2 marks)
12. Calculation: $2,100 +$11,000 - $2,500 =$10,600 (1 mark)
13. Calculation: 365 / 6 = 60.83 days (2 marks)
14. NRV Definition: The estimated selling price of the inventory in the ordinary course of business minus the estimated costs of completion and the estimated costs necessary to make the sale. (2 marks)
15. Reason: Overstocking of goods, slow-moving inventory, or a decline in customer demand. (1 mark)
16. T-Account:
    • Debit: Balance b/d $3,000; Purchases$5,000
    • Credit: Cost of Sales (Balancing figure) $4,500; Balance c/d$3,500
    • Balance b/d (next month) $3,500 on Debit side. (3 marks)
17. Calculation:
    • Cost of Sales = $4,000 +$20,000 - $5,000 =$19,000
    • Gross Profit = $50,000 -$19,000 = $31,000 (2 marks)
18. Difference: FIFO assumes the first items purchased are the first sold. AVCO calculates a weighted average cost of all items available for sale. (2 marks)
19. Effect: Overstating closing inventory understates the cost of sales. Therefore, the gross profit is overstated by $1,000. (2 marks)
20. Recommendation: Implement a "Just-in-Time" (JIT) inventory system or offer discounts to clear slow-moving stock. This reduces the average inventory held, thereby increasing the turnover ratio and decreasing the number of days inventory is held. (3 marks)