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O Level Principles of Accounts Practice Paper 4

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

Practice Paper: Inventory Costing (Version 4 of 5)

School: TuitionGoWhere Exam Practice (AI)
Subject: Principles of Accounts
Level: O-Level
Paper: Practice Paper (Topic: Inventory Costing) — Version 4
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) — 10 marks

1. (a) State the formula for cost of sales. [1]
(b) Calculate the cost of sales for the year ended 31 Dec 2024 given: opening inventory $4,200, purchases$ 28,500, closing inventory $3,800. [1]

2. A shop had opening inventory of $1,500 and closing inventory of$ 2,100. Purchases during the period were $12,400. Calculate the cost of sales. [2]

3. Explain, with reference to an accounting concept, how inventory is valued in the financial statements. [2]

4. Calculate the ending inventory at 30 Sep 2024 from the following: physical stock count $6,300, goods in transit (FOB destination)$ 700, damaged goods (not sellable) $200. [2]

5. The inventory turnover ratio for a business is 5.2 times. Calculate the days sales in inventory for the year, rounded to 2 decimal places. [2]

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

6. Prepare the inventory account (T-account) for the month of July 2024 using: opening balance 1 Jul $2,000; purchases 10 Jul$ 5,000; issues 18 Jul $3,500; closing balance carried down. Show balance brought down to Aug. [3]

7. A business uses a perpetual inventory system. The following transactions occurred in August 2024:

1 Aug: Opening inventory 100 units @ $10
5 Aug: Purchase 50 units @ $12
12 Aug: Sale 120 units
20 Aug: Purchase 80 units @ $11 Using FIFO, calculate the value of closing inventory at 31 Aug. [3]

8. Using the same data as Q7, calculate closing inventory using AVCO (weighted average cost, calculated at each purchase). [3]

9. State two reasons why a business should maintain accurate inventory records. [2]

10. A company reported closing inventory of $9,000. Subsequently,$ 600 of obsolete stock was identified. Pass the adjustment and state the revised closing inventory. [4]

Section C: FIFO and AVCO Applications (Questions 11–15) — 15 marks

11. The following purchases and issues are recorded for September 2024:

1 Sep: Opening 200 units @ $5
4 Sep: Purchase 300 units @ $6
10 Sep: Issue 250 units
15 Sep: Purchase 400 units @ $7
22 Sep: Issue 350 units Using FIFO, calculate the closing inventory value at 30 Sep. [3]

12. Using the data in Q11, calculate closing inventory using AVCO (periodic weighted average). [3]

13. Explain one effect of using FIFO instead of AVCO during a period of rising prices on the reported profit. [2]

14. A trader provided the following for the year ended 31 Dec 2024: Opening inventory $3,000, purchases$ 20,000, sales $35,000, closing inventory$ 4,500. Calculate (a) cost of sales [1] and (b) gross profit [1]. [2]

15. A business had opening inventory $2,200, purchases$ 15,800, and cost of sales $14,000. Calculate closing inventory and explain why it is shown as a current asset. [4]

Section D: Analysis and Interpretation (Questions 16–20) — 20 marks

16. The following information is available for GreenMart:

Year	Cost of Sales	Opening Inventory	Closing Inventory
2023	$80,000	$6,000	$8,000
2024	$96,000	$8,000	$10,000
Calculate the days sales in inventory for both years to 2 decimal places. [4]

17. Using the answers from Q16, explain whether inventory management improved. [2]

18. A business has closing inventory $12,000, cost of sales$ 72,000. Its competitor has closing inventory $9,000, cost of sales$ 54,000. Compare their inventory turnover ratios. [3]

19. Recommend two measures a business could take to reduce its days sales in inventory. [4]

20. A sole proprietor uses FIFO and reports higher profit than a similar business using AVCO in an inflation period. Explain why this happens and state one limitation of comparing their profits. [7]

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Answers

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

Practice Paper: Inventory Costing (Version 4) — Answer Key

Total Marks: 60

Section A: Basic Inventory Calculations (10 marks)

1. (a) Formula: Opening Inventory + Purchases − Closing Inventory = Cost of Sales. [1]
(b) $4,200 +$ 28,500 − $3,800 =$ 29,000. [1]
Teaching note: Cost of sales is the cost of inventory actually sold. We add opening stock and buys, then subtract what is left (closing) to get the sold portion.

2. Cost of Sales = $1,500 +$ 12,400 − $2,100 =$ 11,800. [2]
Marks: 1 for formula use, 1 for correct answer.
Common mistake: using closing > opening to add instead of subtract.

3. Inventory is valued at the lower of cost and net realisable value (NRV). [1] This follows the prudence concept — assets should not be overstated and losses anticipated. [1]
Teaching note: Cost = purchase price; NRV = expected selling price less costs to sell. If NRV < cost, write down to NRV.

4. Ending inventory = $6,300 (physical) −$ 200 (damaged, not sellable) = $6,100. [2]
Goods in transit (FOB destination) excluded as not yet owned. [implicit]
Marking: 1 for excluding damaged, 1 for correct figure.

5. Days sales in inventory = 365 ÷ 5.2 = 70.19 days. [2]
Working: 365 / 5.2 = 70.1923… → 70.19.

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

6. Inventory Account (T-account) [3]

Inventory
Dr                      Cr
1 Jul Bal b/d  2,000
10 Jul Purch   5,000    18 Jul Issues  3,500
                        Bal c/d        3,500
       7,000                  7,000
1 Aug Bal b/d  3,500

Marks: 1 format, 1 entries, 1 balance b/d.

7. FIFO: 1 Aug 100@ $10, 5 Aug 50@$ 12, 12 Aug sell 120 (100@10 + 20@12). Left: 30@ $12. 20 Aug buy 80@$ 11. Closing = 30@12 + 80@11 = $360 +$ 880 = $1,240. [3]

8. AVCO: After 5 Aug avg = (10010+5012)/150 = $10.67. After sale 120, left [email protected] =$ 320. 20 Aug: (320+80*11)/110 = $11.09. Closing 110*11.09 =$ 1,220 (approx). [3]
Exact: (320+880)=1200/110=10.909; 11010.909= $1,200.* Use$ 1,200.

9. (i) To calculate cost of sales accurately; (ii) To prevent theft/loss (control). [2]

10. Dr Obsolete Stock Loss 600, Cr Inventory 600. Revised closing = $9,000 −$ 600 = $8,400. [4: 2 journal, 2 revised]

Section C: FIFO and AVCO Applications (15 marks)

11. FIFO: 1 Sep 200@5, 4 Sep 300@6, 10 Sep iss 250 (200@5+50@6). Left 250@6. 15 Sep 400@7. 22 Sep iss 350 (250@6+100@7). Left 300@7 = $2,100. [3]

12. AVCO periodic: Total units = 200+300+400=900. Total cost = 1000+1800+2800=5600. Avg = 5600/900=6.222. Issues 600, left 300. Closing = 300*6.222 = $1,866.67. [3]

13. FIFO gives higher reported profit in rising prices because older (cheaper) costs are matched to sales, leaving newer (higher) costs in inventory. [2]

14. (a) COS = 3000+20000−4500 = $18,500. [1] (b) GP = 35000−18500 =$ 16,500. [1]

15. Closing = 2200+15800−14000 = $4,000. [2] It is a current asset because it is expected to be sold within 12 months to generate cash. [2]

Section D: Analysis and Interpretation (20 marks)

16. 2023 avg inv = (6000+8000)/2=7000; ITR=80000/7000=11.43; days=365/11.43=31.93. [2]
2024 avg = (8000+10000)/2=9000; ITR=96000/9000=10.67; days=365/10.67=34.21. [2]

17. Management worsened: days increased from 31.93 to 34.21, inventory held longer. [2]

18. Business A: 72000/12000=6 times. B: 54000/9000=6 times. Same turnover. [3]

19. (i) Improve stock control to avoid overbuying; (ii) Offer discounts to clear slow-moving stock. [4: 2 each]

20. FIFO uses older lower costs in COS → higher profit in inflation. [3] Limitation: different methods make profit comparison misleading without adjustment. [4: explain 3, limitation 4]