O Level Principles of Accounts Practice Paper 4

TuitionGoWhere Exam Practice (AI) - Answer Key & Marking Scheme

Subject: Principles of Accounts (O-Level)
Paper: Practice Paper - Version 4 (Inventory Costing)
Total Marks: 40

Section A: Multiple Choice & Short Concepts (10 Marks)

1. C
[1 mark for correct option]
Reasoning: Prudence dictates assets should not be overstated. If NRV < Cost, we write down to NRV.

2. B
[1 mark for correct option]
Reasoning: In rising prices, FIFO assigns older (cheaper) costs to Cost of Sales, resulting in lower COGS and higher Gross Profit.

3. Net Realisable Value 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.
[1 mark for "estimated selling price", 1 mark for "less costs to complete/sell"]

4. Any one of the following:

• It smooths out price fluctuations.
• It is easier to administer/calculate than tracking specific batches (FIFO).
• It is often permitted by tax authorities as a reasonable approximation.
  [1 mark]

5.
(a) No Effect / None
[1 mark]
*Reasoning: Purchase returns reduce Purchases and Inventory, but do not affect Sales. Gross Profit = Sales - COGS. Since the goods were never recorded in inventory/COGS yet, or if they were purchased and returned immediately, the net effect on COGS for the period depends on timing. However, standard interpretation: If returned before recording in COGS, no impact. If recorded in Purchases, Purchases decrease, COGS decreases, Gross Profit increases. Correction based on prompt "not yet recorded in inventory account": If not recorded, no entry made. If the question implies they were purchased but not yet counted in closing inventory, and now returned: The purchase entry likely exists. If Purchase is reversed, Purchases drop. COGS = Op + Purch - Cl. If Purch drops, COGS drops. Gross Profit rises.
Wait, let's look at the standard trap. "Goods... returned... not yet recorded in inventory account." This usually implies they are in transit or just received. If they are returned, the Purchase is cancelled.
Alternative Interpretation for O-Level: If the goods were part of Purchases but not included in Closing Inventory (because they were returned), then Purchases decrease.
Let's stick to the simplest accounting logic:
If the goods were purchased (Dr Purchases, Cr Payables) and then returned (Dr Payables, Cr Purchases Returns), Purchases Returns reduces Net Purchases.
COGS = Opening + (Purchases - Returns) - Closing.
If Returns increase, Net Purchases decrease, COGS decreases, Gross Profit Increases.
However, if the question means "The goods were damaged and written off," that's different. It says "returned to supplier".
Re-reading carefully: "Goods costing 500 were returned... not yet recorded in the inventory account." If they are not in the inventory account, they are likely still in the Purchases account (if periodic) or not yet moved to COGS (if perpetual). If Periodic: Purchases Returns increases. Net Purchases decreases. COGS decreases. Gross Profit **Increases**. If Perpetual: Inventory was Dr'd on purchase. Now Cr Inventory. No impact on P&L until sale. *Standard O-Level Assumption:* Usually Periodic or general impact. Let's assume the standard "Purchase Return" effect. (a) Gross Profit: **Increases** (by 500)
(b) Closing Inventory: No Effect (since they were not in the closing count/account yet).
[1 mark each]

6.

• Perpetual: Cost of Sales is calculated and recorded at the time of each sale.
• Periodic: Cost of Sales is calculated only at the end of the accounting period (using Opening Inventory + Purchases - Closing Inventory).
  [1 mark for each correct distinction]

Section B: Calculations & Inventory Ledgers (18 Marks)

7. XYZ Traders

(a) Closing Inventory (FIFO)
Total Units Available: 100 + 200 + 100 = 400 units
Total Units Sold: 150 + 120 = 270 units
Closing Units: 400 - 270 = 130 units

Under FIFO, closing inventory consists of the most recent purchases.
130 units remaining:

• 100 units from Mar 18 Purchase @ $13.00 =$1,300
• 30 units from Mar 5 Purchase @ $12.00 =$360
  (Note: The Mar 5 batch had 200. We sold 150 on Mar 10. Remaining from Mar 5 = 50. Then we sold 120 on Mar 25. We take the remaining 50 from Mar 5, and 70 from Mar 18? Let's trace carefully.)

Trace:

1. Mar 1: 100 @ $10
2. Mar 5: Buy 200 @ $12. Stock: 100@$10, 200@$12.
3. Mar 10: Sell 150.
   • Take 100 @ $10 (gone)
   • Take 50 @ $12 (from Mar 5 batch)
   • Remaining Stock: 150 @ $12.
4. Mar 18: Buy 100 @ $13. Stock: 150@$12, 100@$13.
5. Mar 25: Sell 120.
   • Take 120 @ $12 (from Mar 5 batch)
   • Remaining Stock:
     • From Mar 5 batch: 150 - 120 = 30 units @ $12.
     • From Mar 18 batch: 100 units @ $13.

Closing Inventory Value:
30 units @ $12.00 =$360
100 units @ $13.00 =$1,300
Total = $1,660

[1 mark for identifying remaining units, 1 mark for correct layers, 1 mark for calculation, 1 mark for final answer]

(b) Gross Profit (FIFO)
Revenue:
(150 units × $25) + (120 units ×$25) = 270 × $25 =$6,750

Cost of Sales (FIFO):
Cost of Goods Available for Sale:
(100 × $10) + (200 ×$12) + (100 × $13) =$1,000 + $2,400 +$1,300 = $4,700 Less Closing Inventory:$1,660
Cost of Sales = $4,700 -$1,660 = $3,040

Gross Profit:
$6,750 -$3,040 = $3,710

[1 mark for Revenue, 1 mark for COGS calculation, 1 mark for final GP]

(c) Closing Inventory (AVCO)
Calculate Weighted Average Cost after each purchase (Perpetual AVCO):

1. Mar 1: 100 units @ $10. Total Value$1,000. Avg $10.
2. Mar 5: Buy 200 @ $12 ($2,400).
   • Total Units: 300. Total Value: $3,400.
   • New Avg Cost: $3,400 / 300 =$11.3333...
3. Mar 10: Sell 150 units.
   • COGS: 150 × $11.3333 =$1,700.
   • Remaining Units: 150. Remaining Value: $1,700.
4. Mar 18: Buy 100 @ $13 ($1,300).
   • Total Units: 150 + 100 = 250.
   • Total Value: $1,700 +$1,300 = $3,000.
   • New Avg Cost: $3,000 / 250 = **$12.00**.
5. Mar 25: Sell 120 units.
   • COGS: 120 × $12.00 =$1,440.
   • Remaining Units: 250 - 120 = 130.
   • Remaining Value: 130 × $12.00 = **$1,560**.

Closing Inventory = $1,560

[1 mark for Mar 5 Avg, 1 mark for Mar 10 Balance, 1 mark for Mar 18 Avg, 1 mark for final units, 1 mark for final value]

(d) Gross Profit (AVCO)
Revenue: $6,750 (Same as above)

Cost of Sales (AVCO):
COGS Mar 10: $1,700 COGS Mar 25:$1,440
Total COGS: $3,140

Gross Profit:
$6,750 -$3,140 = $3,610

[1 mark for Total COGS, 1 mark for subtraction, 1 mark for final GP]

(e) Comparison
FIFO results in a higher profit ($3,710 vs$3,610).
Reason: In a period of rising prices (inflation), FIFO assigns the older, lower costs to Cost of Sales. This results in a lower Cost of Sales and therefore a higher Gross Profit compared to AVCO, which averages the higher recent costs into the COGS.
[1 mark for identifying FIFO, 1 mark for profit comparison, 1 mark for explanation of rising prices/cost flow]

Section C: Analysis & Decision Making (12 Marks)

8. ABC Electronics

(a) Inventory Turnover Ratio
Formula: Cost of Sales / Average Inventory
Average Inventory: (Opening + Closing) / 2

2023:
Avg Inv = (40,000 + 50,000) / 2 = 45,000
Turnover = 500,000 / 45,000 = 11.11 times

2024:
Avg Inv = (50,000 + 90,000) / 2 = 70,000
Turnover = 650,000 / 70,000 = 9.29 times

[1 mark for each Avg Inv, 1 mark for each correct ratio]

(b) Days Sales in Inventory
Formula: 365 / Inventory Turnover Ratio

2023:
365 / 11.1111... = 33 days (32.85 rounded)

2024:
365 / 9.2857... = 39 days (39.31 rounded)

[1 mark for each correct calculation]

(c) Evaluation
Observation 1: The inventory turnover has decreased from 11.11 times to 9.29 times. This indicates that the business is selling its inventory more slowly in 2024 compared to 2023.
Observation 2: The days sales in inventory has increased from 33 days to 39 days. This means inventory is held for 6 days longer on average before being sold.

Evaluation:
The efficiency of inventory management has worsened in 2024. While Revenue increased (from $800k to$950k), the Closing Inventory increased significantly (from $50k to$90k), outpacing the growth in Cost of Sales. This suggests overstocking or a slowdown in sales velocity relative to stock levels. This ties up working capital and increases the risk of obsolescence (especially for electronics). The manager should investigate why inventory levels are high relative to sales volume.

[2 marks for identifying the decrease in efficiency, 1 mark for using data from (a), 1 mark for using data from (b), 1 mark for practical implication (working capital/obsolescence)]