O Level Principles of Accounts Practice Paper 5

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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.
• Show all necessary workings for calculation questions.
• Use a calculator where necessary.
• Round all ratio answers to two decimal places.

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Section A: Fundamental Calculations (Questions 1-8)

1. Define "Cost of Sales". [1] \

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2. Calculate the cost of sales for the month of October 2023 given:

   • Opening Inventory: $4,200
   • Purchases: $15,800
   • Closing Inventory: $3,100 [1] \

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3. A business has opening inventory of $2,000 and closing inventory of$3,000. Calculate the average inventory. [1] \

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4. If the Cost of Sales is $45,000 and the average inventory is$5,000, calculate the inventory turnover ratio. [1] \

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5. Calculate the ending inventory as at 31 December 2023:

   • Total goods available for sale: $22,000
   • Cost of goods sold: $14,500 [1] \

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6. A business uses the FIFO method. On 1 Jan, it had 10 units at $5 each. On 15 Jan, it bought 10 units at$7 each. If 12 units were sold, what is the value of the remaining inventory? [2] \

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7. Using the data from Question 6, what would the remaining inventory value be if the AVCO method was used? [2] \

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8. State the effect on the gross profit if the closing inventory is overstated by $500. [1] \

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Section B: Structured Applications (Questions 9-15)

9. Explain the "lower of cost and net realizable value" (NRV) principle. [2] \

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10. Which accounting concept supports the valuation of inventory at the lower of cost and NRV? Explain why. [2] \

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11. Distinguish between the FIFO and AVCO methods of inventory valuation. [2] \

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12. A business has the following data:

    • Cost of Sales (2023): $120,000
    • Average Inventory (2023): $15,000 Calculate the days sales in inventory for 2023. [2] \

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13. Compare the effect of FIFO and AVCO on the Statement of Financial Position during a period of rising prices. [2] \

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14. If a business has a very high "days sales in inventory" figure, what does this indicate about its inventory management? [2] \

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15. List two factors that might cause the Net Realizable Value (NRV) of inventory to be lower than its cost. [2] \

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Section C: Integrated Scenarios (Questions 16-20)

Scenario for Q16-18: Zion Traders provides the following information for the year ended 30 June 2024:

• Inventory at 1 July 2023: $8,000
• Inventory at 30 June 2024: $12,000
• Purchases for the year: $60,000
• Revenue for the year: $95,000

16. Calculate the Cost of Sales for the year ended 30 June 2024. [2] \

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17. Calculate the Gross Profit for the year ended 30 June 2024. [2] \

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18. Calculate the days sales in inventory for the year ended 30 June 2024. [3] \

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19. Prepare a T-account for Inventory for the month of March 2024.

    • Balance b/d (1 Mar): $5,000
    • Purchases during March: $12,000
    • Closing balance (31 Mar): $6,500 [4]
      
      
      
      
      
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20. A business is facing a liquidity crisis. Recommend two actions it could take specifically regarding its inventory to improve its current ratio. Justify your answers. [4] \

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Answer Key - O-Level Principles of Accounts Quiz (Inventory Costing)

1. Definition: The total direct cost of the goods sold by a business during a specific accounting period. (1m)
2. Calculation: $4,200 +$15,800 - $3,100 = **$16,900** (1m)
3. Calculation: ($2,000 +$3,000) / 2 = $2,500 (1m)
4. Calculation: $45,000 /$5,000 = 9 times (1m)
5. Calculation: $22,000 -$14,500 = $7,500 (1m)
6. FIFO: 12 units sold (10 @ $5, 2 @$7). Remaining: 8 units @ $7 = **$56** (2m)
7. AVCO: Avg cost = ($50 +$70) / 20 = $6 per unit. Remaining: 8 units @$6 = $48 (2m)
8. Effect: Gross profit is overstated (Closing inventory $\uparrow$ $\rightarrow$ Cost of Sales $\downarrow$ $\rightarrow$ Gross Profit $\uparrow$). (1m)
9. Explanation: Inventory should be recorded at whichever is lower: the original purchase cost or the estimated selling price minus costs to complete/sell. (2m)
10. Concept: Prudence Concept. (1m) It ensures assets and profits are not overstated and potential losses are recognized. (1m)
11. Distinction: FIFO assumes the first goods purchased are the first sold; AVCO assigns a weighted average cost to all units. (2m)
12. Calculation:
    • Turnover Ratio = $120,000 /$15,000 = 8
    • Days = 365 / 8 = 45.63 days (2m)
13. Comparison: FIFO results in a higher ending inventory value (more recent, higher prices), thus overstating assets compared to AVCO. (2m)
14. Indication: Slow-moving inventory or overstocking; inefficient inventory management. (2m)
15. Factors: Physical damage, obsolescence (outdated style/tech), or a drop in market demand. (2m)
16. Calculation: $8,000 +$60,000 - $12,000 = **$56,000** (2m)
17. Calculation: $95,000 -$56,000 = $39,000 (2m)
18. Calculation:
    • Avg Inventory = ($8,000 +$12,000) / 2 = $10,000 (1m)
    • Turnover Ratio = $56,000 /$10,000 = 5.6 (1m)
    • Days = 365 / 5.6 = 65.18 days (1m)
19. T-Account:
    • Debit side: Balance b/d $5,000; Purchases$12,000.
    • Credit side: Cost of Sales $10,500; Balance c/d$6,500.
    • Balance b/d (Apr 1): $6,500 on Debit side. (4m)
20. Recommendations:
    • Action 1: Implement a clearance sale to reduce slow-moving stock. (1m) Justification: Converts inventory into cash, increasing the current asset (cash) and reducing inventory, improving the quick ratio. (1m)
    • Action 2: Adopt Just-in-Time (JIT) ordering. (1m) Justification: Reduces the amount of capital tied up in inventory, lowering storage costs and improving overall liquidity. (1m)