O Level Principles of Accounts Practice Paper 5

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

PRACTICE PAPER — Inventory Costing (Version 5 of 5)

School: TuitionGoWhere Secondary School (AI)
Subject: Principles of Accounts
Level: O-Level
Paper: Practice Paper (Topic: Inventory Costing)
Version: 5
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 cost prices (not selling prices) unless told otherwise.
• Round monetary values to 2 decimal places where not stated.

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Section A: Basic Inventory Calculations (15 marks)

Questions 1–5

1. A stationery shop had opening inventory of $4,200, purchases of$18,500, and closing inventory of $3,900 for the month of May 2025. Calculate the cost of sales for May 2025. [1]

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2. On 31 July 2025, a bakery counted unsold flour worth $1,250, packaging$380, and damaged goods (unsellable) $120. Calculate the ending inventory at 31 July 2025. [1]

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3. Compute the average inventory for the year ended 31 December 2024 given opening inventory $6,000 and closing inventory$8,000. [1]

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4. A retailer’s cost of sales for 2024 was $73,000 and average inventory was$9,125. Calculate the inventory turnover ratio for 2024. [1]

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5. Using your answer from Q4, calculate the days sales in inventory for 2024. Show to two decimal places. [1]

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Section B: Inventory Records and Valuation Methods (20 marks)

Questions 6–11

6. Prepare the inventory account (T-account) for the month of March 2025 using the following: opening balance $2,000 (1 Mar), purchases$7,500 (10 Mar), issues to production $6,200 (25 Mar). Show the balance carried down and brought down to April. [3]

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

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8. The following purchases and issues occurred in June 2025:

• 1 Jun: Opening inventory 100 units @ $5.00
• 5 Jun: Purchase 200 units @ $5.50
• 12 Jun: Issue 250 units
• 20 Jun: Purchase 150 units @ $6.00
• 28 Jun: Issue 200 units

Using the FIFO method, calculate the value of closing inventory at 30 June 2025. [4]

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9. Using the same data as Q8, calculate the value of closing inventory at 30 June 2025 using the AVCO (weighted average cost) method. Show the average cost per unit to 3 decimal places. [4]

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10. State one reason why a business might prefer FIFO over AVCO during a period of rising prices. [1]

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11. A company values inventory at lower of cost and net realisable value. An item cost $40 but can only be sold for$32 after repair costs of $5. Calculate the inventory value per unit. [1]

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Section C: Analysis, Interpretation and Decision-Making (25 marks)

Questions 12–20

12. From the following table, calculate days sales in inventory for both years. Show answers to two decimal places. [4]

Year ended	Cost of Sales	Opening Inventory	Closing Inventory
30 Jun 2023	$120,000	$10,000	$14,000
30 Jun 2024	$150,000	$14,000	$16,000

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13. Based on your answer in Q12, explain whether the company’s inventory efficiency improved or worsened from 2023 to 2024. [2]

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14. A hardware store had the following inventory movements in July 2025 (all at cost):

• Opening: 50 units @ $10
• Purchase: 100 units @ $11
• Sale: 120 units
• Purchase: 80 units @ $12
• Closing count: 110 units

Prepare a stores ledger card using FIFO. Show the balance after each issue. [4]

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15. Using the data in Q14, calculate the cost of sales for July 2025 under FIFO. [2]

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16. A business uses AVCO. Opening inventory 200 units @ $4.00. Purchase 300 units @$4.40. Issue 250 units. Purchase 100 units @ $4.80. Calculate the issue cost for the 250 units using AVCO. [3]

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17. Explain the effect of using FIFO (instead of AVCO) on reported gross profit when purchase prices are steadily increasing. [2]

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18. The trial balance shows inventory account with a debit balance of $5,000 before year-end adjustment. Explain the double-entry adjustment needed to record closing inventory of$5,000 at year end. [2]

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19. A shop’s inventory turnover ratio fell from 8 times to 5 times over two years. Suggest two possible business reasons for this change. [2]

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20. A café owner is deciding between FIFO and AVCO for inventory costing. Advise the owner with two reasons to support a chosen method, based on accounting concepts and business needs. [4]

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

PRACTICE PAPER ANSWER KEY — Inventory Costing (Version 5 of 5)

Total Marks: 60

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Section A: Basic Inventory Calculations

Q1 [1 mark] Cost of Sales = Opening Inventory + Purchases − Closing Inventory
= $4,200 +$18,500 − $3,900 = **$18,800**
Teaching note: Cost of sales is the cost of inventory consumed/sold in the period. Always use cost, not selling price. Common mistake: subtracting purchases instead of adding.

Q2 [1 mark] Ending inventory = Unsold flour + Packaging − Damaged (unsellable)
= $1,250 +$380 − $120 = **$1,510**
Teaching note: Damaged unsellable goods are excluded from inventory. Consignment goods not mentioned, so ignore.

Q3 [1 mark] Average Inventory = (Opening + Closing) ÷ 2
= ($6,000 +$8,000) ÷ 2 = $7,000
Teaching note: Average inventory smooths fluctuations for ratio use.

Q4 [1 mark] Inventory Turnover Ratio = Cost of Sales ÷ Average Inventory
= $73,000 ÷$9,125 = 8 times
Teaching note: Shows how many times inventory is sold and replaced in a year.

Q5 [1 mark] Days Sales in Inventory = 365 ÷ Inventory Turnover Ratio
= 365 ÷ 8 = 45.63 days (2 dp)
Teaching note: Must multiply/divide by 365. Rounding to 2 dp required.

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Section B: Inventory Records and Valuation Methods

Q6 [3 marks] Inventory Account (T-account):

                      Inventory
Date    | Debit       | Date    | Credit
1 Mar   | Bal b/d 2000| 25 Mar  | Issues 6200
10 Mar  | Purchases 7500| 31 Mar | Bal c/d 3300
        |             |
31 Mar  | Bal b/d 3300|

Working: 2000 + 7500 − 6200 = 3300.
Marking: 1 mark format, 1 mark entries, 1 mark balancing.
Teaching note: Debit increases inventory; credit reduces via issues.

Q7 [2 marks] Inventory is valued at lower of cost and net realisable value (LCNRV), based on the prudence concept — do not overstate assets or profit.
Marking: 1 mark for LCNRV, 1 mark for prudence concept.
Teaching note: Prudence means caution; record losses early, gains only when certain.

Q8 [4 marks] FIFO: first units bought are first issued.

• 12 Jun issue 250: 100 @5 + 150 @5.50 = 500 + 825 = 1325
• Remaining: 50 @5.50 = 275; +150 @6 = 900 → total 1150
• 28 Jun issue 200: 50 @5.50 + 150 @6 = 275 + 900 = 1175
• Closing: 0 units left from those; actually after 28 Jun: 0 remaining? Check: opened 100+200=300; issue250 → 50 left @5.50; purchase150@6 → 200 total; issue200 → 0 left. Wait, closing should be 0? Recompute units: total avail = 100+200+150=450; issues=250+200=450; closing=0. Value = $0**. *Correction:* Closing inventory = 0 units, value **$0.
  Marking: 2 for layering, 2 for final value. Common mistake: wrong layer used.

Q9 [4 marks] AVCO:

• After 5 Jun: (100×5 + 200×5.50)=500+1100=1600; /300 = $5.333/unit
• Issue 250: 250×5.333=1333.25; rem 50×5.333=266.65
• After 20 Jun: 266.65+900=1166.65; /200=$5.833/unit
• Issue 200: 200×5.833=1166.60; closing 0. Value = $0.00
  Marking: 2 avg calc, 2 final. Note both methods give 0 closing here by coincidence of data.

Q10 [1 mark] FIFO matches actual physical flow for perishable goods; or reports higher profit in inflation (acceptable). [1]

Q11 [1 mark] NRV = 32 − 5 = 27; cost 40 → lower = $27 per unit. [1]

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Section C: Analysis, Interpretation and Decision-Making

Q12 [4 marks] 2023: Avg inv = (10k+14k)/2=12k; ITR=120k/12k=10; DSI=365/10=36.50 2024: Avg inv=(14k+16k)/2=15k; ITR=150k/15k=10; DSI=365/10=36.50 Marking: 1 each for avg, 1 each for DSI.

Q13 [2 marks] Efficiency unchanged; DSI same at 36.50 days despite higher sales. [2]

Q14 [4 marks] Stores ledger FIFO:

• 1 Jul: 50@10 = 500
• Purch 100@11: bal 150 (50@10,100@11)=500+1100=1600
• Sale 120: 50@10+70@11=500+770=1270; bal 30@11=330
• Purch 80@12: bal 110 (30@11,80@12)=330+960=1290
• Count 110 matches. Marking: 1 format, 3 entries.

Q15 [2 marks] COGS = 1270 (from sale layer) = $1,270 [2]

Q16 [3 marks] AVCO: (200×4 + 300×4.40)=800+1320=2120/500=$4.24/unit. Issue 250×4.24=**$1,060**. [3]

Q17 [2 marks] FIFO leaves older (lower) costs in COGS, higher closing inventory, so higher gross profit in inflation. [2]

Q18 [2 marks] Debit Inventory (SFP) $5,000; Credit Purchases/COGS$5,000 to record closing stock. (If already in trial balance as debit, adjust via statement). [2]

Q19 [2 marks] Two reasons: (1) Overstocking / poor sales; (2) Obsolete goods. [2]

Q20 [4 marks] Advise AVCO: (1) smooths price fluctuations, (2) matches matching concept better. Or FIFO: (1) simpler, (2) reflects physical flow. Any two with reasons. [4]