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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.

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]

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]

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

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]

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

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]

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

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]

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]

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

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]

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

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

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]

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

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]

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

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]

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]

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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Answers

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

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

Total Marks: 60

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.

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]

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]