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O Level Principles of Accounts Practice Paper 5

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Questions

TuitionGoWhere Practice Paper - Principles of Accounts O-Level

TuitionGoWhere Exam Practice (AI)

Subject: Principles of Accounts (7087)
Level: O-Level
Paper: Practice Paper - Version 5 of 5
Topic Focus: Inventory Costing & Analysis
Duration: 1 Hour
Total Marks: 40

Name: __________________________
Class: __________________________
Date: __________________________

Instructions to Candidates

Write your Name, Class, and Date in the spaces provided above.
Answer all questions.
Show all workings clearly. Marks are awarded for the method as well as the final answer.
Use a black or blue pen. Pencils may be used for diagrams and graphs.
Calculators are permitted.

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

1. Which of the following best describes the prudence concept in relation to inventory valuation?
[1]
A. Inventory is always valued at selling price.
B. Inventory is valued at the higher of cost and net realizable value.
C. Inventory is valued at the lower of cost and net realizable value.
D. Inventory is valued at historical cost regardless of market changes.

2. Under the FIFO (First-In, First-Out) method, which of the following is true during a period of rising prices?
[1]
A. Cost of sales is higher, and profit is lower.
B. Cost of sales is lower, and profit is higher.
C. Closing inventory is valued at the oldest prices.
D. Closing inventory is valued at the average price.

3. Calculate the Cost of Sales given the following information:
[1]

Opening Inventory: $12,000
Purchases: $45,000
Carriage Inwards: $1,500
Closing Inventory: $10,500

Cost of Sales = $____________________

4. Define Net Realizable Value (NRV) in the context of inventory.
[2]

5. State two reasons why a business might choose the AVCO (Weighted Average Cost) method over FIFO.
[2]

6. A business has the following inventory movements for Product X:
[3]

1 Jan: Opening Inventory 100 units @ $10
5 Jan: Purchased 200 units @ $12
10 Jan: Sold 150 units

Using the FIFO method, calculate the value of the closing inventory on 10 Jan.

Value = $____________________

Section B: Calculations & Inventory Ledgers (18 Marks)

7. SmartTech Pte Ltd uses the perpetual inventory system. The following transactions occurred for Item A in March 2024:

Date	Transaction	Units	Cost per Unit ($)	Selling Price per Unit ($)
1 Mar	Opening Balance	200	15.00	-
5 Mar	Purchase	300	16.50	-
12 Mar	Sale	250	-	25.00
20 Mar	Purchase	150	17.00	-
28 Mar	Sale	300	-	25.00

(a) Calculate the value of the Closing Inventory at 31 March 2024 using the FIFO method. Show your workings clearly.
[6]

(b) Calculate the value of the Closing Inventory at 31 March 2024 using the AVCO (Weighted Average Cost) method.
Note: Recalculate the average cost after each purchase. Round unit costs to two decimal places.
[8]

(c) State which method (FIFO or AVCO) would result in a higher gross profit for SmartTech Pte Ltd in March 2024, given that prices are rising. Explain your answer.
[4]

Section C: Analysis & Decision Making (12 Marks)

8. The following extracts are from the financial statements of GreenGrocers for the years ended 31 December 2023 and 2024.

	2023 ($)	2024 ($)
Revenue	500,000	620,000
Cost of Sales	300,000	400,000
Opening Inventory	40,000	50,000
Closing Inventory	50,000	70,000

(a) Calculate the Inventory Turnover Ratio (times) for both 2023 and 2024.
[4]

Formula: Cost of Sales / Average Inventory
Average Inventory = (Opening Inventory + Closing Inventory) / 2

2023: ____________________ times

2024: ____________________ times

(b) Calculate the Days Sales in Inventory for both years. Use 365 days in a year. Round to the nearest whole day.
[4]

Formula: 365 / Inventory Turnover Ratio

2023: ____________________ days

2024: ____________________ days

(c) The manager of GreenGrocers is concerned about the change in inventory efficiency between 2023 and 2024.
Evaluate the inventory management performance of GreenGrocers based on your answers in (a) and (b). Recommend one action the manager could take to improve the situation.
[4]

END OF PAPER

Answers

TuitionGoWhere Practice Paper - Principles of Accounts O-Level

Answer Key & Marking Scheme - Version 5

Topic: Inventory Costing
Total Marks: 40

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

1. C
[1]
Reasoning: Prudence dictates that assets should not be overstated. Therefore, inventory is valued at the lower of cost and NRV.

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

3. ** $48,000** [1] *Workings:* Opening Inventory ($ 12,000) + Purchases ( $45,000) + Carriage Inwards ($ 1,500) - Closing Inventory ( $10,500) =$ 48,000.
Note: Carriage Inwards is part of the cost of purchases.

4. Net Realizable Value (NRV)
[2]
Marking:
1 mark for "Estimated selling price in the ordinary course of business"
1 mark for "Less estimated costs of completion and costs necessary to make the sale."
Accept: Selling price minus costs to sell/complete.

5. Reasons for choosing AVCO
[2]
Any two of the following (1 mark each):

It smooths out price fluctuations, providing a more stable cost figure.
It is easier to administer than FIFO if inventory items are indistinguishable/mixed.
It is often accepted by tax authorities as it prevents manipulation of profit through specific identification of batches.
It reflects a middle-ground cost, avoiding extreme highs or lows in valuation.

6. ** $1,900** [3] *Workings (FIFO):* Total Units Available: 100 + 200 = 300 units. Units Sold: 150 units. Closing Units: 150 units. Under FIFO, the first 100 units sold are from Opening Inventory (@$ 10).
The next 50 units sold are from the 5 Jan Purchase (@ $12). Remaining Inventory: 150 units from 5 Jan Purchase @$ 12 = $1,800. *Wait, let's re-calculate carefully.* Sold 150. First 100 @$ 10 (Opening) -> Gone.
Next 50 @ $12 (from the 200 purchased) -> Gone. Remaining from 5 Jan Purchase: 200 - 50 = 150 units @$ 12.
Value = 150 * $12 =$ 1,800.
Correction: The question asks for Closing Inventory.
Remaining units: 150 units.
These 150 units are from the batch purchased on 5 Jan @ $12. Value = 150 *$ 12 = $1,800. *Let's check the logic again.* Opening: 100 @ 10. Buy: 200 @ 12. Sell: 150. FIFO sells oldest first. Sell 100 @ 10. Sell 50 @ 12. Left: 150 @ 12. Value =$ 1,800.
Answer Key Correction: The provided answer in the thought process was $1,900 initially but corrected to$ 1,800.
Final Answer: $1,800.
[3 marks: 1 for identifying remaining units, 1 for correct price layer, 1 for final calculation]

Section B: Calculations & Inventory Ledgers (18 Marks)

7. SmartTech Pte Ltd

(a) FIFO Closing Inventory
[6]

Workings:
Total Units Available: 200 + 300 + 150 = 650 units.
Total Units Sold: 250 + 300 = 550 units.
Closing Units: 650 - 550 = 100 units.

Under FIFO, closing inventory consists of the most recently purchased units.
The last purchase was 20 Mar: 150 units @ $17.00.
We have 100 units left.
Therefore, all 100 units are from the 20 Mar batch.

Value = 100 units × $17.00 = **$ 1,700**

Marking:
1 mark for correct closing unit count (100).
2 marks for identifying correct cost layer ( $17.00). 3 marks for correct final value ($ 1,700).
(If workings show step-by-step deduction of layers, award method marks)

(b) AVCO Closing Inventory
[8]

Workings:

1 Mar Balance:
200 units @ $15.00 =$ 3,000

5 Mar Purchase:
300 units @ $16.50 =$ 4,950
Total Units: 500
Total Value: $3,000 +$ 4,950 = $7,950 New Average Cost:$ 7,950 / 500 = $15.90 per unit

12 Mar Sale:
250 units sold @ $15.90 =$ 3,975 (Cost of Sales)
Remaining Units: 500 - 250 = 250 units
Remaining Value: 250 × $15.90 =$ 3,975

20 Mar Purchase:
150 units @ $17.00 =$ 2,550
Total Units: 250 + 150 = 400 units
Total Value: $3,975 +$ 2,550 = $6,525 New Average Cost:$ 6,525 / 400 = $16.3125** -> Round to **$ 16.31 (or keep precise depending on instruction, usually 2 dp for unit cost).
Instruction says: Round unit costs to two decimal places.
So, Unit Cost = $16.31.

28 Mar Sale:
300 units sold @ $16.31 =$ 4,893 (Cost of Sales)
Remaining Units: 400 - 300 = 100 units
Remaining Value: 100 × $16.31 = **$ 1,631**

Alternative Calculation using precise numbers (if allowed):
$6,525 / 400 = 16.3125. Closing Inv = 100 * 16.3125 =$ 1,631.25.
Given the instruction "Round unit costs to two decimal places", we use $16.31.* **Answer:** **$ 1,631*

Marking:
1 mark for 1st Avg Cost ( $15.90). 1 mark for Value after 1st Sale ($ 3,975).
2 marks for 2nd Avg Cost calculation ($16.31).
2 marks for Final Closing Inventory calculation.
2 marks for accuracy and following rounding instructions.

(c) Comparison of Profit
[4]

Method: FIFO
Reason:

During a period of rising prices, FIFO assigns the older, lower costs to Cost of Sales.
Lower Cost of Sales results in a higher Gross Profit compared to AVCO (which averages in the higher recent costs).

Marking:
1 mark for identifying FIFO.
1 mark for stating FIFO uses older/lower costs for COGS.
1 mark for linking lower COGS to higher profit.
1 mark for clarity/comparison context.

Section C: Analysis & Decision Making (12 Marks)

8. GreenGrocers

(a) Inventory Turnover Ratio
[4]

2023:
Average Inventory = ( $40,000 +$ 50,000) / 2 = $45,000 Turnover =$ 300,000 / $45,000 = 6.67 times (or 6.66...)

2024:
Average Inventory = ( $50,000 +$ 70,000) / 2 = $60,000 Turnover =$ 400,000 / $60,000 = 6.67 times (or 6.66...)

Marking:
1 mark for correct Avg Inv 2023.
1 mark for correct Ratio 2023.
1 mark for correct Avg Inv 2024.
1 mark for correct Ratio 2024.
(Accept 6.66 or 6.67)

(b) Days Sales in Inventory
[4]

2023:
365 / 6.666... = 54.75 days -> 55 days (nearest whole day)

2024:
365 / 6.666... = 54.75 days -> 55 days (nearest whole day)

Marking:
1 mark for correct calculation 2023.
1 mark for rounding 2023.
1 mark for correct calculation 2024.
1 mark for rounding 2024.

(c) Evaluation and Recommendation
[4]

Evaluation:
The inventory turnover ratio and days sales in inventory have remained constant (stable) between 2023 and 2024. Despite Revenue increasing by $120,000 and Cost of Sales increasing by$ 100,000, the efficiency of inventory management has not improved or deteriorated. The business is holding inventory for approximately 55 days before selling it. This stability suggests consistent management, but it does not indicate improvement in efficiency despite business growth.

Recommendation:
Action: Implement stricter inventory control or review slow-moving items.
Reason: Since the ratio is stagnant, there may be opportunity to reduce holding costs. By identifying and discounting slow-moving stock, GreenGrocers could reduce the closing inventory balance, thereby increasing the turnover ratio and freeing up cash flow.

Marking:
1 mark for identifying stability/constant ratio.
1 mark for contextual comment (e.g., efficiency unchanged despite growth).
1 mark for a valid recommendation (e.g., clear old stock, improve marketing, negotiate faster supply).
1 mark for a justified reason linked to liquidity or efficiency.

END OF MARKING SCHEME