O Level Principles of Accounts Practice Paper 1

TuitionGoWhere Practice Paper - Principles of Accounts O-Level

TuitionGoWhere Practice Paper (AI)

Subject: Principles of Accounts
Level: O-Level
Paper: 2
Duration: 2 hours
Total Marks: 60

Name: _________________ Class: _________ Date: _________

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Instructions to Candidates

1. Answer ALL questions in this paper.
2. Write your answers in the spaces provided on this question paper.
3. Show all workings clearly. Marks may be awarded for correct methods even if the final answer is wrong.
4. Calculators may be used.
5. All monetary amounts should be rounded to the nearest dollar unless otherwise stated.

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Question 1 (15 marks)

Metro Electronics uses the perpetual inventory system. The following transactions occurred during January 2024:

1 January: Opening inventory 150 units at $40 each **8 January:** Purchased 200 units at$45 each
15 January: Sold 180 units at $70 each **22 January:** Purchased 100 units at$48 each
28 January: Sold 120 units at $72 each

(a) Prepare an inventory record using the FIFO method showing purchases, sales, and balance after each transaction. (8 marks)

Date	Purchases	Cost of Sales	Balance
1 Jan
8 Jan
15 Jan
22 Jan
28 Jan

(b) Calculate the gross profit for January 2024 using the FIFO method. (3 marks)

Sales revenue: $_________________

Cost of sales: $_________________

Gross profit: $_________________

(c) Calculate the value of closing inventory using the AVCO method for comparison. (4 marks)

Working:

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Closing inventory (AVCO): $_________________

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Question 2 (20 marks)

The following trial balance was extracted from the books of Kim's Fashion Store as at 31 December 2024:

Account	Dr ($)	Cr ($)
Sales revenue		280,000
Purchases	168,000
Opening inventory (1 Jan 2024)	25,000
Equipment	80,000
Accumulated depreciation - Equipment		24,000
Trade receivables	35,000
Trade payables		28,000
Cash at bank	12,000
Rent expense	18,000
Salaries	45,000
Insurance	6,000
Capital (1 Jan 2024)		57,000
Totals	389,000	389,000

Additional information:

• Closing inventory as at 31 December 2024: $32,000
• Depreciation on equipment for the year: $8,000
• Insurance prepaid: $2,000
• Accrued salaries: $3,000

(a) Prepare the Income Statement for Kim's Fashion Store for the year ended 31 December 2024. (10 marks)

Kim's Fashion Store
Income Statement for the year ended 31 December 2024

	$
Sales revenue
Cost of sales:
Opening inventory
Add: Purchases
Less: Closing inventory
Cost of sales
Gross profit
Operating expenses:
Rent expense
Salaries
Insurance expense
Depreciation - Equipment
Total operating expenses
Net profit

(b) Prepare the Statement of Financial Position as at 31 December 2024. (10 marks)

Kim's Fashion Store
Statement of Financial Position as at 31 December 2024

ASSETS	$
Non-current assets:
Equipment
Less: Accumulated depreciation
Current assets:
Inventory
Trade receivables
Prepaid insurance
Cash at bank
Total assets
EQUITY AND LIABILITIES
Equity:
Capital (1 Jan 2024)
Add: Net profit
Current liabilities:
Trade payables
Accrued salaries
Total equity and liabilities

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Question 3 (15 marks)

Sunrise Trading has the following information for the years ended 31 December:

	2023 ($)	2024 ($)
Sales revenue	400,000	480,000
Cost of sales	240,000	300,000
Current assets:
- Inventory	40,000	60,000
- Trade receivables	35,000	45,000
- Cash	15,000	10,000
Current liabilities	30,000	40,000

(a) Calculate the following ratios for both years (show answers to 2 decimal places): (8 marks)

Ratio	2023	2024
Gross profit margin
Current ratio
Quick ratio
Inventory turnover

(b) Calculate the days sales in inventory for 2024. (2 marks)

Working:

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Days sales in inventory: _________________ days

(c) Evaluate the liquidity position of Sunrise Trading by comparing the two years. Recommend TWO actions the business could take to improve its liquidity position. (5 marks)

Evaluation:

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Recommendations:

1. ---

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2. ---

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Question 4 (10 marks)

(a) Explain the difference between FIFO and AVCO inventory costing methods. (4 marks)

FIFO method:

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AVCO method:

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(b) During a period of rising prices, explain the effect of using FIFO compared to AVCO on: (4 marks)

(i) Closing inventory value:

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(ii) Net profit:

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(c) State TWO factors a business should consider when choosing an inventory costing method. (2 marks)

1. ---

2. ---

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END OF PAPER

TuitionGoWhere Practice Paper - Principles of Accounts O-Level

Answer Key and Marking Scheme

Total Marks: 60

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Question 1 (15 marks)

(a) FIFO Inventory Record (8 marks) 1 mark for each correct entry

Date	Purchases	Cost of Sales	Balance
1 Jan			150 units @ $40 =$6,000
8 Jan	200 units @ $45 =$9,000		150 @ $40 + 200 @$45 = $15,000
15 Jan		150 @ $40 + 30 @$45 = $7,350	170 units @ $45 =$7,650
22 Jan	100 units @ $48 =$4,800		170 @ $45 + 100 @$48 = $12,450
28 Jan		120 @ $45 =$5,400	50 @ $45 + 100 @$48 = $7,050

(b) Gross Profit Calculation (3 marks)

• Sales revenue: (180 × $70) + (120 ×$72) = $12,600 +$8,640 = $21,240 (1 mark)
• Cost of sales: $7,350 +$5,400 = $12,750 (1 mark)
• Gross profit: $21,240 -$12,750 = $8,490 (1 mark)

(c) AVCO Closing Inventory (4 marks)

Working:

• Total units purchased: 150 + 200 + 100 = 450 units (½ mark)
• Total cost: (150×$40) + (200×$45) + (100×$48) =$6,000 + $9,000 +$4,800 = $19,800 (1 mark)
• Total units sold: 180 + 120 = 300 units (½ mark)
• Closing inventory: 150 units (½ mark)
• Average cost per unit: $19,800 ÷ 450 =$44 (1 mark)
• Closing inventory (AVCO): 150 × $44 = **$6,600** (½ mark)

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Question 2 (20 marks)

(a) Income Statement (10 marks)

Kim's Fashion Store
Income Statement for the year ended 31 December 2024

	$
Sales revenue	280,000 (½ mark)
Cost of sales:
Opening inventory	25,000 (½ mark)
Add: Purchases	168,000 (½ mark)
	193,000 (½ mark)
Less: Closing inventory	(32,000) (½ mark)
Cost of sales	(161,000) (½ mark)
Gross profit	119,000 (1 mark)
Operating expenses:
Rent expense	18,000 (½ mark)
Salaries ($45,000 +$3,000)	48,000 (1 mark)
Insurance expense ($6,000 -$2,000)	4,000 (1 mark)
Depreciation - Equipment	8,000 (½ mark)
Total operating expenses	(78,000) (1 mark)
Net profit	41,000 (1 mark)

(b) Statement of Financial Position (10 marks)

Kim's Fashion Store
Statement of Financial Position as at 31 December 2024

ASSETS	$
Non-current assets:
Equipment	80,000 (½ mark)
Less: Accumulated depreciation ($24,000 +$8,000)	(32,000) (1 mark)
	48,000 (½ mark)
Current assets:
Inventory	32,000 (½ mark)
Trade receivables	35,000 (½ mark)
Prepaid insurance	2,000 (½ mark)
Cash at bank	12,000 (½ mark)
	81,000 (½ mark)
Total assets	129,000 (½ mark)
EQUITY AND LIABILITIES
Equity:
Capital (1 Jan 2024)	57,000 (½ mark)
Add: Net profit	41,000 (½ mark)
	98,000 (½ mark)
Current liabilities:
Trade payables	28,000 (½ mark)
Accrued salaries	3,000 (½ mark)
	31,000 (½ mark)
Total equity and liabilities	129,000 (½ mark)

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Question 3 (15 marks)

(a) Ratio Calculations (8 marks) 2 marks each ratio

Ratio	2023	2024
Gross profit margin	(400,000-240,000)/400,000 × 100 = 40.00%	(480,000-300,000)/480,000 × 100 = 37.50%
Current ratio	90,000/30,000 = 3.00	115,000/40,000 = 2.88
Quick ratio	(90,000-40,000)/30,000 = 1.67	(115,000-60,000)/40,000 = 1.38
Inventory turnover	240,000/40,000 = 6.00 times	300,000/60,000 = 5.00 times

(b) Days Sales in Inventory (2 marks) Working: Days sales in inventory = 365 ÷ Inventory turnover (1 mark) = 365 ÷ 5.00 = 73.00 days (1 mark)

(c) Evaluation and Recommendations (5 marks)

Evaluation: (2 marks) The liquidity position has deteriorated from 2023 to 2024. Current ratio decreased from 3.00 to 2.88, and quick ratio fell from 1.67 to 1.38. Inventory turnover also declined from 6.00 to 5.00 times, indicating slower inventory movement and potential cash flow concerns.

Recommendations: (1.5 marks each)

1. Reduce inventory levels through better demand forecasting and just-in-time ordering to improve inventory turnover and free up cash for operations.

2. Implement stricter credit collection procedures to reduce trade receivables and accelerate cash collection, improving the quick ratio and overall liquidity position.

(Accept other reasonable recommendations such as negotiating extended payment terms with suppliers, obtaining short-term financing, or disposing of slow-moving inventory)

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Question 4 (10 marks)

(a) Difference between FIFO and AVCO (4 marks) 2 marks each method

FIFO method: First In First Out assumes that the oldest inventory items are sold first, leaving the most recently purchased items in closing inventory. Cost of sales reflects older, historical costs.

AVCO method: Weighted Average Cost calculates an average cost per unit after each purchase, and this average cost is used for both cost of sales and closing inventory valuation.

(b) Effect during rising prices (4 marks) 2 marks each

(i) Closing inventory value: FIFO will show a higher closing inventory value because it includes the most recent (higher cost) purchases, while AVCO will show a lower value based on the average of all costs.

(ii) Net profit: FIFO will show higher net profit because cost of sales includes older, cheaper inventory costs, while AVCO will show lower profit as cost of sales reflects the higher average cost.

(c) Factors to consider (2 marks) 1 mark each

1. Physical flow of goods - method should match actual movement of inventory where possible
2. Tax implications - different methods affect reported profits and tax liability
3. Industry practices - consistency with competitors for comparison purposes
4. Management information needs - which method provides better decision-making information

(Accept any two reasonable factors)

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Marking Notes:

• Award partial credit for workings even if final answer is incorrect
• Accept reasonable rounding differences (±$1 for monetary amounts)
• Deduct marks for poor presentation or missing labels
• Award method marks where appropriate
• Accept alternative valid explanations for conceptual questions

Grade Boundaries (Suggested):

• A: 54-60 marks (90-100%)
• B: 48-53 marks (80-89%)
• C: 42-47 marks (70-79%)
• D: 36-41 marks (60-69%)
• E: 30-35 marks (50-59%)