O Level Principles of Accounts Practice Paper 1

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O-Level Principles of Accounts Quiz - Inventory Costing

Name: __________________________
Class: __________________________
Date: __________________________
Score: ________ / 50

Duration: 60 Minutes
Total Marks: 50

Instructions:

• Answer all questions in the spaces provided.
• Show all workings clearly for calculation questions.
• Round all ratio answers to two decimal places.

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Section A: Conceptual Knowledge (Questions 1-5)

1. Define "Inventory" in the context of a trading business. [1]
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2. State the general rule for valuing inventory at the end of an accounting period. [1]
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3. Explain the "Prudence Concept" and how it relates to the valuation of inventory. [2]
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4. Distinguish between the FIFO (First-In, First-Out) and AVCO (Weighted Average Cost) methods of inventory valuation. [2]
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5. State two reasons why a business might maintain a minimum level of safety stock. [2]
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Section B: Calculations and Applications (Questions 6-15)

6. A business has opening inventory of $4,500, purchases of$12,000, and closing inventory of $3,200. Calculate the Cost of Sales. [2]
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7. Calculate the Gross Profit if Revenue is $25,000 and the Cost of Sales is$14,800. [1]
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8. A trader has an average inventory of $6,000 and a Cost of Sales of$72,000 for the year. Calculate the Inventory Turnover Ratio. [2]
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9. Using the data from Question 8, calculate the Days Sales in Inventory. [2]
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10. Inventory was valued at $8,000 (cost). However, the Net Realisable Value (NRV) is estimated at$7,200. State the value at which the inventory should appear in the Statement of Financial Position. [1]
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11. Scenario: A business uses FIFO.

    • 1 Oct: 100 units @ $10 each
    • 15 Oct: 100 units @ $12 each
    • 20 Oct: Sold 120 units. Calculate the value of the closing inventory as at 31 Oct. [3]
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12. Using the same scenario as Question 11, calculate the value of the closing inventory if the business used the AVCO method. [3]
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13. Compare the effect of FIFO and AVCO on the Gross Profit when purchase prices are steadily rising. Which method results in a higher profit? [2]
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14. A business has a current ratio of 2.5 and a quick ratio of 0.8. Explain what this significant difference suggests about the business's inventory levels. [3]
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15. Calculate the Cost of Sales if the Gross Profit Margin is 40% and Revenue is $50,000. [2]
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Section C: Structured Analysis (Questions 16-20)

16. Prepare the journal entry to record the write-down of inventory from $5,000 to$4,200 due to obsolescence. Include a narration. [3]
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17. A business's Days Sales in Inventory increased from 45 days to 70 days over two years. Suggest one possible reason for this increase. [2]
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18. Explain how an overvaluation of closing inventory affects the profit for the current year and the profit for the following year. [4]
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19. Identify two non-accounting factors a business should consider when deciding on its inventory control levels. [2]
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20. A business is considering switching from FIFO to AVCO. Discuss one advantage and one disadvantage of using the AVCO method. [4]
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Answer Key - O-Level Principles of Accounts Quiz: Inventory Costing

Section A: Conceptual Knowledge

1. Definition: Goods held by a business for the purpose of resale in the ordinary course of business. (1 mark)
2. General Rule: Valued at the lower of cost and net realisable value (NRV). (1 mark)
3. Prudence Concept: The practice of not overstating assets or income and not understating liabilities or expenses. (1 mark). In inventory, this means choosing the lower of cost/NRV to avoid overstating the asset value on the SFP and overstating profit. (1 mark)
4. FIFO vs AVCO: FIFO assumes the first goods purchased are the first sold (oldest stock issued first). (1 mark). AVCO calculates a weighted average cost of all units available for sale. (1 mark)
5. Safety Stock Reasons: (Any two) To prevent stock-outs during supplier delays; to meet unexpected surges in customer demand; to maintain customer loyalty/service levels. (2 marks)

Section B: Calculations and Applications

6. $4,500 +$12,000 - $3,200 = **$13,300** (2 marks)
7. $25,000 -$14,800 = $10,200 (1 mark)
8. $72,000 /$6,000 = 12 times (2 marks)
9. 365 / 12 = 30.42 days (2 marks)
10. $7,200 (Lower of cost and NRV) (1 mark)
11. Total units = 200. Sold = 120. Remaining = 80 units. Under FIFO, the 80 units remaining are from the most recent batch (15 Oct). 80 units * $12 = **$960** (3 marks)
12. Average cost = ($1,000 +$1,200) / 200 units = $11 per unit. Remaining 80 units *$11 = $880 (3 marks)
13. FIFO results in a higher profit. (1 mark). Because FIFO assigns the oldest (cheaper) costs to the Income Statement, resulting in a lower Cost of Sales and higher Gross Profit. (1 mark)
14. The large gap between the current ratio (2.5) and quick ratio (0.8) indicates that a very large proportion of the business's current assets are tied up in inventory. (2 marks). This may suggest overstocking or slow-moving inventory. (1 mark)
15. Gross Profit = 40% of $50,000 =$20,000. Cost of Sales = $50,000 -$20,000 = $30,000 (2 marks)

Section C: Structured Analysis

16. Journal Entry: Dr Inventory Write-down/Expense $800 Cr Inventory$800 (Narration: To record the write-down of inventory to NRV) (3 marks)
17. Reason: (Any one) Decrease in demand for products; poor inventory management/overstocking; supplier issues leading to bulk buying. (2 marks)
18. Effect:
    • Current Year: Overvalued closing inventory reduces Cost of Sales, which overstates profit. (2 marks)
    • Following Year: The overvalued closing inventory becomes the opening inventory. This increases Cost of Sales, which understates profit. (2 marks)
19. Non-accounting factors: (Any two) Storage capacity/cost; perishability of goods; reliability of suppliers; market trends/fashion changes. (2 marks)
20. AVCO Discussion:
    • Advantage: Smooths out price fluctuations; provides a more stable average cost. (2 marks)
    • Disadvantage: More complex to calculate than FIFO; does not reflect the actual physical flow of goods if the business physically uses FIFO. (2 marks)