O Level Principles of Accounts Practice Paper 1

TuitionGoWhere Practice Paper - Principles of Accounts O-Level

Answer Key and Marking Scheme

Subject: Principles of Accounts (7087)
Topic: Inventory Costing
Version: 1 of 5

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Section A: Multiple Choice and Short Concepts [10 Marks]

1. B) Prudence Concept [1]
Reasoning: Prudence ensures assets are not overstated. Valuing at the lower of cost and NRV prevents overstatement of profit and assets.

2. A) FIFO (First-In, First-Out) [1]
Reasoning: In rising prices, FIFO assigns older (cheaper) costs to Cost of Sales, resulting in lower COGS and higher Gross Profit.

3. Net Realizable Value (NRV) is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. [2]
(1 mark for selling price, 1 mark for less costs to complete/sell)

4. One reason for using AVCO:

• It smooths out price fluctuations, providing a more stable cost figure.
• OR: It is easier to administer than FIFO if inventory items are indistinguishable.
• OR: It is often accepted by tax authorities as a reasonable approximation.
  [1]

5. Consignment Goods:
The consignee holds the goods but does not own them. The legal title remains with the consignor until the goods are sold to a third party. Therefore, they are not the consignee's asset. [1]

6. Cost of Sales Calculation:
$\text{Opening Inventory} + \text{Purchases} + \text{Carriage Inwards} - \text{Closing Inventory}$
$12,000 + 45,000 + 1,500 - 9,500 = 49,000$
Answer: $49,000 [2]
(1 mark for correct formula/inclusion of carriage inwards, 1 mark for correct answer)

7. Carriage Inwards vs Outwards:

• Carriage Inwards: Added to the cost of purchases in the Trading Account (part of Cost of Sales). It is a direct cost of acquiring inventory.
• Carriage Outwards: Recorded as an operating expense in the Income Statement (below Gross Profit). It is a distribution/selling expense.
  [2]
  (1 mark for each correct treatment)

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Section B: FIFO Inventory Valuation [15 Marks]

8. TechParts Pte Ltd

(a) Closing Inventory Value (FIFO) [6]

Step 1: Track Inventory Layers

• Mar 1 Op Bal: 200 units @ $10.00
• Mar 5 Purchase: 300 units @ $11.00
  • Available: 200 @ $10, 300 @$11
• Mar 10 Sale (350 units):
  • Sold 200 @ $10 (Oldest)
  • Sold 150 @ $11 (Next oldest)
  • Remaining: 150 units @ $11.00
• Mar 15 Purchase: 400 units @ $12.00
  • Available: 150 @ $11, 400 @$12
• Mar 22 Sale (300 units):
  • Sold 150 @ $11 (Oldest)
  • Sold 150 @ $12 (Next oldest)
  • Remaining: 250 units @ $12.00
• Mar 28 Purchase Return (50 units @ $12):
  • Returned from the Mar 15 batch.
  • Remaining: $250 - 50 = 200$ units @ $12.00

Calculation:
$200 \text{ units} \times \$12.00 = \$2,400$

Answer: $2,400 [6]
(1 mark for tracking Mar 10 sale correctly, 1 mark for remaining balance, 1 mark for tracking Mar 22 sale correctly, 1 mark for remaining balance, 1 mark for adjusting return, 1 mark for final value)

(b) Gross Profit for March [5]

Step 1: Calculate Sales Revenue
Total Units Sold = $350 + 300 = 650$ units
$\text{Revenue} = 650 \times \$18.00 = \$11,700$

Step 2: Calculate Cost of Sales (FIFO)
Method: $\text{Opening Inventory} + \text{Net Purchases} - \text{Closing Inventory}$

• Opening Inventory: 200 \times 10 = \2,000$
• Purchases:
  • Mar 5: 300 \times 11 = \3,300$
  • Mar 15: 400 \times 12 = \4,800$
  • Less Return: 50 \times 12 = (\600)$
  • Net Purchases = \3,300 + $4,800 - $600 = $7,500$
• Closing Inventory (from part a): \2,400$

$\text{Cost of Sales} = 2,000 + 7,500 - 2,400 = \$7,100$

Step 3: Gross Profit
$\text{Gross Profit} = \text{Revenue} - \text{Cost of Sales}$
$\text{Gross Profit} = 11,700 - 7,100 = \$4,600$

Answer: $4,600 [5]
(1 mark for Revenue, 1 mark for Net Purchases, 1 mark for COGS formula, 1 mark for COGS value, 1 mark for Gross Profit)

(c) Inventory Ledger Account [4]

Date	Details	Units	Cost ($)	Total ($)	Date	Details	Units	Cost ($)	Total ($)
Mar 1	Balance b/d	200	10.00	2,000	Mar 10	Cost of Sales	350	Mix	3,500*
Mar 5	Purchases	300	11.00	3,300	Mar 22	Cost of Sales	300	Mix	3,450**
Mar 15	Purchases	400	12.00	4,800	Mar 28	Purchases Return	50	12.00	600
					Mar 31	Balance c/d	200	12.00	2,400
	Total	900		10,100		Total	900		10,100
Apr 1	Balance b/d	200	12.00	2,400

*Workings for Mar 10 COGS: $(200 \times 10) + (150 \times 11) = 2,000 + 1,650 = 3,650$. Wait, let me re-check the T-account totals.

Correction for T-Account Presentation:
In a T-account, we usually record total values.
Debit Side:

• Bal b/d: 2,000
• Purchases (Mar 5): 3,300
• Purchases (Mar 15): 4,800
  Total Debits: 10,100

Credit Side:

• Cost of Sales (Mar 10): 3,650 $(200@10 + 150@11)$
• Cost of Sales (Mar 22): 3,450 $(150@11 + 150@12)$
• Purchases Return (Mar 28): 600
• Balance c/d: 2,400
  Total Credits: $3,650 + 3,450 + 600 + 2,400 = 10,100$.

(4 marks: 1 for correct format/headings, 1 for correct debit entries, 1 for correct credit entries including returns, 1 for balanced closing balance)

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Section C: AVCO Inventory Valuation [15 Marks]

9. FreshFoods Ltd

(a) Weighted Average Cost after June 4 Purchase [2]

• Opening: 1,000 units @ $4.00 =$4,000
• Purchase: 500 units @ $4.20 =$2,100
• Total Units: 1,500
• Total Value: $6,100

$\text{Average Cost} = \frac{6,100}{1,500} = \$4.0666...$

Answer: $4.07 (rounded to 2 d.p.) [2]
(1 mark for total value calculation, 1 mark for correct division and rounding)

(b) Closing Inventory Value (AVCO) [8]

Step 1: Sale on June 10 (800 units)
Cost of Sales = 800 \times \4.0667$(use unrounded for accuracy) or$800 \times 4.07$? *Standard practice: Keep precision in workings.* Let's use fractions:$6100/1500 = 61/15$. COGS =$800 \times (61/15) = 3,253.33$Remaining Inventory Value =$6,100 - 3,253.33 = 2,846.67$Remaining Units =$1,500 - 800 = 700$units. *(Check:$700 \times 4.0667 = 2,846.67$)*

*Step 2: Purchase on June 18 (600 units @ $4.50)* New Units =$700 + 600 = 1,300$units New Value =$2,846.67 + (600 \times 4.50)$New Value =$2,846.67 + 2,700 = 5,546.67$

Recalculate Average Cost:
$\text{New Avg Cost} = \frac{5,546.67}{1,300} = \$4.2666... \approx \$4.27$

Step 3: Sale on June 25 (700 units)
Remaining Units = $1,300 - 700 = 600$ units
Value of Closing Inventory = $600 \times 4.2666...$
$600 \times \left(\frac{5,546.67}{1,300}\right) = 2,559.99 \approx 2,560.00$

Alternative Calculation using rounded steps (if allowed by specific school policy, but precision is preferred):
If using $4.07: Rem Val =$700 \times 4.07 = 2,849$. New Val =$2,849 + 2,700 = 5,549$. New Avg =$5,549 / 1,300 = 4.268$. Closing Inv =$600 \times 4.268 = 2,560.80$.

We will accept answers between $2,559.00 and$2,561.00 due to rounding differences.

Answer: Approximately $2,560.00 [8]
(2 marks for Jun 10 COGS/Rem Balance, 2 marks for Jun 18 New Total Value, 2 marks for New Average Cost, 2 marks for Final Closing Inventory Value)

(c) Comparison with FIFO (Rising Prices) [3]

• In a period of rising prices, FIFO assigns older, lower costs to Cost of Sales.
• AVCO assigns a weighted average, which includes the newer, higher costs.
• Therefore, FIFO would result in a lower Cost of Sales and a higher Gross Profit compared to AVCO.
  [3]
  (1 mark for identifying FIFO has lower COGS, 1 mark for identifying higher Profit, 1 mark for logical connection to rising prices)

(d) Advantage of AVCO [2]

• It is practical for homogeneous goods (like rice) where individual batches are indistinguishable.
• It smooths out price volatility, making profit figures more stable and predictable for management.
  [2]
  (1 mark for practicality/homogeneity, 1 mark for smoothing effect)

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END OF MARKING SCHEME