O Level Principles of Accounts Practice Paper 3

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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.
• Use two decimal places for ratio calculations unless otherwise stated.

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Section A: Fundamental Concepts (Questions 1-5)

1. Define "Inventory" in the context of a trading business. [1]
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2. State the accounting principle that requires inventory to be valued at the lower of cost and net realizable value (NRV). [1]
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3. Explain the difference between "Cost" and "Net Realizable Value" (NRV). [2]
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4. A business has inventory with a cost of $5,000, but it is estimated that the item can only be sold for$4,200 after spending $300 on repairs. State the value at which this inventory should be recorded in the Statement of Financial Position. [2]
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5. Explain how overstating the closing inventory figure affects the gross profit for the accounting period. [2]
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Section B: Cost of Sales & T-Accounts (Questions 6-12)

6. Calculate the cost of sales for the month of May 2025 given: Opening Inventory $2,400; Purchases$15,600; Closing Inventory $3,100. [2]
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7. If the cost of sales is $22,000 and the selling price of the goods is$30,000, calculate the gross profit. [2]
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8. A business started the year with inventory worth $8,000. During the year, it purchased$45,000 worth of goods. At the end of the year, the cost of sales was $40,000. Calculate the value of the closing inventory. [2]
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9. State the double-entry for recording the purchase of inventory on credit. [2]
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10. Prepare the Inventory Account for the month of June 2025. (3 marks)

    • 1 June: Balance b/d $1,500
    • 15 June: Purchases $4,000
    • 30 June: Closing inventory valued at $2,000.
      
      [Space for T-Account]
      
      
      
      
      
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11. Explain why the closing inventory of one accounting period becomes the opening inventory of the next period. [2]
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12. A business discovers that $500 worth of inventory was damaged and cannot be sold. Describe the adjustment required to the inventory value and its effect on the Income Statement. [2]
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Section C: FIFO and AVCO Methods (Questions 13-20)

Scenario for Questions 13-16: A trader deals in a single product. The following transactions occurred in October 2025:

• Oct 1: Opening Inventory: 100 units @ $10 each
• Oct 10: Purchased: 200 units @ $12 each
• Oct 20: Sold: 220 units
• Oct 25: Purchased: 100 units @ $15 each

13. Using the FIFO (First-In, First-Out) method, calculate the value of the closing inventory as at 31 October 2025. [4]
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14. Using the AVCO (Weighted Average Cost) method, calculate the average cost per unit after the purchase on 10 October. [3]
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15. Using the AVCO method, calculate the value of the closing inventory as at 31 October 2025. [4]
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16. Compare the closing inventory values from Question 13 and Question 15. Which method results in a higher inventory valuation in a period of rising prices? [2]
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17. In a period of falling prices, which method (FIFO or AVCO) would typically result in a lower gross profit? Explain your answer. [3]
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18. Calculate the "Days Sales in Inventory" for a business with:

    • Average Inventory: $6,000
    • Cost of Sales: $72,000 (Use 365 days) [3]
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19. If the "Days Sales in Inventory" increases from 40 days to 60 days over two years, what does this suggest about the business's inventory management? [3]
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20. Recommend one non-accounting factor a business should consider when deciding whether to hold high levels of inventory. Justify your reason. [3]
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Answer Key - Inventory Costing Quiz

1. Definition: The goods held by a business for the purpose of resale in the ordinary course of business. (1m)

2. Principle: Prudence Concept. (1m)

3. Explanation: Cost is the actual purchase price plus any costs to bring the item to its current location/condition. NRV is the estimated selling price minus any costs to complete or sell the item. (2m)

4. Calculation: NRV = $4,200 -$300 = $3,900. Since$3,900 < $5,000 (cost), the inventory is valued at$3,900. (2m)

5. Effect: Overstating closing inventory reduces the Cost of Sales (Opening + Purchases - Closing). A lower Cost of Sales leads to an overstatement of Gross Profit. (2m)

6. Calculation: $2,400 +$15,600 - $3,100 =$14,900. (2m)

7. Calculation: $30,000 -$22,000 = $8,000. (2m)

8. Calculation: Closing Inventory = Opening + Purchases - Cost of Sales $\rightarrow$ $8,000 +$45,000 - $40,000 =$13,000. (2m)

9. Double Entry: Debit Inventory/Purchases account, Credit Trade Payables account. (2m)

10. T-Account:

    • Debit side: Balance b/d $1,500; Purchases$4,000. Total = $5,500.
    • Credit side: Cost of Sales (balancing figure) $3,500; Balance c/d$2,000. (3m)

11. Explanation: The inventory remaining at the end of the day/year is the exact same physical stock that is available at the start of the next day/year. (2m)

12. Adjustment: Reduce inventory value by $500 (Write-down). This increases expenses (or cost of sales), thereby decreasing the net profit in the Income Statement. (2m)

13. FIFO Calculation:

    • Total units = 100 + 200 + 100 = 400.
    • Sold = 220. Remaining = 180 units.
    • FIFO assumes oldest sold first. Remaining are the newest:
    • 100 units @ $15 (Oct 25) =$1,500
    • 80 units @ $12 (Oct 10) =$960
    • Total = $2,460. (4m)

14. AVCO Calculation:

    • Total cost = (100 * 10) + (200 * 12) = $1,000 +$2,400 = $3,400.
    • Total units = 300.
    • Average cost = $3,400 / 300 =$11.33 per unit. (3m)

15. AVCO Calculation:

    • After Oct 10: 300 units @ $11.33.
    • Oct 20: Sold 220 units. Remaining = 80 units @ $11.33 =$906.40.
    • Oct 25: Purchased 100 units @ $15 =$1,500.
    • Total Closing Inventory = $906.40 +$1,500 = $2,406.40. (4m)

16. Comparison: FIFO ($2,460) > AVCO ($2,406.40). FIFO results in a higher valuation during rising prices because it keeps the most recent (higher) costs on the balance sheet. (2m)

17. Falling Prices: FIFO. In falling prices, FIFO sells the oldest (more expensive) stock first, leading to a higher Cost of Sales and thus a lower Gross Profit. (3m)

18. Calculation:

    • Inventory Turnover = $72,000 /$6,000 = 12 times.
    • Days Sales = 365 / 12 = 30.42 days. (3m)

19. Interpretation: It suggests inventory is moving more slowly. This could indicate overstocking, a drop in demand, or inefficient inventory management, potentially tying up cash flow. (3m)

20. Non-Accounting Factor: e.g., Lead time from suppliers. If suppliers are unreliable or have long delivery times, the business must hold more safety stock to avoid stock-outs and loss of customers. (3m)