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O Level Principles of Accounts Practice Paper 5

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TuitionGoWhere Practice Paper - Principles of Accounts O-Level

TuitionGoWhere Practice Paper (AI)
Version: 5 of 5
Subject: Principles of Accounts
Level: O-Level (Syllabus 7087)
Paper: Practice Paper – Inventory Costing Focus
Duration: 1 Hour 30 Minutes
Total Marks: 60

Name: __________________________
Class: __________________________
Date: __________________________

Instructions to Candidates

Write your Name, Class, and Date in the spaces above.
Answer all questions.
Show all workings clearly. Marks are awarded for method as well as accuracy.
Use a black or dark blue pen. You may use an HB pencil for any diagrams or graphs.
Use of an approved calculator is permitted.

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

1. Which of the following best describes the prudence concept in relation to inventory valuation?
A. Inventory should always be valued at selling price.
B. Inventory should be valued at the higher of cost and net realisable value.
C. Inventory should be valued at the lower of cost and net realisable value.
D. Inventory should be valued at historical cost regardless of market conditions.

[1]

2. In a period of rising prices, which inventory valuation method will result in the highest gross profit?
A. FIFO (First-In, First-Out)
B. AVCO (Weighted Average Cost)
C. LIFO (Last-In, First-Out)
D. Specific Identification

[1]

3. Define Net Realisable Value (NRV).

[2]

4. State two reasons why a business might choose to use the AVCO method instead of FIFO.

[2]

5. Goods costing $500 were returned to a supplier due to damage. The supplier issued a credit note. How does this transaction affect the value of closing inventory? A. Increase by$ 500
B. Decrease by $500
C. No effect
D. Increase by the selling price of the goods

[1]

6. Differentiate between periodic and perpetual inventory systems.

[3]

Section B: Calculations – FIFO and AVCO [30 Marks]

7. SmartTech Pte Ltd sells electronic components. The following transactions occurred in March 2026:

Date	Transaction	Units	Unit Cost ($)	Selling Price per Unit ($)
1 Mar	Opening Inventory	200	10.00	-
5 Mar	Purchase	300	12.00	-
10 Mar	Sale	250	-	25.00
15 Mar	Purchase	400	13.00	-
20 Mar	Sale	350	-	25.00
28 Mar	Purchase	100	14.00	-

(a) Using the FIFO method:
(i) Calculate the value of the closing inventory at 31 March 2026. [4]
(ii) Calculate the Cost of Sales for March 2026. [3]

(b) Using the AVCO (Weighted Average Cost) method (recalculating the average after each purchase):
(i) Calculate the weighted average cost per unit after the purchase on 5 March. [2]
(ii) Calculate the weighted average cost per unit after the purchase on 15 March. [3]
(iii) Calculate the value of the closing inventory at 31 March 2026. [4]
(iv) Calculate the Cost of Sales for March 2026. [3]

(c) Compare the Gross Profit calculated under FIFO and AVCO. Which method yields a higher Gross Profit for SmartTech Pte Ltd in this period? Explain why. [4]

(d) If the Net Realisable Value of the inventory on 31 March was $11.50 per unit, state the value at which the closing inventory should be recorded under the lower of cost and NRV rule using the FIFO method. [2]

(e) Explain one advantage of using the FIFO method for a business selling perishable goods. [2]

(f) Explain one disadvantage of using the AVCO method in a computerised accounting system compared to FIFO. [3]

Section C: Analysis and Decision Making [20 Marks]

8. GreenGrocers is a sole proprietorship selling organic vegetables. The owner, Mr. Tan, is concerned about his liquidity. He provides the following extract from his financial statements for the years ended 31 December 2024 and 2025:

	2024 ($)	2025 ($)
Revenue	150,000	180,000
Cost of Sales	90,000	115,000
Gross Profit	60,000	65,000
Opening Inventory	10,000	12,000
Closing Inventory	12,000	18,000

(a) Calculate the Inventory Turnover Ratio (times) for both 2024 and 2025. Show your workings. [4]

(b) Calculate the Days Sales in Inventory for both 2024 and 2025. (Use 365 days in a year). Show your workings to two decimal places. [4]

(c) Analyze the change in inventory management efficiency between 2024 and 2025. [4]

(d) Mr. Tan is considering switching from FIFO to AVCO to value his inventory. Given that vegetable prices have been rising steadily due to inflation:
(i) State how this switch would affect his reported Gross Profit. [2]
(ii) State how this switch would affect his reported Current Assets. [2]

(e) Recommend two actions Mr. Tan could take to improve his inventory turnover ratio. Justify your recommendations. [4]

End of Paper

Answers

TuitionGoWhere Practice Paper - Principles of Accounts O-Level

Answer Key & Marking Scheme

Version: 5 of 5
Topic: Inventory Costing

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

1. C
[1]
Reasoning: The prudence concept requires assets not to be overstated. Therefore, inventory is valued at the lower of cost and NRV.

2. A
[1]
Reasoning: In rising prices, FIFO assigns the older, lower costs to Cost of Sales, resulting in higher Gross Profit.

3. Net Realisable 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]
Marking: 1 mark for "estimated selling price", 1 mark for "less costs to complete/sell".

4. Any two of the following:

It smooths out price fluctuations, providing a more stable cost of sales figure.
It is easier to administer if inventory items are indistinguishable (homogeneous).
It is often accepted by tax authorities as a reasonable approximation of current costs.
It avoids the extreme profit fluctuations seen in FIFO/LIFO during volatile price periods.
[2]
Marking: 1 mark per valid reason.

5. B
[1]
Reasoning: Returning goods reduces the quantity and value of inventory held.

6.
Periodic: Inventory is counted physically at specific intervals (e.g., year-end). Cost of Sales is calculated as a balancing figure.
Perpetual: Inventory records are updated continuously after every purchase and sale. The inventory account balance is always current.
[3]
Marking: 1.5 marks for correct definition of Periodic, 1.5 marks for correct definition of Perpetual.

Section B: Calculations – FIFO and AVCO [30 Marks]

7. (a) FIFO Method

(i) Value of Closing Inventory
Total Units Available = 200 + 300 + 400 + 100 = 1,000 units
Total Units Sold = 250 + 350 = 600 units
Closing Inventory Units = 1,000 - 600 = 400 units

Under FIFO, the closing inventory consists of the most recent purchases:

100 units from 28 Mar @ $14.00 =$ 1,400
300 units from 15 Mar @ $13.00 =$ 3,900
(Note: We need 400 units. We take all 100 from the last purchase, and the remaining 300 from the previous purchase.)

Value = $1,400 +$ 3,900 = $5,300
[4]
Marking: 1 mark for identifying correct units (100 @ 14, 300 @ 13), 1 mark for each calculation, 1 mark for total.

(ii) Cost of Sales (FIFO)
Method 1: Opening Inventory + Purchases - Closing Inventory
Opening Inv = 200 * $10 =$ 2,000
Purchases = (300 * $12) + (400 *$ 13) + (100 * $14) =$ 3,600 + $5,200 +$ 1,400 = $10,200 Cost of Sales =$ 2,000 + $10,200 -$ 5,300 = $6,900

Method 2: Direct Calculation of Sold Units

200 units @ $10 =$ 2,000 (from Op Inv)
50 units @ $12 =$ 600 (from 5 Mar Purchase) -> First Sale of 250 units
250 units @ $12 =$ 3,000 (from 5 Mar Purchase)
100 units @ $13 =$ 1,300 (from 15 Mar Purchase) -> Second Sale of 350 units
Total = $2,000 +$ 600 + $3,000 +$ 1,300 = $6,900
[3]
Marking: 1 mark for method, 1 mark for workings, 1 mark for correct answer.

7. (b) AVCO Method

(i) WAC after 5 March Purchase
Inventory before purchase: 200 units @ $10 =$ 2,000
Purchase: 300 units @ $12 =$ 3,600
Total Value = $5,600 Total Units = 500 WAC =$ 5,600 / 500 = $11.20
[2]
Marking: 1 mark for total value/units, 1 mark for correct division.

(ii) WAC after 15 March Purchase
Inventory before purchase (after 10 Mar sale):
Sold 250 units @ $11.20 =$ 2,800
Remaining: 250 units @ $11.20 =$ 2,800
Purchase: 400 units @ $13 =$ 5,200
Total Value = $2,800 +$ 5,200 = $8,000 Total Units = 250 + 400 = 650 WAC =$ 8,000 / 650 = ** $12.3077...** (Keep decimals for intermediate steps, round final answer) Let's use$ 12.31 for display but precise for calculation.
[3]
Marking: 1 mark for identifying remaining inventory value, 1 mark for adding new purchase, 1 mark for correct division.

(iii) Value of Closing Inventory (AVCO)
Sale on 20 Mar: 350 units sold.
Remaining Units before 28 Mar purchase: 650 - 350 = 300 units.
Value of these 300 units = 300 * ( $8,000/650) =$ 3,692.31 (approx)
Purchase on 28 Mar: 100 units @ $14 =$ 1,400
New Total Units = 300 + 100 = 400 units
New Total Value = $3,692.31 +$ 1,400 = $5,092.31 New WAC =$ 5,092.31 / 400 = $12.7307... Closing Inventory Value = 400 units *$ 12.7307... = ** $5,092.31** (rounded to 2 dp) *Alternative Calculation Check:* Total Cost of Goods Available for Sale =$ 2,000 (Op) + $3,600 (P1) +$ 5,200 (P2) + $1,400 (P3) =$ 12,200
Total Units = 1,000
Wait, AVCO recalculates after each purchase.
Let's re-verify step-by-step strictly.

Start: 200 @ 10 = 2000.
Buy 300 @ 12 = 3600. Total 500 units, $5600. Avg$ 11.20.
Sell 250. Cost = 250 * 11.20 = 2800. Remaining 250 units, $2800.
Buy 400 @ 13 = 5200. Total 650 units, $8000. Avg$ 12.30769.
Sell 350. Cost = 350 * 12.30769 = 4307.69. Remaining 300 units, $3692.31.
Buy 100 @ 14 = 1400. Total 400 units, $5092.31. Avg$ 12.73077.
Closing Inventory = $5,092.31
[4]
Marking: 1 mark for tracking balance after first sale, 1 mark for new avg after second purchase, 1 mark for tracking balance after second sale, 1 mark for final valuation including last purchase.

(iv) Cost of Sales (AVCO)
Cost of Sale 1 (10 Mar) = $2,800 Cost of Sale 2 (20 Mar) =$ 4,307.69
Total Cost of Sales = $2,800 +$ 4,307.69 = $7,107.69
[3]
Marking: 1 mark for each sale cost, 1 mark for total.

7. (c) Comparison
FIFO Gross Profit: Sales (600 * $25 =$ 15,000) - COGS ( $6,900) =$ 8,100
AVCO Gross Profit: Sales ( $15,000) - COGS ($ 7,107.69) = $7,892.31 **FIFO yields a higher Gross Profit.** **Reason:** In a period of rising prices ($ 10 -> $12 ->$ 13 -> $14), FIFO assigns the older, lower costs to Cost of Sales, whereas AVCO averages in the higher recent costs, resulting in a higher COGS and lower Gross Profit.
[4]
Marking: 1 mark for identifying FIFO is higher, 1 mark for correct GP calculations (or logical deduction), 2 marks for explanation linking rising prices to cost flow.

7. (d) Lower of Cost and NRV (FIFO)
FIFO Cost per unit of closing inventory:
The closing inventory consists of batches at $13 and$ 14.
NRV is $11.50. Since NRV ($ 11.50) is lower than the cost of both batches ( $13 and$ 14), the entire inventory must be written down to NRV.
Value = 400 units * $11.50 = **$ 4,600**
[2]
Marking: 1 mark for comparing cost vs NRV, 1 mark for correct calculation.

7. (e) Advantage of FIFO for Perishables
FIFO ensures that the oldest stock is sold first. For perishable goods (like food), this minimizes the risk of spoilage and obsolescence, ensuring that the physical flow of goods matches the cost flow assumption.
[2]
Marking: 1 mark for "oldest sold first", 1 mark for link to spoilage/waste reduction.

7. (f) Disadvantage of AVCO in Computerised Systems
AVCO requires the recalculation of the weighted average cost after every purchase transaction. In a high-volume computerised system, this constant recalculation can be more processing-intensive and complex to track than FIFO, which simply assigns the specific cost of the specific batch sold.
[3]
Marking: 1 mark for "recalculation after every purchase", 1 mark for "processing intensity/complexity", 1 mark for comparison to FIFO simplicity.

Section C: Analysis and Decision Making [20 Marks]

8. (a) Inventory Turnover Ratio
Formula: Cost of Sales / Average Inventory
Average Inventory = (Opening + Closing) / 2

2024:
Avg Inv = (10,000 + 12,000) / 2 = 11,000
Turnover = 90,000 / 11,000 = 8.18 times (or 8.2)

2025:
Avg Inv = (12,000 + 18,000) / 2 = 15,000
Turnover = 115,000 / 15,000 = 7.67 times (or 7.7)
[4]
Marking: 1 mark for formula/avg inv 2024, 1 mark for answer 2024, 1 mark for avg inv 2025, 1 mark for answer 2025.

8. (b) Days Sales in Inventory
Formula: 365 / Inventory Turnover Ratio

2024:
365 / 8.1818... = 44.61 days

2025:
365 / 7.666... = 47.61 days
[4]
Marking: 1 mark for formula, 1 mark for answer 2024, 1 mark for answer 2025, 1 mark for correct rounding/units.

8. (c) Analysis of Efficiency
The inventory turnover has decreased from 8.18 times to 7.67 times, and the days sales in inventory has increased from 44.61 days to 47.61 days. This indicates that GreenGrocers is holding inventory for a longer period before selling it. Efficiency has worsened. This could suggest overstocking, slower sales, or potential obsolescence of vegetables.
[4]
Marking: 1 mark for identifying decrease in turnover/increase in days, 1 mark for stating efficiency worsened, 2 marks for valid interpretation (overstocking/slow sales).

8. (d) Impact of Switching to AVCO (Rising Prices)
(i) Gross Profit: Gross Profit would decrease. AVCO includes higher recent costs in the Cost of Sales compared to FIFO, reducing the profit margin.
[2]
Marking: 1 mark for "decrease", 1 mark for reason (higher COGS).

(ii) Current Assets: Current Assets would decrease. The closing inventory value under AVCO would be lower than under FIFO (as older, cheaper costs are retained in inventory under FIFO, while AVCO averages in higher costs but typically results in lower ending inventory value than FIFO in rising markets? Wait. In rising markets, FIFO Ending Inventory is HIGHEST because it keeps the newest, most expensive items. AVCO is lower. LIFO is lowest. So switching FROM FIFO TO AVCO means Ending Inventory value drops. Therefore Current Assets drop.)
[2]
Marking: 1 mark for "decrease", 1 mark for reason (lower inventory valuation).

8. (e) Recommendations to Improve Inventory Turnover

Reduce Selling Prices / Offer Discounts: This could stimulate demand and clear stock faster, reducing the days sales in inventory. However, this may reduce gross profit margins.
Improve Inventory Management / Just-in-Time Ordering: Order smaller quantities more frequently to match sales demand closely. This reduces the average inventory held, thereby increasing the turnover ratio.
[4]
Marking: 1 mark per recommendation, 1 mark per justification. Must be relevant to inventory turnover.