O Level Principles of Accounts Inventory Costing Quiz

O-Level Principles of Accounts Quiz - Inventory Costing

Answer Key and Marking Scheme

Section A: Short Answer Questions [15 marks]

Question 1 [2 marks] State the accounting concept used to value inventory and explain why this concept is applied.

Answer: Concept: Lower of cost and net realizable value / Prudence concept [1 mark]

Explanation: This concept ensures that assets are not overstated and prevents the overstatement of profit. It follows the prudence concept by recognizing losses immediately but not anticipating gains. [1 mark]

Marking Notes: Accept "conservatism" for prudence. Must link to not overstating assets/profit for full marks.

Question 2 [3 marks] Prepare the inventory account for March 2024.

Answer:

                    Inventory Account
Dr                                                           Cr
1 Mar Balance b/d  | 8,500     31 Mar Cost of sales | 11,200
31 Mar Purchases   | 12,300    31 Mar Balance c/d   | 9,600
                   | 20,800                         | 20,800

1 Apr Balance b/d  | 9,600

Marking Scheme:

• Correct opening balance (1 mark)
• Correct purchases entry (1 mark)
• Correct cost of sales and closing balance with balance b/d (1 mark)

Question 3 [1 mark] Calculate the cost of sales for June 2024.

Answer: Cost of sales = Opening inventory + Purchases - Closing inventory = $15,600 +$28,400 - $17,200 =$26,800

Marking: 1 mark for correct answer. Accept working shown.

Question 4 [2 marks] List TWO factors for choosing inventory methods.

Sample Answers:

1. Price trend of inventory (rising/falling prices) [1 mark]
2. Tax implications / profit reporting requirements [1 mark]

Accept also: Cash flow considerations, industry practice, ease of calculation, management preference for profit smoothing.

Section B: Calculation Questions [12 marks]

Question 5 [4 marks] FIFO inventory calculation.

Answer: Working:

• 1 May: 50 units @ $120 =$6,000
• 8 May: Purchase 80 units @ $125 =$10,000
• 15 May: Sold 70 units (50 @ $120 + 20 @$125) - leaves 60 @ $125
• 22 May: Purchase 60 units @ $130 =$7,800
• 28 May: Sold 45 units (all from $125 batch) - leaves 15 @$125 + 60 @ $130

Closing inventory = (15 × $125) + (60 ×$130) = $1,875 +$7,800 = $9,675

Marking Scheme:

• Correct FIFO flow identification (1 mark)
• Correct calculation after first sale (1 mark)
• Correct calculation after second sale (1 mark)
• Correct final answer (1 mark)

Question 6 [4 marks] Ratio calculations for Harmony Ltd.

Answer: Current Assets = $45,600 +$32,800 + $8,900 =$87,300 Current Liabilities = $28,500 +$4,200 + $12,300 =$45,000 Current Ratio = $87,300 ÷$45,000 = 1.94:1

Quick Assets = $87,300 -$45,600 = $41,700 Quick Ratio =$41,700 ÷ $45,000 = 0.93:1

Marking Scheme:

• Current assets calculation (1 mark)
• Current liabilities calculation (1 mark)
• Current ratio correct to 2 d.p. (1 mark)
• Quick ratio correct to 2 d.p. (1 mark)

Question 7 [4 marks] Days sales in inventory calculation.

Answer: 2023: Average inventory = ($18,500 +$22,300) ÷ 2 = $20,400 Inventory turnover =$156,000 ÷ $20,400 = 7.65 Days sales in inventory = 365 ÷ 7.65 = 47.71 days

2024: Average inventory = ($22,300 +$26,800) ÷ 2 = $24,550 Inventory turnover =$178,400 ÷ $24,550 = 7.27 Days sales in inventory = 365 ÷ 7.27 = 50.21 days

Marking Scheme:

• 2023 calculation correct (2 marks)
• 2024 calculation correct (2 marks)

Section C: Application Question [8 marks]

Question 8 [8 marks]

(a) TWO liquidity problems [2 marks]

Sample Answers: Problem 1: Low current ratio (1.2:1) compared to competitor (2.1:1) indicates insufficient current assets to cover current liabilities Problem 2: High days sales in inventory (95 days vs industry 45 days) shows slow-moving stock tying up cash

Accept also: Low quick ratio, long collection period, short payment period creating cash squeeze.

(b) THREE actions to improve liquidity [6 marks]

Sample Answers: Action 1: Reduce inventory levels through better stock management/clearance sales Explanation: This will convert slow-moving stock to cash and reduce days sales in inventory closer to industry average

Action 2: Implement stricter credit control to reduce collection period Explanation: Faster collection of receivables will improve cash flow and reduce the 65-day collection period

Action 3: Negotiate extended payment terms with suppliers Explanation: Longer payment period will improve cash flow timing and reduce pressure on working capital

Marking: 2 marks per action (1 for action, 1 for explanation). Must be practical and clearly linked to liquidity improvement.