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O Level Principles of Accounts Inventory Costing Quiz

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Questions

O-Level Principles of Accounts Quiz - Inventory Costing

Name: _________________________ Class: _________________________ Date: _________________________ Score: _____ / 40

Duration: 45 minutes Total Marks: 40

Instructions:

Answer ALL questions in the spaces provided.
Show all workings clearly. Marks are awarded for method.
Round all answers to two decimal places unless stated otherwise.
A calculator may be used.

Section A: Short Answer and Basic Calculations (10 marks)

Answer all questions in this section.

1. State the accounting concept that requires inventory to be valued at the lower of cost and net realisable value.

[2 marks]

2. A business has the following information for the year ended 31 December 2024:

	$
Opening inventory	12,500
Purchases	85,000
Closing inventory	15,200

Calculate the cost of sales for the year.

[2 marks]

3. Explain what is meant by "net realisable value" (NRV) of inventory.

[2 marks]

4. A business purchased 200 units of inventory at $15 each. The selling price is$ 25 per unit. At the year-end, 50 units remain unsold. Due to damage, these units can only be sold for $10 each after incurring repair costs of$ 2 per unit.

Calculate the value at which the closing inventory should be stated in the financial statements.

[2 marks]

5. State one reason why a business might choose the FIFO method over the weighted average cost (AVCO) method for inventory valuation.

[2 marks]

Section B: Structured Questions (10 marks)

Answer all questions in this section.

6. Lim's Trading had the following inventory movements for Product X during January 2025:

Date	Transaction	Units	Cost per unit ($)
1 Jan	Opening inventory	100	8.00
8 Jan	Purchases	150	9.00
15 Jan	Sales	180	—
22 Jan	Purchases	120	10.00
28 Jan	Sales	100	—

(a) Using the FIFO method, calculate the value of closing inventory as at 31 January 2025.

[3 marks]

(b) Using the weighted average cost (AVCO) method, calculate the value of closing inventory as at 31 January 2025. (Calculate the weighted average cost after each purchase.)

[4 marks]

(c) Explain which method (FIFO or AVCO) would result in a higher gross profit for January 2025. Support your answer with reference to your calculations.

[3 marks]

Section C: Application and Analysis (10 marks)

Answer all questions in this section.

7. A fire destroyed part of the inventory of Chen Enterprises on 15 March 2025. The following information is available:

	$
Inventory at 1 January 2025	28,000
Purchases from 1 January to 15 March 2025	64,000
Sales from 1 January to 15 March 2025	120,000
Gross profit margin on sales	25%

(a) Calculate the estimated cost of sales for the period 1 January to 15 March 2025.

[2 marks]

(b) Calculate the estimated value of inventory destroyed by the fire.

[2 marks]

(c) State one limitation of using the gross profit method to estimate inventory.

[2 marks]

8. The following information relates to Jasmine Retail for the years ended 31 December 2023 and 2024:

	2023 ($)	2024 ($)
Revenue	250,000	300,000
Cost of sales	175,000	225,000
Opening inventory	22,000	28,000
Closing inventory	28,000	35,000

(a) Calculate the inventory turnover ratio (times) for both years. Show your answers to two decimal places.

[3 marks]

(b) Calculate the days sales in inventory for both years. Show your answers to two decimal places.

[3 marks]

(c) Comment on the inventory management of Jasmine Retail over the two years. Use your calculations to support your answer.

[4 marks]

Section D: Additional Practice (10 marks)

Answer all questions in this section.

9. Define the term "inventory" in the context of financial accounting.

[2 marks]

10. A company values its closing inventory at $45,000. However, the net realisable value of the inventory is estimated to be$ 42,000. Explain the accounting treatment required and state the value at which inventory should be reported.

[2 marks]

11. State the effect of an overstatement of closing inventory on the following items in the current year's financial statements: (a) Cost of sales (b) Gross profit

[2 marks]

12. Explain how the consistency concept applies to the choice of inventory valuation methods.

[2 marks]

13. A business uses the FIFO method. During a period of rising prices, will the cost of sales be higher or lower compared to using the AVCO method? Briefly explain why.

[2 marks]

14. A business has the following inventory data for Product Z:

Date	Transaction	Units	Cost per unit ($)
1 May	Opening inventory	80	5.00
10 May	Purchases	120	5.50
20 May	Sales	150	—

Using the FIFO method, calculate the value of closing inventory as at 31 May.

[2 marks]

15. State the formula for calculating the inventory turnover ratio.

[2 marks]

16. A business has cost of sales of $200,000 and average inventory of$ 40,000. Calculate the inventory turnover ratio (times).

[2 marks]

17. Explain why a high inventory turnover ratio is generally considered favourable.

[2 marks]

18. A business has closing inventory of $10,000 at cost. The net realisable value is$ 9,500. State the value at which inventory should be reported and the accounting concept applied.

[2 marks]

19. State one disadvantage of using the FIFO method during a period of rising prices.

[2 marks]

20. A business has revenue of $500,000 and a gross profit margin of 20%. Calculate the cost of sales.

[2 marks]

END OF QUIZ

Check your work carefully before submitting.

Answers

O-Level Principles of Accounts Quiz - Inventory Costing - ANSWER KEY

Total Marks: 40

Section A: Short Answer and Basic Calculations (10 marks)

1. State the accounting concept that requires inventory to be valued at the lower of cost and net realisable value.

Answer: Prudence concept (or Conservatism concept).

Marking notes:

Award 1 mark for naming the concept correctly.
Award 1 mark for a brief explanation: assets and profits should not be overstated; losses should be recognised as soon as they are foreseen.
Accept "Prudence" or "Conservatism" alone for 1 mark if explanation is not required. [2 marks]

2. Calculate the cost of sales for the year.

Answer: Cost of sales = Opening inventory + Purchases − Closing inventory = $12,500 +$ 85,000 − $15,200 = **$ 82,300**

Marking notes:

Award 1 mark for correct formula or method shown.
Award 1 mark for correct answer ($82,300).
Accept minor arithmetic errors if method is correct (award method mark only). [2 marks]

3. Explain what is meant by "net realisable value" (NRV) of inventory.

Answer: Net realisable value is the estimated selling price of inventory in the ordinary course of business, less any estimated costs to complete the goods and any estimated costs necessary to make the sale.

Marking notes:

Award 1 mark for mentioning "estimated selling price".
Award 1 mark for mentioning deduction of "costs to complete" and/or "costs to sell".
Accept alternative phrasing that conveys the same meaning. [2 marks]

4. Calculate the value at which the closing inventory should be stated.

Answer: Cost of 50 units = 50 × $15 =$ 750 NRV per unit = $10 −$ 2 = $8 NRV of 50 units = 50 ×$ 8 = $400 Lower of cost and NRV = **$ 400**

Marking notes:

Award 1 mark for calculating cost ( $750) or NRV per unit ($ 8).
Award 1 mark for correct final answer ($400) using the lower of cost and NRV principle.
If candidate uses $10 without deducting repair costs, award 0 marks (NRV incorrectly calculated). [2 marks]

5. State one reason why a business might choose the FIFO method over the weighted average cost (AVCO) method.

Answer (any one of the following):

FIFO more closely reflects the actual physical flow of goods (oldest items sold first).
FIFO results in closing inventory being valued at more recent (current) costs, providing a more up-to-date statement of financial position value.
FIFO is simpler to apply and understand.
FIFO may result in higher reported profit during periods of rising prices (which may be desirable for some stakeholders).

Marking notes:

Award 2 marks for a clear, valid reason with brief explanation.
Award 1 mark for a valid reason stated without explanation.
Do not accept "FIFO is easier" without qualification. [2 marks]

Section B: Structured Questions (10 marks)

6. Lim's Trading – Product X inventory movements.

(a) FIFO closing inventory value.

Answer: Total units available = 100 + 150 + 120 = 370 units Total units sold = 180 + 100 = 280 units Closing inventory units = 370 − 280 = 90 units

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

90 units from 22 Jan purchase @ $10.00 = **$ 900**

Marking notes:

Award 1 mark for correctly calculating closing inventory units (90).
Award 1 mark for identifying that closing inventory comes from the 22 Jan purchase.
Award 1 mark for correct valuation ($900).
If units are incorrect but FIFO logic is correctly applied to the candidate's units, award method marks accordingly. [3 marks]

(b) AVCO closing inventory value.

Answer: After 1 Jan opening: Units: 100, Total cost: $800, AVCO:$ 8.00

After 8 Jan purchase: Units: 100 + 150 = 250 Total cost: $800 + (150 ×$ 9) = $800 +$ 1,350 = $2,150 AVCO:$ 2,150 ÷ 250 = $8.60

After 15 Jan sale (180 units): Remaining units: 250 − 180 = 70 Remaining cost: 70 × $8.60 =$ 602

After 22 Jan purchase: Units: 70 + 120 = 190 Total cost: $602 + (120 ×$ 10) = $602 +$ 1,200 = $1,802 AVCO:$ 1,802 ÷ 190 = $9.4842... ≈$ 9.48 (rounded)

After 28 Jan sale (100 units): Remaining units: 190 − 100 = 90 Closing inventory value: 90 × $9.4842... = **$ 853.58** (or $853.60 depending on rounding)

Marking notes:

Award 1 mark for correct AVCO after first purchase ($8.60).
Award 1 mark for correct units remaining after first sale (70 units).
Award 1 mark for correct AVCO after second purchase (approx. $9.48).
Award 1 mark for correct closing inventory value (accept $853.58 to$ 854.00 depending on rounding approach).
If candidate uses a single weighted average for the whole period (total cost ÷ total units), award maximum 2 marks (method is simplified but not per the question instruction). [4 marks]

(c) Explain which method results in higher gross profit.

Answer: FIFO results in a higher gross profit.

Under FIFO, cost of sales = (100 × $8) + (80 ×$ 9) + (70 × $9) + (30 ×$ 10) = $800 +$ 720 + $630 +$ 300 = $2,450 Under AVCO, cost of sales = (180 ×$ 8.60) + (100 × $9.48) =$ 1,548 + $948 =$ 2,496 (approx.)

Since cost of sales is lower under FIFO ( $2,450 vs ~$ 2,496), and revenue is the same, gross profit is higher under FIFO. This occurs because in a period of rising prices, FIFO assigns older, lower costs to cost of sales.

Marking notes:

Award 1 mark for correctly identifying FIFO as giving higher gross profit.
Award 1 mark for showing cost of sales comparison (or explaining that FIFO uses older/lower costs).
Award 1 mark for linking lower cost of sales to higher gross profit.
Accept reasoning without full calculations if the logic is clearly explained. [3 marks]

Section C: Application and Analysis (10 marks)

7. Chen Enterprises – inventory destroyed by fire.

(a) Estimated cost of sales.

Answer: Gross profit = 25% × $120,000 =$ 30,000 Cost of sales = Sales − Gross profit = $120,000 −$ 30,000 = $90,000

Marking notes:

Award 1 mark for calculating gross profit ($30,000).
Award 1 mark for correct cost of sales ($90,000).
Alternative method: Cost of sales = 75% × $120,000 =$ 90,000 (award full marks). [2 marks]

(b) Estimated value of inventory destroyed.

Answer: Goods available for sale = Opening inventory + Purchases = $28,000 +$ 64,000 = $92,000 Estimated closing inventory (before fire) = Goods available − Cost of sales =$ 92,000 − $90,000 =$ 2,000 Estimated inventory destroyed = $2,000

Marking notes:

Award 1 mark for calculating goods available for sale ($92,000).
Award 1 mark for correct estimated inventory destroyed ($2,000).
If candidate's cost of sales from (a) is incorrect but method is correctly applied, award full marks (error carried forward). [2 marks]

(c) State one limitation of using the gross profit method.

Answer (any one of the following):

It assumes a constant gross profit margin, which may not be accurate if the product mix or pricing has changed.
It does not account for inventory losses due to theft, damage, or obsolescence (other than the fire).
It is an estimate and may not reflect the actual inventory on hand.
It relies on the accuracy of the sales and purchases records.

Marking notes:

Award 2 marks for a clear, valid limitation with brief explanation.
Award 1 mark for a valid limitation stated without explanation. [2 marks]

8. Jasmine Retail – inventory analysis.

(a) Inventory turnover ratio (times).

Answer: 2023: Average inventory = ( $22,000 +$ 28,000) ÷ 2 = $25,000 Inventory turnover =$ 175,000 ÷ $25,000 = 7.00 times

2024: Average inventory = ( $28,000 +$ 35,000) ÷ 2 = $31,500 Inventory turnover =$ 225,000 ÷ $31,500 = 7.14 times

Marking notes:

Award 1 mark for correct average inventory calculation in either year.
Award 1 mark for correct turnover ratio in one year.
Award 1 mark for both years correct. [3 marks]

(b) Days sales in inventory.

Answer: 2023: Days sales in inventory = 365 ÷ 7.00 = 52.14 days

2024: Days sales in inventory = 365 ÷ 7.14 = 51.12 days

Marking notes:

Award 1 mark for correct formula (365 ÷ inventory turnover).
Award 1 mark for correct answer in one year.
Award 1 mark for both years correct.
Accept answers using 365 days or 360 days. [3 marks]

(c) Comment on inventory management.

Answer: Inventory management has improved slightly. The inventory turnover ratio increased from 7.00 times to 7.14 times, and days sales in inventory decreased from 52.14 days to 51.12 days. This indicates that inventory is being sold slightly faster in 2024, reducing holding costs and the risk of obsolescence. However, the improvement is marginal, and management should continue to monitor inventory levels to ensure they are not excessive.

Marking notes:

Award 1 mark for noting the direction of change (improvement).
Award 1 mark for referencing the ratios/days calculated.
Award 1 mark for explaining the implication (faster sales, lower holding costs).
Award 1 mark for a balanced comment (e.g., marginal improvement, need for continued monitoring). [4 marks]

Section D: Additional Practice (10 marks)

9. Define the term "inventory" in the context of financial accounting.

Answer: Inventory refers to goods held by a business for resale, or materials and supplies to be consumed in the production process or in the rendering of services.

Marking notes:

Award 1 mark for mentioning "goods held for resale".
Award 1 mark for mentioning "materials/supplies for production or services". [2 marks]

10. Accounting treatment for inventory with NRV lower than cost.

Answer: Inventory should be written down to its net realisable value of $42,000. The loss of$ 3,000 should be recognised as an expense in the income statement. This applies the prudence concept.

Marking notes:

Award 1 mark for stating inventory should be reported at $42,000.
Award 1 mark for explaining the write-down or loss recognition. [2 marks]

11. Effect of overstatement of closing inventory.

Answer: (a) Cost of sales: Understated (because closing inventory is deducted in calculating cost of sales). (b) Gross profit: Overstated (because cost of sales is understated, leading to higher gross profit).

Marking notes:

Award 1 mark for each correct effect (understated/overstated).
Award 0 marks if no direction of effect is given. [2 marks]

12. Consistency concept and inventory valuation methods.

Answer: The consistency concept requires that once a business chooses an inventory valuation method (e.g., FIFO or AVCO), it should apply the same method from period to period. This ensures comparability of financial statements over time. A change is only allowed if there is a valid reason and the change is disclosed.

Marking notes:

Award 1 mark for stating that the same method should be used consistently.
Award 1 mark for explaining the purpose (comparability) or the exception (disclosure required if changed). [2 marks]

13. FIFO cost of sales during rising prices.

Answer: Cost of sales will be lower under FIFO compared to AVCO. This is because FIFO assigns the oldest (and in a period of rising prices, the lowest) costs to cost of sales, while AVCO averages all costs, including the newer, higher costs.

Marking notes:

Award 1 mark for stating "lower".
Award 1 mark for explaining that FIFO uses older/lower costs. [2 marks]

14. FIFO closing inventory for Product Z.

Answer: Total units available = 80 + 120 = 200 units Units sold = 150 units Closing inventory units = 200 − 150 = 50 units Under FIFO, closing inventory consists of the most recent purchases: 50 units from 10 May purchase @ $5.50 = **$ 275**

Marking notes:

Award 1 mark for correct closing inventory units (50).
Award 1 mark for correct valuation ($275). [2 marks]

15. Formula for inventory turnover ratio.

Answer: Inventory turnover ratio = Cost of sales ÷ Average inventory

Marking notes:

Award 2 marks for the correct formula.
Award 1 mark if "Cost of sales" or "Average inventory" is correctly stated but the formula is incomplete. [2 marks]

16. Calculate inventory turnover ratio.

Answer: Inventory turnover = $200,000 ÷$ 40,000 = 5 times

Marking notes:

Award 1 mark for correct formula or method.
Award 1 mark for correct answer (5 times). [2 marks]

17. Why a high inventory turnover ratio is favourable.

Answer: A high inventory turnover ratio indicates that inventory is being sold quickly, which reduces holding costs (storage, insurance), minimises the risk of obsolescence or damage, and improves cash flow. It suggests efficient inventory management.

Marking notes:

Award 1 mark for mentioning faster sales or reduced holding costs.
Award 1 mark for mentioning reduced obsolescence risk or improved cash flow. [2 marks]

18. Inventory valuation with NRV lower than cost.

Answer: Inventory should be reported at $9,500. The accounting concept applied is the prudence concept (or lower of cost and net realisable value).

Marking notes:

Award 1 mark for correct value ($9,500).
Award 1 mark for naming the prudence concept (or lower of cost and NRV). [2 marks]

19. Disadvantage of FIFO during rising prices.

Answer (any one of the following):

FIFO results in higher reported profits, which may lead to higher tax liabilities.
Closing inventory may be valued at older, outdated costs, not reflecting current market values.
Cost of sales is understated compared to current costs, potentially misleading users of financial statements.

Marking notes:

Award 2 marks for a clear, valid disadvantage with brief explanation.
Award 1 mark for a valid disadvantage stated without explanation. [2 marks]

20. Calculate cost of sales from revenue and gross profit margin.

Answer: Gross profit = 20% × $500,000 =$ 100,000 Cost of sales = Revenue − Gross profit = $500,000 −$ 100,000 = $400,000

Marking notes:

Award 1 mark for calculating gross profit ($100,000).
Award 1 mark for correct cost of sales ($400,000).
Alternative method: Cost of sales = 80% × $500,000 =$ 400,000 (award full marks). [2 marks]

END OF ANSWER KEY