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O Level Principles of Accounts Inventory Costing Quiz

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O Level Principles of Accounts From Real Exams Generated by Gemma 4 31B Updated 2026-06-03
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Questions

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O-Level Principles of Accounts Quiz - Inventory Costing

Name: ____________________ Class: ____________________ Date: ____________________ Score: ________ / 45

Duration: 60 Minutes
Total Marks: 45
Instructions: Answer all questions. Show all workings clearly. Round all calculations to two decimal places where applicable.

Section A: Basic Calculations (Questions 1-8)

  1. Define the term 'Closing Inventory'. [1]
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  2. Calculate the cost of sales for Zenith Trading for the month of March 2024. [2]

    • Opening Inventory: $12,000
    • Purchases: $45,000
    • Closing Inventory: $14,500
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  3. A business has a Cost of Sales of 120,000andanAverageInventoryof120,000 and an Average Inventory of 15,000. Calculate the Inventory Turnover Ratio. [1]
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  4. Using the answer from Question 3, calculate the Days Sales in Inventory. [2]
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  5. 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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  6. Explain why a business would value inventory at NRV instead of cost. [2]
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  7. Calculate the ending inventory as at 31 December 2023. [2]

    • Opening Inventory: $8,000
    • Purchases: $22,000
    • Cost of Sales: $18,000
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  8. If a business uses the FIFO method, which units are assumed to be sold first? [1]
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Section B: Application & Analysis (Questions 9-15)

  1. Compare the effects of FIFO and AVCO on the value of closing inventory during a period of rising prices. [3]
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  2. Calculate the Days Sales in Inventory for the two years ended 30 June 2023 and 30 June 2024. [4]

    Item20232024
    Cost of Sales$200,000$240,000
    Opening Inventory$30,000$35,000
    Closing Inventory$35,000$45,000
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  3. Explain how an overstatement of closing inventory affects the gross profit for the period. [2]
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  4. A business has the following inventory movements for May:

    • May 1: Opening Balance 100 units @ $5 each
    • May 10: Purchased 200 units @ $6 each
    • May 20: Sold 150 units Calculate the value of closing inventory using the FIFO method. [3]
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  5. Using the same data as Question 12, calculate the value of closing inventory using the AVCO (Weighted Average) method. [3]
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  6. State two non-accounting factors a business should consider when deciding on its inventory levels. [2]
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  7. Describe the impact on the Statement of Financial Position if inventory is written down to its NRV. [2]
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Section C: Structured & Integrated Tasks (Questions 16-20)

  1. Prepare the Inventory Account (T-account) for Alpha Ltd for the month of January 2024. [4]

    • Jan 1: Balance b/d $5,000
    • Jan 15: Purchases $12,000
    • Jan 31: Closing Inventory $6,500






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  2. A business has a Days Sales in Inventory of 85 days. The industry average is 45 days. Evaluate this result. [3]
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  3. Recommend two actions a business can take to reduce its Days Sales in Inventory. [4]
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  4. Explain the relationship between the Inventory Turnover Ratio and the liquidity of a business. [3]
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  5. A business discovered that closing inventory was understated by $2,000. State the effect of this error on: (a) Gross Profit and (b) Current Assets. [2] (a) _______________________________________________________________________ (b) _______________________________________________________________________

Answers

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O-Level Principles of Accounts Quiz - Inventory Costing (Answers)

  1. Definition: The value of goods remaining unsold at the end of an accounting period. (1m)

  2. Calculation: 12,000+12,000 + 45,000 - 14,500=∗∗14,500 = **42,500** (2m)

  3. Ratio: 120,000/120,000 / 15,000 = 8 times (1m)

  4. Days Sales: 365 / 8 = 45.63 days (2m)

  5. Principle: Prudence Concept. (1m)

  6. Explanation: To ensure assets and profits are not overstated (1m); if the selling price minus costs to sell is lower than what we paid, we must recognize the loss immediately (1m). (2m)

  7. Calculation: 8,000+8,000 + 22,000 - 18,000=∗∗18,000 = **12,000** (2m)

  8. FIFO: The oldest units (first in) are assumed to be sold first. (1m)

  9. Comparison:

    • FIFO: Closing inventory consists of the most recent, higher-priced purchases, leading to a higher closing inventory value (1m).
    • AVCO: Closing inventory is valued at a weighted average, resulting in a value between FIFO and LIFO (1m).
    • Effect: FIFO results in higher reported profit during rising prices (1m). (3m)

  10. Days Sales Calculation:

    • 2023: Avg Inv = (30k+35k)/2 = 32.5k. Ratio = 200k/32.5k = 6.15. Days = 365/6.15 = 59.35 days (2m)
    • 2024: Avg Inv = (35k+45k)/2 = 40k. Ratio = 240k/40k = 6.00. Days = 365/6 = 60.83 days (2m)

  11. Effect: Overstated closing inventory reduces the Cost of Sales (1m), which leads to an overstatement of Gross Profit (1m). (2m)

  12. FIFO Calculation:

    • Total units = 100 + 200 = 300. Sold = 150. Remaining = 150.
    • All 150 remaining units are from the May 10 batch (@ $6).
    • 150 * 6=∗∗6 = **900** (3m)

  13. AVCO Calculation:

    • Total Cost = (100 * 5) + (200 * 6) = 500 + 1200 = $1,700.
    • Total Units = 300.
    • Average Cost = 1,700/300=1,700 / 300 = 5.67 per unit.
    • Closing Inventory = 150 * 5.67=∗∗5.67 = **850.50** (3m)

  14. Non-accounting factors: (Any two) Storage capacity, perishability of goods, lead time from suppliers, market trends/obsolescence. (2m)

  15. SFP Impact: The value of Current Assets (Inventory) will decrease (1m), and the equity/profit will decrease due to the write-down expense (1m). (2m)

  16. Inventory Account:

    • Debit: Balance b/d 5,000;Purchases5,000; Purchases 12,000.
    • Credit: Cost of Sales (balancing figure) 10,500;Balancec/d10,500; Balance c/d 6,500.
    • Balance b/d (next month) $6,500 on Debit side. (4m)

  17. Evaluation: The business is holding inventory for significantly longer than the industry average (1m). This suggests inefficient inventory management or slow-moving stock (1m), which ties up working capital (1m). (3m)

  18. Recommendations:

    • Implement Just-in-Time (JIT) inventory system to reduce stock levels (2m).
    • Offer discounts or promotions to clear slow-moving stock (2m). (4m)

  19. Relationship: A higher inventory turnover ratio means inventory is sold faster (1m). This improves liquidity as cash is recovered more quickly from stock (1m), reducing the need for external short-term financing (1m). (3m)

  20. Error Effect: (a) Gross Profit: Understated (1m) (b) Current Assets: Understated (1m) (2m)