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O Level Principles of Accounts Inventory Costing Quiz

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O Level Principles of Accounts AI Generated Generated by Gemma 4 31B Updated 2026-06-03
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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. Show all workings clearly for calculation questions. Use a calculator where necessary.

Section A: Basic Concepts and Calculations (Questions 1-8)

Focus: Cost of Sales, Ending Inventory, and Basic Valuation

  1. Define "Cost of Sales" and state its formula. [2]
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  2. A business has the following data for the month of May:

    • Opening Inventory: $4,500
    • Purchases: $12,000
    • Closing Inventory: $3,200 Calculate the Cost of Sales for May. [2]
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  3. Explain the "Lower of Cost and Net Realisable Value (NRV)" rule. [2]
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  4. An item of inventory cost 50.Itsestimatedsellingpriceis50. Its estimated selling price is 45, and the cost to complete and sell it is $5. Determine the value at which this item should be recorded in the Statement of Financial Position. [2]
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  5. State the accounting concept that justifies valuing inventory at the lower of cost and NRV. [1]
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  6. A trader has opening inventory of 8,000andclosinginventoryof8,000 and closing inventory of 6,000. If the Cost of Sales was $45,000, calculate the total purchases for the period. [2]
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  7. Distinguish between "Periodic Inventory System" and "Perpetual Inventory System". [2]
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  8. If closing inventory is overstated by $1,000, state the effect on the Gross Profit for the period. [1]
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Section B: Inventory Valuation Methods (Questions 9-15)

Focus: FIFO and AVCO

Scenario for Questions 9-12: A business sells a specific model of headphones. The following transactions occurred in October:

  • Oct 1: Opening Inventory: 10 units @ $20 each
  • Oct 10: Purchased 20 units @ $22 each
  • Oct 20: Sold 25 units
  • Oct 25: Purchased 15 units @ $25 each

  1. Using the FIFO (First-In, First-Out) method, calculate the value of the closing inventory as at 31 October. [4]
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  2. Using the FIFO method, calculate the Cost of Sales for the 25 units sold on Oct 20. [3]
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  3. Using the AVCO (Weighted Average Cost) method, calculate the average cost per unit after the purchase on Oct 10 (before the sale on Oct 20). [3]
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  4. Using the AVCO method, calculate the value of the closing inventory as at 31 October. [4]
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  5. In a period of rising prices, which method (FIFO or AVCO) generally results in a higher closing inventory value? Explain why. [3]
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  6. In a period of falling prices, which method results in a lower Cost of Sales? Explain why. [3]
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  7. State one advantage of using the AVCO method over the FIFO method. [2]
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Section C: Analysis and Application (Questions 16-20)

Focus: Ratios and Decision Making

  1. Calculate the Inventory Turnover Ratio if the Cost of Sales is 120,000andtheAverageInventoryis120,000 and the Average Inventory is 20,000. [2]
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  2. Using the answer from Question 16, calculate the Days Sales in Inventory. (Use 365 days). [2]
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  3. A business has a very high "Days Sales in Inventory" compared to the industry average. State two possible reasons for this. [2]
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  4. Explain how a high level of closing inventory affects the liquidity of a business. [3]
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  5. A manager suggests switching from FIFO to AVCO to "smooth out" the impact of price fluctuations on profit. Do you agree with this strategy? Justify your answer. [4]
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Answers

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Answer Key - O-Level Principles of Accounts Quiz (Inventory Costing)

Section A

  1. Definition: The total direct cost of the goods sold by a business during a specific period. Formula: Opening Inventory + Purchases - Closing Inventory. [2]
  2. 4,500+4,500 + 12,000 - 3,200=∗∗3,200 = **13,300**. [2]
  3. Inventory must be recorded at whichever is lower: the original cost of purchase or the estimated selling price minus costs to complete/sell (NRV). This prevents assets from being overstated. [2]
  4. Cost = 50;NRV=50; NRV = 45 - 5=5 = 40. Value = $40 (the lower of the two). [2]
  5. Prudence Concept. [1]
  6. 45,000=45,000 = 8,000 + Purchases - 6,0006,000 \rightarrowPurchases=Purchases =45,000 - 2,000=∗∗2,000 = **43,000**. [2]
  7. Periodic: Inventory is counted physically at the end of the period to determine COGS. Perpetual: Inventory records are updated continuously after every purchase and sale. [2]
  8. Closing inventory is subtracted from COGS. If it is overstated, COGS is understated, therefore Gross Profit is overstated. [1]

Section B

  1. FIFO Closing Inventory:
    • Total units = 10 + 20 + 15 = 45 units.
    • Sold = 25 units. Remaining = 20 units.
    • FIFO assumes newest units remain: 15 units @ 25+5units@25 + 5 units @ 22 = 375+375 + 110 = $485. [4]
  2. FIFO Cost of Sales (25 units):
    • 10 units @ 20=20 = 200
    • 15 units @ 22=22 = 330
    • Total = $530. [3]
  3. AVCO Average Cost (Oct 10):
    • Total Cost = (10 * 20) + (20 * 22) = 200 + 440 = $640.
    • Total Units = 30.
    • Average = 640/30=∗∗640 / 30 = **21.33 per unit**. [3]
  4. AVCO Closing Inventory:
    • After sale of 25 units, 5 units remain from the first batch @ 21.33=21.33 = 106.65.
    • Plus Oct 25 purchase: 15 units @ 25=25 = 375.
    • Total = 106.65+106.65 + 375 = $481.65. [4]
  5. FIFO. Because FIFO assumes the oldest (cheaper) items are sold first, the closing inventory consists of the most recent (more expensive) purchases. [3]
  6. FIFO. In falling prices, the oldest (more expensive) items are sold first, but the closing inventory is valued at the newest (cheaper) prices. Wait—correction: In falling prices, FIFO sells the most expensive first, resulting in higher COGS. AVCO would result in a lower COGS compared to FIFO in falling prices. [3]
  7. It reduces the volatility of profit figures by averaging out price spikes; it is simpler for businesses with large volumes of identical items where tracking batches is impossible. [2]

Section C

  1. 120,000/120,000 / 20,000 = 6 times. [2]
  2. 365 / 6 = 60.83 days. [2]
  3. (1) Poor sales performance/slow-moving stock. (2) Overstocking/poor inventory management. [2]
  4. High closing inventory increases the Current Ratio (Current Assets ↑\uparrow), but it decreases the Quick Ratio (since inventory is excluded). It may indicate "trapped" cash, reducing the business's ability to meet immediate cash obligations. [3]
  5. Agree. AVCO blends the costs of different batches. During price volatility, FIFO can cause "profit jumps" as old cheap stock is cleared and new expensive stock is recorded. AVCO provides a more stable, averaged cost of sales, leading to smoother profit trends. [4]