O Level Principles of Accounts Inventory Costing Quiz

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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.

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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. 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 $8,000 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

9. Using the FIFO (First-In, First-Out) method, calculate the value of the closing inventory as at 31 October. [4]
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10. Using the FIFO method, calculate the Cost of Sales for the 25 units sold on Oct 20. [3]
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11. 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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12. Using the AVCO method, calculate the value of the closing inventory as at 31 October. [4]
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13. 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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14. In a period of falling prices, which method results in a lower Cost of Sales? Explain why. [3]
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15. 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

16. Calculate the Inventory Turnover Ratio if the Cost of Sales is $120,000 and the Average Inventory is$20,000. [2]
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17. Using the answer from Question 16, calculate the Days Sales in Inventory. (Use 365 days). [2]
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18. 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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19. Explain how a high level of closing inventory affects the liquidity of a business. [3]
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20. 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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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 +$12,000 - $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 =$45 - $5 =$40. Value = $40 (the lower of the two). [2]
5. Prudence Concept. [1]
6. $45,000 =$8,000 + Purchases - $6,000$\rightarrow$Purchases =$45,000 - $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

9. FIFO Closing Inventory:
   • Total units = 10 + 20 + 15 = 45 units.
   • Sold = 25 units. Remaining = 20 units.
   • FIFO assumes newest units remain: 15 units @ $25 + 5 units @$22 = $375 +$110 = $485. [4]
10. FIFO Cost of Sales (25 units):
    • 10 units @ $20 =$200
    • 15 units @ $22 =$330
    • Total = $530. [3]
11. AVCO Average Cost (Oct 10):
    • Total Cost = (10 * 20) + (20 * 22) = 200 + 440 = $640.
    • Total Units = 30.
    • Average = $640 / 30 = **$21.33 per unit**. [3]
12. AVCO Closing Inventory:
    • After sale of 25 units, 5 units remain from the first batch @ $21.33 =$106.65.
    • Plus Oct 25 purchase: 15 units @ $25 =$375.
    • Total = $106.65 +$375 = $481.65. [4]
13. FIFO. Because FIFO assumes the oldest (cheaper) items are sold first, the closing inventory consists of the most recent (more expensive) purchases. [3]
14. 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]
15. 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

16. $120,000 /$20,000 = 6 times. [2]
17. 365 / 6 = 60.83 days. [2]
18. (1) Poor sales performance/slow-moving stock. (2) Overstocking/poor inventory management. [2]
19. 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]
20. 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]