O Level Principles of Accounts Inventory Costing Quiz

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

Total Marks: 50

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Section A: Multiple Choice & Short Concepts (10 Marks)

1. B (Prudence)

• Reasoning: Prudence ensures assets are not overstated. Inventory is valued at the lower of cost and NRV to prevent overstatement of profit and assets.

2. A (FIFO)

• Reasoning: In rising prices, the earliest (cheaper) goods are sold first, leaving the latest (more expensive) goods in closing inventory. Thus, FIFO yields higher closing inventory value.

3. C (Every time a purchase is made)

• Reasoning: In perpetual AVCO, a new weighted average is calculated after every purchase to determine the cost of subsequent sales.

4. A (The consignor)

• Reasoning: Legal ownership remains with the consignor until the goods are sold by the consignee.

5. B (Overstated by $500)

• Reasoning: Cost of Sales = Opening Inv + Purchases - Closing Inv. If Closing Inv is higher, Cost of Sales is lower, making Gross Profit higher.

6. C (Storage costs for finished goods awaiting sale)

• Reasoning: Storage costs for finished goods are selling/distribution expenses, not part of the cost of bringing inventory to its present location and condition. Import duties, carriage inwards, and direct labour are included.

7. B (Selling price less costs to complete and sell)

• Reasoning: This is the standard definition of Net Realizable Value.

8. A (Higher than under AVCO)

• Reasoning: In falling prices, FIFO sells the older (higher cost) goods first. AVCO averages the high and low costs. Therefore, FIFO Cost of Sales is higher.

9. C (Calculating the closing inventory figure incorrectly)

• Reasoning: Closing inventory is adjusted in the Trading Account/Income Statement but is not a double-entry ledger balance in the Trial Balance (unless using a perpetual system where it's an asset account, but typically in O-Level context, the adjustment figure is derived outside the TB). However, strictly speaking, if the Inventory Account balance is wrong in a perpetual system, the TB disagrees. But usually, "Closing Inventory" in O-Level questions refers to the adjustment figure. Let's look at the other options: A (Omission) - TB agrees. B (Prime Entry Error) - TB agrees (double entry still balances). D (Commission) - TB agrees. C is the only one that typically involves a figure derived outside the double-entry ledger checks or a suspense account situation if the asset account is forced. Correction for O-Level Context: Usually, Closing Inventory is not in the Trial Balance. It is an adjustment. If the value is wrong, the Financial Statements are wrong, but the Trial Balance (which lists ledger balances) might still balance if the Inventory Ledger Account wasn't updated yet. However, if we assume a perpetual system where Inventory is a ledger account, an incorrect balance causes a disagreement if not matched by an entry. Among the choices, A, B, and D definitely do not affect the TB agreement. C is the most likely candidate for a discrepancy if the asset account is included in the TB.

10. C (Current Asset)

• Reasoning: Inventory is expected to be sold within one year.

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Section B: FIFO and AVCO Calculations (24 Marks)

11. FIFO Valuation

(a) Closing Inventory Value

• Total Units Available: $100 + 200 + 100 = 400$ units.
• Total Units Sold: $150 + 180 = 330$ units.
• Closing Units: $400 - 330 = 70$ units.
• Under FIFO, closing inventory consists of the most recent purchases.
• The last purchase was 100 units @ $12.00.
• We have 70 units remaining, all from this batch.
• Value = 70 \text{ units} \times \12.00 = $840$.
• [4 marks]: 1 mark for identifying remaining units (70), 1 mark for identifying correct batch (last purchase), 1 mark for calculation, 1 mark for final answer.

(b) Cost of Sales

• Method 1: Opening Inv + Purchases - Closing Inv
  • Opening: 100 \times 10 = \1,000$
  • Purchases: (200 \times 11) + (100 \times 12) = \2,200 + $1,200 = $3,400$
  • Goods Available for Sale: \4,400$
  • Less Closing Inv: \840$
  • Cost of Sales: \4,400 - $840 = $3,560$.
• Method 2: Sum of specific costs sold
  • Sale 1 (150 units): 100 @ $10 + 50 @$11 = $1,000 +$550 = $1,550
  • Sale 2 (180 units): 150 @ $11 (remaining from 2nd batch) + 30 @$12 = $1,650 +$360 = $2,010
  • Total COS: $1,550 +$2,010 = $3,560.
• [2 marks]: 1 mark for workings, 1 mark for correct answer.

12. AVCO (Perpetual) Valuation

(a) Weighted Average Cost after 5 March Purchase

• Opening: 100 units @ $10.00 =$1,000
• Purchase: 200 units @ $11.00 =$2,200
• Total Value: $3,200
• Total Units: 300
• Average Cost: \3,200 / 300 = $10.666...$
• Answer: $10.67 (rounded to 2 d.p.)
• [2 marks]: 1 mark for total value/units, 1 mark for correct rounded answer.

(b) Closing Inventory Value (Perpetual AVCO)

• 12 Mar Sale (150 units):
  • Cost of Sale: 150 \times \10.666... = $1,600$
  • Remaining Units: $300 - 150 = 150$ units.
  • Remaining Value: \3,200 - $1,600 = $1,600$(or$150 \times 10.666...$).
• 20 Mar Purchase (100 units @ $12.00):
  • New Units: $150 + 100 = 250$ units.
  • New Value: \1,600 + (100 \times 12) = $1,600 + $1,200 = $2,800$.
  • New Average Cost: \2,800 / 250 = $11.20$.
• 28 Mar Sale (180 units):
  • Cost of Sale: 180 \times \11.20 = $2,016$.
  • Remaining Units: $250 - 180 = 70$ units.
  • Remaining Value: 70 \times \11.20 = $784$.
• Closing Inventory Value: $784.
• [6 marks]: 1 mark for avg cost after 1st purchase, 1 mark for value after 1st sale, 1 mark for new total value after 2nd purchase, 1 mark for new avg cost, 1 mark for final units, 1 mark for final value.

13. Comparison of Methods

(a) Gross Profit (FIFO)

• Cost of Sales = Opening ($5,000) + Purchases ($45,000) - Closing ($8,000) =$42,000.
• Gross Profit = Revenue ($80,000) - COS ($42,000) = $38,000.
• [2 marks]

(b) Gross Profit (AVCO)

• Cost of Sales = Opening ($5,000) + Purchases ($45,000) - Closing ($7,200) =$42,800.
• Gross Profit = Revenue ($80,000) - COS ($42,800) = $37,200.
• [2 marks]

(c) Explanation

• In a period of rising prices, FIFO assigns older, lower costs to Cost of Sales, resulting in lower COS and higher Gross Profit. AVCO averages the costs, resulting in a higher COS (compared to FIFO) and lower Gross Profit.
• [2 marks]: 1 mark for referencing rising prices/cost flow, 1 mark for linking to profit difference.

14. Inventory Account (FIFO)

Inventory Account

Date	Details	$	Date	Details	$
Mar 1	Balance b/d	1,000	Mar 12	Cost of Sales	1,550
Mar 5	Bank/Payables	2,200	Mar 28	Cost of Sales	2,010
Mar 20	Bank/Payables	1,200	Mar 31	Balance c/d	840
		4,400			4,400
Apr 1	Balance b/d	840

• [4 marks]: 1 mark for correct format (T-account), 1 mark for correct debits (Op Bal + Purchases), 1 mark for correct credits (COS + Cl Bal), 1 mark for balancing. Note: COS figures must match Q11(b) workings ($1,550 +$2,010 = $3,560).

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Section C: Adjustments and Analysis (16 Marks)

15. Lower of Cost and NRV

• Model A: Cost $400 < NRV$420 -> Use **$400**. Value:$10 \times 400 = $4,000$.
• Model B: Cost $350 > NRV$330 -> Use **$330**. Value:$15 \times 330 = $4,950$.
• Model C: Cost $500 < NRV$510 -> Use **$500**. Value:$8 \times 500 = $4,000$.
• Model D: Cost $200 > NRV$180 -> Use **$180**. Value:$20 \times 180 = $3,600$.
• Total Inventory Value = 4,000 + 4,950 + 4,000 + 3,600 = \mathbf{\16,550}$.
• [4 marks]: 1 mark for correct selection of lower value for each item, 1 mark for total calculation. (Deduct 0.5 for each wrong item selection).

16. Impact of Errors

(a) Net Profit is Overstated by $2,000.

• Reasoning: Closing Inv overstated by $2,000 -> COS understated by$2,000 -> Profit overstated by $2,000.
• [1 mark]

(b) Current Assets are Overstated by $2,000.

• Reasoning: Inventory is a current asset.
• [1 mark]

(c) Net Profit of the following year is Understated by $2,000.

• Reasoning: This year's overstated closing inventory becomes next year's overstated opening inventory. Higher Opening Inv -> Higher COS -> Lower Profit.
• [1 mark]

17. Ratio Analysis

(a) Inventory Turnover Ratio (2025)

• Average Inventory = (Opening $50,000 + Closing$70,000) / 2 = $60,000.
• Cost of Sales = $380,000.
• Inventory Turnover = $380,000 / 60,000 = \mathbf{6.33}$ times.
• [2 marks]: 1 mark for avg inv, 1 mark for final ratio.

(b) Days Sales in Inventory (2025)

• Days = 365 / Inventory Turnover
• Days = $365 / 6.333... = 57.63...$
• Answer: 57.6 days.
• [2 marks]: 1 mark for formula/application, 1 mark for correct rounding.

(c) Comment

• GreenGrocers takes 57.6 days to sell inventory, which is significantly higher than the industry average of 45 days. This indicates inefficiency in inventory management. They may be holding excess stock, facing obsolescence, or having slow sales. This ties up cash that could be used elsewhere.
• [2 marks]: 1 mark for comparison (higher/slower), 1 mark for implication (inefficiency/cash flow impact).

18. Conceptual Application (AVCO vs FIFO)

• Reason 1: Smoothing Effect: AVCO smooths out price fluctuations, providing a more stable cost of sales and profit figure, which is useful for management planning.
• Reason 2: Administrative Simplicity (in some systems): For businesses with large volumes of identical items where tracking specific batches (FIFO) is difficult or costly, AVCO is easier to apply, especially if using a periodic system.
• Reason 3: Middle-ground valuation: It represents a middle ground between the extreme valuations of FIFO and LIFO (if LIFO were permitted), often reflecting the actual physical flow of mixed goods.
• [3 marks]: 1.5 marks per valid reason with explanation.

19. Consignment Inventory

• Alpha Ltd is the consignor (owner).
• Unsold goods = 40% of $5,000 =$2,000.
• Alpha's own inventory = $20,000.
• Total Inventory = $20,000 +$2,000 = $22,000.
• [2 marks]: 1 mark for calculating unsold consignment stock, 1 mark for total.

20. Decision Making

• Action 1: Reduce Prices / Sales Promotion: To clear old stock and increase turnover, thereby generating cash.
• Action 2: Review Purchasing Policy: Order smaller quantities more frequently to avoid overstocking and reduce holding costs.
• Action 3: Discontinue Slow-Moving Items: Stop stocking products that do not sell well.
• [2 marks]: 1 mark per valid, distinct action.