Secondary 4 Principles of Accounts Semestral Assessment 1 (Mid-Year) Paper 1

TuitionGoWhere Practice Paper - Principles of Accounts Secondary 4

SA1 Examination - Version 1 - ANSWER KEY

TuitionGoWhere Secondary School (AI)

---

Section A: Short Answer Questions (10 marks)

Question 1 (2 marks)

Answer: Inventory should be valued at the lower of cost and net realisable value (NRV).

Reason: This basis is used to comply with the prudence/conservatism concept, which requires that assets should not be overstated and losses should be recognised as soon as they are foreseen. By valuing inventory at the lower amount, the business avoids overstating its assets and profits.

Marking scheme:

• 1 mark for stating "lower of cost and net realisable value"
• 1 mark for explaining the prudence concept or avoiding overstatement of assets/profits

---

Question 2 (2 marks)

Answer:

• Cash sale: Revenue is recognised and cash is received at the point of sale. The transaction is immediate.
• Credit sale: Revenue is recognised at the point of sale, but cash is received at a later date. A receivable is created until payment is received.

Marking scheme:

• 1 mark for explaining cash sale (immediate recognition and receipt)
• 1 mark for explaining credit sale (recognition at sale, receipt later)

---

Question 3 (2 marks)

Answer (any two of the following):

1. Insufficient funds in the drawer's bank account.
2. Signature mismatch or missing signature on the cheque.
3. The cheque is post-dated or stale (more than 6 months old).
4. There are alterations on the cheque that are not authenticated.
5. The drawer's account has been closed.
6. A stop payment order has been issued by the drawer.

Marking scheme:

• 1 mark for each valid reason (maximum 2 marks)

---

Question 4 (2 marks)

Answer: If closing inventory is overstated by $3,500, then:

• Cost of sales is understated by $3,500 (because closing inventory is deducted in the COGS calculation).
• Therefore, gross profit is overstated by $3,500.

Marking scheme:

• 1 mark for stating that gross profit is overstated
• 1 mark for stating the correct amount ($3,500) or explaining the relationship between closing inventory and COGS

---

Question 5 (2 marks)

Answer: Net realisable value (NRV) is the estimated selling price of inventory in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale (e.g., marketing, distribution costs).

Marking scheme:

• 1 mark for "estimated selling price"
• 1 mark for "less estimated costs to complete and sell"

---

Section B: Calculation Questions (20 marks)

Question 6 (4 marks)

Calculation of Cost of Sales:

	$
Opening inventory	12,400
Add: Purchases	85,600
Less: Purchases returns	(2,100)
Add: Carriage inwards	1,800
Net purchases	85,300
Cost of goods available for sale	97,700
Less: Closing inventory	(14,200)
Cost of sales	83,500

Answer: $83,500

Marking scheme:

• 1 mark for correct treatment of purchases returns
• 1 mark for correct treatment of carriage inwards
• 1 mark for correct formula application (opening + net purchases - closing)
• 1 mark for correct final answer ($83,500)

---

Question 7 (4 marks)

(a) Gross profit: Revenue - Cost of sales = $240,000 -$156,000 = $84,000 (1 mark)

(b) Gross profit margin: (Gross profit ÷ Revenue) × 100% = ($84,000 ÷$240,000) × 100% = 35.0% (1 mark)

(c) Inventory turnover rate: Average inventory = (Opening + Closing) ÷ 2 = ($18,000 +$22,000) ÷ 2 = $20,000 Inventory turnover = Cost of sales ÷ Average inventory =$156,000 ÷ $20,000 = 7.8 times (2 marks)

Marking scheme:

• (a) 1 mark for correct gross profit ($84,000)
• (b) 1 mark for correct gross profit margin (35.0%)
• (c) 1 mark for correct average inventory calculation, 1 mark for correct turnover rate (7.8 times)

---

Question 8 (4 marks)

FIFO Method - Closing Inventory Valuation:

Total units available = 200 + 300 + 400 = 900 units Total units sold = 250 + 350 = 600 units Closing inventory units = 900 - 600 = 300 units

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

• 300 units from Jan 22 purchase @ $17.50 =$5,250.00

Answer: $5,250.00

Marking scheme:

• 1 mark for correct calculation of closing inventory units (300)
• 1 mark for identifying that FIFO uses most recent purchases
• 1 mark for correct cost per unit ($17.50)
• 1 mark for correct final answer ($5,250.00)

---

Question 9 (4 marks)

AVCO Method - Closing Inventory Valuation:

Total cost of goods available:

• Opening: 200 × $15.00 =$3,000
• Jan 8: 300 × $16.00 =$4,800
• Jan 22: 400 × $17.50 =$7,000
• Total cost = $3,000 +$4,800 + $7,000 =$14,800
• Total units = 200 + 300 + 400 = 900 units

Weighted average cost per unit = $14,800 ÷ 900 = **$16.44** (to 2 d.p.)

Closing inventory units = 900 - 600 = 300 units Closing inventory value = 300 × $16.44 = **$4,932.00**

Answer: $4,932.00

Marking scheme:

• 1 mark for correct total cost ($14,800)
• 1 mark for correct weighted average cost per unit ($16.44)
• 1 mark for correct closing inventory units (300)
• 1 mark for correct final answer ($4,932.00)

---

Question 10 (4 marks)

Adjusted Gross Profit Calculation:

	$
Reported gross profit	95,000
Add: Closing inventory understated (increases gross profit)	+4,500
Add: Purchases overstated ($8,200 -$2,800 = $5,400 overstatement)	+5,400
Less: Sales returns omitted (reduces gross profit)	-1,600
Adjusted gross profit	103,300

Answer: $103,300

Marking scheme:

• 1 mark for correct adjustment for closing inventory understatement (+$4,500)
• 1 mark for correct calculation of purchases overstatement ($5,400) and adjustment
• 1 mark for correct adjustment for sales returns (-$1,600)
• 1 mark for correct final answer ($103,300)

---

Section C: Structured Response Questions (30 marks)

Question 11 (8 marks)

Silver Star Enterprise Trading Portion of Income Statement for the year ended 31 December 2024

	$	$
Revenue		320,000
Less: Sales returns		(4,000)
Net revenue		316,000
Opening inventory	25,000
Add: Purchases	180,000
Less: Purchases returns	(3,500)
Add: Carriage inwards	2,400
Net purchases		178,900
Cost of goods available for sale		203,900
Less: Closing inventory		(28,500)
Cost of sales		(175,400)
Gross profit		140,600

Marking scheme:

• 1 mark for correct heading (business name, statement title, date)
• 1 mark for correct treatment of sales returns
• 1 mark for correct treatment of purchases returns
• 1 mark for correct treatment of carriage inwards
• 1 mark for correct inclusion of opening inventory
• 1 mark for correct inclusion of closing inventory
• 1 mark for correct cost of sales ($175,400)
• 1 mark for correct gross profit ($140,600)

---

Question 12 (8 marks)

(a) Gross profit margin:

Crystal Trading: Gross profit = $500,000 -$350,000 = $150,000 Gross profit margin = ($150,000 ÷ $500,000) × 100% = 30.0%

Diamond Trading: Gross profit = $480,000 -$312,000 = $168,000 Gross profit margin = ($168,000 ÷ $480,000) × 100% = 35.0%

(b) Inventory turnover rate:

Crystal Trading: Average inventory = ($40,000 +$45,000) ÷ 2 = $42,500 Inventory turnover =$350,000 ÷ $42,500 = 8.2 times

Diamond Trading: Average inventory = ($35,000 +$38,000) ÷ 2 = $36,500 Inventory turnover =$312,000 ÷ $36,500 = 8.5 times

(c) Comparison and commentary:

Diamond Trading has a slightly higher inventory turnover rate (8.5 times) compared to Crystal Trading (8.2 times). This indicates that Diamond Trading is converting its inventory into sales more quickly.

Possible reasons for the difference:

• Diamond Trading may have more efficient inventory management practices.
• Diamond Trading may have a different product mix with faster-moving items.
• Diamond Trading may offer more competitive pricing, leading to quicker sales.
• Diamond Trading may have better supplier relationships allowing more frequent, smaller deliveries.

A higher inventory turnover generally suggests better efficiency, as it reduces holding costs and the risk of inventory obsolescence. However, both businesses have relatively similar turnover rates, suggesting comparable operational efficiency.

Marking scheme:

• (a) 1 mark for each correct gross profit margin (2 marks total)
• (b) 1 mark for each correct inventory turnover rate (2 marks total)
• (c) 1 mark for identifying which business has higher turnover
• 1 mark for interpreting the meaning of higher turnover
• 1 mark for providing one valid reason
• 1 mark for providing a second valid reason or linking to business implications

---

Question 13 (8 marks)

(a) Gross profit margin:

2023: ($140,000 ÷$400,000) × 100% = 35.0% 2024: ($135,000 ÷$450,000) × 100% = 30.0%

(b) Inventory turnover rate:

2023: Average inventory = ($30,000 +$32,000) ÷ 2 = $31,000 Inventory turnover =$260,000 ÷ $31,000 = 8.4 times

2024: Average inventory = ($32,000 +$38,000) ÷ 2 = $35,000 Inventory turnover =$315,000 ÷ $35,000 = 9.0 times

(c) Possible reasons for decreasing gross profit margin despite increasing revenue:

1. Increased cost of purchases: The business may be paying higher prices to suppliers without proportionally increasing selling prices. This is supported by the increase in cost of sales from $260,000 to$315,000 (a 21.2% increase) while revenue only increased by 12.5%.

2. Change in sales mix: The business may have sold more lower-margin products in 2024 compared to 2023. Even though total revenue increased, the proportion of sales from high-margin products may have decreased.

3. Increased competition: The business may have reduced selling prices to remain competitive, which would increase sales volume (and revenue) but reduce the gross profit margin on each unit sold.

4. Inventory management issues: The increase in closing inventory from $32,000 to$38,000 suggests the business is holding more stock, which could indicate slower-moving inventory or overstocking, potentially leading to markdowns.

Marking scheme:

• (a) 1 mark for each correct gross profit margin (2 marks total)
• (b) 1 mark for each correct inventory turnover rate (2 marks total)
• (c) 1 mark for each valid reason with explanation (2 marks per reason, maximum 4 marks)
  • Reasons must be clearly explained and linked to the scenario
  • Accept any two valid reasons with proper justification

---

Question 14 (6 marks)

(a) Effect of FIFO vs AVCO on gross profit during rising prices:

During a period of rising prices:

• FIFO assigns the oldest (lower) costs to cost of sales, resulting in a higher gross profit. Closing inventory is valued at more recent (higher) prices.
• AVCO averages all costs, resulting in a cost of sales that falls between the oldest and newest prices. This produces a moderate gross profit that is lower than FIFO but higher than what LIFO would produce.

Therefore, in a period of rising prices, FIFO will report a higher gross profit compared to AVCO.

(b) Advantages and disadvantages of AVCO:

Advantage:

• AVCO smooths out price fluctuations over time, providing a more stable and consistent measure of inventory cost and gross profit. This reduces the impact of short-term price volatility on reported profits.

Disadvantage:

• AVCO requires continuous recalculation of the weighted average cost after each purchase, which can be more complex and time-consuming to compute, especially for businesses with frequent inventory purchases.

Marking scheme:

• (a) 1 mark for explaining FIFO effect (higher gross profit)
• 1 mark for explaining AVCO effect (moderate gross profit)
• 1 mark for clear comparison between the two methods
• (b) 1 mark for a valid advantage with explanation
• 1 mark for a valid disadvantage with explanation
• 1 mark for overall clarity and relevance to the scenario

---

END OF ANSWER KEY

Total marks: 60