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Secondary 4 Principles of Accounts Semestral Assessment 1 (Mid-Year) Paper 3

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Questions

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TuitionGoWhere Practice Paper - Principles of Accounts Secondary 4

TuitionGoWhere Secondary School (AI)

Subject: Principles of Accounts Level: Secondary 4 Paper: SA1 Practice Paper — Version 3 of 5 Duration: 1 hour 30 minutes Total Marks: 60

Name: ________________________ Class: ________________________ Date: ________________________

Instructions to Candidates

  1. Write your name, class, and date in the spaces provided above.
  2. Answer all questions in the spaces provided.
  3. Show all workings clearly. Marks are awarded for correct method even if the final answer is wrong.
  4. The number of marks for each question or part-question is shown in brackets [ ].
  5. Non-programmable calculators may be used.
  6. Give answers to 2 decimal places unless otherwise stated.

Section A: Short Answer Questions [20 marks]

Answer all questions 1–10. Each question carries 2 marks.

1. State two reasons why a business should value inventory at the lower of cost and net realisable value. [2]

2. Define net realisable value (NRV) in the context of inventory valuation. [2]

3. A business uses the FIFO (First-In, First-Out) method of inventory valuation. During a period of rising prices, state whether the closing inventory value will be higher or lower compared to using the LIFO method. Explain your answer. [2]

4. The following information relates to Tan's Trading for the month of March 2025:

$
Inventory, 1 March 202512,000
Purchases during March48,000
Inventory, 31 March 202515,000

Calculate the cost of sales for March 2025. Show your working. [2]

5. Distinguish between cost of sales and cost of goods sold in the context of a trading business. Are they the same? Explain. [2]

6. State one advantage and one disadvantage of using the weighted average cost method for inventory valuation. [2]

7. On 1 January 2025, a business had 200 units of Product Z in inventory, valued at 8perunit.On15January,itpurchasedafurther300unitsat8 per unit. On 15 January, it purchased a further 300 units at 10 per unit. On 20 January, it sold 250 units.

Using the FIFO method, calculate the cost of the units sold on 20 January. [2]

8. Explain why the prudence concept requires inventory to be valued at the lower of cost and net realisable value. [2]

9. A business discovers that some of its inventory has been damaged. The original cost of the damaged goods is 3,000.Theestimatedsellingpriceis3,000. The estimated selling price is 2,200 and costs to sell are $200.

Calculate the net realisable value of the damaged inventory. [2]

10. State the formula for calculating the inventory turnover rate (in times per year). [2]

Section B: Structured Questions [28 marks]

Answer all questions 11–16.

11. The following information is extracted from the books of Lim's Electronics for the year ended 30 June 2025:

$
Sales250,000
Opening inventory (1 July 2024)30,000
Purchases160,000
Carriage inwards5,000
Closing inventory (30 June 2025)35,000

(a) Prepare a trading account extract to calculate the gross profit for the year ended 30 June 2025. [4]

(b) Calculate the inventory turnover rate (in times) for the year ended 30 June 2025. Show all workings. [3]

(c) Suggest one reason why a high inventory turnover rate is generally considered favourable for a business. [1]

12. Mei Ling runs a clothing boutique. She uses the FIFO method to value her inventory. The following transactions occurred in April 2025:

DateTransactionUnitsCost per unit ($)
1 AprOpening balance10012.00
8 AprPurchased20013.00
15 AprSold180—
22 AprPurchased15014.00
29 AprSold120—

(a) Prepare a FIFO inventory ledger card for April 2025. Show the balance after each transaction. [5]

<image_placeholder> id: Q12-fig1 type: table linked_question: Q12 description: FIFO inventory ledger card template with columns for Date, Receipts (Units, Cost per unit, Total), Issues (Units, Cost per unit, Total), and Balance (Units, Cost per unit, Total). Rows for 1 Apr, 8 Apr, 15 Apr, 22 Apr, 29 Apr. labels: Date, Receipts, Issues, Balance, Units, Cost per unit (),Total(), Total () values: Opening: 100 units @ 12.00;Purchase8Apr:200units@12.00; Purchase 8 Apr: 200 units @ 13.00; Sale 15 Apr: 180 units; Purchase 22 Apr: 150 units @ $14.00; Sale 29 Apr: 120 units must_show: All columns and rows clearly labelled; space for students to fill in calculated values for each row </image_placeholder>

(b) State the value of the closing inventory on 30 April 2025. [1]

13. Raj Trading had the following inventory transactions for Product X during the year ended 31 December 2025:

DateUnitsUnit cost ($)
1 JanOpening inventory5006.00
1 MarPurchased4007.00
1 JunPurchased6008.00
1 SepPurchased3009.00
31 DecClosing inventory350—

During the year, 1,450 units were sold.

(a) Calculate the cost of closing inventory using the weighted average cost method. Show all workings. [4]

(b) Calculate the cost of sales for the year using the weighted average cost method. [2]

14. The following information relates to two businesses, Alpha Trading and Beta Trading, for the year ended 31 March 2025:

Alpha Trading ($)Beta Trading ($)
Cost of sales180,000240,000
Opening inventory25,00040,000
Closing inventory35,00020,000

(a) Calculate the inventory turnover rate for each business. [4]

(b) Which business manages its inventory more efficiently? Explain your answer with reference to your calculations in (a). [2]

15. On 31 December 2025, the inventory of Grace Trading included a batch of goods that had been in storage for over two years. The original cost of this batch was 8,000.Duetochangesinconsumerpreferences,theestimatedsellingpriceisnow8,000. Due to changes in consumer preferences, the estimated selling price is now 5,500. Costs to complete and sell these goods are estimated at $500.

(a) Calculate the net realisable value of this batch of inventory. [2]

(b) State the value at which this batch should be reported in the statement of financial position at 31 December 2025. Explain your answer with reference to an accounting concept. [3]

(c) Calculate the amount of any inventory write-down that should be recorded. State the journal entry (narrations not required). [3]

16. Sam's Stationery had the following information for the year ended 30 September 2025:

$
Sales320,000
Gross profit96,000
Opening inventory28,000
Closing inventory36,000

(a) Calculate the cost of sales. [2]

(b) Calculate the purchases for the year. [2]

(c) Calculate the inventory turnover rate (in times). [2]

Section C: Scenario-Based Question [12 marks]

Answer question 17.

17. Read the following scenario and answer the questions that follow.

Diana runs a small business called Diana's Delights, selling premium cakes and pastries. She has been in operation for three years. Her financial year ends on 31 December.

The following information is available for the year ended 31 December 2025:

$
Sales185,000
Opening inventory (1 Jan 2025)10,000
Purchases72,000
Closing inventory (31 Dec 2025) — at cost14,000

Diana recently attended a business workshop where she learned about inventory management. She is concerned because she noticed that her inventory has been increasing each year. She also discovered that a batch of specialty ingredients (included in closing inventory at cost of 2,500)haspasseditsbest−beforedate.Theseingredientscanstillbesoldbutonlyatareducedpriceof2,500) has passed its best-before date. These ingredients can still be sold but only at a reduced price of 1,800, with selling costs of $150.

Diana's friend, who runs a similar business, has an inventory turnover rate of 8.5 times per year.

(a) Prepare a trading account for Diana's Delights for the year ended 31 December 2025. Show the gross profit. [4]

(b) Calculate the inventory turnover rate for Diana's Delights for the year ended 31 December 2025. Show all workings. [3]

(c) Compare Diana's inventory turnover rate with her friend's rate of 8.5 times. Advise Diana on what this comparison tells her about her inventory management. [2]

(d) Calculate the adjusted closing inventory value after accounting for the out-of-date specialty ingredients. Explain which accounting concept applies. [3]

End of Paper

Summary of Marks

SectionMarks
Section A: Questions 1–1020
Section B: Questions 11–1628
Section C: Question 1712
Total60

Answers

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SA1 Practice Paper — Version 3

Principles of Accounts (Secondary 4) — Answer Key

Section A: Short Answer Questions [20 marks]

1. State two reasons why a business should value inventory at the lower of cost and net realisable value. [2]

Answer:

  • To comply with the prudence concept, which requires that assets are not overstated and losses are anticipated as soon as they are known.
  • To ensure that inventory is not reported at more than its recoverable amount, giving a true and fair view of the business's financial position.

Marking: 1 mark each for any two valid reasons. Accept: prevents overstatement of assets/profits; ensures realistic valuation; complies with prudence concept; avoids showing inventory above what the business can actually recover.

Common mistake: Students may confuse this with the going concern concept. The prudence concept is the key principle here.

2. Define net realisable value (NRV) in the context of inventory valuation. [2]

Answer: Net realisable value is the estimated selling price of inventory less any costs that are necessary to complete the sale (i.e., costs to complete and costs to sell).

Marking: 1 mark for "estimated selling price" and 1 mark for "less costs to complete/sell." Both elements required for full marks.

Common mistake: Students sometimes define NRV as just the selling price without subtracting selling/completion costs.

3. A business uses the FIFO method of inventory valuation. During a period of rising prices, state whether the closing inventory value will be higher or lower compared to using the LIFO method. Explain your answer. [2]

Answer: The closing inventory value under FIFO will be higher than under LIFO.

Explanation: Under FIFO, the oldest (cheapest) costs are assigned to cost of sales first, leaving the newest (most expensive) costs in closing inventory. Under LIFO, the newest (most expensive) costs are assigned to cost of sales, leaving the oldest (cheapest) costs in closing inventory. Therefore, in a period of rising prices, FIFO gives a higher closing inventory value.

Marking: 1 mark for stating "higher" and 1 mark for a correct explanation referencing oldest vs. newest costs.

4. Calculate the cost of sales for March 2025. [2]

Answer:

Cost of Sales=Opening Inventory+Purchases−Closing Inventory\text{Cost of Sales} = \text{Opening Inventory} + \text{Purchases} - \text{Closing Inventory}

Cost of Sales=$12,000+$48,000−$15,000=$45,000\text{Cost of Sales} = \$12{,}000 + \$48{,}000 - \$15{,}000 = \$45{,}000

Marking: 1 mark for correct formula/working, 1 mark for correct final answer ($45,000).

Common mistake: Students may forget to subtract closing inventory or may add it instead.

5. Distinguish between cost of sales and cost of goods sold in the context of a trading business. Are they the same? Explain. [2]

Answer: For a trading business, cost of sales and cost of goods sold are the same thing. Both represent the cost of purchasing the goods that were sold during the accounting period. The formula is:

Cost of Sales=Opening Inventory+Purchases−Closing Inventory\text{Cost of Sales} = \text{Opening Inventory} + \text{Purchases} - \text{Closing Inventory}

(For a manufacturing business, cost of goods sold would include manufacturing costs such as direct materials, direct labour, and factory overheads.)

Marking: 1 mark for stating they are the same for a trading business, 1 mark for explanation or formula.

6. State one advantage and one disadvantage of using the weighted average cost method for inventory valuation. [2]

Answer:

  • Advantage: It smooths out price fluctuations, so the cost assigned to each unit is a fair average and is not affected by the timing of purchases. It is also simple to apply once the average is calculated.
  • Disadvantage: The average cost may not reflect the actual cost of the specific units sold, and it needs to be recalculated after each purchase (in the weighted average method), which can be time-consuming.

Marking: 1 mark for a valid advantage, 1 mark for a valid disadvantage.

7. Using the FIFO method, calculate the cost of the units sold on 20 January. [2]

Answer: Under FIFO, the first units purchased are the first ones sold.

  • 200 units from opening inventory @ 8=8 = 1,600
  • 50 units from 15 January purchase @ 10=10 = 500

Cost of units sold=$1,600+$500=$2,100\text{Cost of units sold} = \$1{,}600 + \$500 = \$2{,}100

Marking: 1 mark for identifying the correct layers (200 from opening, 50 from purchase), 1 mark for correct final answer ($2,100).

Common mistake: Students may use the latest purchase price for all 250 units instead of applying FIFO layering.

8. Explain why the prudence concept requires inventory to be valued at the lower of cost and net realisable value. [2]

Answer: The prudence concept states that a business should not overstate its assets or income. If the net realisable value of inventory falls below its original cost, the business would be overstating its assets (and therefore its profit) if it continued to value the inventory at cost. By valuing inventory at the lower of cost and NRV, the business recognises the loss immediately, ensuring that the financial statements present a cautious and realistic picture.

Marking: 1 mark for referencing the prudence concept, 1 mark for explaining the consequence (prevents overstatement of assets/profits).

9. Calculate the net realisable value of the damaged inventory. [2]

Answer:

NRV=Estimated Selling Price−Costs to Sell\text{NRV} = \text{Estimated Selling Price} - \text{Costs to Sell}

NRV=$2,200−$200=$2,000\text{NRV} = \$2{,}200 - \$200 = \$2{,}000

Marking: 1 mark for correct formula, 1 mark for correct answer ($2,000).

Common mistake: Students may subtract the original cost instead of costs to sell, or may add costs to sell instead of subtracting.

10. State the formula for calculating the inventory turnover rate (in times per year). [2]

Answer:

Inventory Turnover Rate=Cost of SalesAverage Inventory\text{Inventory Turnover Rate} = \frac{\text{Cost of Sales}}{\text{Average Inventory}}

where

Average Inventory=Opening Inventory+Closing Inventory2\text{Average Inventory} = \frac{\text{Opening Inventory} + \text{Closing Inventory}}{2}

Marking: 1 mark for the main formula, 1 mark for the average inventory formula. Award 2 marks if both are clearly shown.

Section B: Structured Questions [28 marks]

11. Lim's Electronics — Year ended 30 June 2025

(a) Trading account extract to calculate gross profit. [4]

Answer:

Lim's Electronics Trading Account for the year ended 30 June 2025

$$
Sales250,000
Less: Cost of sales
Opening inventory30,000
Add: Purchases160,000
Add: Carriage inwards5,000
195,000
Less: Closing inventory(35,000)
Cost of sales(160,000)
Gross profit90,000

Marking:

  • 1 mark for correct heading/title
  • 1 mark for correct cost of sales calculation (30,000+30,000 + 160,000 + 5,000−5,000 − 35,000 = $160,000)
  • 1 mark for including carriage inwards as part of cost of purchases
  • 1 mark for correct gross profit ($90,000)

Common mistake: Students often forget to include carriage inwards in the cost of sales calculation.

(b) Calculate the inventory turnover rate. [3]

Answer:

Average Inventory=$30,000+$35,0002=$32,500\text{Average Inventory} = \frac{\$30{,}000 + \$35{,}000}{2} = \$32{,}500

Inventory Turnover Rate=$160,000$32,500=4.92 times\text{Inventory Turnover Rate} = \frac{\$160{,}000}{\$32{,}500} = 4.92 \text{ times}

Marking: 1 mark for correct average inventory calculation, 1 mark for correct formula application, 1 mark for correct final answer (4.92 times).

(c) Suggest one reason why a high inventory turnover rate is generally considered favourable. [1]

Answer: A high inventory turnover rate means the business is selling its inventory quickly, which reduces the risk of inventory becoming obsolete or outdated, and reduces storage costs. It also means the business is efficiently converting inventory into sales revenue.

Marking: 1 mark for any valid reason (e.g., less risk of obsolescence, lower storage costs, efficient use of working capital, faster conversion to sales).

12. Mei Ling's Clothing Boutique — FIFO Inventory Ledger Card

(a) FIFO inventory ledger card for April 2025. [5]

Answer:

DateReceipts (Units / Cost / Total)Issues (Units / Cost / Total)Balance (Units / Cost / Total)
1 Apr——100 / 12.00/12.00 / 1,200
8 Apr200 / 13.00/13.00 / 2,600—100 / 12.00/12.00 / 1,200 + 200 / 13.00/13.00 / 2,600 = 300 units / $3,800
15 Apr—100 / 12.00/12.00 / 1,200 + 80 / 13.00/13.00 / 1,040 = 180 units / $2,240120 / 13.00/13.00 / 1,560
22 Apr150 / 14.00/14.00 / 2,100—120 / 13.00/13.00 / 1,560 + 150 / 14.00/14.00 / 2,100 = 270 units / $3,660
29 Apr—120 / 13.00/13.00 / 1,560 + 0 / 14.00/14.00 / 0 = 120 units / $1,560150 / 14.00/14.00 / 2,100

Detailed working:

  • 1 Apr: Opening balance: 100 units @ 12.00=12.00 = 1,200
  • 8 Apr: Purchase 200 @ 13.00.Balance:100@13.00. Balance: 100 @ 12.00 + 200 @ 13.00=300units,13.00 = 300 units, 3,800
  • 15 Apr: Sale of 180 units. Under FIFO, sell oldest first:
    • 100 units @ 12.00=12.00 = 1,200 (all of opening batch)
    • 80 units @ 13.00=13.00 = 1,040 (from 8 Apr purchase)
    • Cost of issues = $2,240
    • Remaining balance: 120 units @ 13.00=13.00 = 1,560
  • 22 Apr: Purchase 150 @ 14.00.Balance:120@14.00. Balance: 120 @ 13.00 + 150 @ 14.00=270units,14.00 = 270 units, 3,660
  • 29 Apr: Sale of 120 units. Under FIFO, sell oldest first:
    • 120 units @ 13.00=13.00 = 1,560 (all of remaining 8 Apr batch)
    • Remaining balance: 150 units @ 14.00=14.00 = 2,100

Marking: 1 mark each for correct balance after each of the 5 dates (1 Apr, 8 Apr, 15 Apr, 22 Apr, 29 Apr). Award follow-through marks if the method is consistently applied.

(b) Value of closing inventory on 30 April 2025. [1]

Answer: 2,100(150units@2,100 (150 units @ 14.00)

Marking: 1 mark for $2,100. Accept follow-through from (a).

13. Raj Trading — Weighted Average Cost Method

(a) Calculate the cost of closing inventory using the weighted average cost method. [4]

Answer:

Step 1: Calculate total units and total cost of all goods available for sale:

UnitsUnit cost ($)Total cost ($)
Opening inventory5006.003,000
Purchase 1 Mar4007.002,800
Purchase 1 Jun6008.004,800
Purchase 1 Sep3009.002,700
Total available1,80013,300

Step 2: Calculate weighted average cost per unit:

Weighted Average Cost per Unit=$13,3001,800=$7.39 (to 2 d.p.)\text{Weighted Average Cost per Unit} = \frac{\$13{,}300}{1{,}800} = \$7.39 \text{ (to 2 d.p.)}

Step 3: Calculate cost of closing inventory:

Closing Inventory=350×$7.39=$2,586.50\text{Closing Inventory} = 350 \times \$7.39 = \$2{,}586.50

Step 4: Calculate cost of sales:

Cost of Sales=1,450×$7.39=$10,715.50\text{Cost of Sales} = 1{,}450 \times \$7.39 = \$10{,}715.50

(Check: 2,586.50+2,586.50 + 10,715.50 = 13,302—smallroundingdifferenceof13,302 — small rounding difference of 2 due to rounding the average cost. Accept $13,300 total.)

More precise approach (periodic weighted average):

Cost of Sales=1,4501,800×$13,300=$10,713.89\text{Cost of Sales} = \frac{1{,}450}{1{,}800} \times \$13{,}300 = \$10{,}713.89

Closing Inventory=3501,800×$13,300=$2,586.11\text{Closing Inventory} = \frac{350}{1{,}800} \times \$13{,}300 = \$2{,}586.11

Marking: 1 mark for total cost (13,300),1markforweightedaveragecostperunit(13,300), 1 mark for weighted average cost per unit (7.39), 1 mark for correct method applied to closing inventory, 1 mark for correct final answer (2,586.11or2,586.11 or 2,586.50 — accept either method).

(b) Calculate the cost of sales for the year using the weighted average cost method. [2]

Answer:

Cost of Sales=1,450×$7.39=$10,715.50\text{Cost of Sales} = 1{,}450 \times \$7.39 = \$10{,}715.50

OR (proportional method):

Cost of Sales=1,4501,800×$13,300=$10,713.89\text{Cost of Sales} = \frac{1{,}450}{1{,}800} \times \$13{,}300 = \$10{,}713.89

Marking: 1 mark for correct method, 1 mark for correct answer (accept 10,713.89or10,713.89 or 10,715.50).

14. Alpha Trading and Beta Trading

(a) Calculate the inventory turnover rate for each business. [4]

Answer:

Alpha Trading:

Average Inventory=$25,000+$35,0002=$30,000\text{Average Inventory} = \frac{\$25{,}000 + \$35{,}000}{2} = \$30{,}000

Inventory Turnover Rate=$180,000$30,000=6.0 times\text{Inventory Turnover Rate} = \frac{\$180{,}000}{\$30{,}000} = 6.0 \text{ times}

Beta Trading:

Average Inventory=$40,000+$20,0002=$30,000\text{Average Inventory} = \frac{\$40{,}000 + \$20{,}000}{2} = \$30{,}000

Inventory Turnover Rate=$240,000$30,000=8.0 times\text{Inventory Turnover Rate} = \frac{\$240{,}000}{\$30{,}000} = 8.0 \text{ times}

Marking: 1 mark each for correct average inventory (Alpha and Beta), 1 mark each for correct turnover rate (Alpha and Beta).

(b) Which business manages its inventory more efficiently? Explain. [2]

Answer: Beta Trading manages its inventory more efficiently because it has a higher inventory turnover rate (8.0 times compared to Alpha's 6.0 times). This means Beta sells and replaces its inventory more frequently throughout the year, indicating more efficient use of inventory investment, lower holding costs, and less risk of inventory becoming obsolete.

Marking: 1 mark for identifying Beta Trading, 1 mark for correct explanation referencing the higher turnover rate.

15. Grace Trading — Inventory Write-Down

(a) Calculate the net realisable value of this batch. [2]

Answer:

NRV=Estimated Selling Price−Costs to Complete and Sell\text{NRV} = \text{Estimated Selling Price} - \text{Costs to Complete and Sell}

NRV=$5,500−$500=$5,000\text{NRV} = \$5{,}500 - \$500 = \$5{,}000

Marking: 1 mark for correct formula, 1 mark for correct answer ($5,000).

(b) State the value at which this batch should be reported in the statement of financial position. Explain. [3]

Answer: The batch should be reported at $5,000 (the NRV) in the statement of financial position.

Explanation: According to the prudence concept, inventory must be valued at the lower of cost and net realisable value. Since the NRV (5,000)islowerthantheoriginalcost(5,000) is lower than the original cost (8,000), the inventory should be written down to $5,000. This ensures that assets and profits are not overstated.

Marking: 1 mark for stating $5,000, 1 mark for referencing "lower of cost and NRV," 1 mark for referencing the prudence concept.

(c) Calculate the inventory write-down and state the journal entry. [3]

Answer:

Inventory Write-Down=Cost−NRV=$8,000−$5,000=$3,000\text{Inventory Write-Down} = \text{Cost} - \text{NRV} = \$8{,}000 - \$5{,}000 = \$3{,}000

Journal Entry:

Debit ($)Credit ($)
Inventory write-down expense (or Cost of sales)3,000
Inventory3,000

Marking: 1 mark for correct write-down amount ($3,000), 1 mark for correct debit entry, 1 mark for correct credit entry.

Common mistake: Students may debit the inventory account instead of crediting it. Remember: writing down inventory reduces the asset, so credit inventory.

16. Sam's Stationery — Year ended 30 September 2025

(a) Calculate the cost of sales. [2]

Answer:

Cost of Sales=Sales−Gross Profit\text{Cost of Sales} = \text{Sales} - \text{Gross Profit}

Cost of Sales=$320,000−$96,000=$224,000\text{Cost of Sales} = \$320{,}000 - \$96{,}000 = \$224{,}000

Marking: 1 mark for correct formula, 1 mark for correct answer ($224,000).

(b) Calculate the purchases for the year. [2]

Answer:

Cost of Sales=Opening Inventory+Purchases−Closing Inventory\text{Cost of Sales} = \text{Opening Inventory} + \text{Purchases} - \text{Closing Inventory}

$224,000=$28,000+Purchases−$36,000\$224{,}000 = \$28{,}000 + \text{Purchases} - \$36{,}000

Purchases=$224,000−$28,000+$36,000=$232,000\text{Purchases} = \$224{,}000 - \$28{,}000 + \$36{,}000 = \$232{,}000

Marking: 1 mark for correct rearrangement of formula, 1 mark for correct answer ($232,000).

(c) Calculate the inventory turnover rate. [2]

Answer:

Average Inventory=$28,000+$36,0002=$32,000\text{Average Inventory} = \frac{\$28{,}000 + \$36{,}000}{2} = \$32{,}000

Inventory Turnover Rate=$224,000$32,000=7.0 times\text{Inventory Turnover Rate} = \frac{\$224{,}000}{\$32{,}000} = 7.0 \text{ times}

Marking: 1 mark for correct average inventory, 1 mark for correct final answer (7.0 times).

Section C: Scenario-Based Question [12 marks]

17. Diana's Delights — Year ended 31 December 2025

(a) Prepare a trading account for the year ended 31 December 2025. [4]

Answer:

Diana's Delights Trading Account for the year ended 31 December 2025

$$
Sales185,000
Less: Cost of sales
Opening inventory10,000
Add: Purchases72,000
82,000
Less: Closing inventory(14,000)
Cost of sales(68,000)
Gross profit117,000

Marking: 1 mark for correct heading, 1 mark for correct cost of sales calculation (10,000+10,000 + 72,000 − 14,000=14,000 = 68,000), 1 mark for correct subtraction of closing inventory, 1 mark for correct gross profit ($117,000).

(b) Calculate the inventory turnover rate. [3]

Answer:

Average Inventory=$10,000+$14,0002=$12,000\text{Average Inventory} = \frac{\$10{,}000 + \$14{,}000}{2} = \$12{,}000

Inventory Turnover Rate=$68,000$12,000=5.67 times\text{Inventory Turnover Rate} = \frac{\$68{,}000}{\$12{,}000} = 5.67 \text{ times}

Marking: 1 mark for correct average inventory ($12,000), 1 mark for correct formula application, 1 mark for correct answer (5.67 times).

(c) Compare Diana's inventory turnover rate with her friend's rate of 8.5 times. Advise Diana. [2]

Answer: Diana's inventory turnover rate of 5.67 times is significantly lower than her friend's rate of 8.5 times. This means Diana is holding her inventory for a longer period before selling it. Diana should investigate why her inventory is turning over more slowly — possible reasons include overstocking, slow-moving products, or ineffective marketing. She should consider reducing her inventory levels, offering promotions to clear slow-moving stock, or improving her purchasing planning to better match demand.

Marking: 1 mark for identifying that Diana's rate is lower/worse, 1 mark for a valid suggestion or explanation.

(d) Calculate the adjusted closing inventory value after accounting for the out-of-date specialty ingredients. Explain which accounting concept applies. [3]

Answer:

Step 1: Calculate NRV of the specialty ingredients:

NRV=Estimated Selling Price−Selling Costs=$1,800−$150=$1,650\text{NRV} = \text{Estimated Selling Price} - \text{Selling Costs} = \$1{,}800 - \$150 = \$1{,}650

Step 2: Compare with cost:

  • Cost of specialty ingredients = $2,500
  • NRV = $1,650
  • NRV is lower, so the ingredients should be valued at $1,650

Step 3: Calculate the write-down:

Write-down=$2,500−$1,650=$850\text{Write-down} = \$2{,}500 - \$1{,}650 = \$850

Step 4: Calculate adjusted closing inventory:

Adjusted Closing Inventory=$14,000−$850=$13,150\text{Adjusted Closing Inventory} = \$14{,}000 - \$850 = \$13{,}150

Accounting concept: The prudence concept requires inventory to be valued at the lower of cost and net realisable value. Since the NRV (1,650)isbelowcost(1,650) is below cost (2,500), the inventory must be written down to prevent overstatement of assets and profit.

Marking: 1 mark for correct NRV calculation (1,650),1markforcorrectadjustedclosinginventory(1,650), 1 mark for correct adjusted closing inventory (13,150), 1 mark for identifying the prudence concept with explanation.

Mark Summary

QuestionMarks
12
22
32
42
52
62
72
82
92
102
11(a)4
11(b)3
11(c)1
12(a)5
12(b)1
13(a)4
13(b)2
14(a)4
14(b)2
15(a)2
15(b)3
15(c)3
16(a)2
16(b)2
16(c)2
17(a)4
17(b)3
17(c)2
17(d)3
Total60