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

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Secondary 4 Principles of Accounts From Real Exams Generated by Gemma 4 31B Updated 2026-06-03
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Questions

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Secondary 4 Principles of Accounts Quiz - Inventory Costing

Name: ____________________ Class: __________ Date: __________ Score: ________/60

Duration: 90 Minutes
Total Marks: 60
Instructions: Answer all questions. Show all workings clearly. Use of a calculator is permitted.

Section A: Foundational Concepts (Questions 1-5)

  1. State the basis used for the valuation of inventory at the end of the accounting period. (1)
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  2. Explain the accounting concept that justifies valuing inventory at the lower of cost and net realisable value. (2)
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  3. Define "Net Realisable Value" (NRV) in the context of inventory costing. (2)
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  4. State whether the following statement is True or False: "Inventory is classified as a non-current asset in the Statement of Financial Position." (1)
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  5. Identify two costs that are typically included in the "cost" of inventory. (2)

    i) ________________________________________________________________________ ii) ________________________________________________________________________

Section B: Calculations & Applications (Questions 6-15)

  1. Calculate the cost of sales for Zen Electronics for the year ended 31 December 2023 given the following:

    • Opening Inventory: $12,000
    • Purchases: $85,000
    • Purchase Returns: $3,000
    • Carriage Inwards: $2,000
    • Closing Inventory: $15,000 (2)
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  2. A business has a Cost of Goods Sold (COGS) of 120,000andanaverageinventoryof120,000 and an average inventory of 20,000. Calculate the inventory turnover rate. (2)
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  3. Calculate the average inventory for a business with an opening inventory of 8,500andaclosinginventoryof8,500 and a closing inventory of 11,500. (2)
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  4. If the inventory turnover rate is 6 times per year, calculate the average inventory given that the cost of sales is $240,000. (2)
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  5. A trader discovered that the closing inventory for the year ended 31 March 2024 was understated by $2,000. State the effect of this error on the profit for the year. (1)
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  6. A trader discovered that the opening inventory for the year ended 31 March 2024 was overstated by $1,500. State the effect of this error on the profit for the year. (1)
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  7. Calculate the Gross Profit for a business with Revenue of 200,000andCostofSalesof200,000 and Cost of Sales of 130,000. (2)
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  8. Using the figures from Question 12, calculate the Gross Profit Margin. (2)
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  9. A business uses the FIFO method. It purchased 10 units at 5eachon1Janand10unitsat5 each on 1 Jan and 10 units at 7 each on 1 Feb. If 12 units are sold, calculate the value of the remaining inventory. (3)
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  10. A business uses the Weighted Average Cost (AVCO) method. It has 100 units at 10eachandpurchasesanother100unitsat10 each and purchases another 100 units at 12 each. Calculate the new weighted average cost per unit. (3)
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Section C: Analysis & Synthesis (Questions 16-20)

  1. Compare the inventory turnover rates of two companies: Company A (8 times) and Company B (3 times). Which company is managing its inventory more efficiently? Explain your answer. (4)
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  2. Explain two reasons why a business might experience a decrease in its inventory turnover rate over two consecutive years. (4)

    i) ________________________________________________________________________
    ii) ________________________________________________________________________

  3. Discuss the impact of using the FIFO method versus the AVCO method on the reported profit during a period of steadily rising prices. (5)
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  4. A business has a high inventory turnover rate but a very low gross profit margin. Explain how this scenario is possible. (5)
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  5. You are the accountant for a fashion retailer. The closing inventory includes last season's clothes which are now obsolete. Explain how you should value these items and why. (6)
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Answers

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Answer Key - Inventory Costing Quiz

1. Basis of Valuation

  • Lower of cost and net realisable value (NRV). (1)

2. Accounting Concept

  • Prudence Concept. (1)
  • Explanation: To ensure that assets and profits are not overstated. (1)

3. Net Realisable Value (NRV)

  • The estimated selling price (1) minus the estimated costs of completion and the estimated costs necessary to make the sale. (1)

4. True/False

  • False. (1)

5. Costs included in Inventory

  • Any two: Purchase price, import duties, transport/carriage inwards, handling costs. (2)

6. Cost of Sales Calculation

  • 12,000(Opening)+(12,000 (Opening) + (85,000 - 3,000)(NetPurchases)+3,000) (Net Purchases) + 2,000 (Carriage In) - $15,000 (Closing)
  • 12,000+12,000 + 82,000 + 2,000−2,000 - 15,000 = $81,000. (2)

7. Inventory Turnover Rate

  • 120,000/120,000 / 20,000 = 6 times. (2)

8. Average Inventory

  • (8,500+8,500 + 11,500) / 2 = $10,000. (2)

9. Average Inventory Calculation

  • 240,000/6=240,000 / 6 = 40,000. (2)

10. Effect of Understated Closing Inventory

  • Profit is understated. (1)

11. Effect of Overstated Opening Inventory

  • Profit is understated. (1)

12. Gross Profit

  • 200,000−200,000 - 130,000 = $70,000. (2)

13. Gross Profit Margin

  • (70,000/70,000 / 200,000) x 100 = 35%. (2)

14. FIFO Valuation

  • Units remaining: 20 - 12 = 8 units.
  • Under FIFO, the remaining units are from the latest batch ($7 each).
  • 8 units x 7=7 = 56. (3)

15. AVCO Calculation

  • Total Cost: (100 x 10)+(100x10) + (100 x 12) = 1,000+1,000 + 1,200 = $2,200.
  • Total Units: 200.
  • Average Cost: 2,200/200=2,200 / 200 = 11 per unit. (3)

16. Comparison

  • Company A is more efficient. (1)
  • Reason: A higher turnover rate indicates that inventory is sold and replaced more quickly. (2)
  • This reduces holding costs and the risk of obsolescence. (1)

17. Reasons for Decrease in Turnover

  • Reason 1: Decrease in market demand for products (slow sales). (2)
  • Reason 2: Overstocking/Poor purchasing decisions (too much inventory held). (2)

18. FIFO vs AVCO (Rising Prices)

  • FIFO: Sells oldest (cheaper) stock first. COGS is lower, resulting in higher reported profit. (2)
  • AVCO: Sells stock at an average price. COGS is higher than FIFO, resulting in lower profit than FIFO. (2)
  • Conclusion: FIFO reports higher profit in inflationary periods. (1)

19. High Turnover / Low Margin

  • The business may be using a "high-volume, low-margin" strategy. (2)
  • They sell goods very quickly (high turnover) but at a very small markup over cost (low margin). (2)
  • Example: Supermarkets or discount wholesalers. (1)

20. Obsolete Inventory Valuation

  • Valuation: Value at Net Realisable Value (NRV). (2)
  • Why: Because the items are obsolete, their selling price has likely dropped below their original cost. (2)
  • Concept: Prudence concept requires that we do not overstate the value of assets on the SFP. (2)