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

TuitionGoWhere Exam Practice (AI) - Answer Key

Secondary 4 Principles of Accounts - SA1 Practice Paper (Version 4)

Total Marks: 40

Section A: Structured Questions

Question 1
(a) Value of Closing Inventory (FIFO) [3 marks]

• Total Units Available: $100 + 200 + 100 = 400$ units
• Total Units Sold: $150 + 180 = 330$ units
• Closing Inventory Units: $400 - 330 = 70$ units
• Under FIFO, closing inventory consists of the most recent purchases.
• The last purchase was 100 units @ $14.00.
• Therefore, the 70 units are valued at $14.00 each.
• Calculation: 70 \times 14.00 = \980$
  • 1 mark for identifying closing units (70)
  • 1 mark for identifying correct cost layer ($14.00)
  • 1 mark for correct final value ($980)

(b) Cost of Sales (FIFO) [2 marks]

• Method 1: Total Cost of Goods Available for Sale - Closing Inventory
  • Opening: $100 \times 10 = 1,000$
  • Purchase 1: $200 \times 12 = 2,400$
  • Purchase 2: $100 \times 14 = 1,400$
  • Total Available: $4,800$
  • Less Closing Inventory: $980$
  • Cost of Sales: 4,800 - 980 = \3,820$
• Method 2: Direct Calculation of Sold Units
  • Sale 1 (150 units): 100 @ $10 + 50 @$12 = $1,000 +$600 = $1,600
  • Sale 2 (180 units): 150 @ $12 (remaining from Purchase 1) + 30 @$14 = $1,800 +$420 = $2,220
  • Total COS: 1,600 + 2,220 = \3,820$
  • 1 mark for correct workings/method
  • 1 mark for correct answer ($3,820)

Question 2
Value of Closing Inventory (AVCO) [4 marks]

• Step 1: Calculate Weighted Average Cost after first purchase.
  • Opening: $500 \times 8 = 4,000$
  • Purchase: $300 \times 9 = 2,700$
  • Total Value: $6,700$
  • Total Units: $800$
  • Average Cost: 6,700 / 800 = \8.375$ per unit
• Step 2: Value of Sale and Remaining Inventory after 15 April.
  • Sold 400 units. Remaining: $800 - 400 = 400$ units.
  • Value of Remaining: 400 \times 8.375 = \3,350$
• Step 3: Calculate New Weighted Average Cost after second purchase.
  • Existing: $400 \times 8.375 = 3,350$
  • Purchase: $200 \times 10 = 2,000$
  • Total Value: $5,350$
  • Total Units: $600$
  • New Average Cost: 5,350 / 600 = \8.9167$ (approx)
• Step 4: Closing Inventory Value.
  • Closing Units: 600
  • Value: $5,350$
  • Note: Since no further sales occurred, the total value of the pool is the closing inventory.
  • Answer: $5,350
  • 1 mark for first average cost calculation ($8.375)
  • 1 mark for value of inventory before second purchase ($3,350)
  • 1 mark for adding second purchase correctly
  • 1 mark for final answer ($5,350)

Question 3
Prudence and Inventory Valuation [3 marks]

• Definition: Prudence means that assets and profits should not be overstated, and liabilities and losses should not be understated. (1 mark)
• Application: Inventory is valued at the lower of cost and Net Realisable Value (NRV). (1 mark)
• Explanation: If NRV falls below cost, the inventory value is written down to NRV to recognize the loss immediately, ensuring assets are not overstated. (1 mark)

Question 4
Cost of Sales Calculation [3 marks]

• Opening Inventory: $45,000
• Add: Purchases: $210,000
• Less: Purchases Returns: ($3,000)
• Add: Carriage Inwards: $5,000
• Cost of Goods Available for Sale: $45,000 + 210,000 - 3,000 + 5,000 = 257,000$
• Less: Closing Inventory: ($52,000)
• Cost of Sales: 257,000 - 52,000 = \mathbf{\205,000}$
  • 1 mark for correct net purchases/carriage adjustment
  • 1 mark for correct COGAS
  • 1 mark for final correct answer

Question 5
Gross Profit Margin [2 marks]

• Gross Profit = Revenue - Cost of Sales
• Gross Profit = $300,000 - 205,000 = 95,000$
• Gross Profit Margin = $(95,000 / 300,000) \times 100\%$
• Answer: 31.67% (or 31.7%)
  • 1 mark for correct Gross Profit figure
  • 1 mark for correct percentage calculation

Question 6
Reasons for Choosing FIFO [2 marks]

• Any two of the following:
  1. Closing inventory value is higher (closer to current replacement cost) during inflation, showing a stronger financial position.
  2. Gross profit is higher, which may be favorable for reporting to shareholders or securing loans.
  3. It matches the physical flow of goods for many businesses (older stock sold first).
  • 1 mark per valid reason.

Question 7
Effect of Overstated Closing Inventory [2 marks]

• (a) Gross Profit: Overstated (1 mark)
  • Reasoning: Closing inventory is deducted from COGS. If closing inventory is too high, COGS is too low, making profit too high.
• (b) Current Assets: Overstated (1 mark)
  • Reasoning: Inventory is a current asset. If valued too high, total current assets are too high.

Question 8
Definition of NRV [2 marks]

• Net Realisable Value is the estimated selling price in the ordinary course of business (1 mark)
• Less the estimated costs of completion and the estimated costs necessary to make the sale (1 mark).

Section B: Application and Analysis

Question 9
(a) Inventory Turnover Rate [4 marks]

• Formula: Cost of Sales / Average Inventory

• Average Inventory = (Opening + Closing) / 2

• Alpha Electronics:

  • Average Inventory = $(40,000 + 60,000) / 2 = 50,000$
  • Turnover = $800,000 / 50,000 = \mathbf{16 \text{ times}}$
  • (2 marks: 1 for avg inv, 1 for final rate)

• Beta Electronics:

  • Average Inventory = $(30,000 + 50,000) / 2 = 40,000$
  • Turnover = $600,000 / 40,000 = \mathbf{15 \text{ times}}$
  • (2 marks: 1 for avg inv, 1 for final rate)

(b) Comparison [2 marks]

• Alpha Electronics has a higher inventory turnover rate (16 times) compared to Beta (15 times). (1 mark)
• This suggests Alpha is slightly more efficient in managing its inventory, selling its stock faster than Beta. (1 mark)

Question 10
AVCO for Perishable Goods [4 marks]

• Advantages:
  1. Smoothes out price fluctuations, providing a more stable cost of sales figure.
  2. Less administrative burden than tracking specific batches (if using perpetual AVCO systems).
• Disadvantages:
  1. Does not reflect the physical flow of perishable goods (which should be FIFO to prevent spoilage).
  2. The cost calculated is an average, which may not reflect the current replacement cost accurately for decision-making.
  • 1 mark per valid point (max 2 advantages, 2 disadvantages).

Question 11
(a) Correct Closing Inventory Value [2 marks]

• Normal Goods: $30,000 - 2,000 = 28,000$
• Damaged Goods:
  • Cost: $2,000$
  • NRV: Selling Price ($500) - Repair Costs ($200) = $300$
  • Valuation: Lower of Cost ($2,000) and NRV ($300) = $300$
• Total Closing Inventory: 28,000 + 300 = \mathbf{\28,300}$
  • 1 mark for identifying NRV of damaged goods
  • 1 mark for final total

(b) Trading Account Extract [5 marks]

• 1 mark for correct Sales figure
• 1 mark for correct Opening Inventory
• 1 mark for correct Purchases + Carriage Inwards
• 1 mark for correct Closing Inventory deduction ($28,300)
• 1 mark for correct Gross Profit ($71,300)
• Note: Carriage Outwards is an expense, not part of Trading Account.

Question 12
Effect of Understated Opening Inventory [3 marks]

• (a) Gross Profit: Overstated (1 mark)
  • Reasoning: Opening inventory is added to calculate COGS. If opening is too low, COGS is too low, so Gross Profit is too high.
• (b) Net Profit: Overstated (1 mark)
  • Reasoning: Since Gross Profit is overstated and expenses are unchanged, Net Profit is also overstated.
• (c) Capital: Overstated (1 mark)
  • Reasoning: Net Profit is added to Capital. If Net Profit is overstated, Capital is overstated.

Question 13
Low Inventory Turnover [3 marks]

• Reasons (Any 2):
  1. Overstocking / Poor purchasing decisions.
  2. Obsolete or slow-moving goods.
  3. Decline in market demand / Sales performance.
  4. Holding safety stock for anticipated price increases.
• Consequence (Any 1):
  1. High storage/holding costs.
  2. Risk of obsolescence or spoilage.
  3. Cash flow tied up in inventory (liquidity issues).
  • 1 mark per reason (max 2), 1 mark for consequence.