Secondary 4 Principles of Accounts Semestral Assessment 1 (Mid-Year) Paper 5

TuitionGoWhere Practice Paper - Principles of Accounts Secondary 4

SA1 Examination - Inventory Costing - ANSWER KEY

TuitionGoWhere Secondary School (AI)

Subject: Principles of Accounts (7087) Level: Secondary 4 Paper: SA1 - Version 5 Total Marks: 50

Section A: Short Answer Questions (10 marks)

Question 1 (2 marks) Basis: Inventory should be valued at the lower of cost and net realisable value (NRV). [1 mark]

Concept: The prudence/conservatism concept. This concept requires that assets should not be overstated and losses should be recognised as soon as they are foreseen. By valuing inventory at the lower of cost and NRV, the business ensures that inventory is not recorded at an amount higher than what it can realistically recover. [1 mark]

Question 2 (2 marks) FIFO (First-In-First-Out): Assumes that the earliest (oldest) inventory purchased is sold first. Closing inventory is valued at the most recent purchase prices. [1 mark]

AVCO (Weighted Average Cost): Calculates a weighted average cost per unit after each purchase by dividing total cost of inventory available by total units available. Both cost of sales and closing inventory are valued at this average cost. [1 mark]

Question 3 (1 mark) Formula: Inventory Turnover Rate = Cost of Sales ÷ Average Inventory

Where Average Inventory = (Opening Inventory + Closing Inventory) ÷ 2

[1 mark for correct formula]

Question 4 (2 marks) (a) Effect on cost of sales: Cost of sales is understated by $3,500. (Since closing inventory is deducted from cost of sales, an overstated closing inventory reduces cost of sales.) [1 mark]

(b) Effect on net profit: Net profit is overstated by $3,500. (Since cost of sales is understated, gross profit and therefore net profit are overstated.) [1 mark]

Question 5 (3 marks) Three costs to include when determining the cost of inventory (any three, 1 mark each):

1. Purchase price/cost of goods bought
2. Carriage inwards/freight charges/transportation costs to bring inventory to its present location
3. Import duties/taxes paid on purchases
4. Direct costs of bringing inventory to saleable condition (e.g., packaging, assembly)
5. Any other directly attributable costs

Section B: Structured Questions (24 marks)

Question 6 (6 marks) - FIFO Method

(a) Cost of sales for March 2026 (3 marks)

Total cost of sales = $920.00 +$810.00 = $1,730.00 [3 marks for correct calculation with workings]

(b) Closing inventory as at 31 March 2026 (3 marks)

Remaining from Mar 22 purchase: 250 - 130 = 120 units × $3.00 = **$360.00**

Closing inventory: $360.00 [3 marks for correct calculation with workings]

Question 7 (6 marks) - AVCO Method

(a) Weighted average cost after 8 March 2026 (2 marks)

Weighted average cost = $1,340.00 ÷ 500 = **$2.68 per unit** [2 marks]

(b) Cost of sales for 15 March 2026 (2 marks)

Sale on 15 March: 350 units × $2.68 = **$938.00**

Remaining after sale: 500 - 350 = 150 units at $2.68 =$402.00

Cost of sales (15 March): $938.00 [2 marks]

(c) Closing inventory as at 31 March 2026 (2 marks)

New weighted average cost = $1,152.00 ÷ 400 =$2.88 per unit

Sale on 29 March: 280 units × $2.88 =$806.40

Closing inventory: 400 - 280 = 120 units × $2.88 = **$345.60**

Closing inventory: $345.60 [2 marks for correct calculation with workings]

Question 8 (6 marks)

(a) Cost of sales (3 marks)

[3 marks for correct calculation with workings]

(b) Gross profit (1 mark)

Gross profit = Revenue - Cost of sales = $150,000 -$82,200 = $67,800 [1 mark]

(c) Gross profit margin (2 marks)

Gross profit margin = (Gross Profit ÷ Revenue) × 100% = ($67,800 ÷$150,000) × 100% = 45.20% [2 marks for correct calculation to two decimal places]

Question 9 (6 marks)

(a) Inventory turnover rate (4 marks)

Sunrise Enterprise: Average inventory = ($30,000 +$50,000) ÷ 2 = $40,000 Inventory turnover =$240,000 ÷ $40,000 = 6.00 times [2 marks]

Moonlight Trading: Average inventory = ($25,000 +$35,000) ÷ 2 = $30,000 Inventory turnover =$180,000 ÷ $30,000 = 6.00 times [2 marks]

(b) Commentary (2 marks)

Both businesses have the same inventory turnover rate of 6.00 times. However, Moonlight Trading may be considered more efficient because it achieves the same turnover rate with a lower average inventory level ($30,000 vs$40,000), suggesting it manages its inventory more tightly while generating proportionally similar sales relative to its inventory investment. [2 marks for valid comparison and reasoning]

Accept any reasonable comparison with justification.

Section C: Scenario-Based Question (16 marks)

Question 10 (16 marks)

(a)(i) Gross profit margin (2 marks)

2024: ($100,000 ÷$250,000) × 100% = 40.00% [1 mark] 2025: ($98,000 ÷$280,000) × 100% = 35.00% [1 mark]

(a)(ii) Inventory turnover rate (4 marks)

2024: Average inventory = ($35,000 +$42,000) ÷ 2 = $38,500 Inventory turnover =$150,000 ÷ $38,500 = 3.90 times [2 marks]

2025: Average inventory = ($42,000 +$56,000) ÷ 2 = $49,000 Inventory turnover =$182,000 ÷ $49,000 = 3.71 times [2 marks]

(b) Analysis - Two concerns (4 marks)

Concern 1: Gross profit margin has declined from 40.00% in 2024 to 35.00% in 2025. This indicates that Jasmine is earning less gross profit per dollar of sales, possibly due to increased cost of goods sold relative to revenue, discounting, or inability to pass on cost increases to customers. [2 marks]

Concern 2: Inventory turnover rate has decreased from 3.90 times to 3.71 times, while closing inventory has increased significantly from $42,000 to$56,000 (33.3% increase). This suggests inventory is moving more slowly, which could lead to higher holding costs, increased risk of obsolescence (especially for fashion items), and cash tied up in inventory. [2 marks]

Accept any two valid concerns with explanation.

(c) Advantages and disadvantages of JIT (4 marks)

Advantage 1: Reduced inventory holding costs - lower storage, insurance, and handling costs as less inventory is kept on hand. [1 mark]

Advantage 2: Reduced risk of inventory obsolescence - particularly important for a fashion boutique where styles change quickly and unsold inventory may become outdated. [1 mark]

Disadvantage 1: Risk of stock-outs - if suppliers fail to deliver on time, Jasmine may not have sufficient inventory to meet customer demand, leading to lost sales and customer dissatisfaction. [1 mark]

Disadvantage 2: Loss of bulk purchase discounts - ordering smaller quantities more frequently may result in higher per-unit costs and increased ordering/transportation costs. [1 mark]

Accept other valid advantages and disadvantages.

(d) Recommendation (2 marks)

Recommendation: Option B (JIT inventory system) [1 mark for clear choice]

Reason 1 (Accounting): The declining inventory turnover rate (3.90 to 3.71 times) and increasing closing inventory ($42,000 to$56,000) indicate that Jasmine is holding too much inventory. A JIT system would reduce average inventory levels, improve turnover, and free up cash that is currently tied up in slow-moving stock. [1 mark]

Reason 2 (Non-accounting): As a fashion boutique, Jasmine's products are subject to changing trends and seasons. A JIT system would allow her to respond more quickly to fashion trends, reduce the risk of holding obsolete stock, and ensure fresher inventory that appeals to customers. [1 mark]

Accept Option A if well-justified with valid reasons. Award marks for justified reasoning, not the choice itself.

END OF ANSWER KEY

Marking Scheme Summary

Marking Notes:

• Method marks should be awarded where workings are shown, even if the final answer is incorrect.
• For calculation questions, deduct only 0.5 marks for arithmetic errors if the method is correct.
• For commentary/analysis questions, accept any reasonable answer that demonstrates understanding of the concept.
• Rounding: Accept answers rounded to two decimal places unless otherwise specified.
• For the scenario-based question, reward justified reasoning over the specific choice made.