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Secondary 4 Principles of Accounts Practice Paper 1

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TuitionGoWhere Practice Paper - Principles of Accounts Secondary 4

TuitionGoWhere Practice Paper (AI) — Version 1 of 5

Subject: Principles of Accounts
Level: Secondary 4
Paper: Practice Paper (Topic: Inventory Costing)
Duration: 1 hour
Total Marks: 40
Name: ___________________________
Class: ________
Date: ____________

Instructions:

This practice paper contains 20 questions on Inventory Costing.
Answer all questions in the spaces provided.
Show all workings clearly. Method marks are awarded.
Use the lower of cost and net realisable value basis where required.
Section A: 10 short questions (1 mark each) = 10 marks
Section B: 6 structured questions (3 marks each) = 18 marks
Section C: 4 extended questions (3 marks each) = 12 marks
Total = 40 marks

Section A (10 marks)

Answer all questions. 1 mark each.

1. State the accounting concept that requires inventory to be valued at the lower of cost and net realisable value.

2. Using FIFO, who is assumed to sell their goods first: the earliest purchased or the latest purchased?

3. Under AVCO, is the average cost recalculated after every purchase or only at year end?

4. If closing inventory is overstated by $500, state the effect on gross profit (overstated / understated / no effect).

5. Give the formula for inventory turnover rate.

6. Calculate average inventory if opening inventory is $2,000 and closing inventory is$ 3,000.

7. State one reason why a business may prefer FIFO over AVCO during a period of rising prices.

8. What does NRV stand for?

9. If cost price of an item is $40 and NRV is$ 35, at what amount should it be valued?

10. Name the inventory costing method that assumes issue price is based on weighted average.

Section B (18 marks)

Answer all questions. 3 marks each.

11. Bright Store had opening inventory $4,000, purchases$ 20,000, closing inventory $5,000. Calculate cost of sales. Show workings.

12. Using the following data, calculate inventory turnover for the year:
COGS = $60,000; Opening inventory$ 8,000; Closing inventory $12,000.

13. A shop values stock at lower of cost and NRV. Item A cost $50, NRV$ 45. Item B cost $30, NRV$ 38. Calculate total inventory value. Show workings.

14. Explain why prudence concept is important in inventory valuation. (3 marks)

15. Company X uses FIFO, Company Y uses AVCO. In inflation, which method gives higher closing inventory? Explain briefly. (3 marks)

16. Opening inventory was understated by $200. State and explain the effect on profit for the year. (3 marks)

Section C (12 marks)

Answer all questions. 3 marks each.

17. The following purchases and sales occurred for Gem Co in March:
Mar 1: Opening 10 units @ $20 Mar 5: Buy 20 units @$ 22
Mar 12: Sell 15 units
Mar 20: Buy 10 units @ $24
Mar 25: Sell 15 units
Using FIFO, calculate closing inventory units and value. Show workings. (3 marks)

18. Using same data as Q17, calculate closing inventory value using AVCO (weighted average, recalculated after each purchase). Show workings. (3 marks)

19. Compare the FIFO and AVCO closing inventory values from Q17 and Q18. Which is higher and why? (3 marks)

20. A student says: "Inventory error in closing stock does not affect net profit because it is a balance sheet item." Explain the mistake. (3 marks)

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Answers

TuitionGoWhere Practice Paper — Answer Key (Version 1)

Subject: Principles of Accounts
Level: Secondary 4
Topic: Inventory Costing
Total Marks: 40

Section A — Answers (1 mark each)

1. Prudence (or conservatism) concept
Teaching note: Prudence requires not overstating assets or profit. Inventory is recorded at lower of cost and NRV to avoid overstatement.

2. Earliest purchased
Teaching note: FIFO = First-In-First-Out; oldest inventory is issued first.

3. After every purchase
Teaching note: Under periodic AVCO, average is recalculated after each purchase to reflect new weighted cost.

4. Overstated
Teaching note: COGS = Opening + Purchases − Closing. If closing is overstated, COGS understated, so gross profit overstated.

5. Inventory Turnover = COGS ÷ Average Inventory
Teaching note: Average inventory = (Opening + Closing) ÷ 2.

**6. $2,500** Working: ($ 2,000 + $3,000) ÷ 2 =$ 2,500.

7. FIFO gives higher closing inventory and matches older lower costs against revenue (any valid reason)
e.g. "FIFO shows higher profit in inflation" or "FIFO closing stock closer to current replacement cost".

8. Net Realisable Value
Teaching note: Estimated selling price less costs to sell.

**9. $35** Teaching note: Lower of$ 40 cost and $35 NRV =$ 35.

10. AVCO (Weighted Average Cost)

Section B — Answers (3 marks each)

**11. Cost of Sales = $19,000** Working: Opening inventory$ 4,000

Purchases $20,000 =$ 24,000
− Closing inventory $5,000 =$ 19,000
Marking: 1m formula, 2m correct calc.

12. Inventory Turnover = 6 times
Average inventory = ( $8,000 +$ 12,000) ÷ 2 = $10,000 Turnover =$ 60,000 ÷ $10,000 = 6 times
Marking: 1m avg, 1m division, 1m answer.

**13. Total = $80** Item A: lower of$ 50/ $45 =$ 45
Item B: lower of $30/$ 38 = $30 Total =$ 45 + $30 =$ 80
Marking: 1m each item, 1m total.

14. Prudence prevents overstatement of assets/profit; ensures financial statements are cautious; users not misled.
Marking: 1m define, 2m explain with inventory context.

15. FIFO gives higher closing inventory in inflation
Because older cheaper costs remain in inventory, recent costly purchases go to COGS.
Marking: 1m identify FIFO, 2m reason.

16. Opening understated by $200 → COGS understated by$ 200 → profit overstated by $200 for the year.
Marking: 1m effect stated, 2m explanation via COGS.

Section C — Answers (3 marks each)

17. FIFO Closing Inventory: 10 units @ $24 =$ 240
Ledger:
Mar1: 10 @ $20 Mar5: 20 @$ 22 → total 30
Mar12 sell 15: 10@20 + 5@22 leave 15@22
Mar20: 10@24 → total 25
Mar25 sell 15: 15@22 leave 10@24
Closing = 10 units @ $24 =$ 240
Marking: 1m units, 2m value.

**18. AVCO Closing Inventory ≈ $233.20** Mar5 avg = (10×20+20×22)/30 =$ 21.33
Mar12 sell 15 → 15 left @ $21.33 Mar20 avg = (15×21.33+10×24)/25 =$ 22.32
Mar25 sell 15 → 10 left @ $22.32 =$ 223.20 (rounded)
Actual: $22.32×10 =$ 223.20; if using fractions $233.20 typo corrected:$ 223.20
Marking: 1m method, 2m calc.

19. FIFO ( $240) > AVCO ($ 223.20)
Because FIFO keeps latest (higher) cost in inventory during inflation.
Marking: 1m compare, 2m reason.

20. Mistake: Closing inventory affects COGS, which affects gross and net profit.
If closing inventory wrong, COGS wrong, profit wrong. It is balance sheet item but also income statement adjustment.
Marking: 1m identify error, 2m explain linkage.