Secondary 4 Principles of Accounts Practice Paper 5

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Secondary 4 Principles of Accounts Quiz - Inventory Costing

Name: ____________________
Class: ____________________
Date: ____________________
Score: ________ / 50

Duration: 60 Minutes
Total Marks: 50

Instructions:

• Answer all questions in the spaces provided.
• Show all workings clearly for calculation questions.
• Use a calculator where necessary.
• Round all final monetary answers to 2 decimal places and ratios to 2 decimal places.

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Section A: Foundational Concepts (Questions 1–5)

1. State the general basis used for the valuation of inventory at the end of an accounting period. (1m)
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2. Define "Net Realisable Value" (NRV) in the context of inventory costing. (2m)
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3. Explain the accounting concept that requires inventory to be valued at the lower of cost and NRV. (2m)
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4. Identify whether the following item should be included in the calculation of "Cost" for inventory: Import duties paid on the purchase of goods. (1m)
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5. State the effect on the Gross Profit for the current year if the closing inventory is accidentally understated. (2m)
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Section B: Calculations and Application (Questions 6–15)

6. A business has the following data:

   • Opening Inventory: $12,000
   • Purchases: $85,000
   • Purchase Returns: $3,000
   • Carriage Inwards: $2,000
   • Closing Inventory: $15,000 Calculate the Cost of Sales. (3m) \ \ \ \ Answer:$____________________

7. Using the data from Question 6, if the Revenue for the year was $140,000, calculate the Gross Profit. (2m) \ \ \ \ Answer:$____________________

8. A company has a Cost of Sales of $240,000. The average inventory for the year is$30,000. Calculate the inventory turnover rate. (2m)
   
   
   
   Answer: ____________________ times

9. A retailer has an inventory turnover rate of 6 times per year. If the Cost of Sales is $180,000, calculate the average inventory value. (2m) \ \ \ \ Answer:$____________________

10. A batch of 10 smartphones was bought at $600 each. Due to a newer model release, the estimated selling price is now$550 each, and the cost to refurbish them for sale is $60 per unit. Calculate the value at which this batch should be recorded in the Statement of Financial Position. (3m) \ \ \ \ Answer:$____________________

11. Explain the difference between the FIFO (First-In, First-Out) and AVCO (Weighted Average Cost) methods of inventory valuation. (3m)
    
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12. In a period of falling prices, which method (FIFO or AVCO) will generally result in a higher closing inventory value? Justify your answer. (3m)
    
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13. A business uses the FIFO method. During the month of May, it had the following transactions:

    • May 1: Opening stock 100 units @ $10
    • May 10: Purchased 200 units @ $12
    • May 20: Sold 150 units Calculate the value of the closing inventory at the end of May. (3m)
      
      
      
      Answer: $____________________

14. Using the same data as Question 13, calculate the Cost of Sales for the 150 units sold using the FIFO method. (3m)
    
    
    
    Answer: $____________________

15. Using the same data as Question 13, calculate the value of the closing inventory if the business had used the AVCO method (weighted average cost per unit). (4m)
    
    
    
    Answer: $____________________

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Section C: Analysis and Evaluation (Questions 16–20)

16. Company X has an inventory turnover rate of 12 times, while Company Y has a rate of 4 times. Both operate in the same industry. Which company is managing its inventory more efficiently? Explain your reasoning. (4m)
    
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17. State two non-accounting factors that a business should consider when deciding whether to maintain high levels of inventory. (2m)
    
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    2. ________________________________________________________________________

18. A business discovers that its opening inventory for the current year was overstated by $2,000. State the effect of this error on the Gross Profit for the current year. (2m)
    
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19. Explain how a very low inventory turnover rate might affect the liquidity of a business. (3m)
    
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20. A company is considering switching from AVCO to FIFO during a period of rising prices. Explain the likely effect of this switch on the reported Net Profit. (3m)
    
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Answer Key - Secondary 4 Principles of Accounts Quiz (Inventory Costing)

Section A: Foundational Concepts

1. Lower of cost and net realisable value (NRV). (1m)
2. NRV is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. (2m)
3. Prudence Concept. (1m) It ensures that assets and profits are not overstated and liabilities/expenses are not understated. (1m)
4. Included. (1m)
5. Gross Profit is overstated. (2m) (Closing inventory is subtracted from COGS; if it is too low, COGS is too high, and profit is too low... Correction: If closing inventory is understated $\rightarrow$ COGS is overstated $\rightarrow$ Gross Profit is understated). Correct Answer: Gross Profit is understated.

Section B: Calculations and Application

6. Calculation: $12,000 + (85,000 - 3,000) + 2,000 - 15,000 = 81,000$. (3m)
   • Net Purchases: $82,000 (1m)
   • Total goods available: $96,000 (1m)
   • Final COGS: $81,000 (1m)
7. Calculation: $140,000 - 81,000 = 59,000$. (2m)
8. Calculation: $240,000 \div 30,000 = 8.00$ times. (2m)
9. Calculation: $180,000 \div 6 = 30,000$. (2m)
10. Calculation:
    • Cost = $600
    • NRV = $550 -$60 = $490
    • Value = Lower of $600 and$490 = $490 per unit.
    • Total = $490 \times 10 = 4,900$. (3m)
11. FIFO: Assumes the oldest stock is sold first; closing inventory consists of the most recent purchases. (1.5m) AVCO: Calculates a weighted average cost of all units available for sale; closing inventory is valued at this average. (1.5m)
12. FIFO. (1m) In falling prices, the oldest (more expensive) items are sold first, leaving the newest (cheaper) items in stock. Wait, the question asks for HIGHER value.
    • Falling prices: FIFO sells expensive first $\rightarrow$ Closing stock is cheap. AVCO is an average.
    • Therefore, AVCO will result in a higher closing inventory value than FIFO in a falling price environment. (2m)
13. Calculation:
    • Total units = $100 + 200 = 300$. Sold 150. Remaining = 150.
    • FIFO: Remaining units are from the latest batch.
    • 150 \text{ units} \times \12 = 1,800$. (3m)
14. Calculation:
    • 100 units @ $10 =$1,000
    • 50 units @ $12 =$600
    • Total = $1,600. (3m)
15. Calculation:
    • Total Cost = $(100 \times 10) + (200 \times 12) = 1,000 + 2,400 = 3,400$.
    • Total Units = 300.
    • AVCO per unit = 3,400 \div 300 = \11.33$.
    • Closing Inventory = 150 \text{ units} \times \11.33 = 1,699.50$(or$1,700$ depending on rounding). (4m)

Section C: Analysis and Evaluation

16. Company X. (1m) A higher turnover rate indicates that inventory is sold and replaced more quickly. (2m) This suggests better efficiency, lower storage costs, and reduced risk of obsolescence. (1m)
17. Any two: (2m)
    • Risk of supplier delays/shortages.
    • Anticipated increase in purchase prices (inflation).
    • Ability to meet sudden surges in customer demand.
    • Bulk purchase discounts.
18. Gross Profit is overstated. (2m) Opening inventory is part of COGS (added). If it is too high, COGS is too high, which makes profit too low. Correction: Overstated opening inventory $\rightarrow$ Overstated COGS $\rightarrow$ Understated Gross Profit. Correct Answer: Gross Profit is understated.
19. Negative effect. (1m) A low turnover rate means capital is tied up in unsold stock. (1m) This reduces the amount of cash available to meet short-term liabilities, thereby worsening the liquidity position (e.g., lower quick ratio). (1m)
20. Net Profit will increase. (1m) In rising prices, FIFO assigns the lower, older costs to COGS. (1m) Lower COGS leads to higher Gross Profit and consequently higher Net Profit. (1m)