Secondary 4 Principles of Accounts Practice Paper 5

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TuitionGoWhere Practice Paper - Principles of Accounts Secondary 4

TuitionGoWhere Practice Paper (AI) — Version 5

Subject: Principles of Accounts
Level: Secondary 4
Paper: Practice Paper (Topic: Inventory Costing)
Duration: 1 hour 15 minutes
Total Marks: 60
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 marks are shown. Total = 60 marks.

Section A: Basic Concepts and Valuation (Questions 1–5) — 10 marks

1. State the basis on which inventory should be valued according to the prudence concept. [1]

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2. Define "net realisable value" of inventory in your own words. [2]

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3. Bright Store had opening inventory of $4,000 and closing inventory of$5,000. Purchases during the year were $30,000. Calculate the cost of sales. [2]

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4. A student says: "If closing inventory is overstated by $800, profit will be understated." State whether this is correct and give the correct effect. [2]

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5. List two reasons why a business must control its inventory levels. [3]

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Section B: FIFO and AVCO Methods (Questions 6–12) — 22 marks

6. The following purchases and sales occurred for Gem Trading in March:

Date	Details	Units	Unit Cost ($)
1 Mar	Opening	100	10
5 Mar	Purchase	200	12
12 Mar	Sale	150	—
20 Mar	Purchase	100	14
25 Mar	Sale	180	—

Using FIFO, calculate the closing inventory value as at 31 March. [3]

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7. Using the data in Question 6, calculate the cost of goods sold under FIFO. [2]

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8. Using the same data as Question 6, calculate the weighted average cost (AVCO) per unit after the 20 March purchase. [3]

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9. Based on your AVCO calculation in Q8, calculate closing inventory value under AVCO. [2]

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10. Explain one difference between FIFO and AVCO in how they value closing inventory during a period of rising prices. [2]

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11.

Image pending generation: table for Q11.

Using the inventory card above and the FIFO method, calculate the value of closing inventory for Sunrise Co. as at 30 April. [4]

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12. State which method (FIFO or AVCO) would show a higher closing inventory value during inflation. Explain why. [2]

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Section C: Inventory Turnover and Analysis (Questions 13–16) — 14 marks

13. Calm Enterprises has cost of sales of $120,000, opening inventory$15,000, closing inventory $21,000. Calculate the inventory turnover rate. [2]

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14. Compare the inventory turnover of Calm Enterprises (from Q13) with a competitor, Swift Ltd, which has inventory turnover of 9 times. Comment on efficiency. [3]

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15.

Image pending generation: graph for Q15.

Using the graph, state which company improved its inventory turnover most from Year 1 to Year 2 and calculate the improvement in times. [3]

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16. Explain two business factors that could cause a company to have a low inventory turnover rate. [6]

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Section D: Integrated Application (Questions 17–20) — 14 marks

17. Leaf Co. had opening inventory $8,000, purchases$52,000, closing inventory $10,000. Calculate gross profit if sales were$80,000. [3]

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18. Mist Co. uses FIFO. In a period of falling prices, explain whether FIFO or AVCO gives a higher cost of sales. [3]

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19. A business discovered that $1,200 of inventory was damaged and could only be sold for$400 after repair costs of $100. State the value at which this inventory should be reported. [2]

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20.

Image pending generation: diagram for Q20.

Using the diagram, explain how the choice of inventory method affects the Statement of Financial Position. [6]

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End of Paper — Total Marks: 60

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TuitionGoWhere Practice Paper Answers — Principles of Accounts Secondary 4 (Version 5)

Topic: Inventory Costing
Total Marks: 60

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Section A: Basic Concepts and Valuation (10 marks)

Q1 [1 mark]
Answer: Lower of cost and net realisable value (NRV).
Teaching note: Inventory must not be overstated. Prudence means we report the lower of what it cost us or what we can sell it for (minus costs to sell).

Q2 [2 marks]
Answer: Net realisable value is the estimated selling price of inventory in the ordinary course of business, less any estimated costs of completion and costs necessary to make the sale (e.g. selling expenses).
Marking: 1 mark for selling price idea, 1 mark for deducting costs to sell.
Common mistake: Confusing NRV with cost price.

Q3 [2 marks]
COGS = Opening Inventory + Purchases − Closing Inventory
= $4,000 +$30,000 − $5,000 =$29,000
Answer: $29,000.
Teaching: Closing inventory is deducted because it is unsold and remains an asset.

Q4 [2 marks]
Answer: Incorrect. If closing inventory is overstated by $800, COGS is understated, so profit is OVERSTATED by$800.
Marking: 1 mark correct direction, 1 mark explanation.
Common trap: Reversing the effect.

Q5 [3 marks]
Any two of: (1) avoid overstocking (storage cost, obsolescence), (2) avoid stockouts (lost sales), (3) improve cash flow, (4) meet customer demand efficiently.
[1.5 marks each, max 3]

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Section B: FIFO and AVCO Methods (22 marks)

Q6 [3 marks]
FIFO: issues from earliest stock first.

• 12 Mar sale 150: 100 @ $10 + 50 @$12 = $1,000 +$600 = $1,600
• Remaining: 150 @ $12
• 20 Mar purchase: +100 @ $14 → 150 @$12, 100 @ $14
• 25 Mar sale 180: 150 @ $12 + 30 @$14 = $1,800 +$420 = $2,220
• Closing: 70 @ $14 =$980
  Answer: $980.
  Marking: 1 m calc remaining, 1 m sale allocation, 1 m final value.

Q7 [2 marks]
COGS = Total available − Closing = (100×10 + 200×12 + 100×14) − 980 = ($1,000+$2,400+$1,400)−$980 = $4,800−$980 = $3,820 Answer:$3,820.

Q8 [3 marks]
After 20 Mar: total units = 150 (from earlier remaining) + 100 = 250? Wait: after 12 Mar sale, 150@$12 remain. Add 100@$14. Total cost = 150×12 + 100×14 = $1,800+$1,400=$3,200. AVCO =$3,200 ÷ 250 = $12.80 per unit. Answer:$12.80.

Q9 [2 marks]
After 25 Mar sale 180: 250−180 = 70 units. AVCO closing = 70 × $12.80 =$896.
Answer: $896.

Q10 [2 marks]
During rising prices, FIFO leaves newer (higher) cost units in closing inventory, so closing inventory is higher under FIFO than AVCO. AVCO smooths costs.

Q11 [4 marks]
FIFO on card:

• 1 Apr: 50 @ $20
• 8 Apr: +100 @ $22 → bal 150 (50@20, 100@22)
• 15 Apr issue 120: 50@20 + 70@22 → bal 30@22
• 22 Apr: +80@24 → bal 30@22, 80@24
• 28 Apr issue 90: 30@22 + 60@24 → bal 20@24
  Closing = 20 × $24 =$480.
  Answer: $480. [4 m: 1 each step]

Q12 [2 marks]
FIFO gives higher closing inventory in inflation because latest (higher) prices remain in inventory. AVCO averages them down.

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Section C: Inventory Turnover and Analysis (14 marks)

Q13 [2 marks]
Avg inv = ($15,000+$21,000)/2 = $18,000 Turnover =$120,000 ÷ $18,000 = 6.67 times
Answer: 6.67 times.

Q14 [3 marks]
Calm = 6.67, Swift = 9. Swift is more efficient (faster stock movement, lower holding cost). Calm may be overstocking or slow-moving. [1 compare, 2 comment]

Q15 [3 marks]
From graph: A 6→7 (+1), B 8→8.5 (+0.5), C 5→6.2 (+1.2). C improved most by 1.2 times.
Answer: Company C, 1.2 times.

Q16 [6 marks]
Two factors (3 marks each):

1. Seasonal demand – firm holds stock before peak season.
2. Slow-moving / obsolete goods – poor management or niche products.
3. High-value items sold infrequently.
   (Any two with explanation.)

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Section D: Integrated Application (14 marks)

Q17 [3 marks]
COGS = 8,000+52,000−10,000 = $50,000 GP = Sales − COGS = 80,000−50,000 =$30,000.
Answer: $30,000.

Q18 [3 marks]
Falling prices: FIFO uses older (higher) costs first, so COGS is higher under FIFO; AVCO lower. Thus FIFO gives higher COGS.

Q19 [2 marks]
NRV = $400 −$100 = $300. Report at$300 (lower than cost).
Answer: $300.

Q20 [6 marks]
Method choice changes COGS and closing inventory. FIFO in inflation → higher closing inventory → higher assets on SFP, lower COGS, higher profit. AVCO → smoother. Diagram shows flow to SFP. [2 sequence, 2 effect, 2 link to SFP]