Secondary 4 Principles of Accounts Practice Paper 5

TuitionGoWhere Practice Paper - Principles of Accounts Secondary 4

Answer Key & Marking Scheme (Version 5)

Subject: Principles of Accounts
Topic: Inventory Costing
Total Marks: 60

Section A: Structured Questions

Question 1
(a) Value of Closing Inventory (FIFO)
Total Units Available = 200 + 300 + 150 = 650 units
Total Units Sold = 350 + 200 = 550 units
Closing Inventory Units = 650 - 550 = 100 units

Under FIFO, closing inventory consists of the most recent purchases.
The last purchase was 150 units @ $14.00 on 20 Oct. Therefore, the 100 units remaining are from this batch. Value = 100 units ×$14.00 = $1,400
[1 mark for correct units, 1 mark for identifying correct batch, 1 mark for calculation, 1 mark for final answer]

(b) Cost of Sales (FIFO)
Method 1: Total Cost of Goods Available for Sale - Closing Inventory
Cost of Goods Available:
(200 × $12.00) + (300 ×$13.50) + (150 × $14.00) =$2,400 + $4,050 +$2,100 = $8,550 Cost of Sales =$8,550 - $1,400 = **$7,150**

Method 2: Direct Calculation of Sold Units
First 200 units @ $12.00 =$2,400
Next 150 units (from 300 batch) @ $13.50 =$2,025
Remaining 200 units sold:
150 units (remainder of 300 batch) @ $13.50 =$2,025
50 units (from 150 batch) @ $14.00 =$700
Wait, let's re-track sales:
Sale 1 (350 units): 200 @ $12 + 150 @$13.50 = $2,400 +$2,025 = $4,425 Sale 2 (200 units): 150 @$13.50 (remaining from 2nd batch) + 50 @ $14.00 =$2,025 + $700 =$2,725
Total COS = $4,425 +$2,725 = $7,150
[1 mark for method, 1 mark for working, 1 mark for answer]

Question 2
(a) Weighted Average Cost per Unit (AVCO Periodic)
Total Cost of Goods Available = $8,550 (from Q1) Total Units Available = 650 units AVCO Unit Cost =$8,550 / 650 = $13.1538...** (Keep decimals for intermediate step) Rounded to 2 decimals for statement: **$13.15
[1 mark for total cost, 1 mark for total units, 1 mark for division]

(b) Value of Closing Inventory (AVCO)
Closing Units = 100 units
Value = 100 × $13.1538... = **$1,315.38** (or $1,315 if using$13.15)
Accept $1,315.38 or$1,315.00 depending on rounding instruction adherence. Standard is to not round until end.
[1 mark for units, 1 mark for calculation]

(c) Comparison of Profit
FIFO results in higher gross profit.
[1 mark for FIFO]
Explanation: In a period of rising prices, FIFO assigns the older, lower costs to Cost of Sales. Lower Cost of Sales results in higher Gross Profit. AVCO averages the costs, resulting in a higher Cost of Sales than FIFO in this scenario.
[2 marks for explanation linking rising prices to lower COS in FIFO]

Question 3
(a) Effect on Gross Profit
Gross Profit is overstated by $4,500.
[1 mark]

(b) Effect on Current Assets
Current Assets are overstated by $4,500.
[1 mark]

(c) Correct Value and Concept
Value = **$200** (NRV). *[1 mark]* Concept = **Prudence** (or Conservatism). *[1 mark]* Reason: Inventory must be valued at the lower of cost ($800) and NRV ($200).
[1 mark]

(d) Importance of Concept
It ensures that assets and profits are not overstated. It provides a realistic/cautious view of the financial position, preventing distribution of unrealized profits.
[2 marks for clear explanation]

Question 4
(a) Cost of Sales
Opening Inventory: $40,000 Add: Purchases:$320,000
Add: Carriage Inwards: $5,000 Less: Closing Inventory: ($60,000)
Cost of Sales = 40,000 + 320,000 + 5,000 - 60,000 = $305,000
[1 mark for format/items, 1 mark for carriage inwards inclusion, 1 mark for answer]

(b) Gross Profit Margin
Gross Profit = Revenue - COS = 500,000 - 305,000 = $195,000
GPM = (195,000 / 500,000) × 100 = 39.0%
[1 mark for GP calc, 1 mark for formula, 1 mark for answer]

(c) Inventory Turnover Rate
Average Inventory = (40,000 + 60,000) / 2 = $50,000
Turnover = COS / Average Inventory = 305,000 / 50,000 = 6.1 times
[1 mark for avg inv, 1 mark for formula, 1 mark for answer]

Question 5
(a) Comparison
The turnover rate has increased from 4.5 times to 6.1 times.
[1 mark]

(b) Reasons for Change

1. Improved inventory management (e.g., better demand forecasting).
2. Increase in sales volume without a proportional increase in inventory levels.
3. Discontinuation of slow-moving stock lines.
   [2 marks per valid reason, max 4 marks]

(c) Negative Consequence of High Turnover
Risk of stockouts (running out of goods), leading to lost sales and dissatisfied customers.
[2 marks for identification and explanation]

Question 6
(a) Cost of Sales (Periodic AVCO)
Total Units Available = 100 + 200 + 100 = 400 units
Total Cost = (100×10) + (200×12) + (100×13) = 1,000 + 2,400 + 1,300 = $4,700 AVCO Unit Cost = 4,700 / 400 =$11.75
Units Sold = 150
Cost of Sales = 150 × $11.75 = **$1,762.50**
[1 mark for total cost, 1 mark for total units, 1 mark for unit cost, 1 mark for final COS]

(b) Perpetual vs Periodic
Same (if prices were constant) or Different?
Actually, in this specific sequence:
Perpetual:
1 Nov Bal: 100 @ 10.
10 Nov Purchase: 200 @ 12. New Avg = (1000+2400)/300 = $11.33. 15 Nov Sale: 150 @ 11.33 =$1,700.
Periodic COS was $1,762.50.
So, Perpetual COS is Lower.
[1 mark for correct direction]

Question 7
(a) Definition of NRV
Estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.
[2 marks]

(b) Item A Valuation
Cost = $50. NRV = Selling Price ($60) - Repair Costs ($15) =$45.
Lower of Cost ($50) and NRV ($45) is $45.
[2 marks]

(c) Item B Valuation
Value = $70** (NRV). Write-down = Cost ($80) - Value ($70) = **$10.
[1 mark for value, 1 mark for write-down]

Question 8
(a) Effect on Net Profit 2025
Net Profit is understated by $2,000.
(Closing Inventory was understated -> COS overstated -> Profit understated).
[1 mark]

(b) Effect on Retained Earnings 2025
Retained Earnings is understated by $2,000.
[1 mark]

(c) Effect on Gross Profit 2026
Closing Inventory 2025 becomes Opening Inventory 2026.
Opening Inventory 2026 is understated by $2,000. Understated Opening Inventory -> Understated COS -> **Overstated** Gross Profit by$2,000.
[2 marks]

Question 9
(a) Inventory Holding Period 2026
Holding Period = 365 / Inventory Turnover
= 365 / 6 = 60.83 days (or 61 days).
[2 marks]

(b) Liquidity Impact
The holding period increased (from 365/8 = 45.6 days to 60.8 days).
This is unfavorable for liquidity because cash is tied up in inventory for a longer period, reducing the cash available for other obligations.
[2 marks]

Question 10
(a) Goods on Consignment
Included. Ownership remains with the consignor (the retailer) until sold by the consignee.
[1 mark for decision, 1 mark for reason]

(b) Goods FOB Destination in Transit
Excluded. Ownership transfers only when goods reach the destination. Since they are in transit, the seller still owns them.
[1 mark for decision, 1 mark for reason]

(c) Empty Packaging Materials
Excluded. These are supplies/expenses, not inventory held for resale in the ordinary course of business.
[1 mark for decision, 1 mark for reason]

Section B: Scenario-Based Application

Question 11
(a) Cost of Sales (FIFO)
Units Sold = Opening (10) + Purchases (20) - Closing (5) = 25 units.
FIFO assumes first units bought are sold first.
10 units @ $2,000 =$20,000
15 units @ $1,800 =$27,000
Total COS = $20,000 +$27,000 = $47,000
[1 mark for units sold, 1 mark for layering, 1 mark for answer]

(b) Cost of Sales (AVCO Periodic)
Total Cost Available = (10 × 2,000) + (20 × 1,800) = 20,000 + 36,000 = $56,000 Total Units = 30 AVCO Unit Cost = 56,000 / 30 =$1,866.67
Units Sold = 25
COS = 25 × 1,866.67 = $46,666.67 (approx)
[1 mark for total cost, 1 mark for unit cost, 1 mark for COS]

(c) Higher Net Profit
FIFO results in higher COS ($47,000) vs AVCO ($46,667)?
Wait.
FIFO COS = $47,000. AVCO COS =$46,667.
Lower COS = Higher Profit.
So AVCO results in higher Net Profit.
[1 mark]

(d) Explanation
In a period of falling prices, the older inventory (FIFO) has the higher cost ($2,000). The newer inventory has the lower cost ($1,800).
FIFO assigns the higher older costs to COS.
AVCO averages the costs, resulting in a lower unit cost than the oldest FIFO layer.
Therefore, AVCO has lower COS and higher Profit.
[3 marks for logical chain: Falling prices -> FIFO uses high cost -> High COS -> Low Profit. AVCO uses avg -> Lower COS -> Higher Profit.]

(e) Non-Financial Factors

1. Consistency: Changing methods reduces comparability with previous years.
2. Administrative Cost: AVCO may require more complex calculations/system updates than FIFO.
3. Industry Practice: Deviating from industry norms may confuse investors.
   [2 marks per valid factor, max 4 marks]

(f) Importance of Disclosure

1. Transparency: Users need to know that the change is a policy change, not an operational improvement.
2. Comparability: Disclosure allows users to adjust previous years' figures (if restated) to make valid trends analysis.
3. Impact Assessment: Users can assess the quantitative impact of the change on profit and assets.
4. Compliance: Adheres to accounting standards (e.g., IAS 8 / FRS 8) requiring disclosure of accounting policies.
   [2 marks per well-explained point, max 6 marks]