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Secondary 4 Principles of Accounts Inventory Costing Quiz

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Questions

Secondary 4 Principles of Accounts Quiz - Inventory Costing

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

Duration: 60 Minutes
Total Marks: 50
Instructions: Answer all questions. Show all workings clearly for calculation questions. Round all final answers to 2 decimal places where applicable.

Section A: Conceptual Understanding (Questions 1-5)

State the basis of inventory valuation. (1)
Explain the accounting concept (principle) that requires inventory to be valued at the lower of cost and net realisable value. (2)
Define "Net Realisable Value" (NRV). (2)
State two reasons why a business might choose the FIFO (First-In, First-Out) method over the Weighted Average Cost (AVCO) method. (2) i) ________________________________________________________________________ ii) ________________________________________________________________________
Explain the difference between a cash sale and a credit sale in terms of how they affect the business's current assets. (3)

Section B: Calculations & Application (Questions 6-15)

Calculate the cost of sales for Zenith Trading for the year ended 31 December 2023 given:
- Opening Inventory: $12,000
- Purchases: $85,000
- Purchase Returns: $3,000
- Carriage Inwards: $2,000
- Closing Inventory: $15,000 (2)
Working:

Answer: $____________________
Calculate the inventory turnover rate for Apex Ltd for the year ended 31 December 2023:
- Cost of Goods Sold: $120,000
- Opening Inventory: $18,000
- Closing Inventory: $22,000 (2)
Working:

Answer: ____________________ times
A business discovered that its closing inventory on 31 December 2023 was overstated by $4,000. State the effect of this error on the profit for the year ended 31 December 2023. (1)
A business discovered that its opening inventory on 1 January 2024 was understated by $2,500. State the effect of this error on the profit for the year ended 31 December 2024. (1)
Calculate the cost of sales for a business with the following data:
- Revenue: $200,000
- Gross Profit Margin: 30% (2)
Working:

Answer: $____________________
Using the FIFO method, calculate the value of closing inventory for a business with these transactions:
- Jan 1: Opening stock 100 units @ $5 each
- Jan 10: Purchased 200 units @ $6 each
- Jan 20: Sold 150 units
- Jan 25: Purchased 100 units @ $7 each (3)
Working:

Answer: $____________________
Using the Weighted Average Cost (AVCO) method, calculate the value of closing inventory for the same transactions in Question 11. (3)

Working:

Answer: $____________________
Compare the closing inventory values from Question 11 and 12. Which method results in a higher inventory valuation in a period of rising prices? (2)
Calculate the average inventory for a business if the inventory turnover rate is 6 times and the Cost of Goods Sold is $90,000. (2)

Working:

Answer: $____________________
If the closing inventory is understated by $1,000, how does this affect the Gross Profit? (1)

Section C: Analysis & Synthesis (Questions 16-20)

Entity A has an inventory turnover rate of 8 times, while Entity B has a rate of 3 times. Compare and comment on the efficiency of their inventory management. (3)
Explain two reasons why a business's inventory turnover rate might decrease from one year to the next. (4) Reason 1: _________________________________________________________________ Reason 2: _________________________________________________________________
A business has a Gross Profit Margin of 40% and an inventory turnover rate of 12 times. Explain how these two figures together indicate the business's pricing and sales strategy. (4)
Prepare the trading portion of the Income Statement for "Quick-Stop Mart" for the year ended 31 December 2023:
- Sales: $450,000
- Opening Inventory: $40,000
- Purchases: $280,000
- Carriage Inwards: $5,000
- Closing Inventory: $30,000 (5)
(Space for Trading Account)
A business is deciding between FIFO and AVCO. If the business expects prices of raw materials to fall significantly next year, which method would result in a lower cost of sales? Justify your answer. (4)

Answers

Secondary 4 Principles of Accounts Quiz - Inventory Costing (Answer Key)

Basis: Lower of cost and net realisable value (NRV). (1m)
Concept: Prudence Concept. (1m) It ensures that assets and income are not overstated and liabilities and expenses are not understated. (1m)
NRV Definition: The estimated selling price in the ordinary course of business (1m) minus the estimated costs of completion and the estimated costs necessary to make the sale. (1m)
Reasons for FIFO:
- Closely mimics the actual physical flow of goods (especially for perishables). (1m)
- Results in a closing inventory value that is closer to current market replacement costs. (1m)
Difference:
- Cash sale: Increases Cash (Asset) immediately; no change in total current assets. (1m)
- Credit sale: Increases Trade Receivables (Asset) instead of cash. (1m)
- Impact: Credit sales increase the risk of irrecoverable debts compared to cash sales. (1m)
Cost of Sales: Working: $12,000 + ($ 85,000 - $3,000) +$ 2,000 - $15,000 =$ 81,000. (2m) Answer: $81,000
Inventory Turnover: Working: Average Inventory = ( $18,000 +$ 22,000) / 2 = $20,000. Turnover =$ 120,000 / $20,000 = 6. (2m) Answer: 6 times
Effect: Profit is overstated by $4,000. (Closing inventory$ \uparrow\rightarrow $COGS$ \downarrow\rightarrow $Profit$ \uparrow$). (1m)
Effect: Profit is overstated by $2,500. (Opening inventory$ \downarrow\rightarrow $COGS$ \downarrow\rightarrow $Profit$ \uparrow$). (1m)
Cost of Sales: Working: Gross Profit = 30% of $200,000 =$ 60,000. COGS = $200,000 -$ 60,000 = $140,000. (2m) Answer:$ 140,000
FIFO Closing Inventory: Total units = 100 + 200 + 100 = 400. Sold 150. Remaining = 250 units. Valuation: 100 units @ $7 (latest) + 150 units @$ 6 = $700 +$ 900 = $1,600. (3m) Answer:$ 1,600
AVCO Closing Inventory: Total Cost = (1005) + (2006) + (100*7) = 500 + 1200 + 700 = $2,400. Total Units = 400. Avg Cost =$ 2,400 / 400 = $6 per unit. Closing Inventory = 250 units *$ 6 = $1,500. (3m) Answer:$ 1,500
Comparison: FIFO results in a higher inventory valuation ( $1,600 vs$ 1,500). (1m) In periods of rising prices, FIFO leaves the most expensive (newest) items in stock. (1m)
Average Inventory: Working: $90,000 / 6 =$ 15,000. (2m) Answer: $15,000
Effect: Gross Profit is understated. (Closing inventory $\downarrow$ $\rightarrow$ COGS $\uparrow$ $\rightarrow$ GP $\downarrow$ ). (1m)
Comparison: Entity A is more efficient (8 times vs 3 times). (1m) Entity A moves stock faster, reducing holding costs and risk of obsolescence. (1m) Entity B may have overstocked or is facing slow sales. (1m)
Reasons for Decrease:
- Decrease in demand for products leading to unsold stock. (2m)
- Bulk purchasing to take advantage of discounts, increasing average inventory. (2m)
Strategy: High GP margin (40%) suggests a premium pricing strategy or high value-add. (2m) High turnover (12 times) suggests high volume sales. Together, this indicates a highly successful "high-margin, high-volume" strategy. (2m)
Trading Account: Sales: $450,000 Less: Cost of Sales: Opening Inventory:$ 40,000 Add: Purchases: $280,000 Add: Carriage Inwards:$ 5,000 Less: Closing Inventory: ( $30,000) COGS: ($ 295,000) (4m) Gross Profit: $155,000 (1m)
Decision: AVCO would likely result in a lower cost of sales. (1m) In a falling price environment, FIFO uses the oldest (more expensive) stock first, increasing COGS. (2m) AVCO averages the high old prices with the new lower prices, resulting in a lower COGS than FIFO. (1m)