VCE-ACCT-U12 9.1 📋 – VCE Accounting Practice Exam 6

VCE Accounting Practice Exam 6

Trading Business – Inventory and COGS

Question 1  (4 marks)

Question 2  (4 marks)

Question 3  (4 marks)

Question 4  (4 marks)

Question 5  (4 marks)

Question 6  (4 marks)

Question 7  (4 marks)

Question 8  (4 marks)

Question 9  (6 marks)

Question 10  (2 marks)

Question 11  (5 marks)

Question 12  (3 marks)

✦ Model Answer – Question 1 (4 marks)

Service business: earns revenue by providing services. No inventory held. Revenue = Fees Earned. Income Statement: Revenue − Expenses = Net Profit.
Trading business: earns revenue by buying and selling goods. Holds inventory. Revenue = Sales. Income Statement adds: Sales − COGS = Gross Profit; Gross Profit − Expenses = Net Profit.
Additional accounts for trading: Inventory, Cost of Sales (COGS), Sales Returns, Purchase Returns, GST Clearing.
Additional statements/records: inventory records (stock cards for perpetual system), more complex Income Statement showing gross profit separately.

✦ Model Answer – Question 2 (4 marks)

Perpetual inventory: inventory records updated after every purchase, sale, and return. The Inventory account always shows the current balance. COGS recorded at the time of each sale.
Advantages: (1) Real-time inventory balance – management always knows stock on hand. (2) Inventory losses detected promptly via comparison with physical counts. (3) More accurate COGS for pricing decisions. (4) Supports reorder levels and prevents stockouts.
Sale entries (perpetual):
(1) Revenue: Dr Accounts Receivable/Bank; Cr Sales; Cr GST Clearing.
(2) Cost: Dr Cost of Sales; Cr Inventory.
Both entries made simultaneously at point of sale.

✦ Model Answer – Question 3 (4 marks)

FIFO: oldest units sold first.
Sale of 40 units:
20 units from opening @ $30 = $600
20 units from purchase @ $35 = $700
COGS = $600 + $700 = $1,300
Closing inventory: 30 units remaining @ $35 = $1,050
Verification: Opening $600 + Purchases $1,750 − COGS $1,300 = Closing $1,050 ✓

✦ Model Answer – Question 4 (4 marks)

(i) Dr Inventory $2,200; Dr GST Clearing $220; Cr Accounts Payable $2,420
(ii) Revenue: Dr AR $2,904 [60×$44×1.1]; Cr Sales $2,640; Cr GST Clearing $264
Cost: Dr Cost of Sales $1,320 [60×$22]; Cr Inventory $1,320
(iii) Reverse revenue: Dr Sales Returns $220 [5×$44]; Dr GST Clearing $22; Cr AR $242
Restore inventory: Dr Inventory $110 [5×$22]; Cr Cost of Sales $110

✦ Model Answer – Question 5 (4 marks)

GPM = (Gross Profit ÷ Net Sales) × 100
Gross Profit = $180,000 − $108,000 = $72,000
GPM = ($72,000 ÷ $180,000) × 100 = 40%
Meaning: the business retains 40 cents of gross profit for every $1 of sales before operating expenses are deducted.
Factors causing decline:
1. Increase in purchase cost of inventory without corresponding price increase – e.g., supplier price rises not passed on to customers.
2. Decrease in selling prices – e.g., discounting to compete, leading to lower revenue per unit while COGS stays the same.

✦ Model Answer – Question 6 (4 marks)

Inventory loss = 50 − 45 = 5 units × $28 = $140
Dr Inventory Loss $140
Cr Inventory $140
[Narration: Inventory adjustment following physical stocktake – 5 units unaccounted for]
The Inventory Loss account is an expense on the Income Statement, reducing net profit. The Inventory account is reduced to reflect the actual physical count. This adjustment ensures the Balance Sheet shows the correct inventory value and the Income Statement reflects the full cost of running the business.

✦ Model Answer – Question 7 (4 marks)

Identified Cost: each individual inventory item is tracked separately. The COGS for a sale equals the actual purchase price of that specific item sold.
Used when: goods are high-value, individually distinguishable, and few in number. Examples: motor vehicles, jewellery, artwork, custom-manufactured goods, antiques.
Comparison with FIFO:
FIFO: assumes oldest units sold first – systematic assumption, does not track individual items. Suitable for homogeneous goods (any unit is identical).
Identified Cost: tracks each specific item – precise but requires detailed records. More accurate for unique goods but impractical for large quantities of identical items.
Both methods are acceptable under Australian accounting standards; the choice should be disclosed and applied consistently.

✦ Model Answer – Question 8 (4 marks)

Inventory write-down: reduction of the carrying value of inventory to its Net Realisable Value (NRV) when NRV falls below cost.
NRV = estimated selling price − costs to complete and sell.
Required when: inventory is damaged, obsolete, selling prices have fallen, or goods are no longer saleable at above cost.
Example: 10 units cost $50 each; NRV = $35 each. Write-down = ($50−$35)×10 = $150.
Journal entry: Dr Inventory Loss $150; Cr Inventory $150
Effect on financial statements:
Income Statement: Inventory Loss increases expenses → reduces net profit.
Balance Sheet: Inventory reduced by $150 → total assets decrease.
Conservatism principle: we record the lower of cost or NRV to avoid overstating assets.

✦ Model Answer – Question 9 (6 marks)

FIFO:
Sale 1 (45 units): 30×$20=$600 + 15×$24=$360 = COGS $960
After Sale 1: 35 units @ $24 remain.
Sale 2 (35 units): 35×$24=$840 = COGS $840
After Sale 2: 40 units @ $26 remain from Purchase 2.
Total COGS = $960 + $840 = $1,800
Closing inventory: 40 units × $26 = $1,040
Verification: Opening $600 + Purchases ($1,200+$1,040) − COGS $1,800 = Closing $1,040 ✓
GPM: Total sales = (45+35)×$40 = $3,200. Gross Profit = $3,200−$1,800 = $1,400. GPM = $1,400÷$3,200×100 = 43.75%

✦ Model Answer – Question 10 (2 marks)

Consistency principle: same accounting methods applied each period to allow meaningful comparison of results over time.
If a business switched from FIFO to Identified Cost, changes in COGS, GPM, and net profit would reflect the method change rather than genuine business performance – making period-to-period comparison misleading.
Any change must be disclosed in the notes to the financial statements and applied only when genuinely justified by changed circumstances.

✦ Model Answer – Question 11 (5 marks)

Mason’s Furniture – Income Statement year ended 30 June
Gross Sales $320,000
Less Sales Returns $4,800
Net Sales $315,200
Less Cost of Sales:
Opening Inventory $28,000
Add Purchases $192,000
Less Purchase Returns ($3,200)
Less Closing Inventory ($31,000)
COGS $185,800
Gross Profit $129,400
Gross Profit Margin = $129,400÷$315,200×100 = 41.1%
Less Expenses: Wages $38,000 + Rent $18,000 + Depreciation $9,600 + Bad Debts $1,400 = $67,000
Net Profit $62,400
Net Profit Margin = $62,400÷$315,200×100 = 19.8%

✦ Model Answer – Question 12 (3 marks)

GPM 41.1% vs industry 38%: above average – Mason’s earns more gross profit per dollar of sales. This could reflect premium pricing, lower-cost suppliers, or efficient purchasing. Positive indicator of pricing strategy.
NPM 19.8% vs industry 22%: below average – despite a high GPM, operating expenses consume more revenue than industry peers. This suggests Mason’s other expenses (wages, rent, depreciation, bad debts) are proportionally higher than competitors.
Conclusion: Mason’s has a strong pricing position but needs to review operating cost efficiency. Reducing wages relative to revenue or renegotiating rent could bring NPM in line with industry standards.