Question 1

Employees have worked for the full year and have received total wages of $306,000 in cash. However, they must wait until the next payday to be paid for the last three days of the year they have worked. The amount owing is $5,500. Wages expense in the income statement and accrued wages in the balance sheet are, respectively:
A) $311,500; $0
B) $306,000; $0
C) $306,000; $5,500
D) $311,500; $5,500

Accepted Answer

The correct wages expense for the income statement is $311,500, which includes both the cash paid ($306,000) and the amount still owed ($5,500) for the full year's work. The accrued wages of $5,500 represent the liability on the balance sheet for wages earned but not yet paid.

Question 2

Choose the statement about depreciation that is correct.
A) Yearly depreciation will always be higher using the reducing-balance method.
B) At the end of the asset's useful life, total depreciation charged will be the same whichever depreciation method is used.
C) Yearly depreciation will always be higher using the straight-line method.
D) Yearly depreciation will always be lower using the units of production method.

Accepted Answer

The total depreciation charged at the end of an asset's useful life will be the same regardless of which depreciation method is used. This is because the total amount of depreciation charged over the asset's life should be the same, regardless of whether it is calculated using straight-line, reducing-balance, or units of production method.

Question 3

If doubtful debts are over-estimated:
A) profit for the following years will be understated.
B) profit over the total life of the business will be understated.
C) profit for following years will be overstated.
D) profit for the current year will be overstated.

Accepted Answer

If doubtful debts are over-estimated, it means that more provision than necessary has been made for bad debts. This leads to an understatement of profit for the current year. However, in the following years, the actual bad debts may be lower than what was estimated, and so less provision will be required. As a result, profit for the following years will be overstated. Therefore, the correct choice is C.

Question 4

In calculating depreciation, the life of an asset refers to its:
A) technological life.
B) legal life.
C) useful life.
D) physical life.

Accepted Answer

The life of an asset refers to its useful life - the period of time over which an asset is expected to be useful to the business before it becomes obsolete or inefficient. It is based on estimates of wear and tear, expected usage, and technological change. The legal life refers to the period of time during which an asset is required to be held based on legal or tax regulations, and may not necessarily align with the useful life. The physical life refers to the actual length of time an asset lasts before it is no longer usable.

Question 5

If equity at the beginning of the period is $35,000 and at the end of the period is $56,000, and $20,000 is withdrawn by the owner during the period, calculate profit. (Use the stock approach.)
A) $1,000
B) $21,000
C) $41,000
D) $76,000

Accepted Answer

The profit can be calculated using the formula: Ending Equity = Beginning Equity + Profit - Withdrawals. Rearranging the formula to solve for profit gives: Profit = Ending Equity - Beginning Equity + Withdrawals. Substituting the given values: Profit = $56,000 - $35,000 + $20,000 = $41,000.

Question 6

Identify the recognition criteria that must be satisfied under the Conceptual Framework for an expense to be included in the income report.
A) probability that the outflow of resources has occurred
B) outflow of resources able to be reliably measured
C) outflow of resources virtually certain
D) both A and B

Accepted Answer

According to the Conceptual Framework, an expense should be recognized in the income statement if it meets the following criteria: (1) there is a probability that the outflow of resources has occurred, and (2) the outflow of resources can be reliably measured. Therefore, option D, which includes both criteria A and B, is the correct answer. Option C, while sounding similar to criterion A, is not an actual recognition criterion.

Question 7

On 31 December 2013, a new machine with a useful life of 6 years and an estimated residual value of zero was purchased by a business at a cost of $30,000. The amount of depreciation expense charged for the year ended 31st December 2015, using the reducing balance method at a rate of 30% per annum, is:
A) $6,300
B) $9,000
C) $5,000
D) $1,800

Accepted Answer

The depreciation for the year ended 31st December 2015 is calculated using the reducing balance method at a rate of 30% per annum. For the first year (2014), the depreciation is 30% of $30,000, which is $9,000, leaving a book value of $21,000. For the second year (2015), the depreciation is 30% of $21,000, which is $6,300.

Question 8

Which statement about net profit is not true?
A) Net profit normally represents the amount of cash generated from operations for the period.
B) Net profit increases equity.
C) Net profit is a measure of achievement or productive effort.
D) None of the statements, i.e. all are true.

Accepted Answer

Net profit is not always equal to the amount of cash generated from operations. It is calculated by subtracting total expenses from total revenue earned during the period. It is possible for a company to have a net profit but not generate cash from operations, for example, if they have significant non-cash expenses such as depreciation or amortization.

Question 9

Which of these occurrences could account for a difference between the total value of inventory in the accounting records and the total value of inventory as per the stocktake?
A) inventory stolen from the storeroom
B) cost of sales transactions not recorded in the accounting records
C) some inventory items not counted in the stocktake
D) all of the above

Accepted Answer

All of the given occurrences could account for a difference between the total value of inventory in the accounting records and the total value of inventory as per the stocktake. Inventory theft would mean that the actual physical inventory is less than what the accounting records indicate. If cost of sales transactions are not recorded in the accounting records, it would mean that the cost of goods sold is understated, which would result in an overstatement of inventory. Similarly, if some inventory items are not counted in the stocktake, it would result in an understatement of inventory.

Question 10

To allow for debts that might prove bad in the future, a business will recognise as an expense in the income report:
A) bad debts.
B) provision for depreciation.
C) provision for doubtful debts.
D) doubtful debts.

Accepted Answer

The answer of To allow for debts that might prove...

Question 11

Accrual accounting:
A) recognises expenses when they are possible.
B) recognises expenses when they are earned.
C) recognises expenses when the cash has been paid.
D) recognises expenses when they have been incurred (economic benefits used up) regardless of whether the cash has or hasn't been paid.

Accepted Answer

Accrual accounting recognises expenses when they have been incurred (economic benefits used up) regardless of whether the cash has or hasn't been paid. This means that expenses are recorded when they are owed, rather than when they are paid, which gives a more accurate picture of a company's financial position.

Question 12

A forklift had a purchase price of $10,000, delivery costs of $2,000, a physical life of 6 years and a useful life of 4 years. Estimated residual value is zero. The annual depreciation charge using the straight-line method is:
A) $2,000
B) $3,000
C) $2,500
D) $1,667

Accepted Answer

The annual depreciation charge using the straight-line method is calculated by subtracting the residual value from the cost and then dividing by the useful life. The cost includes the purchase price plus delivery costs, so $10,000 + $2,000 = $12,000. With a useful life of 4 years and a residual value of $0, the annual depreciation is $12,000 / 4 = $3,000.

Question 13

The asset that is not depreciated is:
A) land.
B) buildings.
C) premises.
D) motor vehicles.

Accepted Answer

Land is not subject to depreciation since its value does not decrease over time.

Question 14

If inventory item X has a cost of $49,000 and a net realisable value of $60,000 while inventory item Y has a cost of $2,000 and a net realisable value of $500, closing inventory will be valued at:
A) $49,500
B) $60,000
C) $62,000
D) $51,000

Accepted Answer

Inventory item X is valued at the lower of cost and net realisable value, which is $49,000. Inventory item Y is valued at the lower of cost and net realisable value, which is $500. Therefore, closing inventory will be valued at $49,000 + $500 = $49,500.

Question 15

The accounting statement which is specifically designed to measure and report on how much profit an entity has made is:
A) the balance sheet.
B) the cash flow statement.
C) the statement of comprehensive income.
D) all of the above.

Accepted Answer

The statement of comprehensive income is the accounting statement specifically designed to measure and report on how much profit an entity has made. The balance sheet reports on an entity's assets, liabilities, and equity at a specific point in time, while the cash flow statement reports on an entity's cash inflows and outflows over a specific period of time.

Question 16

The major purpose of charging depreciation is:
A) to adjust the asset to its expected market value.
B) to provide for the replacement of the asset.
C) to spread the cost of the asset over its useful life so that the cost of using it up is matched against income earned.
D) none of the above.

Accepted Answer

Depreciation is charged to spread the cost of an asset over its useful life so that the cost of using it up is matched against the income earned by using it. It is a non-cash expense that reflects the wear and tear of an asset over time. Thus, option C is the correct answer. Option A is incorrect because the purpose of charging depreciation is not to adjust an asset to its expected market value; instead, it reflects the cost of using up the asset. Option B is also incorrect because depreciation does not provide for the replacement of an asset; it only reflects its historical cost.

Question 17

In practice, under accrual accounting most income is recognised:
A) when the goods are produced.
B) at the point of sale.
C) when the cash is received.
D) when an order is received.

Accepted Answer

Under accrual accounting, income is recognized at the point of sale, regardless of when the cash is received. This means that revenue is recognized when a product or service is sold, regardless of whether or not the payment has been received. This allows for a more accurate representation of the financial performance of a business over a period of time.

Question 18

Choose the statement that best describes the way the reducing-balance method charges depreciation.
A) Yearly depreciation is lower at the beginning of the asset's life.
B) Yearly depreciation expense is greater at the end of the asset's life.
C) Yearly depreciation is the same in each year of the asset's life.
D) Yearly depreciation is greater at the beginning of the asset's life.

Accepted Answer

The reducing-balance method charges higher depreciation in the earlier years of the asset's life and decreases the amount of depreciation over time. This is because the depreciation expense is calculated based on the asset's remaining book value, and since the book value reduces each year, the amount of depreciation also reduces. Therefore, yearly depreciation is greater at the beginning of the asset's life.

Question 19

Which type of business would call its main source of income 'sales'?
A) bank
B) financial adviser
C) accounting firm
D) clothing shop

Accepted Answer

A clothing shop would call its main source of income 'sales' as they generate revenue by selling clothes to customers. The other options listed do not typically generate their main source of income through sales.

Question 20

Which depreciation method best matches the pattern by which the following contribute to income: 1. a building; 2. a motor vehicle?
A) 1. straight-line, 2. reducing-balance
B) 1. straight-line; 2. straight-line
C) 1. reducing-balance; 2. straight-line
D) 1. reducing-balance; 2. reducing-balance

Accepted Answer

A building typically depreciates at a consistent rate over its useful life, making the straight-line method appropriate. A motor vehicle, however, tends to lose value more rapidly in the initial years, making the reducing-balance method a better fit.

Quiz 4: Measuring and Reporting Financial Performance

Choose the statement about depreciation that is correct.

If doubtful debts are over-estimated:

In calculating depreciation, the life of an asset refers to its:

If equity at the beginning of the period is $35,000 and at the end of the period is $56,000, and $20,000 is withdrawn by the owner during the period, calculate profit. (Use the stock approach.)

Identify the recognition criteria that must be satisfied under the Conceptual Framework for an expense to be included in the income report.

Which statement about net profit is not true?

Which of these occurrences could account for a difference between the total value of inventory in the accounting records and the total value of inventory as per the stocktake?

To allow for debts that might prove bad in the future, a business will recognise as an expense in the income report:

Accrual accounting:

A forklift had a purchase price of $10,000, delivery costs of $2,000, a physical life of 6 years and a useful life of 4 years. Estimated residual value is zero. The annual depreciation charge using the straight-line method is:

The asset that is not depreciated is:

If inventory item X has a cost of $49,000 and a net realisable value of $60,000 while inventory item Y has a cost of $2,000 and a net realisable value of $500, closing inventory will be valued at:

The accounting statement which is specifically designed to measure and report on how much profit an entity has made is:

The major purpose of charging depreciation is:

In practice, under accrual accounting most income is recognised:

Choose the statement that best describes the way the reducing-balance method charges depreciation.

Which type of business would call its main source of income 'sales'?

Which depreciation method best matches the pattern by which the following contribute to income: 1. a building; 2. a motor vehicle?