Question 1

The accounting principle that requires the same depreciation method or inventory valuation method to be used over consecutive accounting periods is:
A)conservatism.
B)consistency.
C)reliability.
D)historical cost.

Accepted Answer

The accounting principle that requires consistency in the use of depreciation methods or inventory valuation methods over successive accounting periods is consistency. This is important for comparability between different periods and for the accuracy of financial statements.

Question 2

Choose the statement that best describes the effects of the LIFO inventory valuation method compared to FIFO or average cost.
A)During periods of falling prices, LIFO gives the highest gross profit and the lowest closing inventory value.
B)During periods of rising prices, LIFO gives the highest gross profit and the lowest closing inventory value.
C)During periods of rising prices, LIFO gives the lowest gross profit and the lowest closing inventory value.
D)None of the above

Accepted Answer

During periods of rising prices, the Last In, First Out (LIFO) method results in the newest, most expensive inventory being sold first, leading to lower gross profit due to higher cost of goods sold and a lower closing inventory value, as the older, cheaper inventory remains unsold.

Question 3

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

Accepted Answer

Buildings generally contribute to income consistently over time, so straight-line depreciation is the best method. Motor vehicles typically contribute more to income in the early years of their use, so reducing-balance depreciation is a better choice. Therefore, choice C, straight-line for the building and reducing-balance for the motor vehicle, best matches their income contributions.

Question 4

LTT had stock on hand on the 1st January 2018 of 100 heaters valued at $50 each.
The following transactions occurred during January:
 Jan 7 $\quad$bought 110 heaters at $ \$ 52 $ each
$\quad$15$\quad$ sold 60 heaters at $ \$ 80 $ each (selling price
$\quad$30 $\quad$sold 70 heaters at $ \$ 80 $ each (selling price) REQUIRED:
a)Calculate cost of sales and closing stock at the end of the month from the above information using:
 i)$\quad$ the FIFO methed of valuation,
ii)$\quad$ the LIFO method of valuation, and
iii) $\quad$the average cost method of valuation. b)Prepare a statement of comprehensive income for the month ended 31 January under each method assuming no stock loss (use a columnar approach).
 c) 1) Which method produces the most favourable profit result for LTT?
ii) Comment on why the differences in profit have occurred under the 3 methods.

Accepted Answer

The answer of LTT had stock on hand on the...

Question 5

Choose the statement which is correct. Assume that inventory prices are rising.
A)The LIFO method gives the highest closing inventory figure in the statement of financial position.
B)The FIFO method gives the highest closing inventory figure in the statement of financial position.
C)The FIFO method gives the lowest closing inventory figure in the statement of financial position.
D)The LIFO method gives the lowest figure for cost of sales.

Accepted Answer

Under FIFO (First-in, First-out) method, the older and cheaper inventory is sold first, which results in a higher valuation of the remaining higher-priced inventory. Hence, in a rising price scenario, FIFO method will result in the highest closing inventory figure in the statement of financial position.

Question 6

The method of inventory valuation that assumes the earliest inventory acquired is the first to be sold is the:
A)lower of cost and net realisable value method.
B)average cost method
C)FIFO method.
D)LIFO method.

Accepted Answer

The method of assuming the earliest inventory acquired is the first to be sold is known as the first-in, first-out (FIFO) method. This method assumes that the first inventory purchased or produced is the first to be sold, leaving the most recently produced or purchased inventory in the company's possession.

Question 7

Which of these is not part of inventory for a manufacturing firm?
A)Partly completed goods (work in process)
B)Raw materials
C)Finished goods
D)None of the above, i.e., all are part of inventory

Accepted Answer

All of the options listed (partly completed goods, raw materials, and finished goods) are part of inventory for a manufacturing firm.

Question 8

An item of inventory costing $750 can now only be sold at auction for $200. Auction costs of $50 will be incurred to make the sale. The net realisable value of the inventory is:
A)$700
B)$150
C)$750
D)$200

Accepted Answer

The net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion, and selling expenses. 
In this case, the estimated selling price is $200, and the estimated auction costs are $50. Therefore, the net realisable value is $150 ($200 - $50 = $150).

Question 9

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)$60 000
B)$62 000
C)$51 000
D)$49 500

Accepted Answer

The answer of If inventory item X has a cost...

Question 10

Which of these is not an area where judgement must normally be applied in order to calculate depreciation expense?
A)Determining the residual or disposal value of the asset
B)Determining the expected useful life of the asset
C)Choosing a depreciation method
D)None of the above

Accepted Answer

All three areas (determining residual value, expected useful life, and choosing a depreciation method) require judgement in order to calculate depreciation expense. Therefore, none of them are exempt from requiring judgement.

Question 11

The method of inventory valuation that assumes earliest inventory acquired comprises the stock of inventory at the end of the period is the:
A)reducing-balance method.
B)FIFO method.
C)average cost method.
D)LIFO method.

Accepted Answer

The answer of The method of inventory valuation that assumes...

Question 12

What type of account is accumulated depreciation?
A)A liability account
B)An expense account
C)A contra asset account
D)An equity account

Accepted Answer

Accumulated depreciation is a contra asset account, which means it has a credit balance and is used to offset the balance of another asset account (in this case, the related fixed asset account). This account shows the total amount of depreciation recorded on a fixed asset over its useful life. It is not a liability account, expense account, or equity account.

Question 13

Choose the statement about depreciation that is correct.
A)Yearly depreciation will always be higher using the straight-line 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 lower using the units of use method.
D)Yearly depreciation will always be higher using the reducing-balance method.

Accepted Answer

Total depreciation charged will be the same whichever depreciation method is used, since the total amount depreciated will be the same regardless of the method used.

Question 14

Calculate cost of sales if stock at start is $2 450, purchases are $19 000 and stock at end is $1 000.
A)$21 450
B)$20 450
C)$22 550
D)$22 450

Accepted Answer

The cost of sales formula is: Cost of Sales = Opening Stock + Purchases - Closing Stock. So, $2,450 (Opening Stock) + $19,000 (Purchases) - $1,000 (Closing Stock) = $20,450.

Question 15

Cost of sales is a major expense for a retailer. Cost of sales is:
A)the cost of the goods purchased during the period.
B)the cost of the goods available for sale during the period.
C)the cost of the goods sold during the period.
D)None of the above

Accepted Answer

Cost of sales is the cost directly associated with producing or purchasing the goods that were sold during the period. Therefore, it is the cost of the goods sold during the period. Options A and B both include goods that may not have been sold yet, while option D is not correct as one of the other options is correct.

Question 16

Calculate the goods available for sale if sales are $7 000, inventory at beginning is $3 400, inventory at end is $2 100 and purchases of inventory are $5 600.
A)$6 900
B)$18 100
C)$12 500
D)$9 000

Accepted Answer

The answer of Calculate the goods available for sale if...

Question 17

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

Accepted Answer

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

Question 18

The writing off of a debtor's account as a bad debt when no allowance for doubtful debts has been made will see:
A)a decrease in the asset accounts receivable, decrease in equity.
B)no effect.
C)a decrease in the asset accounts receivable, increase in the liability provision for doubtful debts.
D)a decrease in the asset bank, decrease in the asset accounts receivable.

Accepted Answer

Writing off a debtor's account as a bad debt means that the company can no longer expect to receive payment from that debtor. This results in a decrease in the asset accounts receivable, as the company can no longer consider that amount of money to be owed to them. Since no allowance for doubtful debts has been made, the decrease in the asset will result in a direct decrease in equity as well. Therefore, option A is the correct choice.

Question 19

The accounting principle underpinning the inventory valuation rule 'the lower of cost and net realisable value' is:
A)prudence (conservatism).
B)historical cost.
C)matching costs with revenue.
D)going concern.

Accepted Answer

The principle of prudence or conservatism states that accounting should err on the side of caution and anticipate losses in advance, rather than overstating gains. The inventory valuation rule "lower of cost and net realisable value" is an application of this principle, as it ensures that inventory is not overstated by valuing it at the lower of its historical cost or its estimated net realisable value.

Question 20

Calculate gross profit if sales are $90 000, inventory at beginning is $5 600, purchases of inventory are $30 500 and inventory at end is $4 900.
A)$41 000
B)$31 200
C)$58 800
D)$59 500

Accepted Answer

Gross profit is calculated as Sales - Cost of Goods Sold (COGS). COGS is calculated as (Beginning Inventory + Purchases) - Ending Inventory. Therefore, COGS = ($5,600 + $30,500) - $4,900 = $31,200. Gross profit = Sales - COGS = $90,000 - $31,200 = $58,800.

Quiz 3: Measuring and Reporting Financial Performance

The accounting principle that requires the same depreciation method or inventory valuation method to be used over consecutive accounting periods is:

Choose the statement that best describes the effects of the LIFO inventory valuation method compared to FIFO or average cost.

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

Choose the statement which is correct. Assume that inventory prices are rising.

The method of inventory valuation that assumes the earliest inventory acquired is the first to be sold is the:

Which of these is not part of inventory for a manufacturing firm?

An item of inventory costing $750 can now only be sold at auction for $200. Auction costs of $50 will be incurred to make the sale. The net realisable value of the inventory 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:

Which of these is not an area where judgement must normally be applied in order to calculate depreciation expense?

The method of inventory valuation that assumes earliest inventory acquired comprises the stock of inventory at the end of the period is the:

What type of account is accumulated depreciation?

Choose the statement about depreciation that is correct.

Calculate cost of sales if stock at start is $2 450, purchases are $19 000 and stock at end is $1 000.

Cost of sales is a major expense for a retailer. Cost of sales is:

Calculate the goods available for sale if sales are $7 000, inventory at beginning is $3 400, inventory at end is $2 100 and purchases of inventory are $5 600.

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

The writing off of a debtor's account as a bad debt when no allowance for doubtful debts has been made will see:

The accounting principle underpinning the inventory valuation rule 'the lower of cost and net realisable value' is:

Calculate gross profit if sales are $90 000, inventory at beginning is $5 600, purchases of inventory are $30 500 and inventory at end is $4 900.