Deck 4: Measuring and Reporting Financial Performance

Question 1

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

A) raw materials
B) finished goods
C) partly completed goods (work in process)
D) None of the above, i.e. all are part of inventory.

Answer 1

D

Question 2

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) choosing a depreciation method
C) determining the expected useful life of the asset
D) determining the cost of the asset

Answer 2

D

Question 3

The factor that could cause the net realisable value of an item of inventory to be lower than its cost is:

A) the goods were originally purchased at too low a price.
B) a rise in the market price of the item.
C) the inventory item has become obsolete.
D) all of the above.

Answer 3

C

Question 4

Under accounting standard NZ IAS 39, the statement in relation to changes in accounting for bad and doubtful debts that is true is:

A) The name of bad and doubtful debts expense may be changed to 'impairment loss' on debtors.
B) An impairment test will be applied so that debtors will not be carried in the balance sheet at more than is expected to be recovered.
C) The name of the contra asset account 'allowance for doubtful debts' may be changed to 'allowance for impairment loss'.
D) All of the statements are true.

Question 5

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

A) During periods of rising prices LIFO gives the highest gross profit and the lowest closing inventory value.
B) During periods of falling 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.

Question 6

The effect on the accounting reports of the current year of not taking into account a bad debt would be:

A) to overstate profit.
B) to overstate the asset debtors.
C) both A and B.
D) neither A nor B.

Question 7

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

A) the cost of the goods available for sale during the period.
B) the cost of the goods sold during the period.
C) the cost of the goods purchased during the period.
D) none of the above.

Question 8

Under accrual accounting, income is:

A) the cash received from customers for goods or services provided by the business.
B) the inflow of assets or the reduction in liabilities that arise as a result of trading operations.
C) the cash collected from accounts receivable.
D) the money the owner puts into the business to start operations.

Question 9

Bad debts:

A) occur when debtors do not pay their accounts.
B) are sales where the customer returns the goods.
C) is just another term for doubtful debts.
D) all of the above

Question 10

At year-end it was forgotten to adjust the asset prepaid rent for the $5,000 rent expense used up during the year. This will result in an:

A) overstatement of assets, profit, and equity.
B) understatement of assets and an overstatement of profit and equity.
C) understatement of assets, profit, and equity.
D) overstatement of liabilities and an understatement of profit and equity.

Question 11

Identify the outgoing that could not appear in the income statement.

A) interest paid
B) purchase of flowers for the waiting room
C) wages and salaries
D) repayment of loan

Question 12

The cost associated with the purchase of a new machine that will be included in the cost of the machine is:

A) delivery charges.
B) installation costs.
C) invoice price.
D) all of the above.

Question 13

Choose the statement which best describes the straight-line method of depreciation.

A) Depreciation expense is greater at the beginning of the asset's life.
B) Depreciation is a fixed percentage of the carrying value of the asset.
C) Depreciation is allocated equally over each year of the asset's life.
D) Both A and C are correct.

Question 14

If equity at the beginning of the period is $100,000 and at the end of the period is $90,000, and additional capital of $20,000 is paid into the business by the owner during the period, profit or loss is:

A) profit $30,000
B) loss $30,000
C) loss $10,000
D) profit $10,000

Question 15

The expense in the statement of comprehensive income which represents the purchase price of the goods that have been sold is called:

A) merchandise.
B) cost of sales.
C) sales.
D) payments for stock.

Question 16

The accounting principle underpinning the practice of providing for doubtful debts is the:

A) matching convention.
B) historical cost convention.
C) dual aspect convention.
D) going concern convention.

Question 17

How are accrued expenses classified in the balance sheet?

A) non-current liability
B) current asset
C) non-current asset
D) current liability

Question 18

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) $200
B) $150
C) $700
D) $750

Question 19

Under the realisation convention, income is regarded as realised when:

A) the amount of income generated can be objectively determined.
B) there is reasonable certainty that any income owing will be received and any outstanding expenses, such as warrantee claims, can be identified.
C) the activities necessary to generate the income are substantially complete.
D) all of the above.

Question 20

If equity at the beginning of the period is $177,000, profit for the period is $87,000 and $25,000 is withdrawn by the owner during the period, equity at the end of the period is:

A) $115,000
B) $289,000
C) $239,000
D) Cannot be calculated from the information provided.

Question 21

On 1 July 2013, LMZ Traders paid $9,000 in insurance premiums for coverage for the next three years. The insurance expense that will appear in the income report and the amount of prepaid insurance that will appear in the balance sheet for the year ended 30 June 2014 are, respectively:

A) $6,000; $3,000
B) $3,000; $6,000
C) $9,000; $0
D) $4,500; $4,500

Question 22

The best description of the relationship between the statement of comprehensive income and the balance sheet is:

A) The opening balance sheet plus the profit equals the closing balance sheet.
B) There is no direct relationship between the income statement and the balance sheet.
C) The income statement explains the change in equity that arises from operating activities.
D) The balance sheet is the link between two income statements.

Question 23

On 31 December 2013 a new motor vehicle with a useful life of 5 years and an estimated residual value of $5,000 was purchased by a business at a cost of $25,000. The amount of depreciation expense charged for the six months ended 30th June 2014, using the straight-line method, is:

A) $25,000
B) $2,000
C) $4,000
D) nil.

Question 24

The statement that is not correct is:

A) A loss is incurred when income < expenses.
B) A profit is earned when income > expenses.
C) A profit is earned when income < expenses.
D) A loss is incurred when expenses > income.

Question 25

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) $18,100
B) $12,500
C) $6,900
D) $9,000

Question 26

Accumulated depreciation is what type of account?

A) a contra asset account
B) an equity account
C) a liability account
D) an expense account

Question 27

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

A) The LIFO method gives the lowest figure for cost of sales.
B) The FIFO method gives the lowest closing inventory figure in the balance sheet.
C) The FIFO method gives the highest closing inventory figure in the balance sheet.
D) The LIFO method gives the highest closing inventory figure in the balance sheet.

Question 28

The disclosure that must be included in a statement of comprehensive income prepared for a company which is reporting to external parties under the accounting standards is:

A) profit.
B) comparative figures for the prior year.
C) income tax expense.
D) all of the above.

Question 29

The estimated residual value of an asset is its:

A) historical cost.
B) book value.
C) estimated disposal value at the end of its useful life.
D) carrying value.

Question 30

Using the direct write-off method, the effect on the accounting equation of writing off a debtor's account as a bad debt is:

A) decrease in the asset bank, decrease in the asset debtors.
B) no effect.
C) decrease in the asset debtors, increase in the liability provision for doubtful debts.
D) decrease in the asset debtors, decrease in equity.

Question 31

A driver started a business on 1 January 2014, hiring out his limousine for special occasions. Current regulations require the business to purchase a license that will expire after two years. The cost of the license is $12,000. Calculate the amount of license expense to be included in the income report for the 6 months ended 30 June 2014.

A) $12,000
B) $6,000
C) $4,000
D) $3,000

Question 32

A suitable format for the income statement for a medium-sized furniture store operating as a partnership would be:

A) sales - cost of sales = gross profit.
B) income + expenses = profit.
C) sales - cost of sales = gross profit - expenses = profit.
D) income - expenses = profit.

Question 33

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

A) $22,550
B) $21,450
C) $20,450
D) $22,450

Question 34

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

A) reliability.
B) conservatism.
C) historical cost.
D) consistency.

Question 35

Which of these is not one of the areas where major judgement is required in accounting for inventory?

A) deciding when to apply the 'lower of cost and net realisable value' rule
B) the choice of costing method (FIFO, weighted average, etc.)
C) counting the inventory items when carrying out a stocktake
D) None of the above, i.e. all require major judgement.

Question 36

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

A) matching costs with revenue.
B) prudence (conservatism).
C) historical cost.
D) going concern.

Question 37

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

A) FIFO method.
B) average cost method.
C) reducing balance method.
D) LIFO method.

Question 38

If a business decided to classify its expenses under the headings 'Selling and Distribution', 'General and Administrative' and 'Financial', into which groupings would the following fall: 1. depreciation of sales staff's motor vehicles; and 2. bad debts written off?

A) 1. selling and distribution; 2. financial
B) 1. selling and distribution; 2. general and administrative
C) 1. general and administrative; 2. financial
D) 1. financial; 2. selling and distribution

Question 39

Which of these are not alternative names for the same thing?

A) income statement; profit and loss statement; statement of comprehensive income
B) gross profit; profit
C) cost of sales; cost of goods sold
D) none of the above

Question 40

The amount of interest paid in cash for the period May to August is $1,000. However, the financial reports show interest expense for the period as $750. The difference is recorded in the balance sheet as:

A) accrued interest (asset).
B) prepaid interest (liability).
C) accrued interest (liability).
D) prepaid interest (asset).

Question 41

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

Question 42

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.

Question 43

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.

Question 44

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

A) technological life.
B) legal life.
C) useful life.
D) physical life.

Question 45

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

Question 46

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

Question 47

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

Question 48

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.

Question 49

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

Question 50

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.

Question 51

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.

Question 52

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

Question 53

The asset that is not depreciated is:

A) land.
B) buildings.
C) premises.
D) motor vehicles.

Question 54

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

Question 55

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.

Question 56

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.

Question 57

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.

Question 58

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.

Question 59

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

A) bank
B) financial adviser
C) accounting firm
D) clothing shop

Question 60

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

Question 61

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

A) LIFO method.
B) lower of cost and net realisable value method.
C) average cost method.
D) FIFO method.

Question 62

At year-end it was forgotten to accrue a $2,000 expense. This will result in an:

A) understatement of liabilities and an overstatement of profit and equity.
B) understatement of assets, profit, and equity.
C) overstatement of liabilities and an understatement of profit and equity.
D) overstatement of assets, profit, and equity.

Question 63

In relation to the recognition and realisation of income, the statement that is correct is:

A) Recognition of income means including it in the income report as part of the profit calculation.
B) The realisation convention has replaced the income recognition criteria contained in the Conceptual Framework.
C) Income from a credit sale is normally recognised in the income statement when the cash is received.
D) All of the statements are correct.

Question 64

A fishing boat was purchased for $400,000. It is expected to travel 100,000 kilometres over its 5-year life and have a residual value of $40,000. If it travels 10,000 kilometres in the first year, how much depreciation will be charged using the units of output method?

A) $72,000
B) $40,000
C) $36,000
D) $10,000

Question 65

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

A) probability that the inflow of resources has occurred
B) inflow of resources able to be reliably measured
C) income must be matched with expenses
D) both A and B

Question 66

Under the accrual accounting approach, at which stage of the operating cycle would income be recognised by a timber yard from the sale of timber on credit?

A) goods delivered to and accepted by customer
B) money received from customer
C) order received from customer
D) money banked by business

Question 67

Where the amount of cash paid for office expenses during the year is less than the amount of office expenses recognised in the income statement under the accrual accounting approach, the difference is recorded in the balance sheet as:

A) accrued office expenses (liability).
B) prepaid office expenses (liability).
C) prepaid office expenses (asset).
D) accrued office expenses (asset).

Question 68

All of the statements concerning bad and doubtful debts are correct, except:

A) Doubtful debts can be estimated by applying a given percentage to credit sales.
B) Bad debts written off is an expense that relates to situations where there is a high degree of certainty that the amount owed will never be paid, e.g. the bankruptcy of the debtor.
C) Doubtful debts relate to amounts unlikely to be received from debtors but where the business is still trying to collect the sum owed.
D) The account 'doubtful debts' is a contra asset account deducted from debtors in the balance sheet.

Question 69

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) $59,500
C) $31,200
D) $58,800

Question 70

Prepaid expenses are classified in the balance sheet as:

A) non-current asset.
B) non-current liability.
C) current asset.
D) current liability.

Question 71

Under accrual accounting, profit is measured as:

A) assets minus liabilities.
B) cash sales minus payments for expenses.
C) sales minus cost of sales.
D) income minus expenses.