Deck 8: Accounting for Selected Assets

Question 1

Management prepares and examines an aged list of Accounts Receivable balances, which analyses each debt in order to reach a decision on the probability of receipt of payment.

Answer 1

True

Question 2

The key to the effective management of accounts receivable relies on maximising the benefits from selling goods on credit, not minimising the losses from bad debts.

Answer 2

False

Question 3

The cost of an item is important in considering whether it should be classified as inventory or not.

Answer 3

False

Question 4

The direct write-off method can mean that assets may be overstated in one year and understated the next.

Question 5

Accounting for bad debts under the direct write-off method involves a reduction of accounts receivable and a reduction in owners' equity.

Question 6

Products and services that are at an intermediate stage of completion form part of the work in progress.

Question 7

A contra account for accounts receivable is the allowance for doubtful debts, which shows the estimated total of future bad debts.

Question 8

Items purchased for incorporation into the manufacture or assembly of goods are referred to as raw materials, but they do not constitute inventory until the manufacturing or production process is complete.

Question 9

Under the allowance for doubtful debts method, the net amount of assets will not change when recording a transaction that determines that a specific customer will not pay.

Question 10

A credit sale of a business where the revenue is not collected due to the customer not paying is a bad debt.

Question 11

Goods that have been through the complete production or assembly cycle and are ready for resale to the customer are finished goods.

Question 12

Bad debts have the effect of reducing assets and reducing profits, which results in a reduction of equity.

Question 13

The time spent by a barrister briefing a client prior to a court hearing would constitute 'work in progress' for the law firm.

Question 14

Accounts receivable arise when a business sells goods or services to a third party on credit terms.

Question 15

Goods, other property and services: (a) held for sale in the ordinary course of business; (b) in the process of production for such sale; or (c) to be used up in the production of goods, other property or services for sale, including consumable stores and supplies, are all various types of inventory.

Question 16

Consumable goods for use within the production process are not classified as inventory under current assets in the balance sheet.

Question 17

The failure to allow for uncollectable accounts will cause the owners' equity to be overstated.

Question 18

Allowance for doubtful debts is a contra account to accounts receivable.

Question 19

The direct write-off method for accounting for bad debts is preferred over the allowance for doubtful debts method, as the latter creates a negative or contra asset which is not considered a 'real' account under accrual accounting.

Question 20

The absence of bad debts is an indicator that the credit policy may be too strict, and can result in the loss of profits.

Question 21

Different valuation rules affect inventory values and therefore cost of sales and profits.

Question 22

If two entities use different methods of depreciation, then users need to make adjustments for this when comparing the financial statements of the entities.

Question 23

The nature of the business will determine if the purchase of 500 litres of paint constitutes inventory or not.

Question 24

LIFO is a method of inventory valuation based on the assumption that cost price attached to the goods sold is the cost of the most recently purchased inventory. Closing inventory is therefore assumed to consist of the cost of the earliest units purchased.

Question 25

ABC Ltd purchased an item inventory at a cost of $27 000. The item was damaged during storage. The company could sell the item in its damaged state for $23 000, and in doing so incur selling costs of $1000. The net realisable value of the item of inventory is $23 000.

Question 26

The accumulated depreciation account, unlike the allowance for doubtful debts, is not a contra account.

Question 27

Residual value can be defined as the estimated disposal (sale) value of an asset when it is no longer useful to the entity.

Question 28

When technology is changing rapidly, depreciation of an asset will help maintain an entity's operating capacity.

Question 29

Technological changes are likely to cause a downward movement in inventory values, whereas changes in taste are more likely to cause an upward movement in inventory values.

Question 30

FIFO is a method of inventory valuation based on the artificial assumption that the first goods bought are the first sold. Closing inventory is therefore assumed to be that purchased most recently.

Question 31

Depreciation refers to the systematic allocation of the depreciable amount of a depreciable asset over its useful life.

Question 32

Because goodwill is unidentifiable, it cannot be recognised as an asset.

Question 33

The net realisable value of inventory represents selling price less the costs involved in completing and selling the inventory.

Question 34

The reducing-balance method is an alternative method to the units-of-output method, and may be a better reflection of the actual usage of most assets, such as plant and equipment.

Question 35

It is most likely that a manufacturing firm will have inventory that constitutes raw materials, work in progress and finished goods.

Question 36

Depreciation spreads the original cost of a non-current asset over its useful life, but it cannot be considered a precise measure as it is based on forecasts of future outcomes.

Question 37

Under AASB 102, where the purchase price (cost) of an item of inventory is $248 and the net realisable value is $256, inventory should be adjusted to reflect the net realisable value.

Question 38

A machine was purchased for $30 000 with a life expectancy of five years and a zero residual value. Under the straight-line method, the depreciation expense would be calculated at 20% per annum of the cost.

Question 39

Depreciation expense has the effect of reducing profit, equity and assets.

Question 40

Depreciation is concerned with allocation not valuation.

Question 41

The collection of an account receivable will:

A) increase total assets and increase total owners' equity.
B) not affect total assets and increase total owners' equity.
C) decrease total assets and decrease total liabilities.
D) not affect total assets liabilities and owners' equity.

Question 42

Which of the following methods of handling bad debts often potentially leads to an overstatement of assets?

A) Percentage of credit sales method.
B) Ageing of accounts receivable method.
C) Direct write-off method.
D) Allowance for doubtful debts.

Question 43

When goods are sold at a profit on credit, the effect of the sale on the accounting equation is:

A) an increase in liabilities and an increase in assets.
B) an increase in expenses and a decrease in equity.
C) a decrease in equity and an increase in liabilities.
D) an increase in assets and an increase in equity.

Question 44

The Allowance for Doubtful Debts is classified on the:

A) statement of comprehensive income as an expense.
B) statement of comprehensive income as revenue.
C) balance sheet as a liability.
D) balance sheet as a deduction to an asset.

Question 45

Owens Office Supplies collected $300 that had previously been recorded in Accounts Receivable. Recording this event in the accounting system caused:

A) assets to increase.
B) assets to decrease.
C) total assets to remain the same.
D) revenues to increase.

Question 46

The fundamental difference between identifiable and unidentifiable intangible assets is whether the assets are separable from the business.

Question 47

Hilde Company reported accounts receivable of $40 000 at the beginning of the year. It now reports a balance of $28 000 at the end of the year. From this information, assuming there were no accounts written off as bad debts during the year, it is possible to determine that during the year:

A) credit sales were higher than cash collected from customers.
B) credit sales were less than cash collected from customers.
C) the firm was doing a poor job of collecting its receivables.
D) credit sales decreased from the previous year.

Question 48

The Philamono Bean Company reported the following accounts receivable balances for 20X8: Given that there were no bad debts written off during the year, this information means that:

A) credit sales exceeded cash collections from customers during the year.
B) cash collections from customers exceeded credit sales during the year.
C) the firm did an excellent job of collecting its receivables.
D) credit sales increased during the current year over the previous year.

Question 49

What are the two methods of accounting for bad debts?

A) Receivable reduction and bad debt methods
B) Direct write-off and allowance methods
C) Allowance and bad debt methods
D) Direct write-off and receivable reduction methods

Question 50

Failure to record bad debt expense at year end will result in an:

A) overstatement of assets.
B) understatement of net profit.
C) overstatement of expenses.
D) understatement of liabilities.

Question 51

A credit sale results in increases in which of the following pairs of items on the financial statements? Statement of comprehensive income Balance Sheet

A) Sales Revenue Cash
B) Accounts Receivable Cash
C) Sales Revenue Accounts Receivable
D) Accounts Receivable Sales Revenue

Question 52

An increase in the Allowance for Doubtful Debts will:

A) reduce the cash account.
B) reduce total assets.
C) increase total liabilities.
D) increase shareholders' equity.

Question 53

The balance of an allowance for doubtful debts was ($10 000) at the start of a year and ($16 000) at the end of that year. During the year, accounts totalling $9000 were written off as bad debts. What was the bad debts expense for the year?

A) $7000
B) $9000
C) $10 000
D) $15 000

Question 54

Firms should ideally recognise the expense related to uncollectable accounts:

A) during the period of sale.
B) when accounts are written off.
C) when customers declare bankruptcy.
D) never; there is no expense related to uncollectable accounts.

Question 55

Allowance for doubtful debts is:

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

Question 56

XYZ Company had an accounts receivable account balance of $300 000 and allowance for doubtful debts account balance of $12 500 prior to writing off a bad debt of $3000. The estimated net realisable value of accounts receivable before and after the write-off were, respectively:

A) $12 500 and $309 500.
B) $287 500 and $284 500.
C) $287 500 and $287 500.
D) $300 000 and $297 000.

Question 57

Which of the following statements is incorrect?

A) An accounts receivable arises when a business sells goods or services to a third party on credit terms.
B) The absence of bad debts is an indicator that the credit policy may be too strict and can result in the loss of profits.
C) The higher the number of customer being supplied on credit and amount of inventories, the lower the working capital requirements.
D) The failure to allow for uncollectable accounts will cause the owners' equity to be overstated.

Question 58

On 15 July Sammy Corporation's Gross Accounts Receivable had a balance of $2300 and the Allowance for Doubtful Debts had a balance of ($220). A specific account of $80 was written off on 16 July. If no other relevant transactions had taken place, what is the amount of net receivables after the write-off?

A) $1920
B) $2160
C) $2080
D) $2220

Question 59

Which of the following transactions would cause a decrease in the accounts receivable account?

A) A credit sale
B) A collection of cash from a previous credit sale
C) A cash sale
D) A credit purchase

Question 60

The bookkeeper at Kupertino Company is recording information into the accounting system to recognise the estimated amount of bad debt expense for the fiscal period. This entry into the accounting system will affect which of the account balances below? Allowance
For Doubtful Debts Bad Debts Expense

A) Yes Yes
B) Yes No
C) No Yes
D) No No

Question 61

Assuming that the allowance for doubtful debts method of accounting for bad debts is used, when a customer's account is determined to be a bad debt, which of the following will occur?

A) Bad debts expense is increased, allowance for doubtful debts is decreased.
B) Allowance for doubtful debts is reduced, accounts receivable is reduced.
C) Allowance for doubtful debts is reduced, bad debts expense is reduced.
D) Allowance for doubtful debts is reduced, accounts payable is increased.

Question 62

The So-Big Company sells hot-dogs. Inventory information for a recent week is shown below: If five units were sold during the week, what is the cost of goods sold if the LIFO periodic method is used?

A) $68
B) $54
C) $50
D) $36

Question 63

Which of the following methods results in the higher value for cost of goods sold in times of rising inventory prices?

A) First-in, first-out
B) Weighted average cost
C) Last-in, first-out
D) None of the above

Question 64

Inventories do not include goods and services:

A) held for sale.
B) used up in production.
C) sold to customers.
D) consumed in production.

Question 65

Using the last-in, first-out periodic method, the value of closing inventory is:

A) $4400.
B) $4192.
C) $1840.
D) $3460.

Question 66

The net realisable value of inventory is:

A) the cost of goods sold.
B) the purchase cost of inventory.
C) the selling price less any costs of sale.
D) the selling price less cost of completion and any costs of sale.

Question 67

George, a sole trader, sells goods on credit, and uses the direct write-off method for recording bad debts. The balance for accounts receivable at the end of the last financial year ended 31 December was $12 000. There was $1000 of bad debts that were written off this year. From an accrual perspective, for last year, which of the following is incorrect?

A) Profit and equity were overstated.
B) Profit and assets were overstated.
C) Accounts receivable and assets were overstated.
D) Profit and liabilities were overstated.

Question 68

The inventory valuation method that results in the recognition of the oldest inventory costs on the balance sheet and statement of comprehensive income, respectively, is: Balance Sheet Statement of Comprehensive Income

A) FIFO LIFO
B) FIFO FIFO
C) LIFO LIFO
D) LIFO FIFO

Question 69

You would expect to see the account Work-in-Progress Inventory reported on the balance sheet of a: Manufacturing firm Merchandising firm

A) YesNo
B) No No
C) YesYes
D) No Yes

Question 70

Which inventory measurement method would have the most recent costs in cost of goods sold?

A) First-in, first-out (FIFO)
B) Last-in, first-out (LIFO)
C) Weighted average
D) Work-in-progress

Question 71

Different inventory valuation methods do not affect:

A) profit.
B) cost of sales.
C) liabilities.
D) assets.

Question 72

Inventory should normally be classified on the balance sheet as:

A) a current asset.
B) shareholders' equity.
C) property, plant, and equipment.
D) an intangible asset.

Question 73

Assuming that there are inflationary trends in the economy, the inventory amount shown in the balance sheet, if based on LIFO, would normally be:

A) lower than the FIFO value.
B) equal to current market value.
C) higher than the FIFO value.
D) higher than current market value.

Question 74

Using the first-in, first-out periodic method, the value of closing inventory is:

A) $4192.
B) $3450.
C) $2510.
D) $4400.

Question 75

The balance of the accounts receivable balance of XYZ Pty Ltd was $23 000 at the beginning of the financial year ended 30 June and $27 000 at the end of the period. The total credit sales for the company for the financial year was $132 000. Bad debts write-off totalled $5500. What was the total of the cash received from accounts receivable during the year?

A) $118 500
B) $122 500
C) $128 000
D) $133 500

Question 76

The net figure for accounts receivable after deducting the allowance for doubtful debts account:

A) represents the expected cash to be collected.
B) is a contra account.
C) understates the realisable value of accounts receivable.
D) overstates the realisable value of accounts receivable.

Question 77

When the price of inventory is decreasing, which of the following is true regarding the three best-known inventory valuation methods?

A) The LIFO method will yield the smallest amount for cost of goods sold.
B) The weighted-average method will yield the largest amount for closing inventory.
C) The FIFO method will yield the highest amount for closing inventory.
D) Both LIFO and FIFO will yield a smaller tax obligation than weighted-average.

Question 78

First-in, first-out is the same as:

A) weighted average cost.
B) last-in, last-out.
C) last-in, first-out.
D) first-in, last-out.

Question 79

The cost of a block of wood is $28 but the net realisable value is $24. Under the valuation rule in accounting standards, the block of wood is recognised at:

A) $24 or $28.
B) $24.
C) $28.
D) $32.

Question 80

Using the weighted-average-cost method, the value of closing inventory is (to the nearest whole $):

A) $4400.
B) $4192.
C) $4245.
D) $5040.