Deck 7: Accounting for Current Assets

Question 1

Under the LIFO method,in periods of rising prices:

A) profit cannot be manipulated by changes in purchasing patterns
B) profits could be increased by increasing unit purchases to a higher level than unit sales
C) profits could be increased by reducing unit purchases to a lower level than unit sales
D) profits could be decreased by reducing unit purchases to a lower level than unit sales

Answer 1

C

Question 2

The justification for the inventory valuation rule,the lower of cost and net realisable value,is:

A) conservatism
B) cost versus benefit
C) reliability
D) materiality

Answer 2

A

Question 3

The statement concerning the AASB 101 criteria for classifying assets as current or non-current that is not correct is:

A) The AASB 101 criteria is identical to the traditional current/non-current classification
B) For entities with a long operating cycle, some assets could be classified as current even though realisation was not expected within 12 months
C) One criteria for classification is expected realisation within twelve months after the reporting date
D) Investments maturing within 12 months are classified as current assets

Answer 3

A

Question 4

Which of the following is correct?

A) Inventory that is held by an agent for sale on consignment but is owned by a principal is included in the inventory of the principal
B) Inventory sold under hire purchase is normally treated as an asset of the buyer even though it is owned by the seller
C) Both are correct
D) Neither is correct

Question 5

The item that is not part of manufacturing inventory is:

A) supplies inventory
B) raw materials
C) work-in-process
D) none of the above, i.e., all are part of manufacturing inventory

Question 6

AASB 108 requires that changes to accounting estimates be dealt with prospectively.This means that the effect of a past overestimate of doubtful debts expense is:

A) recognised in the current reporting period
B) used to increase this periods estimated expense
C) both A and B
D) neither A nor B

Question 7

When merchandise is in transit on balance date and has been shipped FOB destination,it should be included in the inventory of:

A) the buyer
B) the seller
C) the carrier
D) it does not need to be included in any parties' inventory

Question 8

The inventory valuation rule 'the lower of cost and net realisable value' cannot be used with which of these methods?

A) Perpetual inventory method
B) Periodic inventory method
C) Last-in-first-out method
D) None of the above, i.e., it can be used with all of the methods

Question 9

Which of the statements is correct? In the United States:

A) there is a requirement to use the same cost flow assumption for taxation and financial reporting purposes
B) for perishable goods FIFO must be used
C) FIFO is not allowed for taxation purposes
D) none of the statements is correct

Question 10

A disadvantage of the LIFO method of inventory valuation is:

A) it gives a poor matching of current costs with current revenues
B) its use accentuates the business cycle
C) closing inventory on the balance sheet may be undervalued
D) all of the above are disadvantages

Question 11

Assuming prices are decreasing,the first-in-first-out approach to inventory valuation,compared to the average cost approach,will give:

A) a higher profit and a higher closing inventory
B) a higher profit and a lower closing inventory
C) a lower profit and a higher closing inventory
D) a lower profit and a lower closing inventory

Question 12

The method where production costs incurred are included in the cost of manufacturing inventory and finance and administration costs are treated as period costs is known as the:

A) full-cost approach
B) direct cost approach
C) absorption cost approach
D) joint cost approach

Question 13

Two approaches to determining the number of units of inventory on hand are:

A) periodic, physical
B) lower of cost and net realisable value
C) FIFO, weighted average
D) periodic, perpetual

Question 14

AASB 102 requires that any write down to net realisable value:

A) must be recognised as an expense in the period that the write down occurs
B) must be reversed when there is clear evidence of an increase in value
C) must be applied only on an item by item basis
D) A and B above

Question 15

The cost flow method where cost of goods sold consists of the most recent goods acquired is:

A) lower of cost or market
B) LIFO
C) FIFO
D) weighted average

Question 16

The Enterprise Company manufactures a single product.At the normal level of production of 100 000 units per annum the costs of production are:
Direct (variable) costs per unit $\quad\$ 75$
Indirect (fixed) costs
Production costs $\quad \$ 250000$
Finance and administration costs $\quad \$ 50000$
The unit cost of manufacture for the product using a direct costing approach is:

A) $77.50
B) $75
C) $78
D) none of the above

Question 17

Inventory item Z8 has a cost price of $30 and a net realisable value $25,while item D3 has a cost price of $20,a net realisable value $25 and a replacement cost of $21.Under the lower of cost and net realisable value rule of inventory valuation,applied on an item-by-item basis,the value of inventory is:

A) $50
B) $51
C) $45
D) none of the above

Question 18

Under the perpetual inventory system,the accounting entry to record a write-down of $600 of various inventory items from cost to net realisable value is:

A) debit cost of goods sold $600; credit inventory $600
B) debit inventory $600; credit cost of goods sold $600
C) debit inventory $600; credit bank $600
D) debit cost of goods sold $600; credit bank $600

Question 19

A reason for not allocating all the outgoings incurred in bringing the inventory to its present location and condition to the cost of inventory is:

A) allocation may not make a material difference to reported profit or to the carrying amount of the inventory
B) the allocation of some costs may be time-consuming
C) incidental costs of acquisition may be minor
D) all of the above are reasons

Question 20

Before the final payment has been made,inventory purchased under a hire purchase agreement is:

A) under the control of the purchaser
B) owned by the seller
C) recognised as an asset by the purchaser
D) all of the above

Question 21

Choosing a cost flow assumption to be applied to inventory,such as FIFO or weighted average,is to solve the problem of:

A) determining the quantity of inventory on hand
B) determining the stock loss from theft or destruction
C) determining which costs to apply to sold and unsold inventory
D) determining net realisable value

Question 22

If inventory prices are rising:

A) the LIFO method will give the lowest profit
B) the LIFO method will give the highest profit
C) the FIFO method will give the lowest profit
D) the LIFO method will give the highest closing inventory valuation

Question 23

Explain the effects on the financial reports of the FIFO cost flow assumption in a period of rising prices and discuss the arguments that have been raised for and against the use of this assumption to value inventory.

Question 24

Under the inventory standard AASB 102,a new assessment of the net realisable value of inventory items is made:

A) in a general meeting
B) each period
C) weekly
D) every two years

Question 25

AASB 102 requires which of these disclosures for inventory?

A) The amount of any write-down of inventories recognised as an expense during the period
B) The total carrying amount of inventories
C) The accounting policies adopted
D) All of the above

Question 26

Discuss the disclosures relating to inventory required by AASB 102.Include a discussion on the disclosures required by not-for-profit entities.

Question 27

Where an allowance for doubtful debts account is maintained,the accounting entry to write off a bad debt is:

A) debit bad debts; credit accounts receivable
B) debit allowance for doubtful debts; credit accounts receivable
C) debit doubtful debts expense; credit accounts receivable
D) none of the above

Question 28

Allowance for doubtful debts is a/an:

A) liability account
B) expense account
C) contra expense account
D) contra asset account

Question 29

The inventory valuation rule is to value inventory at the lower of cost and net realisable value on an item-by-item basis.
Explain the meaning of:
i.cost
ii.net realisable value
iii.the overall operation of the rule.

Question 30

Under AASB 102,'the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale' is known as:

A) the lower of cost or market
B) cost value
C) net realisable value
D) market value

Question 31

Explain and discuss the criteria contained in AASB 101 for distinguishing between current and non-current assets.