Deck 3: Measuring and Reporting Financial Performance

Question 1

Identify the outgoing that could not appear in the statement of financial performance.

A)Interest paid
B)Wages and salaries
C)Purchase of flowers for the waiting room
D)Repayment of loan

Answer 1

D

Question 2

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

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

Answer 2

B

Question 3

If equity at the beginning of the period is $180 000, profit for the period is $90 000 and $25 000 is withdrawn by the owner during the period, equity at the end of the period is:

A)$115 000
B)$245 000
C)$289 000
D)cannot be calculated from the information provided.

Answer 3

B

Question 4

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)Money banked by business
D)Order received from customer

Question 5

What is the expense in the statement of financial performance which represents the purchase price of the goods that have been sold?

A)Payments for stock
B)Cost of sales
C)Sales
D)Merchandise

Question 6

Under accrual accounting, profit is measured as:

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

Question 7

When is income considered to have been earned?

A)It is probable that any income owing will be received and any outstanding expenses, such as warranty claims, can be identified.
B)The activities necessary to generate the income are substantially complete.
C)The amount of income generated can be reliably measured.
D)All of the above

Question 8

The recognition criteria that must be satisfied under the Conceptual Framework for income to be included in the profit report is:

A)probable 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 9

The recognition criteria that must be satisfied under the Conceptual Framework for an expense to be included in the income statement is:

A)probable 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 10

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

A)Gross profit; profit
B)Cost of sales; cost of goods sold
C)Statement of comprehensive income; profit and loss statement: statement of financial performance
D)None of the above, i.e., all are alternative names for the same thing.

Question 11

Which of the following would be a suitable format for the statement of financial performance for a medium size furniture store operation as a partnership?

A)Income - expenses = profit
B)Sales - cost of sales = gross profit - expenses = profit
C)Income + expenses = profit
D)Sales - cost of sales = gross profit

Question 12

In relation to the recognition and realisation of income, which statement is correct?

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

Question 13

Which accounting statement is specifically designed to measure and report on how much profit an entity has made?

A)The statement of cash flows
B)The statement of financial position
C)The statement of financial performance
D)All of the above

Question 14

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

A)profit $10 000.
B)loss $30 000.
C)loss $20 000.
D)profit $30 000.

Question 15

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 is a measure of achievement or productive effort.
C)Net profit increases equity.
D)None of the statements, i.e., all are true.

Question 16

Which is the best description of the relationship between the statement of financial performance and the statement of financial position?

A)There is no direct relationship between the statement of comprehensive income and the statement of financial position.
B)The opening statement of financial position plus the profit equals the closing statement of financial position.
C)The statement of financial position is the link between two statement of comprehensive incomes.
D)The statement of financial performance explains the change in equity that arises from operating activities.

Question 17

Which statement is not correct?

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

Question 18

Accrual accounting:

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

Question 19

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

A)Financial adviser
B)Accounting firm
C)Bank
D)Clothing shop

Question 20

Under accrual accounting, income is:

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

Question 21

At year-end, it was forgotten to adjust the asset prepaid rent for the $7 000 rent expense used-up during the year. This will result in an:

A)understatement of assets 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 22

Which statement 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 is greater at the beginning of the asset's life.
C)Yearly depreciation is the same in each year of the asset's life.
D)Yearly depreciation expense is greater at the end of the asset's life.

Question 23

Employees have worked for the full year and have received total wages of $305 000 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 $6 500. Wages expense in the statement of financial performance and accrued wages in the statement of financial position are respectively:

A)$311 500 and $6 500
B)$306 000 and $5 500
C)$306 000 and $0
D)$311 500 and $0

Question 24

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 statement of financial position as:

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

Question 25

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

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

Question 26

What is the estimated residual value of an asset?

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

Question 27

Which asset is not depreciated?

A)Motor vehicles
B)Buildings
C)Premises
D)Land

Question 28

A driver started a business on 1st of January 2018, 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 $16 000. Calculate the amount of license expense to be included in the income statement for the 6 months ended 30 June 2018.

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

Question 29

How are prepaid expenses classified in the statement of financial position?

A)Current asset
B)Non-current asset
C)Non-current liability
D)Current liability

Question 30

On 31 December 2017, a new motor vehicle with a useful life of five years and an estimated residual value of $5 000 was purchased by a business at a cost of $35 000. The amount of depreciation expense charged for the six months ended 30 June 2018, using the straight-line method, is:

A)nil
B)$3 000
C)$25 000
D)$4 000

Question 31

What is the major purpose of depreciation?

A)To provide for the replacement of the asset
B)To spread the cost of the asset over its useful life, so that the cost of using it up is matched against income earned
C)To adjust the asset to its expected market value
D)None of the above

Question 32

On 1 July 2017, LMZ Traders paid $12 000 in insurance premiums for coverage for the next three years. The insurance expense that will appear in the income statement and the amount of prepaid insurance in the statement of financial position for the year ended 30 June 2018, respectively, are:

A)$6 000 and $3 000
B)$9 000 and $0
C)$3 000 and $6 000
D)$4 000 and $8 000

Question 33

A forklift had a purchase price of $18 000, 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)$1 667
B)$3 000
C)$2 500
D)$5 000

Question 34

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

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

Question 35

In practice, under accrual accounting, most income is recognised:

A)when the goods are delivered.
B)when the cash is received.
C)when the goods are produced.
D)when an order is received.

Question 36

On 31 December 2016, 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 $36 000. The amount of depreciation expense charged for the year ended 31 December 2018, using the reducing-balance method at a rate of 30% per annum, is:

A)$6 300
B)$7 560
C)$9 820
D)$1 800

Question 37

Accrued expenses are classified in the statement of financial position as a:

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

Question 38

At year-end, it was forgotten to accrue a $5 000 expense. This will result in an:

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

Question 39

Which statement best describes the straight-line method of deprecation?

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

Question 40

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

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

Question 41

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.

Question 42

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

Question 43

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

Question 44

LTT had stock on hand on the 1st January 2018 of 100 heaters valued at $50 each.
The following transactions occurred during January:
REQUIRED:
a)Calculate cost of sales and closing stock at the end of the month from the above information using:
b)Prepare a statement of comprehensive income for the month ended 31 January under each method assuming no stock loss (use a columnar approach).

Question 45

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.

Question 46

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.

Question 47

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

Question 48

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

Question 49

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

Question 50

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

Question 51

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.

Question 52

What type of account is accumulated depreciation?

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

Question 53

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.

Question 54

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

Question 55

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

Question 56

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

Question 57

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.

Question 58

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.

Question 59

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.

Question 60

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

Question 61

Bad debts:

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

Question 62

When equipment accumulates depreciation, it causes:

A)equity to decrease and expenses to increase.
B)assets to increase and liabilities to increase.
C)assets to decrease and expenses to increase.
D)assets to decrease and revenues to decrease.

Question 63

Which of the following is a measure of wealth created for owners?

A)Operating profit
B)Gross profit
C)Net profit
D)All of the above

Question 64

The statement of financial performance provides information on:

A)the financial structure of the business.
B)the financial position of the business.
C)how successful the business was in generating wealth.
D)cash inflows and outflows for the accounting period.

Question 65

Paying rent for the premises causes which of the following to occur?

A)Increases expenses and decreases cash
B)Increases expenses and increases accounts payable
C)Decreases revenue and decreases cash
D)Decreases revenue and increases accounts payable

Question 66

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

A)to overstate the asset accounts receivable.
B)to overstate profit.
C)Both A and B
D)Neither A nor B

Question 67

Inventory purchased on credit:

A)decreases the amount of assets.
B)increases the amount of liabilities.
C)increases the amount of equity.
D)decreases the amount of equity.

Question 68

The owners' contribution of capital to open the business bank account will result in which of the following?

A)An increase in both revenue and equity
B)An increase in revenue and a decrease in equity
C)An increase in cash and a decrease in equity
D)An increase in cash and an increase in equity

Question 69

A company pays some cash and takes a loan for the rest of the money that is needed to purchase a delivery vehicle. What is the result of this transaction?

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

Question 70

If doubtful debts are overestimated:

A)profit for the current year will be overstated.
B)profit for following years will be overstated.
C)profit for the following years will be understated.
D)profit over the total life of the business will be understated.

Question 71

All of the statements concerning bad and doubtful debts are correct, except which of the following?

A)The account, doubtful debts expense, is a contra asset account deducted from accounts receivable in the statement of financial position.
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 accounts receivable but where the business is still trying to collect the sum owed.
D)Doubtful debts can be estimated by applying a given percentage to credit sales.

Question 72

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

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