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.

Accepted Answer

All of the options are part of inventory for a manufacturing firm. Raw materials are the inputs that are used to create finished goods, while partly completed goods (work in process) are the outputs that are still in the process of being manufactured. Finished goods are the final products that are ready to be sold.

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

Accepted Answer

The cost of the asset is usually a factual information that can be obtained from invoices, receipts, or other documents. On the other hand, determining the residual value, selecting a depreciation method, and estimating the useful life all require management's judgement and estimation.

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.

Accepted Answer

If an inventory item becomes obsolete, it may no longer have any value or demand in the market. This can cause the net realisable value of the item to be lower than its cost. Option A is incorrect because if the goods were purchased at a low price, it would increase the profitability of the inventory. Option B is incorrect because a rise in market price would increase the net realisable value of the item, making it higher than the cost.

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.

Accepted Answer

All three statements are true. Under NZ IAS 39, the term bad and doubtful debts expense may be changed to 'impairment loss' on debtors. An impairment test must be applied to debtors, ensuring that they are not carried on the balance sheet at more than the expected recoverable amount. The contra asset account 'allowance for doubtful debts' may also be renamed as 'allowance for impairment loss'.

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.

Accepted Answer

During periods of rising prices, the LIFO (Last In, First Out) method results in the most recent, higher-cost items 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 items remain in inventory.

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.

Accepted Answer

Not accounting for a bad debt would result in overstating profit because the expense related to the bad debt would not be recognized, thus inflating the net income. Additionally, the asset debtors (accounts receivable) would be overstated because the expected loss from the bad debt would not be deducted from the total receivables.

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.

Accepted Answer

Cost of sales refers to the cost of goods sold during a period, which includes the cost of acquiring or producing the goods, transportation costs, and any other directly related expenses. Option A refers to the cost of goods available for sale during the period, which may include goods that were not sold. Option C refers to the cost of goods purchased during the period, which may not necessarily be the same as the cost of goods sold. Option D is incorrect as one of the options must be correct.

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.

Accepted Answer

Under accrual accounting, income is recognized when it arises from trading operations, regardless of whether cash has been received or not. It is the inflow of assets or reduction in liabilities that occur as a result of these operations. This is in contrast to cash accounting, where income is recognized only when cash is received. Options A, C, and D do not accurately describe income under accrual accounting.

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

Accepted Answer

Bad debts occur when debtors do not pay their accounts. Option B refers to sales returns, and Option C refers to debts that may or may not be paid, but are still uncertain or doubtful.

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.

Accepted Answer

Failing to adjust the prepaid rent for the rent expense used up during the year means the prepaid rent asset remains too high (overstated), as the expense that should have reduced it was not recognized. This also leads to profit being overstated because an expense that should have been recognized was not, and as a result, equity is overstated because profit contributes to 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

Accepted Answer

Repayment of loan is not an expense related to the operations of a business and therefore does not appear on the income statement. It is a financing activity, affecting the balance sheet and cash flow statement.

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.

Accepted Answer

The cost associated with the purchase of a new machine includes all of the above- delivery charges, installation costs, and the invoice price. Therefore, option D is the correct answer.

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.

Accepted Answer

The straight-line method of depreciation allocates an equal amount of depreciation expense over each year of the asset's life, so option C is correct. Option A is incorrect because depreciation expense is the same each year under straight-line depreciation, rather than being greater at the beginning of the asset's life. Option B is incorrect because depreciation is a fixed dollar amount each year under straight-line depreciation, rather than being a fixed percentage of the carrying value of the asset.

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

Accepted Answer

The equity decreased from $100,000 to $90,000, but there was an additional capital injection of $20,000. Without the capital injection, the equity would have been $70,000 ($90,000 - $20,000), indicating a $30,000 decrease from the original $100,000, which represents a loss of $30,000.

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.

Accepted Answer

The expense in the statement of comprehensive income which represents the purchase price of the goods that have been sold is called cost of sales. This is also commonly known as cost of goods sold (COGS). This expense is deducted from sales revenue to calculate the gross profit margin of a business.

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.

Accepted Answer

The matching convention stipulates that expenses incurred should be matched against revenues earned in the relevant accounting period. The practice of providing for doubtful debts is done to ensure that the expenses associated with credit sales are recognized in the same period as the corresponding revenue. This is consistent with the principle of matching.

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

Accepted Answer

Accrued expenses are expenses that have been incurred but not yet paid or recorded. They are classified as current liabilities because they are expected to be paid within one year.

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

Accepted Answer

The net realisable value of the inventory is the estimated selling price less any directly attributable costs. In this case, the estimated selling price is $200 and the directly attributable costs are $50. So, the net realisable value is $150 (i.e. $200 - $50). Therefore, the best choice is option B.

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.

Accepted Answer

All of the above conditions need to be met for income to be realised under the realisation convention. The objective determination of income, reasonable certainty of receipt, and completion of necessary activities are all factors that determine when income can be recorded in financial statements.

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.

Accepted Answer

Equity at the end of the period can be calculated as:
Beginning Equity + Profit - Owner's Withdrawals = Ending Equity
$177,000 + $87,000 - $25,000 = $239,000

Quiz 4: Measuring and Reporting Financial Performance

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

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

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

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

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

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

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

Under accrual accounting, income is:

Bad debts:

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:

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

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

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

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:

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

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

How are accrued expenses classified in the balance sheet?

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:

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

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: