QUESTION 21-12 Multiple Choice (IAA)

1. Which of the following should not be considered cash?

a. Petty cash fund
b. Money order
c. Coin and currency
d. IOU

2. Which of the following is usually considered cash?

a. Certificate of deposit
b. Checking account
c. Money market saving certificate
d. Postdated check

3. Which of the following should not be included in cash?

a. Travel cash advance
b. Certified check
c. Personal check
d. Manager check

4. All of the following may be included in cash, except

a. Currency
b. Money market instrument
c. Checking account balance
d. Saving account balance

5. Which statement is true about reporting bank overdraft under IRFS?

a. Overdraft typically cannot be offset against positive balance in other cash account but
reported as current liability
b. Generally, cash overdraft is not allowed.
c. Overdraft can be offset against other bank account when payable on demand and often
fluctuates from positive to overdrawn as an integral part of cash management.
d. All of these statements are true about bank overdraft.

6. Technically, cash may not include

a. Foreign currency
b. Money order
c. Restricted cash
d. Undeposited customer check

7. Restricted deposits in foreign bank are classified as

a. Current asset with appropriate disclosure.
b. Noncurrent asset with appropriate disclosure.
c. Be written off as loss.
d. As part of cash and cash equivalents.
 8. What is a compensating balance?
a. Saving account balance
b. Demand deposit account balance
c. Temporary investment as collateral for loan
d. Minimum deposit required to be maintained in connection with a borrowing
arrangement

9. Compensating balance represents

a. Fund in a bank account that cannot be spent
b. Balance in a payroll checking account
c. Account that is subject to bank service charge
d. Account on which a bank pays interest

10. A compensating balance

a. Must be included in cash and cash equivalent.
b. Which is legally restricted and related to a long-term loan is classified as current asset.
c. Which is legally restricted and related to a short-term loan is classified separately as
current asset.
d. Which is not legally restricted as to withdrawal is classified separately as current asset.

QUESTION 21-13 Multiple choice (IAA)

1. A cash equivalent is a short-term, highly liquid investment readily convertible into known
amount of cash and
a. Is acceptable as a means to pay current liability
b. Has a greater current market value
c. Bears a primes interest rate
d. Is so near maturity that it presents insignificant risk of change in interest rate

2. Highly liquid investments are cash equivalents if the maturity is 90 days or less
a. From the date the investments are acquired
b. From the end of reporting period
c. From the date of issue of financial statements
d. From the beginning of reporting period

3. All can be classified as cash and cash equivalents, except.

a. Redeemable preference shares due in 60 days
b. Commercial papers due for repayment in 90 days
c. Equity investments
d. A bank overdraft

4. Cash equivalents do not include

a. Money market funds
b. High grade marketable equity investments
 c. BSP treasury bills
d. Commercial papers

5. Cash equivalents are

a. Treasury bills and money market instruments
b. Investments with original maturity of three months or less.
c. Readily convertible into known amount of cash.
d. All of these are features of cash equivalents

QUESTION 21-14 Multiple choice (IAA)

1. The internal control feature specify to petty cash is

a. Separation of duties
b. Assignment of responsibility
c. Proper authorization
d. Imprest system

2. What is the major purpose of an imprest petty cash fund?

a. To effectively plan cash inflows and outflows
b. To ease the payment of cash to vendors
c. To determine the honest of the petty cashier
d. To effectively control cash disbursements

3. The petty cash fund account under the imprest fund system is debited
a. Only when the fund is created.
b. When the fund is created and everytime it is replenished.
c. When the fund is created and when the size of the fund is increased.
d. When the fund is created and when the fund is decreased.

4. Which statement in relation to an imprest petty cash is incorrect?

a. The imprest petty cash system in effect adheres to the rule of disbursement by check.
b. Entries are made to the petty cash account only to increase or decrease the size of the fund
or to adjust the balance if not replenished at year-end.
c. The petty cash account is debited when the fund is replenished.
d. The petty cash fund is reported as part of cash and cash equivalents under current assets.

5. When an imprest petty cash fund is used, which statement is true?

a. The balance of the petty cash fund should be reported in the statement of financial position
as a long-term investment.
b. The petty cashier’s summary of petty cash payments serves as a journal entry that is posted
to the appropriate general ledger account.
c. The reimbursement of the petty cash fund should be credited to the cash account.
d. Entries that include a credit to the cash account should be recorded at the time the
payments from the petty cash fund are made.
 6. In reimbursing the imprest petty cash fund, which of the following statements is true?
a. Cash in debited
b. Petty cash is debited
c. Petty cash is credited
d. Expense accounts are debited

7. A cash over and short account

a. Is not generally accepted.
b. Is debited when the petty cash fund proves out over.
c. Is debited when the petty cash fund proves out short.
d. Is a contra account to cash.

8. Petty cash fund is

a. Separately classified as current asset
b. Money kept on hand for making minor disbursements of coin and currency rather than by
writing checks
c. Set aside for the payment of payroll
d. Restricted cash

9. Which statement in relation to petty cash fund is false?

a. Each disbursement from petty cash should be supported by a petty cash voucher
b. The creation of a petty cash fund requires a journal entry to reflect the transfer of fund out
of the general cash account.
c. At any time, the sum of the cash in the petty cash fund and the total of petty cash vouchers
should equal the amount for which the imprest petty cash fund was established.
d. With the establishment of an imprest petty cash fund, one person is given the authority and
responsibility for issuing checks to cover minor disbursements.

10. Which statement in relation to the cash short or over account is true?
a. It would be impossible to have cash shortage or overage if employees were paid in cash
rather than by check.
b. The entry to account for daily cash sales for which a small amount of cash shortage existed
would include a debit to cash short or over account.
c. If the cash short or over account has a debit balance at the end of the period it must be
debited to an expense account.
d. A credit balance in a cash short or over account shall be considered a liability because the
short-changed customer will demand return of this amount.

QUESTION 22-11 Multiple choice (IAA)

1. Trade receivables are classified as current assets if reasonably expected to be collected

a. Within one year.
b. Within the normal operating cycle.
 c. Within one year or within the operating cycle, whichever is shorter.
d. Within one year or within the operating cycle, which is longer.

2. Nontrade receivables are classified as current assets only if reasonably expected to be realized
in cash
a. Within one year or within the operating cycle, whichever is shorter
b. Within one year or within the operating cycle, whichever is longer.
c. Within the normal operating cycle.
d. Within one year, the length of the operating cycle notwithstanding

3. Credit balances in accounts receivable are classified as

a. Current liabilities
b. Part of accounts payable
c. Long term liabilities
d. Deduction from accounts receivable

4. Which should be recorded in accounts receivable?

a. Receivables from officers
b. Receivables from subsidiaries
c. Dividends receivable
d. Sales on account

5. Accounts receivable should normally be reported at

1. Present value of future cash receipts
2. Current value plus accrued interest
3. Expected amount to be received
4. Current value less expected collection cost

6. Which of the following does not change the balance in accounts receivable?
a. Return on credit sales
b. Collection from customers
c. Bad debt expense adjusting entry
d. Write-off

7. Which is recorded by a credit to accounts receivable?

a. Sale of inventory on account
b. Estimating the allowance for uncollectible accounts
c. Estimating annual sales returns
d. Write-off of accounts receivable

8. Receivables from subsidiaries are classified as

a. Current assets
b. Noncurrent assets
 c. Either as current or noncurrent depending on the expectation of realizing within one year or
over one year
d. Party current and partly noncurrent

9. Where the operating cycle extends beyond one year because of normal credit terms as in the
case of installment sales
a. The entire receivables are classified as current with disclosure of the amount not realizable
within one year.
b. The entire receivables are shown as noncurrent.
c. The portion due in one year is shown as current and the balance as noncurrent
d. The receivables are not recognized.

10. In the case of long-term real estate installment sales

a. The entire receivables are shown as current without disclosure of the amount not currently
due.
b. The entire receivables are shown as noncurrent.
c. Only the portion currently due is shown as current and the balance as noncurrent.
d. The entire receivables are not recorded.

QUESTION 22-12 Multiple choice (IAA)

1. Which accounting principle primarily supports the use of allowance for doubtful accounts?
a. Continuity principle
b. Full disclosure principle
c. Matching principle
d. Conservatism

2. Why is the allowance method preferred over the direct write-off method of accounting for bad
debts?
a. Allowance method is used for tax purposes
b. Estimates are used
c. Determining worthless accounts under direct write-off method is difficult to do
d. Improved matching of bad debt expense with revenue

3. The entry debiting accounts receivable and crediting allowance for doubtful accounts would be
made when
a. A customer pays an account balance
b. A customer defaults on the account
c. A previously defaulted customer pays the balance.
d. Estimated uncollectible accounts are too low.

4. In recording cash discounts related to accounts receivable, which is more theoretically correct?
a. Net method
b. Gross method
 c. Allowance method
d. All three methods are theoretically correct

5. All of the following are problems associated with the measurement of accounts receivable,
except
a. Uncollectible accounts
b. Returns
c. Cash discounts under the net method
d. Allowance granted

QUESTION 22-13 Multiple Choice (AICPA Adapted)

1. Which method of recording bad debt loss is consistent with accrual accounting
a. Allowance method
b. Direct write-off method
c. Percent of sales method
d. Percent of accounts receivable method

2. When the allowance method is used the entry to record the write-off of a specific account
would
a. Decrease both accounts receivable and the allowance
b. Decrease accounts receivable and increase allowance
c. Increase both accounts receivable and the allowance
d. Increase accounts receivable and decrease the allowance

3. Under the allowance method, the journal entry to record the write-off of a specific uncollectible
account
a. Affects neither net income nor working capital
b. Affects neither net income nor accounts receivable
c. Decreases both net income and working capital
d. Decreases both net income and accounts receivable

4. Under the allowance method, the entries at the time of collection of an account previously
written off would
a. Decrease the allowance for doubtful accounts
b. Increase net income
c. Have no effect on the allowance for doubtful accounts
d. Have no effect on net income

5. Collection of accounts receivable previously written off results in an increase in cash and an
increase in
a. Accounts receivable
b. Allowance for doubtful accounts
c. Bad debt expense
 d. Retained earnings

QUESTION 22-14 Multiple choice (AICPA Adapted)

1. A method of estimating bad debts that focuses on the income statement rather than the
statement of financial position is the allowance method based on
e. Direct write off
f. Aging the trade accounts receivable
g. Credit sales
h. Trade accounts receivable

2. A method of estimating uncollectible accounts that emphasizes asset valuation rather than
income measurement is the allowance method based on
a. Aging of accounts receivable
b. Direct write off
c. Gross sales
d. Credit sales less returns and allowances

3. The advantage of relating the bad debt experience to accounts receivable is that this approach
a. Gives a reasonably accurate measurement of receivables in the statement of
financial position.
b. Relates bad debt expense to the period of sale
c. Is the only generally accepted method for measuring accounts receivable.
d. Makes estimates of uncollectible accounts unnecessary

4. When a specific customer account receivable is written off as uncollectible, what will be the
effect on net income under the allowance and direct write off method?
a. No effect under both allowance method and direct write-off method
b. Decrease under both allowance method and direct write-off method
c. No effect under allowance method and decrease under direct write-off method
d. Decrease under allowance method and no effect under direct write-off method

5. An entity uses the allowance method to recognize doubtful accounts expense. What is the effect
of a collection of an account previously written off?
a. No effect on both allowance for doubtful accounts and doubtful accounts expense
b. No effect on allowance for doubtful accounts and decrease in doubtful accounts
expense
c. Increase in allowance for doubtful accounts and no effect on doubtful accounts expense
d. Increase in allowance for doubtful accounts and decrease in doubtful accounts expense

6. When an accounts receivable aging schedule is prepared, a series of computations is made to

determine the estimated uncollectible accounts. The resulting amount from this aging schedule
a. When added to the total accounts written off during the year is the desired credit
balance of the allowance for doubtful accounts at year-end
b. Is the amount of doubtful accounts expense for the year
 c. Is the amount that should be added to the beginning allowance for doubtful accounts to
get the doubtful accounts expense for the year
d. Is the amount of desired credit balance of the allowance for doubtful accounts to be
reported at year-end

7. When an aging approach is used for estimating uncollectible accounts

a. Bad debt expense is measured indirectly and the allowance for uncollectible accounts is
measured directly.
b. Bad debt expense is measured indirectly and the allowance for uncollectible accounts is
measured indirectly.
c. Bad debt expense is measured directly and the allowance for uncollectible accounts is
measured directly.
d. Bad debt expense is measured directly and the allowance for uncollectible accounts is
measured indirectly.

8. Which is an accurate method of determining the amount of the adjustment to bad debt
expense?
a. A percentage of sales adjusted for the balance in the allowance
b. A percentage of sales not adjusted for the balance in the allowance
c. A percentage of accounts receivable not adjusted for the balance in the allowance
d. An amount derived from aging accounts receivable and not adjusted for the balance in
the allowance

9. A debit balance in the allowance for doubtful accounts

a. Should never occur.
b. Is always the result of management not providing a large enough allowance in order to
manage earnings.
c. May occur before the year-end adjustment for uncollectible accounts.
d. May exist even after the year-end adjustment for uncollectible accounts.

10. Which is not permitted in accounting for uncollectible accounts receivable?

a. Percentage of accounts receivable
b. Percentage of sales
c. Direct write-off method
d. Aging of accounts receivable
QUESTION 22-15 Multiple choice (IAA)

1. Which method of determining bad debt expense does not match expense and revenue?
a. Charging bad debts with a percentage of sales under the allowance method
b. Charging bad debts with a percentage of accounts receivable under the allowance
method
c. Charging bad debts with an amount derived from aging the accounts receivable
under the allowance method
d. Charging bad debts as accounts are written off as uncollectible

2. Which method of determining bad debt expense most closely matches expense to revenue?
a. Charging bad debts only as accounts are written off as uncollectible.
b. Charging bad debts with a percentage of sales for that period.
c. Estimating the allowance for doubtful accounts as a percentage of accounts
receivable.
d. Estimating the allowance for doubtful accounts by aging the accounts receivable.

3. Which concept relates to the allowance method in accounting for uncollectible accounts
receivable?
a. Bad debt expense is an estimate based on historical and prospective information.
b. Bad debt expense is the actual amount determined to be uncollectible.
c. Bad debt expense is an estimate based only on aging of accounts receivable.
d. Bad debt expense is management determination of which accounts are considered
doubtful.

4. Which of the following is not acceptable n estimating uncollectible accounts receivable?

a. The estimate of uncollectible accounts is based on a percentage of sales for the
period.
b. The estimate of uncollectible accounts is based on a percentage of the accounts
receivable at the end of a period.
c. The estimate of uncollectible accounts is based on an aging schedule.
d. No estimate of uncollectible accounts is made but accounts are written off when it
is determined that the accounts cannot be collected.

5. The estimate of uncollectible accounts receivable based on a percentage of sales

a. Emphasizes measurement of the net realizable value of accounts receivable.
b. Emphasizes measurement of bad debt expense.
c. Emphasizes measurement of total assets.
d. Is only acceptable for tax purposes.

QUESTION 23-6 Multiple choice (AICPA Adapted)

1. On October 1 of the current year, an entity received a one-year note receivable bearing interest
at the market rate. The face amount of the note receivable and the entire amount of the
interest are due on September 30 of next year. The interest receivable on December 31 of the
current year would consist of an amount representing
a. Three months of accrued interest income
b. Nine months of accrued interest income
c. Twelve months of accrued interest income
d. The excess on October 1 of the present value of the note receivable over its face
amount

2. On July 1 of the current year, an entity obtained a two-year 8% note receivable for services
rendered. At that time, the market rate of interest was 10%. The face amount of the note and
the entire amount of interest are due on the date of maturity. Interest receivable on December
31 of the current year is
a. 5% of the face amount of the note
b. 4% of the face amount of the note
c. 5% of the present value of the note
d. 4% of the present value of the note

3. An entity uses the installment method to recognize revenue from installment sales. Customers
pay the installment notes in 24 equal monthly amounts which include 12% interest. What is the
installment notes receivable balance six months after the sale?
a. 75% of the original sales price.
b. Less than 75% of the original sales price.
c. The present value of the remaining monthly payments discounted at 12%.
d. Less than the present value of the remaining monthly payments discounted at 12%.

4. What is imputed interest?

a. a. Interest based on the stated interest rate.
b. Interest based on the implicit interest rate.
c. Interest based on the average interest rate.
d. Interest based on the bank prime interest rate

5. Accounting for the interest in a noninterest bearing note receivable is an example of what
aspect of accounting theory?
a. Matching
b. Verifiability
c. Substance over form
d. Form over substance

6. On July 1 of the current year, an entity received a one-year note receivable bearing interest at
the market rate. The face amount of the note receivable and the entire amount of the interest
are due in one year. The interest receivable account would show a balance on.
a. July 1 but not December 31
 b. December 31 but not July 1
c. July 1 and December 31
d. Neither July 1 nor December 31

7. On July 1 of the current year, an entity received a one-year note receivable bearing interest at
the market rate. The face amount of the note receivable and the entire amount of the interest
are due in one year. When the note receivable was recorded on July 1, which of the following
was debited?
a. Interest receivable
b. Unearned discount on note receivable
c. Interest receivable and unearned discount on note receivable
d. Neither interest receivable nor unearned discount on note receivable

8. On August 15, an entity sold goods for which it received a note bearing the market rate of
interest on that date. The four-month note was dated July 15. Note principal, together with all
interest, is due November 15. When the note was recorded on August 15, which of the following
accounts increased?
a. Unearned discount
b. Interest receivable
c. Prepaid interest
d. Interest revenue

9. On July 1 of the current year, an entity received a one-year note receivable bearing interest at
the market rate. The face amount of the note receivable and the entire amount of the interest
are due on June 30 of next year. On December 31 of the current year, the entity should report in
the statement of financial position
a. A deferred credit for interest applicable to next year
b. No interest receivable
c. Interest receivable for the entire amount of the interest due on June 30 of next year
d. Interest receivable for the interest accruing in the current year

10. An entity received a seven-year zero interest-bearing note on February 1, 2019 in exchange for
property sold. There was no established exchange price for the property and the note has no
ready market. The prevailing rate of interest for a note of this type was 7% on February 1, 2019,
6% on December 31, 2019, 8% on February 1, 2020, and 9% on December 31, 2020. What
interest rate should be used to calculate the interest revenue from the transaction for the years
ended December 31, 2019 and 2020, respectively?
a. 0% and 0%
b. 7% and 7%
c. 7% and 9%
d. 6% and 9%
QUESTION 24-10 Multiple choice (IAA)

1. Why would an entity sell accounts receivable to another entity?

a. To improve the quality of credit granting process
b. To limit its legal liability
c. To accelerate access to amount collected
d. To comply with customer agreements

2. Which of the following is a method to generate cash from accounts receivable?

a. Assignment
b. Factoring
c. Assignment and factoring
d. Assignment, factoring and discounting

3. The practice of realizing cash from trade receivables prior to maturity date is widespread. Which
term is not associated with this practice?
a. Hypothecation
b. Factoring
c. Defalcation
d. Pledging

4. When the accounts receivable are sold outright, the accounts receivable have been
a. Pledged
b. Assigned
c. Factored
d. Collateralized

5. Which of the following is used to account for probable sales discounts, sales returns and sales
allowances?
a. Factor holdback
b. Recourse liability
c. Both factor holdback and recourse liability
d. Neither factor holdback nor recourse liability

QUESTION 24-11 Multiple choice (AICPA Adapted)

1. When an entity factored accounts receivable without recourse with a bank, the transaction is
best described as
a. Bank loan collateralized by the accounts receivable.
 b. Bank loan to be repaid by the proceeds from the accounts receivable.
c. Sale of the accounts receivable to the bank, with risk of uncollectible accounts retained
by the entity.
d. Sale of the accounts receivable to the bank, with the risk of uncollectible accounts
transferred to the bank.

2. Which statement is true when accounts receivable are factored without recourse?
a. The transaction may be accounted for either as secured borrowing or sale.
b. The accounts receivable are used as collateral.
c. The factor assumes the risk of collectability and absorbs any credit losses in collecting
the accounts receivable.
d. The financing cost should be recognized ratably over the collection period.

3. All but one of the following are required before a transfer of accounts receivable can be
recorded as a sale.
a. The transferred accounts receivable are beyond the reach of the transferor and the
creditors.
b. The transferor has not kept effective control through a repurchase agreement.
c. The transferor maintains continuing involvement.
d. The transferee can pledge the amounts receivable.

4. If financial assets are exchanged for cash and other consideration but the transfer does not
meet the criteria for a sale, the transaction should be accounted for as
a. Secured borrowing
b. Pledge of collateral
c. Both secured borrowing and pledge of collateral
d. Neither secured borrowing nor pledge of collateral

QUESTION 24-12 Multiple choice (IAA)

1. If a note receivable is discounted with recourse

a. A contingent liability does not exist.
b. Note receivable discounted is credited.
c. Liability for note receivable discounted is credited.
d. Note receivable must be credited.

2. The note receivable discounted account is reported as

a. Contra asset account for the proceeds from discounting
b. Contra asset account for the face amount of the note
 c. Liability account for the proceeds from the discounting
d. Liability account for the face amount of the note

3. If a note receivable is discounted without recourse

a. The contingent liability may be disclosed
b. Liability for note receivable discounted is credited
c. Note receivable is credited
d. The transaction is a secured borrowing

4. Note receivable discounted with recourse should be

a. Excluded from total receivables without disclosure
b. Excluded from total receivables with disclosure
c. Included in total receivables without disclosure
d. Included in total receivables with disclosure

5. After being held for 40 days, a 120-day 12% interest bearing note receivable was discounted at a
bank at 15%. The net proceeds from discounting are equal to
a. Maturity value less the discount at 12%
b. Maturity value less the discount at 15%
c. Face amount less the discount at 12%
d. Face amount less the discount at 15%

QUESTION 25-14 Multiple choice (PAS 2)

1. The cost of purchase of inventory does not include

a. Purchase price
b. Import duties and irrecoverable taxes
c. Freight, handling and other directly attributable
d. Trade discounts, rebates and other similar items

2. The costs of conversion include all, except

a. Direct labor
b. Systematic allocation of fixed production overhead
c. Systematic allocation of variable production overhead
d. Systematic allocation of administrative overhead

3. The allocation of fixed factory overhead is based

 a. Normal capacity of the production facilities
b. Actual use of the production facilities
c. Either the normal capacity or actual use
d. Relative sales value method

4. How should unallocated fixed overhead be treated?

a. Allocated to finished goods and cost of goods sold.
b. Allocated to raw materials, goods in process finished goods.
c. Recognized as an expense in the period incurred.
d. Allocated to cost of goods sold.

5. Variable production overhead is allocated to each of production on the basis of

a. Normal capacity of the production facilities
b. Actual use of the production facilities
c. Either the normal capacity or the actual use
d. Neither the normal capacity nor the actual use

QUESTION 25-15 Multiple choice (IFRS)

1. Which of the following should not be taken into account when determining the cost of
inventory?
a. Storage costs of part-finished goods
b. Trade discounts
c. Recoverable purchase taxes
d. Import duties on shipping of inventory inward

2. The cost of inventory does not include

a. Salaries of factory staff.
b. Storage cost necessary in the production process before a further production stage.
c. Abnormal amount of wasted materials.
d. Irrecoverable purchase taxes.

3. Which of the following costs of conversion cannot be included in cost of inventory?

a. Cost of direct labor
b. Factory rent and utilities
c. Salaries of sales staff
d. Factory overhead based on normal capacity
4. Which of the following should be taken into account when determining the cost of inventory?
a. Storage cost of part-finished goods
b. Abnormal freight in
c. Recoverable purchase tax
d. Interest on inventory loan

5. Costs incurred in bringing the inventory to the present location mild condition include
a. Cost of designing product for specific customers
b. Abnormal amount of wasted material
c. Storage cost not necessary in the production process before a further production stage
d. Distribution cost

6. Inventories encompass all of the following, except

a. Merchandise purchased by a retailer
b. Land and other property not held for sale
c. Finished goods produced
d. Materials and supplies for use in production

7. A property developer must classify properties that it holds for sale in the ordinary course of
business as
a. Inventory
b. Property, plant and equipment
c. Financial asset
d. Investment property

8. Factory supplies to be consumed in the production process are reported as

a. Inventory
b. Property, plant and equipment
c. Investment property
d. Intangible asset

9. Which of the following should not be reported as inventory?

a. Land acquired for resale by a real estate firm
b. Shares and bonds held for resale by a brokerage firm
c. Partially completed goods held by a manufacturing entity
d. Machinery acquired by a manufacturing entity

10. When determining the cost of an inventory, which of the following should not be included?
 a. Interest on loan obtained to purchase the inventory
b. Commission paid when inventory is purchased
c. Labor cost of the inventory when manufactured
d. Depreciation of plant equipment used in manufacturing

QUESTION 25-16 Multiple choice (A1CPA Adapted)

1. Theoretically, cash discounts permitted should be

a. Added to other income, whether taken or not
b. Added to other income, only if taken
c. Deducted from inventory, whether taken or not
d. Deducted from inventory, only if taken

2. Which of the following generally would not be separately accounted for in the computation of
cost of goods sold?
a. Trade discounts applicable to purchases
b. Cash discounts taken
c. Purchase returns and allowances
d. Cost of transportation for merchandise purchased

3. The use of purchase discount account implies that the recorded cost of a purchased inventory is
a. Invoice price
b. Invoice price plus any purchase discount lost
c. Invoice price less the purchase discount taken
d. Invoice price less the purchase discount allowable whether taken or not

4. The use of a discount lost account implies that cost of a purchased inventory is
a. Invoice price
b. List price
c. Invoice price less the purchase discount taken
d. Invoice price less the purchase discount allowable whether or not taken

5. The valuation of inventory on a prime cost basis

a. Would achieve the same results as direct costing
b. Would exclude all overhead from inventory cost
c. Is always achieved when standard costing is adopted
d. Is always achieved when the FIFO is adopted
QUESTION 25-17 Multiple choice (IA)

1. Which term represents the deduction from the invoice granted for early payment? price of
purchased goods
a. Sales discount
b. Purchase discount
c. Trade discount
d. Purchase return and allowance

2. A discount given to a customer for purchasing a large volume of merchandise is typically

referred to as.
a. Trade discount
b. Quantity discount
c. Size discount
d. Cash discount

3. The purchase is recorded as a credit to accounts payable

a. As if the discount is to be taken, if using the gross method
b. Without regard for the discount, if using the net method
c. As if the discount is to be taken, if using the net method
d. As if the discount is to be taken, using either the gross or net method

4. When recording accounts payable, a purchase discount is recorded

a. If using the net method
b. If using the gross method, but only if the payment is made during the discount period
c. If using the net method, provided the payment is made during the discount period
d. If using the gross method, but the purchase discount is reduced by any purchase
discount lost

5. Using the gross method, purchase discount lost is

a. Included in purchases
b. Added to accounts payable
c. Included in interest expense
d. Deducted from interest income

QUESTION 25-18 Multiple choice (IAA)

1. Why is inventory included in the computation of net income?

a. To determine cost of goods sold
b. To determine sales revenue
 c. To determine merchandise returns
d. Inventory is not included in the computation of net income

2. Which of the following is a characteristic of a perpetual inventory system?

a. Inventory purchases are debited to a purchases account.
b. Inventory records are not kept for every item.
c. Cost of goods sold is recorded with each, sale.
d. Cost of goods sold is determined as the amount of purchases less the change in
inventory.

3. Which of the following is incorrect about the perpetual inventory method?

a. Purchases are recorded as debit to the inventory account.
b. The entry to record a sale includes a debit to cost of goods sold and a credit to
inventory.
c. After a physical inventory count, inventory is credited for any missing inventory.
d. Purchase returns are recorded by debiting accounts payable and crediting purchase
returns and allowances

4. An entry debiting inventory and crediting cost of goods sold would be made when
a. Merchandise is sold and the periodic inventory method is used.
b. Merchandise is sold and perpetual inventory method is used.
c. Merchandise is returned and the perpetual inventory method is used.
d. Merchandise is returned and the periodic inventory method is used.

5. Which is not acceptable for valuation of inventory?

a. Historical cost
b. Current replacement cost
c. Prime cost
d. Estimated selling price less cost of disposal

6. In a periodic system, the beginning inventory is

a. Net purchases minus cost of goods sold
b. Net purchases minus ending inventory
c. Total goods available for sale minus net purchases
d. Total goods available for sale minus cost of goods sold

7. Entities must allocate the cost of all goods available for sale between
 a. The cost goods on hand at the beginning and the cost of goods purchased during the
period.
b. The cost of goods on hand at the end and the cost of goods purchased during the
period.
c. The income statement and the statement of financial position.
d. All of the choices are correct.

8. An exception to the general rule that costs should be charged to expense in the period incurred
is
a. Factory overhead costs incurred on a product manufactured but not sold during the
current period.
b. Interest cost for financing of inventories that are routinely manufactured.
c. General and administrative fixed cost incurred in connection with the purchase of
inventory.
d. Sales commission and salary incurred in connection with the sale of inventory.

QUESTION 25-19 Multiple choice (IAA)

1. What is consigned inventory?

a. Goods that are shipped and title transfers to the consignee.
b. Goods that are sold but payment is not required until the goods are sold.
c. Goods that are shipped but title remains with the consignor.
d. Goods that have been segregated for shipment to a customer.

2. Goods on consignment are included in the inventory of

a. The consignor but not the consignee
b. Both the consignor and the consignee
c. The consignee but not the consignor
d. Neither the consignor nor the consignee

3. How is a significant amount of consignment inventory reported?

a. Reported separately by the consignor.
b. Combined with other inventory of the consignor.
c. Reported separately by the consignee.
d. Combined with other inventory of the consignee.

4. Freight and other handling charges incurred in the transfer of goods from the consignor to
consignee are
a. Expense on the part of the consignor
 b. Expense on the part of the consignee
c. Inventoriable by the consignor
d. Inventoriable by the consignee

5. Measurement of inventory requires the determination of all of the following, except

a. The costs to be included in inventory.
b. The physical goods to be included in inventory.
c. The cost of goods held on consignment.
d. The cost flow assumption.

QUESTION 25-20 Multiple choice (IAA)

1. Sales where the goods are delivered only when the buyer makes final payment are called
a. Bill and hold sales
b. Sales subject to installation or inspection
c. Consignment sales
d. Layaway sales

2. Sales in which the buyer is not yet ready to take delivery but does take title are known as
a. Barter sales
b. Bill and hold sales
c. Layaway sales
d. Sales with buyback

3. When activities involve production through natural growth or aging of biological assets, revenue
is recognized as the plant or living animal grows. This is known as what approach?
a. Completion of production basis
b. Fair value approach
c. Accretion approach
d. Cost recovery or zero profit approach

4. For which of the following products is it appropriate to recognize revenue at the completion of
production even though no sale has been made?
a. Automobile
b. Large appliance
c. Residential unit
d. Precious metal
QUESTION 26-8 Multiple choice (AICPA Adapted)

1. Which of the following inventory method reports most closely the current cost of inventory?
a. FIFO
b. Specific identification
c. Weighted average
d. LIFO

2. Which inventory cost flow assumption would consistently result in the highest income in a
period of sustained inflation?
a. FIFO
b. LIFO
c. Weighted average
d. Specific identification

3. In a period of falling prices, the use of which inventory cost flow method would typically result in
the highest cost of goods sold?
a. FIFO
b. LIFO
c. Weighted average
d. Specific identification

4. In a period of rising prices, the inventory cost allocation method that tends to result in the
highest reported net income is
a. LIFO
b. FIFO
c. Moving average
d. Weighted average

5. During periods of rising prices, when the FIFO method is used, a perpetual inventory system
would
a. Not be permitted.
b. Result in a higher ending inventory than a periodic inventory system.
c. Result in the same ending inventory as a periodic inventory system.
d. Result in a lower inventory than a periodic inventory system.

6. Which method of inventory pricing best approximates specific identification of the actual flow of
costs and unite
a. LIFO
b. FIFO
 c. Moving average
d. Weighted average

7. Cost of goods sold is the same under a periodic system and a perpetual system when an entity
uses
a. FIFO
b. LIFO
c. Weighted average
d. Specific identification

8. Which inventory cost flow assumption provides the best measure of earnings, where "best"
means most appropriate for predicting future earnings, when prices have been declining?
a. FIFO
b. Specific identification
c. LIFO
d. Average cost

9. Assuming no beginning inventory, what can be said about the trend of inventory prices if cost of
goods sold computed using the FIFO method exceeds cost of goods sold using the average cost
method?
a. Prices decreased
b. Prices remained unchanged
c. Prices increased
d. Price trend cannot be determined from the information

10. The cost of ending inventory was lower using FIFO than LIFO. If there is no beginning inventory,
what direction did the cost of purchases move during the period?
a. Up
b. Down
c. Steady
d. Cannot be determined

QUESTION 26-9 Multiple choice (IAA)

1. IFRS prohibits which of the following cost flow assumptions?

a. LIFO
b. Specific identification
c. Weighted average
d. Any of these cost flow assumptions is allowed
2. What is the inventory pricing procedure in which the oldest costs rarely have an effect on the
ending inventory?
a. FIFO
b. LIFO
c. Specific identification
d. Weighted average

3. In a period of falling prices which inventory method generally provides the lowest amount of
ending inventory?
a. Weighted average
b. FIFO
c. Moving average
d. Specific identification

4. In a period of falling prices which inventory method generally provides the lowest amount of net
income?
a. Weighted average
b. Moving average
c. FIFO
d. Specific identification

5. The costing of inventory must be deferred until the end of reporting period under which of the
following method of inventory valuation?
a. Moving average
b. Weighted average
c. LIFO perpetual
d. FIFO perpetual

6. The cost of inventories that are not ordinarily interchangeable and goods or services produced
and segregated for specific projects shall be measured using
a. FIFO
b. Average method
c. LIFO
d. Specific identification

7. Which is the reason why the specific identification method may be considered ideal for
assigning cost to inventory and cost of goods sold?
a. The potential for manipulation of net income is reduced.
 b. There is no arbitrary allocation of cost.
c. The cost flow matches the physical flow.
d. It is applicable to all types of inventory.

8. IFRS requires the specific identification method in certain circumstances. Which of the following
is likely to be a circumstance where the specific identification method can be used?
a. Unit price is low.
b. Inventory turnover is low.
c. Inventory quantities are large.
d. All of the choices are likely circumstances.

9. Which of the following cost flow assumptions is used for inventory when an entity builds
townhouses?
a. FIFO
b. Specific identification
c. Weighted average
d. Any of these cost flow assumptions

QUESTION 27-10 Multiple Choice (PAS 2)

1. Inventories shall be measured at

a. Cost
b. Net realizable value
c. Lower of cost and net realizable value
d. Higher of cost and net realizable value

2. The cost of inventory shall be measured using

a. FIFO
b. Average method
c. LIFO
d. Either FIFO or average method

3. Net realizable value is

a. Current replacement cost
b. Estimated selling price
c. Expected selling price less expected cost to complete and expected cost of disposal
d. Estimated selling price less estimated cost to complete and estimated cost of disposal
 4. Inventories are usually written down to net realizable value
a. Item by item
b. By classification
c. By total
d. By segment

5. The amount of any write-down of inventory to net realizable value and all loses of inventory
shall be
a. Recognized as operating expense.
b. Recognized as other expense.
c. Recognized as component of cost of goods sold.
d. Deferred until the related inventory is sold.

QUESTION 27-11 Multiple choice (IFRS)

1. How should trade discounts be dealt with when valuing inventories at the lower of cost and net
realizable value?
a. Added to cost
b. Ignored
c. Deducted in arriving at NRV
d. Deducted in arriving at cost

2. How should prompt payment discount be dealt with when valuing inventories at LCNRV?
a. Added to cost
b. Ignored
c. Deducted in arriving at NRV
d. Deducted from cost

3. How should sales staff commission be dealt with when valuing inventories at LCNRV?
a. Added to cost
b. Ignored
c. Deducted in arriving at NRV
d. Deducted from cost

4. How should import duties be dealt with when valuing inventories at LCNRV
a. Added to cost
b. Ignored
c. Deducted in arriving at NRV
d. Deducted from cost
QUESTION 27-12 Multiple choice (IAA)

1. Which statement is incorrect regarding LCNRV?

a. Net realizable value is the estimated selling price less estimated cost to complete and
estimated cost of disposal
b. In most situations, entities measure inventory on a total inventory basis.
c. The direct method may be used to record the income effect of valuing inventory at net
realizable value.
d. An entity may use an allowance account to reduce inventory to net realizable value.

2. Which statement is true regarding inventory write-down and reversal of write-down?

a. Reversal of inventory write-down is prohibited
b. Separate reporting of reversal of inventory write-down is required.
c. An entity is required to record an inventory write-down in a separate loss account.
d. All of the choices are correct.

3. Lower of cost and net realizable value

a. Results in the lowest valuation if applied to the total inventory
b. Results in the lowest valuation if applied to major group of inventory
c. Results in the lowest valuation if applied to individual item of inventory
d. Must be applied to major group

4. LCNRV of inventory
a. Is always either the net realizable value or cost
b. Must be equal to net realizable value
c. May sometimes be less than net realizable value
d. Must be equal to estimated selling price less cost to complete

5. Lower of cost and net realizable value of inventory valuation is best described as the
a. Reporting of a loss when there is a decrease in the future utility below the original cost.
b. Method of determining cost of goods sold.
c. Assumption to determine inventory flow.
d. Change in inventory value to net realizable value.

6. What is the reason for the inventory measurement at lower of cost and net realizable value?
a. To report a loss when there is a decrease in the future utility below the original selling
price.
b. To be conservative.
c. To report a loss when there is a decrease in the future utility below the original cost.
d. To permit future income to be recognized.
 7. Which method may be used to record a loss on inventory write-down to NRV?
a. Loss method
b. Accrual method
c. Cost of goods sold method
d. Loss method and cost of goods sold method

8. When the cost of goods sold method is used to record inventory at net realizable value
a. There is a direct reduction in the estimated selling price that results in a loss.
b. A loss is recorded directly by crediting inventory.
c. Only the portion of the loss attributable to inventory sold during the period is recorded.
d. The net realizable value for ending inventory is substituted for cost and the loss is buried
in cost of goods sold.

QUESTION 27-13 Multiple choice (IAA)

1. The credit balance that arises when a loss on a purchase commitment is recognized should be
a. Presented as a current liability
b. Subtracted from ending inventory
c. Presented as an appropriation of retained earnings
d. Presented in the income statement

2. If a material amount of inventory has been ordered through a formal purchase contract at the
end of reporting period for future delivery at firm prices
a. This fact must be disclosed.
b. Disclosure is required only if prices have declined since the date of the order.
c. Disclosure is required only if prices have since risen substantially.
d. An appropriation of retained earnings is necessary.

3. When a portion of inventory has been pledged as security for a loan

a. The value of the inventory pledged should be deducted from the debt.
b. An equal amount of retained earnings should be appropriated
c. The fact should be disclosed but the amount of current assets should not be affected
d. The cost of the pledged inventory should be transferred from current asset to
noncurrent asset.

4. An example of an inventory accounting policy that should be disclosed is

a. Effect of inventory profit caused by inflation.
b. Classification of inventory into raw materials, work in process and finished goods.
c. Identification of major suppliers.
d. Method used for inventory costing.
QUESTION 27-14 Multiple choice (IAA)

1. Commodities of broker traders are measured at

a. Fair value
b. Fair value less cost of disposal
c. Cost
d. Net realizable value
2. Commodity broker-traders
a. Produce commodities such as rice or corn.
b. Hold inventory primarily to sell in the near term and generate a profit from price
fluctuation.
c. Measure inventory at LCNRV.
d. All of the choices are correct regarding broker-traders.

3. NRV is the general rule for measuring which inventory?

a. Commodity held by broker-traders
b. Computer component held for sale
c. Inventory priced on an item by item basis
d. All of these inventories are measured at NRV

4. Net realizable value is used to measure which inventory?

a. Agricultural inventory
b. Minerals
c. Commodities held by broker-traders
d. All of these are measured at net realizable value

5. Which financial attribute would not be used to measure inventory?

a. Historical cost
b. Current replacement cost
c. Net realizable value
d. Present value of future cash flows

QUESTION 28-7 Multiple choice (IAA)

1. The gross margin method of estimating ending inventory may be used for all of the following,
except
a. Internal as well as external interim reports
b. Internal as well as external year-end reports
c. Estimate of inventory destroyed by fire or other casualty
 d. Rough test of the validity of an inventory cost determined under either periodic or
perpetual system

2. The gross profit method assumes that

a. The amount of gross profit is the same as in prior years.
b. Sales and cost of goods sold have not changed from previous years.
c. Inventory values have not increased from previous years.
d. The relationship between selling price and cost of goods sold is similar to prior years.

3. The gross profit method if estimating inventory would not be useful when
a. A periodic system is in use and inventories are required for interim statements.
b. Inventories have been destroyed or lost by fire, theft or other casualty, and the specific
data required for inventory valuation are not available.
c. There is a significant change in the mix of products being sold.
d. The relationship between gross profit and sales remains stable over time.

4. The gross profit method of estimating inventory is not valid when

a. There is substantial increase in the quantity of inventory during the year.
b. There is a substantial increase in the cost of inventory during the year.
c. The gross margin percentage changes significantly during the year.
d. All ending inventory is destroyed by fire before it can be counted.

5. The gross profit method is invalid when

a. A portion of inventory is destroyed
b. There is a substantial decrease in inventory
c. There is no beginning inventory
d. The gross profit percentage applicable to the goods in ending inventory is different from
the percentage applicable to goods sold during the period.

6. Which statement is not valid about the gross profit method?

a. It may be used by auditors
b. It is an acceptable accounting procedure.
c. It may be used to estimate inventory for interim statements.
d. It may be used to estimate inventory for annual statements

7. Which is not a basic assumption of the gross profit method

a. The beginning inventory plus net purchases equals total goods to be accounted for,
b. Goods not sold must be on hand.
 c. The sales reduced to cost basis when deducted from the sum of beginning inventory and
net purchases would result to inventory on hand.
d. The amount of purchases and the amount of sales remain relatively unchanged from the
previous period.

8. How is the gross profit method used in relation to inventory valuation?

a. To verify the accuracy of the perpetual inventory record
b. To verify the accuracy of the physical inventory
c. To estimate the cost of goods sold
d. To provide a FIFO inventory value

QUESTION 28-8 Multiple choice (AICPA Adapted)

1. An advantage of the retail inventory method is that it

a. Permits entities to avoid taking an annual physical inventory.
b. Gives a more accurate measurement of inventory.
c. Hides costs from customers and employees.
d. Provides a method for inventory control and facilitates determination of the periodic
inventory.

2. To produce an inventory valuation which approximates the lower of cost and NRV using the
retail method, the computation of the ratio of cost to retail should
a. Included markups but not markdowns
b. Include markups and markdowns
c. Ignore both markups and markdowns
d. Include markdowns but not markups

3. When the conventional retail inventory method Is used, markdowns are commonly ignored
in the computation of cost to retail ratio because
a. There may be no markdowns during the year.
b. This tends to give a better approximation of the lower of average cost and net realizable
value.
c. Markups are also ignored.
d. This tends to result in the showing of a normal profit margin in a period when no
markdown goods have been sold.

4. The retail inventory method would include which of the following in the calculation of the
goods available for sale at both cost and retail?
 a. Freight in
b. Purchase returns
c. Markups
d. Markdowns

5. With regard to the retail inventory method, which is the most accurate statement?
a. Generally, accountants ignore net markups and net markdowns in computing the cost
ratio.
b. Generally, accounts exclude net markups and include net markdowns in computing cost
ratio.
c. The retail method results in a lower ending inventory if net markups are included but
net markdowns are excluded in computing the cost ratio.
d. It is not adaptable to FIFO costing.

6. The conventional retail method produces an ending inventory that approximates

a. Lower of average cost and net realizable value
b. Lower of FIFO cost and net realizable value
c. Lower of LIFO cost and net realizable value
d. Lower of cost and net realizable value

7. The retail method is based on the assumption that

a. Final inventory and the total goods available for sale contain the same proportion of
high cost and low cost ratio goods.
b. Gross margin is the same each period.
c. Ratio of cost to retail changes at a constant rate.
d. Proportions of markup and markdown to selling price are the same.

8. If the conservative retail inventory method is used which of the following calculations would
include or exclude net markdowns?

Cost ratio Ending inventory at retail

a. Include Include
b. Include Exclude
c. Exclude Include
d. Exclude Exclude

9. An inventory method which is designed to approximate inventory valuation at the lower of

average cost and net realizable value is
a. Average retail method
 b. FIFO retail
c. Conventional retail method
d. LIFO retail

10. Which of the following is not a reason why the retail inventory method is used widely?
a. As a control measure in determining inventory shortage
b. For insurance information
c. To permit the computation of net income without a physical count of inventory
d. To defer income tax liability