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5. The amount of any writedown of inventory to net realizable value and all losses of
inventory should be
a. Recognized as operating expense in the period the writedown or loss occurs.
3. LCNRV of inventory
a. Is always either the net realizable value or cost.
b. Should always be equal to net realizable value.
c. May sometimes be less than the net realizable value.
d. Should always be equal to the estimated selling price less cost to complete.
Answer :a. Is always either the net realizable value or cost.
7. When inventory declines in value below original cost, what is the maximum
amount that the inventory can be valued at?
a. Sales price
b. Net realizable value
c. Historical cost
d. Sales price reduced by estimated cost of disposal
Answer :b. Net realizable value
8. Lower of cost and net realizable value as it applies to inventory is best described as
the
a. Reporting of a loss when there is 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.
Answer : a. Reporting of a loss when there is decrease in the future utility
below theoriginal cost.
9. Which method may be used to record a loss due to a price decline in the value o
inventory?
a. Loss method
b. Sales method
c. Cost of goods sold method
d. Loss method and cost of goods sold method
Answer :d. Loss method and cost of goods sold method
10. When the cost of goods sold method is used to record inventory at net realizable
value
a. There is a direct reduction in the selling price.
b. A loss is recorded directly in the inventory account by debiting loss.
c. Only the portion of the loss attributable to inventory sold is recorded.
d. The net realizable value for ending inventory is substituted for cost and the
loss is buried in cost of goods sold.
Answer : d. The net realizable value for ending inventory is substituted for
cost and the loss is buried in cost of goods sold.
Problem 18-3 Multiple Choice (IAA)
1. How should sales staff commission be dealt with when valuing inventory at
LCNRV?
a. Added to cost
b. Ignored
9.It is a market in which transactions for the asset or liability take place with
sufficient regularity and volume to provide pricing information on an going basis.
a.Active market
b.Principal market
c.Global market
d.Financial market
Answer: a. Active market
10.Which of the following should not be considered cost of disposal?
a.Commission to broker and dealer
b.Levy by regulatory agency
c.Transfer tax
d.Transport cost
Answer: d.Transport cost
7.A gain or loss arising on the initial recognition of a biological asset and from a
change in the fair value less cost disposal of a biological asset shall be included in
a.Profit or loss for the period
b.Other comprehensive income
c.A separate revaluation reserve
d.An appropriation reserve
Answer: a. Profit or loss for the period
8.Where there is a long aging or mutation process after harvest, the accounting for
such products shall be dealt with by
a.PAS 41, Agriculture
b.PAS 2, Inventories
c.PAS 16, Property, plant and equipment
d.PAS 40, Investment property
Answer: b. PAS 2, Inventories
9.Which of the following information shall be disclosed in relation to agricultural
activity?
a.Separate disclosure of the gain or loss relating to biological asset and
agricultural produce
b.The aggregate gain or loss arising on the initial recognition of biological
asset and agricultural produce and from the change in fair value less cost
disposal of biological asset
c.The total gain or loss from biological asset, agricultural produce, and from
changes in fair value less cost of disposal of biological asset
d.There is no requirement to disclose separately any gain or loss
Answer: b. The aggregate gain or loss arising on the initial recognition of
biological asset and agricultural produce and from the change in
fair value less cost disposal of biological asset
10.When agricultural produce is harvested, the harvest shall be accounted for as
inventory. For the purpose, cost at the date of harvest is deemed to be
a.The fair value less cost of disposal at the point of harvest.
b.The historical cost
c.The historical cost less accumulated impairment losses
d.Market value
Answer: a. The fair value less cost of disposal at the point of harvest.
5.Where there is a production cycle of more than one year for a biological asset, IAS
41 encourages separate disclosure of the
a.Physical change only
b.Price change only
c.Total change in value
d.Physical change and price change
Answer: d. Physical change and price change
6.All of the following criteria must be satisfied before a biological asset can be
recognized in an entitys financial statements, except
a.The entity controls the asset as a result of past event
b.It is probable that future economic benefits relating to the asset will flow to the
entity
c.An active market for the asset exists
d.The fair value or cost of the asset can be measured reliably
Answer: c. An active market for the asset exists
7.All of the following would be classified as biological asset, except
a.Dairy cattle
b.Chickens
c.Eggs
d.Trees
Answer: c. Eggs
8.All of the following would be classified as agricultural produce?
a. Tree
b.Bush
c.Butter
d.Apple
Answer: d. Apple
9.Animals related to recreational activities, for example, game parks and zoos,
including the natural breeding of animals in zoos, shall be accounted for what
under what standard?
a.IAS 41 Agriculture
3. Which of the following is not a basic assumption of the gross profit method?
a. The beginning inventory plus purchases equal total goods to be accounted for.
b. Goods not sold must be hand
c. The sales reduced to cost basis when deducted from the sum of the beginning
inventory and purchases would result to inventory on hand
d. The amount of purchases and amount of sales remain relatively unchanged from
the comparable previous period.
Answer: d. The amount of purchases and amount of sales remain relatively
unchanged from the comparable previous period.
4. If the gross profit rate is based on cost, the cost of goods sold is computed as
a. Net sales times cost ratio
b. Net sales divided by sales ratio
c. Gross sales times cost ratio
d. Gross sales divided by sales ratio
Answer: b. Net sales divided by sales ratio
5. 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 report
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.
Answer: b. Internal as well as external year end report
6. The use of the gross profit method assumes
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 not increased from previous years.
d. The relationship between selling price and cost of goods sold is similar to prior
years.
Answer: a. The amount of gross profit is the same as in prior years.
7. The gross profit method of estimating inventory would not be useful when
a. A periodic system is 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 product being sold.
d. The relationship between gross profit and sales remain stable over time
Answer c. There is a significant change in product being sold.
8. The gross profit method of inventory valuation is not valid when
a. There is substantial increase in the quantity of inventory during the year.
b. There is 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.
Answer: c. The gross margin percentage changes significantly during the year.
9. The gross profit method of inventory valuation is invalid when
a. A portion of inventory is destroyed
b. There is a substantial increase in inventory during the year.
c. There is no beginning inventory because it is the first year of operation
d. The gross profit percentage applicable to goods in ending inventory is different
from the percentage applicable to goods sold during the period.
Answer : a. A portion of inventory is destroyed
10. Which of the following statements 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.
Answer: d. It may be used to estimate inventory for annual statements.