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Inventories and Investment Theories v2

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  Quiz No.4: Theories  –  Inventories and Investment 1. Bank A is involved in real estate development. A has purchased land in Moscow through the exercise of a purchase option that had been acquired some years ago. The purchase price was 10 million and the fair value of the land as determined by an independent valuer is 23.7 million. The bank is undecided about whether to develop the land for sale to a third party or sell it, but will determine a use within the next accounting period. If you were the accountant, on what account will you record the said transaction? a. Investment Property at fair value, the bank decided to hold the land for long-term capital appreciation rather than short-term sale in the ordinary course of business. b. Inventory under PAS 2, as the bank is a real estate developer, it is in their nature to have a property as an inventory in the normal course of their operations. c. Property plant and equipment under PAS 16, the property is being held neither for sale nor for further development and eventual sale in the ordinary course of business. d. Inventory under PAS 2, the property is being held either for sale or for further development and eventual sale in the ordinary course of business. 2. Dropna Trading Company purchases motorbikes from several countries and sells them to European countries. During the current year, this company has incurred following expenses: i. Trade discounts on purchase ii. Handling costs relating to imports iii. Salaries of accounting department iv. Sales commission paid to sales agents v. After sales warranty costs vi. Import duties vii. Costs of purchases (based on supplier’s invoices)  viii. Freight expense ix. Insurance of purchases x. Brokerage commission paid to indenting agents Dropna Trading Company seeks your advice on which costs are allowed by PAS 2 for inclusion in the cost of inventory? a. I,II,IV,VII,VIII,IX,X b. I,II,V,VI,VII,VIII,XI c. I,II,VI,VII,VIII,IX,X d. I,II,V,VI,VII,VIII,X 3. Which of the following is false relating to cost formulas? a. Costs should be using the specific identification of their individual costs if inventories are normal interchangeable and if goods or services are produced and segregated for specific projects. b. FIFO method assumes the inventories that are purchased first are sold first. This implies that the ending or remaining inventory is valued at the most recent prices. c. The weighted average method determines the weighted-average cost of similar items at the start of a period and the cost of goods or services purchased or produced during the period. d. An entity should value the inventories by using same formula if the items are or similar nature and use, different cost methods can be used if the inventories are not similar in nature and use. 4. Which of the following are not parts of total exclusions in relation to PAS 2 inventories? a. Work in process arising under construction contracts, including directly related service contracts. b. Financial Instruments c. Biological assets related to agricultural activity and agricultural produce at the point of harvest. d. Producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, to the extent that they are measure at net realizable value in accordance with well-established practices in those industries. 5. Cost of purchase includes: a. Purchase price, import duties, and other taxes (other than those subsequently recoverable by the entity from the taxing authorities). b. Rebates. c. All of the above. d. None of the above. 6. Cost of conversion does not include: a. Costs directly related to the units of production, such as direct labor. b. Allocation of variable production overheads to the costs of conversion which is based on the normal capacity of the production facilities. c. Unallocated overheads which are recognized as an expense in the period in which they are incurred. d. Systematic allocation of fixed and variable production overhead, such as activity based costing.  7. Service provider’s inventory necessarily i ncludes: a. Inventories measured at cost of production which consist of direct costs and allocated overhead b. Profit margin and non-attributable overheads c. Selling and administrative expense d. Allocation of variable production overheads to the costs of conversion which is based on the normal capacity of the production facilities. 8. Singko Company made a change in valuing its inventories from first-in, first-out to weighted average method due to acquisition of new accounting system, this is considered a? a. Change in accounting policy that affects current and future periods only b. Change in accounting policy with prospective adjustment c. Change in accounting estimate with retrospective adjustment d. None of the above 9. Which of the following items is not considered in the computation of total goods available for sale under average retail inventory method? a. Employee discount b. Purchase discount c. Mark-up cancellation d. Departmental transfer-in 10. Which of the following items should be excluded from the company’s reported inventory?  a. Goods purchased subject to a buyback agreement b. Goods still in transit sold under FOB Destination c. Goods still in transit purchased under FOB Seller d. Goods out on consignment unsold by the consignee at the balance sheet date 11. On March 1, 2019, Shiftna Company elected to change from weighted average to FIFO inventory system.  Assuming the entity is using calendar year, the cumulative effect of the change is determined? a. As of January 1, 2019 and given prospective application b. As of January 1, 2019 and given retrospective application c. As of March 1, 2019 and given prospective application d. As of March 1, 2019 and given retrospective application 12. Bagsak Company is a large manufacturer of machines. A major customer has placed an order for a special machine for which it has given a deposit to the entity. The parties have agreed on a price for the machine. As per the terms of the sale agreement, it is FOB (free on board) contract and the title passes to the buyer when goods are loaded into the ship at the port. When should the revenue be recognized by the entity? a. When the customer orders the machine b. When the deposit is received c. When the machine is loaded at the port d. When the seller signs the bill of lading 13. Cinco Co. is a large manufacturer of cosmetics sells merchandise to a retailer, which in turn sells the goods to the public at large through its chain of retail outlets. The retailer purchases merchandise from the manufacturer under a consignment contract. When should revenue from the sale of merchandise to the retailer be recognized by the manufacturer? a. When goods are delivered to the retailer b. When goods are sold by the retailer c. It will depend on the terms of delivery of the merchandise (i.e., CIF cost, insurance, and freight or FOB) d. It will depend on the terms of payment (i.e., cash or credit) 14. Which of the following is the incorrect statement? a. A debit valuation allowance balances for an investment in available for a sale security implies a corresponding owners’ equity account with a credit balance of the same amount.  b. Unrealized holding gains on investments in available for sale securities may be recognized as a direct increase to owners’ equity.  c. Investments in trading securities may be classified as current or long-term. d. Investments in available for sale securities may be classified as current or long-term. 15. Which of the following is incorrect? a. Investments classified as long-term are reclassified as short-term investments only if it is the intention of the management to dispose of them in the short term. b. If an investor company does not have significant influence in another company, it must use either the fair value method or the cost method to account for that investment in equity securities.  c. If an investor company has a controlling interest in another company, it must use either the cost method or the equity method to account for that investment in equity securities. d. The cost method is sometimes applied to investments in equity securities. 16. Select the incorrect statement. a. The cost method of accounting for an investment in a subsidiary recognizes the legal fact that the parent and subsidiary is one economic unit. b. Realized gains and losses on investments in equity securities accounted for under the cost method are usually measured by the difference between the cost and current selling price. c. Under the equity method of accounting for long-term investments in equity securities, the inve stor’ investment account is decreased by all dividends received from the investee. d. The equity method of accounting for long-term investments in equity securities is based on the presumption that the investor owns a sufficient number of the outstanding voting shares of another company to exercise significant influence over the operating and financing policies of the other company. 17. Slow-moving and obsolete inventory items should be priced for balance sheet purposes at: a. Retail inventory price b. Cost or market, whichever is lower. c. Moving average. d. None of the above 18. Subnormal or obsolete goods, either under the cost or the lower of cost or market basis: a. Should be taken up an unrealized inventory loss. b. Should be valued at bona-fide selling price less direct cost of disposition. c. Should be valued by applying an inventory method that uses a constant or nominal value for the normal inventory level. d. Should be adjusted in the cost of goods sold. 19. Papasabako corporation purchased shares of Babagsak Company and classified the investment as trading securities. The entity should report these trading securities at a. Lower of cost or market with holding gains included in earnings only to the extent of previously recognized holding losses. b. Lower of cost or market with holding gains and losses included in earnings. c. Fair value, with holding gains and losses included in earnings. d. Fair value with holding gains included in earnings only to the extent of previously recognized holding losses. 20. Which of the following best describes the PFRS requirement for applying the same cost formula to all inventories? a. When they sell for the same price. b. When they are purchased from the same geographic region. c. When they are purchased from different suppliers. d. When they are similar in nature or use. 21. Which of the following is a disadvantage of using the PFRS FIFO method, as compared to Average-cost under GAAP? a. FIFO may cause poorer buying habits as management attempts to manipulate net income. b. Under FIFO, during periods of inflation, inventory costs matched against sales are greater than the inventory replacement cost. c. When price levels increase and inventory quantities do not decrease, taxes are greater under FIFO. d. FIFO typically causes lower reported earnings. 22. Both GAAP and PFRS exclude which of the following from the cost of inventory? a. Selling costs b. Most storage costs c. General administrative costs d. All of these are excluded by GAAP and PFRS. 23. In 2019, Shiftnaentrep Manufacturing signed a contract with a supplier to purchase raw materials in 2020 for P900,000. Before the December 31, 2019 balance sheet date, the market price for these materials dropped to P710,000. The journal entry to record this situation at December 31, 2019 will result in a credit that should be reported? a. on the income statement. b. as an appropriation of retained earnings. c. as a valuation account to Inventory on the balance sheet. d. as a current liability.  24. Which of the following is not a basic assumption of the gross profit method? a. The total amount of purchases and the total amount of sales remain relatively unchanged from the comparable previous period. b. If the sales, reduced to the cost basis, are deducted from the sum of the opening inventory plus purchases, the result is the amount of inventory on hand. c. Goods not sold must be on hand. d. The beginning inventory plus the purchases equal total goods to be accounted for. 25. A major advantage of the retail inventory method is that it? a. Gives a more accurate statement of inventory costs than other methods. b. Provides a method for inventory control and facilitates determination of the periodic inventory for certain types of companies. c. Hides costs from competitors and customers d. Provides reliable results in cases where the distribution of items in the inventory is different from that of items sold during the period. 26. Which of the following is not a reason the retail inventory method is used widely? a. As a control measure in determining inventory shortages b. To permit the computation of net income without a physical count of inventory c. To defer income tax liability d. To defer income tax asset 27. During the prior fiscal year, Lipatnaschool Corp. signed a long-term noncancellable purchase commitment with its primary supplier to purchase P2.5 million of raw materials. Lipatnaschol paid the P2.5 million to acquire the raw materials when the raw materials were only worth P2.3 million. Assume that the purchase commitment was properly recorded. What is the journal entry to record the purchase? a. Debit Inventory for P2,300,000, and credit Cash for P2,300,000. b. Debit Inventory for P2,300,000, debit Unrealized Holding Gain or Loss for P200,000, and credit Cash for P2,500,000. c. Debit Inventory for P2,300,000, debit Estimated Liability on Purchase Commitments for P200,000 and credit Cash for P2,500,000. d. Debit Inventory for P2,500,000, and credit Cash for P2,500,000. 28. During the current fiscal year, Enterpwaving Corp. signed a long-term noncancellable purchase commitment with its primary supplier. Entrepwaving agreed to purchase P2.5 million of raw materials during the next fiscal year under this contract. At the end of the current fiscal year, the raw material to be purchased under this contract had a market value of P2.3 million. What is the journal entry at the end of the current fiscal year? a. Debit Unrealized Holding Gain or Loss for P200,000 and credit Estimated Liability on Purchase Commitment for P200,000. b. Debit Estimated liability on Purchase Commitments for P200,000 and credit Unrealized Holding Gain or Loss for P200,000. c. Debit Unrealized Holding Gain or Loss for P2,300,000 and credit Estimated Liability on Purchase Commitments for P2,300,000. d. No journal entry is required. 29. Which of the following are not key similarities between GAAP and PFRS with respect to the accounting for inventories? a. The guidelines on who owns the goods — goods in transit, consigned goods, special sales agreements, and the costs to include in inventory are essentially accounted for the same under PFRS and GAAP b. Use of specific identification cost flow assumption, where appropriate c. Unlike property plant and equipment, PFRS permits the option of valuing inventories at fair value. d. Certain agricultural products and minerals and mineral products can be reported at net realized value using PFRS 30. Where is the authoritative PFRS guidance related to accounting and reporting for inventories found? a. PAS 2 b. PFRS 15 c. PAS 41 d. All of these standards deal with inventory

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Oct 7, 2019
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