Part 1 Recognition, Measurement, Valuation, & Disclosures (Current Assets)

Question 1
The management accountant of Clifford Products has decided to value inventory using last in, first out
(LIFO) to reduce its tax expense. Under which of the following situations can the decision of the
management accountant go wrong?

A. When the LIFO balance is the same as the FIFO balance due to stable costs.
B. When the prices are rising and inventory quantities on hand are decreasing.
C. When LIFO includes inventory holding gains in the net income.
D. When the company uses LIFO only for external financial reporting and average cost method for
internal reporting.

Question 2
When should a typical merchandiser recognize an account receivable?

A. At the point of sale

B. When cash is received
C. When the transaction price is determined
D. When the contract is signed

Question 3
Which of the following inventory cost flow assumptions would require the application of the Lower of
Cost or Market (LCM) principle?

A. FIFO
B. LIFO
C. Weighted Average
D. Specific Identification

Question 4
Joanie's Caterers bought 10 green tablecloths from Fabric Town for a reception planned for one of their
clients. When the package arrived, there were 10 red tablecloths included, but no green. If Joanie's
Caterers decides to keep the tablecloths, then:

A. Fabric Town may grant a purchase allowance, which will increase the operating expenses for
their company as well as Joanie's.
B. Fabric Town may grant a purchase return, which will increase accounts payable for Joanie's
Caterers, but not Fabric Town.
C. Fabric Town may grant a purchase allowance, which will reduce the caterer's accounts payable.
D. Fabric Town may grant a purchase return, which will decrease accounts payable for Fabric Town,
but not Joanie's Caterers.

Question 5
If a company uses the equity method to account for an investment in another company, which of the
following is true?

A. Income to the investing company consists only of actual dividends, interest, or capital gains.
B. All of the investee's income is included in the investor's income except for income relating to
intra-entity transactions.
 Part 1 Recognition, Measurement, Valuation, & Disclosures (Current Assets)

C. A proportionate share of the investee's net income is included in the investor's income
statement.
D. Income of the investee is included in the investor's income but reduced by any dividends paid to
the investor.

Question 6
Four companies each have a similar total Account Receivables balance and a similar estimated
percentage collectible for the number of days past due. If the companies are trying to estimate their bad
debt expense using the percentage-of-receivables basis, which company should record the LOWEST
amount of Bad Debt Expense? The table reports the company's percentage of total Accounts Receivable
in each category.

A. Company 1
B. Company 2
C. Company 3
D. Company 4

Question 7
At year-end, Rim Co. (Rim) held several investments with the intent of selling them in the near term. The
investments consisted of $100,000, 8%, 5-year bonds, purchased for $92,000, and equity securities
purchased for $35,000. At year-end, the bonds were selling on the open market for $105,000, and the
equity securities had a fair value of $50,000. What amount should Rim report as trading securities in its
year-end balance sheet?

A. $50,000
B. $127,000
C. $105,000
D. $142,000

Question 8
New Haven Products has used LIFO inventory valuation for the life of the company. Each year, their LIFO
reserve increases. What can be assumed about the prices of inventory?

A. Inventory prices have increased each year.

B. Inventory prices have decreased each year.
C. Inventory prices have stayed the same each year.
D. Inventory prices have increased in more years than they have decreased.

Question 9
Which of the following inventory valuation methods cannot be used for IFRS purposes?

A. FIFO
B. LIFO
 Part 1 Recognition, Measurement, Valuation, & Disclosures (Current Assets)

C. Weighted Average
D. Specific Identification

Question 10
Newman Shoes and Bowman Footwear both decided to write off a specific customer's uncollectible
account as a bad debt expense. If Newman Shoes uses the direct write-off method and Bowman
Footwear uses the allowance method for uncollectible accounts, what will be the difference in the
journal entries for these two companies?

A. Newman Shoes will record a credit to Bad Debt Expense, whereas Bowman Footwear will record
a credit to Allowance for Doubtful Accounts.
B. Newman Shoes will record a debit to Allowance for Doubtful Accounts, whereas Bowman
Footwear will record a debit to Bad Debt Expense.
C. Newman Shoes will record a debit to Bad Debt Expense, whereas Bowman Footwear will record
a debit to Allowance for Doubtful Accounts.
D. Newman Shoes will record a credit to Allowance for Doubtful Accounts, whereas Bowman
Footwear will record a credit to Bad Debt Expense.

Question 11
Ashe Co. recorded the following data pertaining to raw material X during January Year 2:

The moving-average unit cost of X inventory at January 31, Year 2, is:

A. $8.00
B. $8.96
C. $9.20
D. $9.60

Question 12
What happens if a company fails to record estimated bad debt expense?

A. Net realizable value of accounts receivable is understated.

B. Revenues are understated.
C. Gross receivables are understated.
D. Expenses are understated.

Question 13
Sweetwater Water Sports owns 35% of Surfside Surf Shop's voting stock. In 20X6, Surfside recorded net
income of $300,000 and paid dividends of $30,000. If Sweetwater mistakenly recorded these
transactions using the fair value method (no significant influence) rather than the equity method
(significant influence), how would this affect the balance of their investment account, net income, and
retained earnings, respectively?

A. Overstate, understate, understate

 Part 1 Recognition, Measurement, Valuation, & Disclosures (Current Assets)

B. Overstate, overstate, overstate

C. Understate, overstate, overstate
D. Understate, understate, understate

Question 14
During a period of rising prices, why would Mariposa Corp. choose the FIFO inventory cost flow
assumption?

A. To track the exact profit made on each highly valuable piece of merchandise
B. To record the highest gross profit
C. To use the highest cost of goods sold to be conservative
D. To make the goods more attractive to buyers

Question 15
On 1/1/20X8 the LOU Company acquired 80% of Company SUB for $1,200,000. The remaining 20% of
Company SUB is valued at $300,000. Company SUB’s net identifiable assets are appraised for $1,000,000
but are on SUB’s books for $850,000. The difference is attributable to a piece of land SUB owns that has
a book value of $300,000 and a fair market value of $450,000. All of the following statements are
correct except:

A. LOU will record goodwill of $500,000 on its consolidated balance sheet prepared immediately
after the acquisition.
B. LOU will record the land at $450,000 on its consolidated balance sheet prepared immediately
after the acquisition.
C. LOU will record its investment in SUB at $1,200,000 on its consolidated balance sheet prepared
immediately after the acquisition.
D. LOU does not include SUB’s equity on its consolidated balance sheet prepared immediately after
the acquisition.

Question 16
The Horton Corporation accepted the delivery on August 15, 20x4, of merchandise that it had purchased
on account. As of August 31, Horton, which uses the periodic method, had not recorded the transaction
or included the merchandise in its inventory count. What is the impact of this on their August 31, 20x4,
balance sheet?

A. The stockholders’ equity would be the only item affected by the omission.
B. The assets, liabilities, and stockholders' equity would be understated.
C. The assets and liabilities would be understated but stockholders’ equity would not be affected.
D. The assets and stockholders' equity would be overstated but liabilities would not be affected.

Question 17
Companies hoping to minimize income tax expense will use which inventory cost flow assumption when
prices are rising?

A. FIFO
B. Average cost
C. Gross profit
D. LIFO
 Part 1 Recognition, Measurement, Valuation, & Disclosures (Current Assets)

Question 18
A method of estimating bad debts that focuses on the income statement rather than the balance sheet
is the allowance method based on:

A. Direct write-off.
B. Aging the trade receivable accounts.
C. Credit sales.
D. The balance in the trade receivable accounts.

Question 19
By using a perpetual inventory system, companies can better track when to replenish inventory, thus
reducing which of the following?

A. Storage costs
B. Sales
C. Sales returns
D. Income

Question 20
FIFO is used when prices are declining and companies wish to do which of the following?

A. Minimize income taxes

B. Maximize income taxes
C. Adjust beginning inventory
D. Lower cost of goods

Question 21
During a period of rising prices, why would Paisley Inc. choose the LIFO inventory cost flow assumption?

A. To track the exact profit made on each highly valuable piece of merchandise
B. To record the highest gross profit
C. To minimize income tax expense
D. To account for corresponding increases in the price of shipping to customers

Question 22
The allowance method of accounting for bad debts is an application of which of the following?

A. Consistency characteristic
B. Materiality quality
C. Revenue recognition principle
D. Expense recognition principle
 Part 1 Recognition, Measurement, Valuation, & Disclosures (Current Assets)

Question 23
Bell Retail Company sells antique replica trunks to customers all over the world. Bell's inventory records
show the following.

Bell sells 470 units this year. Management is researching whether the company should use last in, first
out (LIFO) or first in, first out (FIFO). If Bell's management wants to lower the company's income taxes,
which inventory cost flow assumption should Bell select?

A. FIFO, because the cost of goods sold will be $9,870 higher than LIFO.
B. FIFO, because the operating income will be $840 lower than LIFO.
C. LIFO, because the operating income will be $4,360 lower than FIFO.
D. LIFO, because the cost of goods sold will be $5,250 higher than FIFO.

Question 24
Whitlow Incorporated and Tanaka Manufacturing both have unrealized gains from purchased debt
securities. Whitlow reported their unrealized gains on the income statement as part of net income, but
Tanaka did not. Why?

A. Whitlow classified their debt securities as available-for-sale securities, whereas Tanaka classified
their debt securities as trading securities.
B. Whitlow classified their debt securities as trading securities, whereas Tanaka classified their
debt securities as available-for-sale securities.
C. Whitlow classified their debt securities as long-term securities, whereas Tanaka classified their
debt securities as trading securities
D. Whitlow classified their debt securities as available-for-sale securities, whereas Tanaka classified
their debt securities as long-term securities.

Question 25
Lynch Company reports the following information for its most recent fiscal year, before adjustments:

A review of the accounts receivable aging schedule results in $7,100 of estimated bad debts. If Lynch
uses the percentage-of-receivables basis to estimate bad debts, journalize the appropriate year-end
adjusting entry.
 Part 1 Recognition, Measurement, Valuation, & Disclosures (Current Assets)

A.

B.

C.

D.
Question 26
Clarion had the following investments in its portfolio that were purchased during Year 2.

On December 31, Year 2, the amortized cost of Bond Y was $97,000, and the amortized cost of Bond Z
was $63,500. Clarion uses the fair value option for all instruments in its investment portfolio. What
amount should Clarion record as an unrealized gain in its Year 2 income statement?

A. $21,000
B. $25,000
C. $26,000
D. $0

Question 27
A company is in its first year of operations and has never written off any accounts receivable as
uncollectible. When the allowance method of recognizing bad debt expense is used, the entry to
recognize that expense:

A. Increases net income.

B. Decreases current assets.
C. Has no effect on current assets.
D. Has no effect on net income.

Question 28
Which of the following errors will have no impact on the company's total inventory reported on the
balance sheet?

A. JT Engineering lists $7,500 worth of work-in-process inventory as finished goods inventory.

B. AJ Incorporated lists $13,600 worth of consignment goods as merchandise inventory.
C. DJ Enterprises lists $12,300 worth of FOB shipping point goods in transit to a customer as
merchandise inventory.
 Part 1 Recognition, Measurement, Valuation, & Disclosures (Current Assets)

D. RL Industries lists $8,700 worth of FOB destination goods in transit from a supplier as
merchandise inventory.

Question 29
On 1/1/20X8 the BNF Company purchased 40% of the outstanding common stock of the CTN Company
for $700,000. During 20X8 BNF earned $2,000,000 in net income and CTN had a net loss of $50,000. In
addition, BNF declared $200,000 in dividends and CTN declared $15,000 in dividends. What value will
BNF’s investment in CTN be carried at on the 12/31/20X8 balance sheet?

A. $680,000
B. $674,000
C. $714,000
D. $700,000

Question 30
On January 2, 20X5, Well Co. purchased 10% of Rea, Inc.’s outstanding common shares for $400,000.
Well is the largest single shareholder in Rea, and Well's officers are a majority on Rea's board of
directors. Rea reported net income of $500,000 for 20X5, and paid dividends of $150,000. In its
December 31, 20X5, balance sheet, what amount should Well report as investment in Rea?

A. $450,000
B. $400,000
C. $385,000
D. $435,000

Question 31
Which of the following statements is true about accounting for uncollectible accounts under the
allowance method of accounting?

A. The net realizable value of accounts receivable is greater before an account is written off than
after it is written off.
B. Bad Debt Expense is debited when a specific account is written off as doubtful.
C. The net realizable value of accounts receivable in the balance sheet is the same before and after
an account is written off.
D. Allowance for Doubtful Accounts is closed each year to Retained Earnings.

Question 32
Kale purchased bonds at a discount on the open market as an investment and has both the intent and
ability to hold these bonds to maturity. Kale should account for these bonds at:

A. Cost.
B. Amortized cost.
C. Fair value.
D. Lower of cost or market.

Question 33
Under the allowance method, what happens when a specific account is written off?

A. Total assets will be unchanged.

 Part 1 Recognition, Measurement, Valuation, & Disclosures (Current Assets)

B. Net income will decrease.

C. Total assets will decrease.
D. Total assets will increase.

Question 34
Accurate Auditing is conducting an inventory count for Blake Industries. Blake intermingles empty boxes
with full boxes in the storeroom. How would falsifying its inventory account have affected Blake's
financial statements if the auditors had not discovered the fraud?

A. Assets would have been understated.

B. Liabilities would have been understated.
C. Assets would have been overstated.
D. Revenues would have been overstated.

Question 35
Ownership to goods shipped FOB destination is passed to the ________ when the goods ________.

A. buyer; are ordered

B. buyer; are shipped
C. seller; are returned
D. buyer; arrive at the purchaser's business

Question 36
The table shows the inventory of Elkins Light Fixtures. If Elkins applies the lower-of-cost-or-net-
realizable-value basis per bulb, what would be the value of the inventory reported on the balance
sheet?

A. $184,000
B. $180,000
C. $176,000
D. $182,000

Question 37
The beginning inventory for 20x4 is overstated. The effects of this error on cost of goods sold for 20x4,
net income for 20x4, and assets at December 31, 20x4, respectively, are represented by which of the
following options?

A. Overstatement, understatement, overstatement

B. Understatement, overstatement, overstatement
C. Overstatement, understatement, no effect
D. Understatement, overstatement, no effect

Question 38
Theoretically, cash discounts permitted on purchased raw materials should be:
 Part 1 Recognition, Measurement, Valuation, & Disclosures (Current Assets)

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.

Question 39
Assuming no beginning inventory, what is the trend of inventory prices if cost of goods sold computed
when inventory is valued using the FIFO method exceeds cost of goods sold when inventory is valued
using the LIFO method?

A. Prices will remain unchanged.

B. Prices will decrease.
C. Prices will increase.
D. The price trend cannot be determined from the information given.

Question 40
LIFO is used when prices are falling and companies wish to do which of the following?

A. Maximize asset value

B. Minimize asset value
C. Maximize operating expenses
D. Minimize operating expenses

Question 41
Millennium Motors is a luxury car dealership. Which method of inventory costing would they most likely
use?

A. Specific identification
B. FIFO
C. LIFO
D. Weighted average

Question 42
The following costs pertain to Den Co.'s purchase of inventory:

What amount should Den record as the cost of inventory as a result of this purchase?

A. $3,925
B. $4,650
C. $4,825
D. $4,925

Question 43
In the current year, an entity only had one item of income reported in other comprehensive income.
 Part 1 Recognition, Measurement, Valuation, & Disclosures (Current Assets)

That amount came from the change in value of an investment that was being reported as available-for-
sale.

For the current year, the entity reported net income of $30,000 and total comprehensive income of
$32,000. If the entity had viewed this investment as a trading security rather than available for sale, how
would that have changed the reported income figures for the year?

A. Net income would be $30,000 and total comprehensive income would be $30,000.
B. Net income would be $30,000 and total comprehensive income would be $32,000.
C. Net income would be $32,000 and total comprehensive income would be $30,000.
D. Net income would be $32,000 and total comprehensive income would be $32,000.

Question 44
The LIFO conformity rule requires companies using LIFO for tax purposes to do which of the following?

A. Use FIFO for financial reporting purposes.

B. Use LIFO or FIFO for financial reporting.
C. Use LIFO for financial reporting purposes.
D. Use FIFO in the following tax year.

Question 45
A physical count of inventory at the end of the accounting period is required under which inventory
system(s)?

A. Perpetual system
B. Periodic system
C. Periodic and perpetual systems
D. Sampling system

Question 46
Bowman Devices values its inventory using last in, first out (LIFO) method. For the current year, the
inventory usage exceeded the purchases. Assuming inventory costs are falling, and all else is constant,
how will this situation affect the income statement for the year?

A. Taxes will be higher.

B. Net income will be lower.
C. Net income will be higher.
D. Cost of Goods Sold will be lower.

Question 47
On 1/1/20X9 the CAF Company purchased 30% of the outstanding common stock of the DFG Company
for $550,000. During 20X9 CAF earned $1,000,000 in net income and DFG earned $100,000 in net
income. In addition, CAF declared $160,000 in dividends and DFG declared $20,000 in dividends. What
value will CAF’s investment in DFG be carried at on the 12/31/20X9 balance sheet?

A. $586,000
B. $630,000
C. $574,000
D. $550,000
 Part 1 Recognition, Measurement, Valuation, & Disclosures (Current Assets)

Question 48
The ending inventory of the Ryan Company is understated in year one by $20,000. This error is not
corrected in year one or in year two. What impact will this error have on total net income for years one
and two combined?

A. No effect on total net income for the two years

B. Overstated total income by $20,000
C. Understated total income by $20,000
D. Overstated net income for year one by $20,000 and year two by $20,000 for a total
overstatement of $40,000

Question 49
Companies wishing to minimize income taxes should use which inventory cost flow method during times
when prices are declining?

A. FIFO
B. LIFO
C. Average-cost
D. Periodic

Question 50
Where are the freight costs to sell goods included?

A. As a selling expense
B. In the cost of inventory
C. As a type of overhead
D. In the cost of materials

Question 51
The Preston Company received merchandise on consignment. Preston included the goods in inventory
as of April 30, but did not record the transaction. What would the effect of this be on its financial
statements for April 30?

A. The net income would be correct and the current assets would be understated.
B. The net income, current assets, and retained earnings would all be overstated.
C. The net income and current assets would be overstated and current liabilities would be
understated.
D. The net income, current assets, and retained earnings would all be understated.

Question 52
Karen and Ron are studying the financial information for two different corporations. In particular, they
are looking at the difference in net income and gross profit between the two. One of the companies
uses LIFO and the other uses FIFO. In an inflationary environment, what changes between the two will
Karen and Ron most likely notice?

A. The company that uses LIFO will likely have a higher net income and gross profit than the
company that uses FIFO.
 Part 1 Recognition, Measurement, Valuation, & Disclosures (Current Assets)

B. The company that uses FIFO will likely have a higher net income and gross profit than the
company that uses LIFO.
C. The company that uses FIFO will likely have a higher net income and a lower gross profit than
the company that uses LIFO.
D. Both companies will likely have very similar net income and gross profit amounts, but their tax
payments will vary widely.

Question 53
Steve's Igneous Rock store has generous credit terms, so it has significant amounts of accounts
receivable (AR) outstanding. It has created the following aging analysis of its accounts receivable at year-
end:

In the past, Steve used the aging analysis to estimate bad debts but he is considering a change to the
sales method in order to save time. This year, Steve had sales of $250,000, with an estimated 5%
uncollectible. Steve's G&A expense is 6% of sales. The current balance in the allowance for doubtful
accounts is a $1,000 credit balance. If Steve adopted the sales method, how much higher (lower) would
its bad debt expense be than under the allowance method?

A. $4,000
B. $3,500
C. $1,500
D. $12,500

Question 54
Companies that want to maximize the assets section of the balance sheet will use which inventory cost
flow method during deflationary periods?

A. FIFO
B. Average-cost
C. Specific identification
D. LIFO

Question 55
When using the allowance method, what should a firm do to record bad debt expense?

A. Debit estimated uncollectibles to both Bad Debt Expense and Allowance for Doubtful accounts
through an adjusting entry at the end of each period.
B. Debit estimated uncollectibles to Bad Debt Expense and credit them to Allowance for Doubtful
accounts through an adjusting entry at the end of each accounting period.
C. Credit estimated uncollectibles to Bad Debt Expense and debit them to Allowance for Doubtful
accounts through an adjusting entry at the end of each period.
D. Credit estimated uncollectibles to both Bad Debt Expense and Allowance for Doubtful accounts
through an adjusting entry at the end of each period.
 Part 1 Recognition, Measurement, Valuation, & Disclosures (Current Assets)

Question 56
Loft Co. reviewed its inventory values for proper pricing at year-end. Loft values its inventory using FIFO.
The following summarizes two inventory items examined for the lower of cost or net realizable value:

What amount should Loft include in inventory at year-end if it uses the total of the inventory to apply
the lower of cost or net realizable value?

A. $520,000
B. $610,000
C. $613,000
D. $650,000

Question 57
Warner Machines missed recording an end-of-year $10,000 inventory purchase on account in the
current year's financial records. While finalizing the financial statements after the inventory was located
during the year-end count, the company's accountant detected the error and attempted to correct it.
Under which of the following situations will the company report lower than actual net income?

A. The accountant has increased inventory and reduced cash by $10,000.

B. The accountant has increased cost of goods sold and increased accounts payable by $10,000.
C. The accountant has increased inventory and accounts payable by $10,000.
D. The accountant has reduced accounts payable and inventory by $10,000.

Question 58
On January 1, Year 2, Justo purchases 30,000 shares of the 100,000 outstanding shares of stock in Bonita
Corp. for $5 per share. During the year, Bonita Corporation has $20,000 of net income and pays $4,000
in dividends. On December 31, Year 2, the value of a share of Bonita Corporation stock is $6 per share.
Assuming Justo properly uses the equity method of accounting for Bonita stock, what is the amount
shown for Investment in Bonita on the December 31, Year 2, balance sheet?

A. $150,000
B. $156,000
C. $154,800
D. $180,000

Question 59
Trans Co. uses a perpetual inventory system. The following are inventory transactions for the month of
January:
 Part 1 Recognition, Measurement, Valuation, & Disclosures (Current Assets)

Trans uses the average pricing method to determine the value of its inventory. What amount should
Trans report as cost of goods sold on its income statement for the month of January?

A. $30,000
B. $37,500
C. $40,000
D. $100,000

Question 60
Jonestown Company operates in an inflationary environment and sells luxury cars. Jonestown intends to
decrease its tax burden by using LIFO for its inventory pricing method. Under which of the following
circumstances would the tax-reducing implications of LIFO be mitigated?

A. The products Jonestown sells are generally unaffected by inflationary pressure.

B. Jonestown indexes its prices to inflation.
C. Jonestown's competitors use specific identification of inventory.
D. The weighted average cost method produces costs that are typically 70% of the LIFO costs.