CHAPTER 15

QUESTION 15-13

1. Trade receivables are classified as current assets if they are 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, whichever is longer.

2. Nontrade receivables are classified as current assets only if they are 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. Which of the following statements is true in relation to presentation of receivables in the

statement of financial position?
a. Trade receivables and nontrade receivables are shown separately.
b. Nontrade receivables are presented as noncurrent asses.
c. Trade accounts receivable and trade notes receivable shall be presented separately.
d. Trade receivables and nontrade receivables which are currently collectible shall be
presented as one line item called “trade and other receivables”

4. If the ideal measure of short-term receivables in the statement of financial position is the
discounted amount of the cash to be received in the future, failure to follow this practice usually
does not make the statement of financial position misleading because
a. Most short-term receivables are not interest-bearing.
b. The allowance for doubtful accounts includes a discount element.
c. The amount of the discount is not material.
d. Most receivables can be sold to a bank or factor.

5. Accounts receivable shall be recognized initially at

a. Face value
b. Discounted value
c. Maturity value
d. Current value

6. Long-term notes receivable which normally bear no interest or an interest which is

unreasonably low shall be recognized initially at
a. Face value
b. Present value
c. Maturity value
 d. Current value
7. Credit balances in accounts receivable shall be classified as
a. Current Liabilities
b. Part of accounts payable
c. Long term liabilities
d. Deduction from accounts receivable

8. Receivables from subsidiaries shall be classified as

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

9. Where the operating cycle extends beyond one year because of normal credit terms as in the
case of instalment sales of household appliances
a. It is proper to classify the entire receivables as current assets with disclosure of the amount
not realizable within one year, if material.
b. The entire receivables are shown as noncurrent assets.
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 instalments receivable (real estate instalment sales) where a major
portion of the receivables will be collected beyond the normal operating cycle
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 shown as current with disclosure of the amount not currently
due.

ANSWER 15-13

1. D 6. B
2. D 7. A
3. D 8. C
4. C 9. A
5. A 10. C
QUESTION 15-14

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. 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
a. Direct writeoff
b. Aging the trade accounts receivable
c. Credit sales
d. The balance in the trade accounts receivable

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

4. The advantage of relating an entity’s 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.

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

6. When the allowance method of recognizing uncollectible accounts is used, the entry to record
the writeoff of a specific account would
a. Decrease both accounts receivable and the allowance for uncollectible accounts.
b. Decrease accounts receivable and increase the allowance for uncollectible accounts.
c. Increase the allowance for uncollectible accounts and decrease net income.
d. Decrease both accounts receivable and net income.
7. When an entity uses the allowance method for recognizing uncollectible accounts, the entry to
record the writeoff of a specific uncollectible account
a. Affects neither net income nor working capital
b. Affects neither net income nor accounts receivable
c. Decrease both net income and accounts receivable
d. Decrease both net income and working capital

8. When the allowance method of recognizing bad debt expense is used, 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

9. 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

10. When 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

ANSWER 15-14

1. A 6. A
2. C 7. A
3. A 8. D
4. A 9. C
5. C 10. D
QUESTION 15-15

1. Which of the following methods of determining bad debts 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 of the following methods of determining bad debt expense most closely matches
expense to revenue?
a. Charging bad debts only as accounts 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 of accounts receivable.

3. When the allowance method of recognizing bad debt expense is used, the allowance for
doubtful accounts would decrease when
a. Specific accounts receivable is collected
b. Account previously written off is collected
c. Account previously written off becomes collectible
d. Specific uncollectible account is written off
4. Why is the allowance method preferred over the direct writeoff method of accounting for bad
debts?
a. The allowance method is used for tax purposes.
b. Estimates are used
c. Determining worthless accounts under direct writeoff method is difficult to do.
d. Improved matching of bad debt expense with revenue is achieved.

5. Which of the following is not acceptable in 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 they cannot be collected.

6. 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.

7. When the allowance method of recognizing bad debt expense is used, the entry to record the
writeoff of a specific uncollectible account would decrease
 a. Allowance for doubtful accounts
b. Net income
c. Net realizable value of accounts receivable
d. Working capital

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

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 end-of-period adjustment for uncollectible accounts.
d. May exist even after the end-of-period adjustment for uncollectible accounts.

10. When the direct writeoff method of recognizing bad debt expense is used, the entry to write off
a specific customer account would
a. Increase net income
b. Have no effect on net income
c. Increase accounts receivable and increase net income
d. Decrease accounts receivable and decrease net income

ANSWER 15-15
1. D 6. B
2. B 7. A
3. D 8. C
4. D 9. C
5. D 10. D
QUESTION 15-16

1. Of the methods to record cash discounts related to accounts receivable, which is more
theoretically correct?
a. Net method
b. Gross method
c. Allowance method
d. All the three methods are theoretically correct

2. 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. Allowances granted

3. Which of the following concepts relates to the allowance method in accounting for uncollectible
accounts receivable?
a. Bad debt expense is an estimate that is based on historical and prospective information
b. Bad debt expense is based on the actual amount determined to be uncollectible.
c. Bad debt expense is an estimate that is based only on aging.
d. Bad debt expense is management determination of which amounts will be sent to the
attorney for collection.

4. Which of the following is not permitted in accounting for uncollectible accounts receivable?
a. Percentage of accounts receivable, allowance method
b. Percentage of sales, allowance method
c. Direct writeoff method
d. All of the choices are acceptable under PFRS

5. Which of the following statements is incorrect regarding how the impairment assessment of
accounts receivable is to be performed?
a. Individually significant accounts receivable should be considered for impairment separately
and if impaired, the impairment loss is recognized.
b. Not individually significant accounts receivable should be assessed individually and if
impaired, the impairment loss is recognized.
c. Any accounts receivable individually assessed that is not considered impaired should be
included with a group of assets with similar credit-risk characteristics and collectively
assessed for impairment.
d. Any accounts receivable not individually assessed should be collectively assessed for
impairment.

ANSWER 15-16
1. A
2. C
 3. A
4. C
5. B
CHAPTER 20
QUESTION 20-15

1. Inventories should 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 should 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. Estimated selling price less estimated cost to complete
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 writedown of inventory to net realizable value and all losses of inventory
shall be
a. Recognized as operating expense in the period the writedown or loss occurs.
b. Recognized as other expense in the period the writedown or loss occurs.
c. Recognized as component of cost of goods sold in the period the writedown or loss occurs.
d. Deferred until the related inventory is sold.

6. When inventory decline in value below original cost, what is the maximum amount of the
inventory value?
a. Sales price
b. Net realizable value
c. Historical cost
d. Sales price reduced by estimated cost of disposal

7. 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 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.

8. 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 from cost

9. How should prompt payment discount be dealt with when valuing inventories to the lower of
cost and net realizable value?
a. Added to cost
b. Ignored
c. Deducted in arriving at NRV
d. Deducted from cost

10. How should sales staff commission 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 from cost

ANSWER 20-15

1. C 6. B
2. D 7. A
3. D 8. D
4. A 9. B
5. C 10. C

QUESTION 20-16

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 the 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. During periods of rising prices, when the FIFO inventory cost flow method is used, a perpetual
inventory would
a. Not be permitted.
b. Result in the 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 ending inventory than a periodic inventory system.

5. The inventory cost 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

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

7. 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

8. Which of the following 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.

9. 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.

10. Which of the following financial attributes 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.

ANSWER 20-16

1. A 6. A
2. A 7. C
3. A 8. C
4. C 9. C
5. B 10. D

QUESTION 20-17 multiple choice (IAA)

1. Which of the following statements is incorrect regarding LCNRV?

a. Net realizable value is the selling price less estimated cost to complete and estimated cost of
disposal.
b. In most situation, entities price inventory on a total inventory basis.
c. One of two methods maybe used to record the income effect of valuing inventory at net
realizable value.
d. Entities used an allowance account to reduced inventory to net realizable value.

2. Which of the statements is true regarding inventory writedown and reversal of writedown?
a. Reversal of inventory writedown is prohibited.
b. Separate reporting of reversal of inventory writedown is required.
c. Entities are required to record writedown in a separate loss account.
d. All of the choices are correct.

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 net realizable value.
d. Should always be equal to estimated selling price less cost to complete.

4. Lower of cost and net realizable value

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

5. Which of the following is not an acceptable method of applying the LNCRV?

a. Inventory location
b. Inventory group
c. Inventory item
d. Total of the inventory

ANSWER 20-17

1. B
2. B
3. A
4. C
5. A

QUESTION 20-18 multiple choice (PAS 2)

1. This cost formula assumes that the items of the inventory that were purchased or produced first
are sold first and consequently the items remaining in inventory at the end of the period are
those most recently purchased or produced.
a. FIFO
b. LIFO
c. Weighted average
d. Moving average

2. The weighted average method may be calculated

I. On a periodic basis.
II. As each shipment is received depending upon the circumstances of the entity.

a. I only
b. II only
c. Either I or II
d. Neither I or II

3. 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
4. Commodities of broker-traders are measured at
 a. Fair value
b. Fair value less cost of disposal
c. Cost
d. Net realizable value

5. When agricultural crops have been harvested or mineral ores have been extracted and sale is
assured under a forward contract or government guarantee, such inventories are measured at
a. Net realizable value
b. Cost
c. Standard cost
d. Relative sales price

6. The credit balance that arises when a loss on a purchase commitment is recognized shall 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

7. 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

8. 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.

9. Which is not a mandated disclosure in relation to inventory?

a. Accounting policy adopted in measuring inventories, including the cost formula used
b. The carrying amount of each item of inventories
c. The carrying amount of inventories carried at fair value less cost of disposal
d. The amount if inventories recognized as expenses during the period.

10. Which is not a required disclosure in relation to inventory?

a. The amount of any writedown of inventories recognized as expense
b. The amount of any reversal of writedown of inventories
c. The circumstances or events that led to the reversal of a writedown of inventories
d. The fair value less cost of disposal of inventories pledged as security for liabilities

ANSWER 20-18

1. A 3. B
2. C 4. B
5. A 8. D
6. A 9. B
7. A 10. D