Explanation: Specific identification is used to track and cost specific and identifiable inventory items that are either in or out of stock on an individual basis. This is done with items a company has identified via RFID tag, stamped receipt date, or serial number. The system is designed to specifically allow Mega Irrigation to identify the cost of any inventory item with an ID number.
The best advantage with this method is the high level of accuracy to the cost of the inventory on the balance sheet. The disadvantage of this system is the time it takes to enter large quantities of inventory and their prices. Specific identification is typically a practical solution for companies with expensive and unique inventory. This is not the case for Mega Irrigation; therefore, we will jump to the next cost flow assumption method, known as FIFO.
Q122. Which of the following cost flow assumption methods of inventory valuation assumes that the most recently purchased inventory in stores is sold first?
(A) FIFO assumption
(B) LIFO assumption
(C) AVCO assumption
(D) Any of the above as they all produce the same result
This cost flow assumption was developed for tax purposes. However, because of tax law requirements, if a company uses this assumption for tax purposes it must also use it for its financial statements. (“LIFO conformity rule”) It does not coincide with the actual movement of goods. LIFO is used during inflation to defer income tax payments. Under LIFO the goods in inventory at the beginning of the period are assumed to remain in the ending inventory (perhaps for decades). Obviously, this does not actually happen!
Q123. Which of the following cost flow assumption methods of inventory valuation assumes that the inventory being sold represents the average cost of the inventory in stores?
(A) FIFO assumption
(B) LIFO assumption
(C) AVCO assumption
(D) Any of the above as they all produce the same result
Explanation: Average cost method (AVCO) calculates the cost of ending inventory and cost of goods sold for a period on the basis of weighted average cost per unit of inventory. Weighted average cost per unit is calculated using the following formula:
Weighted Average = Total Cost of Inventory/ Total Units in Inventory
Q124. Under IAS 2 which of the following is regarded as the correct invoice amount to include as the purchase cost of inventory?
(A) Invoice price (excluding trade discount and excluding value added tax)
(B) Invoice price (including trade discount and including value added tax)
(C) Invoice amount (excluding trade discount but including value added tax)
(D) Invoice amount (including trade discount but excluding value added tax)
Explanation: The invoice price is the automobile manufacturer’s original charge to the dealer. This includes freight, destination or delivery charges. This price may not reflect the dealer’s final cost due to rebates, allowances, discounts and incentive awards the dealer may receive.
Q125.Under which method of inventory costing a pre-determined cost is assigned to all items of inventory?
Explanation: Standard costing is the practice of substituting an expected cost for an actual cost in the accounting records, and then periodically recording variances showing the difference between the expected and actual costs.
Q126.Which of the following is generally considered as a non profit oriented organization?
Explanation: A charitable organization is a type of non-profit organization (NPO). It differs from other types of NPOs in that it centers on philanthropic goals as well as social well-being (e.g. charitable, educational, religious, or other activities serving the public interest or common good).
Q127. The receipts and payments account of a non-profit organization is a
Explanation: A real account is a general ledger account that does not close at the end of the accounting year. In other words, the balances in the real accounts are carried over to become the beginning balances of the next accounting period.
Generally, the real accounts are the balance sheet accounts. Balance sheet accounts are the asset accounts (cash, accounts receivable, buildings, etc.), liability accounts (notes payable, accounts payable, wages payable, etc.), and stockholders’ equity accounts (common stock, retained earnings, etc.).
Real accounts are also referred to as permanent accounts.
On the other hand, the income statement accounts (revenues, expenses, gains, losses) are known as temporary accounts because their balances are not carried over to the next accounting period. The income statement accounts begin each new accounting year with zero balances.
The receipts and payments account of a non-profit organization is a real account.
Q128. Non-profit organizations prepare all of the following accounts except the
Explanation: The basic financial reports of a nonprofit organization include:
1.Statement of financial position (also called a balance sheet): This summarizes the assets, liabilities and net assets of the organization at a specified date. It’s a snapshot of the organization’s financial position on that date.
2.Statement of activity (also called an income and expense statement): This reports the organization’s financial activity over a period of time. It shows income minus expenses, which results in either a profit or a loss.
3.Statement of cash flow: This summarizes the resources that become available to the organization during the reporting period and the uses made of such resources. It’s especially useful in real-time because it reports income that has been received and expenses that have been paid. A statement of projected cash flow is helpful for the board and organization to be able to anticipate any shortfalls for planning purposes.
4.Statement of functional expenses: Reports all expenses as related either to program services or to supporting services. Expenses under program services are shown divided among the various programs. Expenses under supporting services are generally divided between (1) management and general expenses and (2) fundraising expenses.
Q129. Expenditures greater than incomes of a non-profit organization give rise to a
Explanation: A deficit is the amount by which a resource falls short of a mark, most often used to describe a difference between cash inflows and outflows. Deficit is the opposite of surplus and is synonymous with shortfall or loss.
Q130. Rent expense of a non-profit organization paid in advance. Which of the following is the correct classification of rent?
Explanation: An advance payment is a type of payment that is made ahead of its normal schedule, such as paying for a good or service before you actually receive the good or service. Advance payments are sometimes required by sellers as protection against non-payment, or to cover the seller’s out-of-pocket costs for supplying the service or product.
Rent expense of a non-profit organization paid in advance, that is the asset of company.
Q131. In a manufacturing business, which of the following is not a fixed asset?
Explanation: Buildings, land, plant and machinery, and motor vehicles are all examples of fixed assets, i.e. assets held for continued and long term use in the business. The fixed assets provide a general service to the business. The benefit received from using them can take the form of increased revenues. Delivery vans, tools and equipment and assembly plant are all fixed assets of a manufacturing company. They have been acquired so as to use in the business. Finished products are a manufacturer’s main category of stock. They will normally be sold in the near future for a profit.
Q132. What is prime cost?
(A) The total of all the direct materials costs and all of the direct labour costs
(B) The total cost of all the most important costs
(C) The total of all the direct costs and all of the manufacturing overhead
(D) The total of all the direct material costs, all of the direct labour costs and all other direct expenses
Explanation: A non-profit making entity such as a social club would be recommended to prepare an income and expenditure account. Apart from the name, this account is almost identical to a profit and loss account. However, as many voluntary entities are managed by members who have no accounting knowledge they often rely on a receipts and payments account, such an account merely listing all the cash receipts and cash payments for the financial year so accruals and prepayments are ignored. The accumulated fund is the term given to a non-profit making entity’s capital account. Any excess of income over expenditure would be transferred to the accumulated fund account.
Q135. Which of the following types of entities would not normally prepare a trading account?
Explanation: Service type entities are unlikely to ‘trade’ in the sense of buying and selling goods, some entities may engage in recognisable trading activities. This is not likely to be the case with a firm of solicitors so statement a) is true. Governmental activities certainly do have some trading activities as do many charities. Similarly, a golf club often operates a bar and offers some catering activities, so it is quite likely to require some form of trading account.
Q136. Which of the following is correct: Where accounting records are maintained on accrual basis:
(A) Income and expenditure relating to the accounting period should be fully accounted for even if income is still to be received and expenditure is yet to be paid for.
(B) Income should be accounted for only when received
(C) Income should be accounted on accruals basis and expenditure on payments basis
(D) Expenditure should be accounted for only to the extent they have been paid for
Explanation: If accounts are prepared on an accruals basis then Income and Expenditure relating to the accounting period should be fully accounted for even if income is still to be received and expenditure is yet to be paid for.
Q137. An accrued expense amounting to £18,000 was overlooked when ascertaining the profit for the year. The effect of this error is that:
(A) Net profit as well as liability are understated
(B) Net profit as well as liability are overstated
(C) Net profit is overstated and liability understated
(D) Net profit is not affected but liability is understated
Explanation: If an accrued expense such as salaries outstanding at the end of an accounting period are not debited to the Expense account and credited in an Expense payable account, then the amount transferred from the Expense account to the Income Statement will be too low meaning that the net profit is overstated and the absence of a credit entry in an Expenses payable account means that the liabilities will be understated.
Q138. Expenses relevant to the accounting period which remain unpaid by period end should be:
(A) included in with expenses paid and shown as a liability at the period end
(B) ignored until they are paid for in the next period.
(C) included with expenses paid and shown as an asset at the period end
(D) deducted from amount already paid and shown as a liability at the period end
Explanation: All expenses relating to an accounting period should be included in the Income Statement. If they have not been paid then the amount due should be charged as an expense in the Income Statement and disclosed as a current liability in the Statement of financial position.
Q139. Staff salary remaining unpaid as at the year-end should be accounted for as:
(A) Debit Salary accrued account and credit Staff salary account
(B) Debit Staff salary account and credit Salary accrued account
(C) Debit Pre-paid Salary account and credit Staff salary account
(D) Debit Staff salary account and credit Cash account
Explanation: Salary that is unpaid at the year end should be debited to the Salary account and credited to a Salary accrued account or Expenses accrued account or brought down as a credit balance on the Salaries account.
Q140. The year-end trial balance as at 31st March 2011 reports a debit balance of £9,800 in the Insurance account. This figure includes £6,000 paid on 1st January 2011 as insurance for the year ended 31st December 2011. Ascertain the amount to be charged in the Income Statement as insurance for the year ended 31st March 2011.
Q141. A Transporter’s trial balance at year end on 31 December 2010 reports the balance in Motor Vehicle Maintenance account as £216,500. This amount includes £27,000 paid on 1 August 2010 for servicing the fleet of vehicles over three years from that date. The amounts to be expensed in 2010 and reported as prepaid as at the year-end are:
Explanation: If the £1,500 is treated as an accrual then the charge to the Income Statement would include the accrued amount. If the accrual were to be omitted then the profit would be overstated by £1,500. If however it is treated as a prepayment then the charge to the Income Statement would be reduced. The effect of putting it on the wrong side is to double the effect. The profit would therefore be overstated by £3,000.
Q143. A loan of £30,000 at 6% interest per year, was given to a member of staff, in the previous year. No interest has been received during the year. The accounting entries for accruing interest income are:
(A) Debit Interest receivable account and credit Staff loan account
(B) Debit Staff Loan account and credit Interest earnings account
(C) Debit Cash account and credit Interest earning account
(D) Debit Interest receivable account and credit Interest earnings account
Explanation: As the loan is an asset the interest receivable debited to an Interest Receivable account representing the asset. The credit will be to an income account headed Interest earnings account.
Q144. A retailer paid £75,000 as rent and treated the whole amount as expenditure for the year, overlooking the fact that the amount was for a five year period commencing from the beginning of that year. The effect of this error would be:
(A) Net profit and current assets are understated by £75,000.
(B) Net profit and current liabilities will be understated by £75,000.
(C) Net profit and current assets are understated by £60,000.
(D) Net profit and current assets are overstated by £60,000.
Explanation: As only £15,000 should be treated as an expense it follows that by expensing £75,000 there has been a £60,000 overcharge which means that the net profit is understated and the current assets will be understated because there is no prepaid rent account.
Q145. After reporting the profit for the year it is found that £13,200 of stationery reported as an asset by the year end has in fact been fully used. The effect of the correction of this error would be:
(A) The gross profit as well as net profit would both increase by £13,200.
(B) The gross profit would decrease by £13,200 but net profit would remain unchanged.
(C) The gross profit and net profit would both decrease by £13,200.
(D) The gross profit will remain unchanged but net profit will decrease by £13,200.
Explanation: As stationery is an administration cost that is charged after the gross profit has been calculated the effect of having to write off the £13,200 is to reduce the net profit by this amount.
Q146. Your business may be vulnerable to significant and irretrievable losses
(A) If you fail to understand the rules of negotiable instruments
(B) If – although you understand the rules of negotiable instruments generally – you miss a technicality
(C) If you depend upon flexibility or openness in a court’s understanding of your interpretation of rights and defences associated with negotiable instrument rules
Explanation: Because of the enormous sums of money often involved in creating commercial credit and loan transactions, the negotiable instrument system requires the efficiency and integrity which is derived from the instruments’ rules.
Q147. A negotiable instrument
(A) Is a written document that passes title to the rights contained in the document
(B) Is a document which transfers title to a piece of property
(C) Is a document which transfers title to a building
(D) Is a document which permits someone to use a piece of property or building
Explanation: An impressive attribute of the bill of exchange for businesses is the fact that the transferee of a bill assumes less risk in taking the assignment of the instrument than an assignee of an ordinary contract.
Q151. The Bills of Exchange Act requires the following in order for a bill to be valid
(A) The bill must be in writing
(B) The bill must be signed by the person giving it
(C) The bill must be addressed to a particular person & the bill must be for a fixed sum of money
Explanation: The third step in the accounting cycle is to post the journal entries into the ledger.Posting refers to the process of transferring entries in the journal into the accounts in the ledger. Posting to the ledger is the classifying phase of accounting.
An accounting ledger refers to a book that consists of all accounts used by the company, the debits and credits under each account, and the resulting balances.While the journal is referred to as Books of Original Entry, the ledger is known as Books of Final Entry.
Q154. An account records the ___________ in the balance of an item
Explanation: The first general rule of accounting is that every transaction is recorded. It has been said that businesses that do not record transactions, or incorrectly record transactions, are committing fraud, although this is not necessarily the case. Fraud is part of a much broader area called material misstatement which also can include error. An error is not necessarily fraud under the law. While there are exceptions to this rule, the guidance for applying those exceptions is specifically defined by GAAP, and is applicable to all businesses.
Q155.If credit side of a bank account is greater than the debit side, it indicates which of the following?
Explanation: A bank overdraft is flexible borrowing facility on a bank current account which is repayable on demand. A bank overdraft does not actually result in cash flowing into a business. Instead the business is allowed to let its bank account become “overdrawn” – i.e. in the red, up to a maximum amount.
Q156. Which Article in the Constitution on India provides for the post of Comptroller and Auditor General of India (CAG)?
Explanation: Article 148 provides for the office of Comptroller and Auditor General of India (CAG), while article 149 describes its role and functions, while Article 150 and 151 further describe the role of Comptroller and Auditor General of India (CAG).
Q157. Who was the first Comptroller and Auditor General of India (CAG)?