Question

1)If a company uses LIFO for annual reporting purposes, it must also use it for interim reporting. This enables external users to accurately compare financial statements.

True

False

2)Which one of the following is not a factor that limits the service life of an asset?

replacement value

operational use

obsolescence

deterioration as a function of time

3)The costs of operating a purchasing department are necessary to the purchasing of inventory therefore; those costs should be allocated to inventory.

True

False

4)A company may elect to use the fair value option for a single note receivable or for all notes receivable.

True

False

5)When a company uses a perpetual inventory system,

the cost of goods sold account is used

there is no purchases account

two entries are required when inventory is sold

All of these answer choices are used in a perpetual inventory system.

6)Given the following information for the Raquel Company:

Date	Cost	Market
December 31, 2016	$500	$500
December 31, 2017	700	700
December 31, 2018	800	730

Under the periodic system, if the direct method of recording lower of cost or market is in use, which December 31, 2018 entry is correct?

Cost of Goods Sold		70
	Inventory			70

Cost of Goods Sold		70
	Allowance to Reduce Inventory to Market			70

Inventory		70
	Cost of Goods Sold			70

Loss Due to Market Valuation		70
	Allowance to Reduce Inventory to Market			70

Answer 1

1. True

Reason: company should consistently apply policies so that it becomes easy to compare financial statements and accordingly take decisions.

2. Replacement value

Reason: estimating life if the asset, we need to consider the cost incurred, deterioration over time, at what point of time asset will become obselete. Replacement value needn't be considered.

3. False.

Reason: all the costs may not be directly related to inventory such as supervision costs and also other costs such as head office allocated cost.

4. False

Reason: fair value option may be exercised at

Time of recognising the notes receivable

Or at occurence of event that triggers new basis of Accounting

And must continue for that specific instrument

Unless otherwise stated above company cannot opt for fair value of option.

5) Yes two entries are recorded in perpetual system

Debtor a/c Dr.

To sales a/c

Cost of goods sold a/c Dr.

To inventory a/c

6.

Loss due to market valuation 70

To allowance to reduce Inventory to market 70

Reason: proper disclosure should be made so that users of financial statements know the nature and type of loss . So loss due to market valuation account is debited and allowance Account is credited.

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