Chapter 4

The matching principle:
1. Addresses the relationship between the accounting database and the statement of financial position
2. Determines whether an item is an asset or a liability
3. Requires that the amount of assets equals the amount of liabilities in the statement of financial position
4. Determines that expenses related to revenue are to be reported in the period when the revenue is recognised
Using accrual accounting, revenue for services rendered is recorded and reported only:
1. When cash is received without regard to when the services are rendered
2. When the services are rendered, without regard to when cash is received
3. When cash is received at the time services are rendered
4. If cash is received after the services are rendered
Using accrual accounting, expenses are recorded and reported only
1. When they are incurred, whether or not cash is paid
2. When they are incurred and paid at the same time
3. If they are paid before they are incurred
4. If they are paid after they are incurred
When a sale of goods takes place on credit, this means that
1. The buyer receives a loan from the bank to pay for the goods
2. The cash settlement follows after the delivery of the goods
3. The cash settlement takes place with the delivery of the goods
4. The cash settlement is done by use of a credit note
A creditor is a...
1. Shareholder
2. Customer
3. Individual or other company to whom the firm owes money
4. Account on which the debts of the firm to a financial institution are recorded
The term “inventory” indicates:
1. Merchandise held for sale in the ordinary course of business
2. Materials in the process of production or held for production
3. Both a and b
4. Neither a nor b
Inventory is reported as a
1. Expense
2. Revenue
3. Liability
4. Asset
Which costs become cost of goods sold when products are sold?
1. Overhead costs
2. Inventory
3. Equipment
4. Prepaid insurance
When do inventory costs of a manufacturing firm appear on the income statement?
1. When raw materials are purchased
2. When raw materials are moved into work in progress
3. When the goods are completed and waiting for sale
4. When the completed goods are sold
The purchase cost for inventory includes all of the following except:
1. Freight-in charges
2. Purchase price
3. Trade discount
4. Showroom maintenance
A warehouse clerk counted an item in the ending inventory twice while taking a physical count. As a result:
1. Net income will be understated
2. Beginning inventory for the next period will be understated
3. Cost of goods available for sale will be overstated
4. Cost of goods sold will be understated
Alfa Company has the following information relating to its inventory activity in 2009:
December 31, 2009 December 31, 2008
Inventory € 25,000 € 28,000

If Alfa purchased € 60,000 worth of inventory in 2009, what was its cost of goods sold for the year ending December 31, 2009?
1. € 28,000
2. € 60,000
3. € 63,000
4. € 92,000
Which system is the best method for matching most recent inventory costs with current revenues?
1. FIFO
2. LIFO
3. Weighted average
4. None of the above
In times of inflation (rising prices), which of the following statements is most likely to be true?
1. LIFO may result in a higher income tax liability than FIFO
2. FIFO may result in a higher income tax liability than LIFO
3. FIFO may result in a higher cost of goods sold than LIFO
4. LIFO may result in a higher net income than FIFO
The inventory data for an item for the month of May are as follows:
May 1 Inventory 20 units at € 50
May 5 Sold 15 units
May 10 Purchased 30 units at € 55
May 20 Sold 30 units
May 29 Purchased 20 units at € 60

What is the cost of the merchandise inventory of 25 units on May 31, using the LIFO-method?
1. € 1,750
2. € 1,275
3. € 1,450
4. € 1,700
Damaged merchandise that can be sold only at prices below cost should be valued at:
1. Net realizable value
2. LIFO
3. FIFO
4. Weighted average cost
If the cost of an item of inventory is € 60 and the current net realizable value is € 65, the amount included in the inventory account is:
1. € 60
2. € 5
3. € 65
4. € 125
Inventories are reported on the statement of financial position in the section entitled:
1. Non-current assets
2. Current assets
3. Current liabilities
4. Equity
The working capital cycle includes:
1. Trade liabilities
2. Share capital
3. Long-term investments
4. All of the above
Accrual accounting has an impact on the:
1. Timing of revenues
2. Timing of expenses
3. Timing of cash flows
4. Both a and b
5. All of the above
In times of rising prices, the FIFO method of inventory measurement will:
1. Understate profit and lead to inventory values at the cost of the latest purchases
2. Understate profit and lead to inventory values at the cost of the earlier purchases
3. Overstate profit and understate the inventory value in the statement of financial position
4. Overstate profit and overstate the inventory value in the statement of financial position
5. Overstate profit and lead to inventory values at the cost of the latest purchases

Chapter 4

Quiz