Measurement issues Test Bank Docx Chapter.7

Chapter 07 Testbank

1. AASB 102 Inventories applies to biological assets related to agricultural activity.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 07-01 Understand the meaning of 'inventory'.
Section: Introduction
Topic: Inventories as a concept

2. The first-in, first-out (FIFO) method assumes that items remaining in inventory at the end of the period are those most recently purchased or produced.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 07-05 Understand why there is typically a necessity to make inventory cost-flow assumptions.
Learning Objective: 07-06 Be able to apply the inventory cost-flow assumptions permitted by AASB 102.
Section: Inventory cost-flow assumptions
Topic: FIFO method

3. In periods where production costs or purchase prices of inventory items do not change, it does not matter which inventory method is adopted as this would generate the same value for cost of goods sold and ending inventory.

4. FIFO method is an income decreasing inventory cost flow method in periods of rising prices.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 07-05 Understand why there is typically a necessity to make inventory cost-flow assumptions.
Learning Objective: 07-06 Be able to apply the inventory cost-flow assumptions permitted by AASB 102.
Section: Inventory cost-flow assumptions
Topic: FIFO method

5. Reversal of a previous inventory write-down is not advocated in AASB 102.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 07-08 Know the disclosure requirements of AASB 102.
Section: Disclosure requirements
Section: The general basis of inventory measurement
Topic: Reversal of previous inventory write-downs

6. Upward revaluation of inventory is permitted for as long as all assets in same inventory class are revalued.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 07-03 Understand how to apply the lower of cost and net-realisable value rule for measuring inventory.
Section: The general basis of inventory measurement
Topic: Revaluation of inventory

7. Some biological assets may be covered by AASB 102 Inventories.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 07-01 Understand the meaning of 'inventory'.
Section: Definition of inventory
Topic: Biological assets

8. The definition of inventories includes assets in the form of materials or supplies to be consumed in the production process or in rendering of services.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 07-01 Understand the meaning of 'inventory'.
Section: Definition of inventory
Topic: Definition of inventories

9. AASB 102 provides that inventories must be valued at the lower of cost and net realisable value for groups of homogeneous items where it is impracticable to measure them on an item-by-item basis.

10. AASB 102 applies to all inventories including work in progress under construction contracts.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 07-02 Be able to calculate the cost of inventory pursuant to AASB 102 Inventories.
Section: The general basis of inventory measurement
Topic: What is included in inventory?

11. The cost of sub-contracted work is not included in costs of conversion for the purposes of calculating the cost of inventory.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 07-01 Understand the meaning of 'inventory'.
Section: The general basis of inventory measurement
Topic: What is included in inventory?

12. AASB 102 requires that fixed manufacturing costs be excluded from the cost of inventories, as they cannot be allocated accurately.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 07-01 Understand the meaning of 'inventory'.
Section: The general basis of inventory measurement
Topic: What is included in inventory?

13. Standard costs may be used to arrive at the cost of inventory only where standards are set at ideal levels and any costs arising from exceptional wastage are excluded from the cost of inventories.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 07-01 Understand the meaning of 'inventory'.
Section: The general basis of inventory measurement
Topic: Standard cost

14. The value of inventory reported in the financial statements under AASB 102 may be reported at an amount lower than its original cost.

15. The cost-flow assumption selected for inventory costing purposes should always reflect the physical flow of goods out of inventory.

16. The only difference between IAS 2 and AASB 102 is that the 'international' standards allow inventory to be valued using LIFO.

AACSB: Analytic
Difficulty: Medium
Learning Objective: 07-02 Be able to calculate the cost of inventory pursuant to AASB 102 Inventories.
Section: Inventory cost-flow assumptions
Topic: Inventory valuation under international accounting standards and Australian standards

17. A company engaged in buying and selling equity securities should consider this asset as inventory and should be accounted for in accordance with AASB 102.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 07-02 Be able to calculate the cost of inventory pursuant to AASB 102 Inventories.
Section: The general basis of inventory measurement
Topic: Inventories includes

18. The measurement of inventories is no different for not-for-profit entities.

AACSB: Analytic
Difficulty: Easy
Learning Objective: 07-02 Be able to calculate the cost of inventory pursuant to AASB 102 Inventories.
Section: The general basis of inventory measurement
Topic: Measurement of inventory

19. Perpetual inventory system is also known as the physical inventory method.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 07-07 Understand the difference between a perpetual and a periodic inventory system and how this influences inventory valuation.
Section: Inventory cost-flow assumptions
Topic: Perpetual inventory system

20. When reversing a previous period inventory write-down, this would result in a debit entry to the inventory account.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 07-04 Understand how and when to reverse a previous inventory write-down.
Section: Reversal of previous inventory write-downs
Topic: Reversal of a previous inventory write-down

21. Which of the following is not a definition in AASB 102 on inventories?

A. Assets in the form of materials or supplies to be consumed in the production process.
B. Assets in the process of production for sale.
C. Raw materials to be used in maintaining machines that prepare goods for sale.
D. Assets held for sale in the ordinary course of business.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 07-01 Understand the meaning of 'inventory'.
Section: Definition of inventory
Topic: Definition of inventories

22. AASB 102 on inventories does not apply to:

A. trees held for sale as part of forestry operations.
B. work-in-progress under construction contracts.
C. agricultural produce of a biological asset.
D. any of the given answers.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 07-02 Be able to calculate the cost of inventory pursuant to AASB 102 Inventories.
Section: Introduction
Topic: Inventories: what do they include?

23. According to AASB 102 inventories include assets:

A. such as service contracts arising under construction contracts.
B. held over the long term for use in the production process.
C. such as financial instruments.
D. held in the process of production, preparation or conversion for sale.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 07-02 Be able to calculate the cost of inventory pursuant to AASB 102 Inventories.
Section: Introduction
Section: The general basis of inventory measurement
Topic: Inventories: what do they include?

24. AASB 102 requires that inventory is valued at:

A. the lower of cost and recoverable value, on an item-by-item basis where practicable.
B. cost or fair value for classes of assets and services that are defined as inventories.
C. the lower of cost and net realisable value, on an item-by-item basis where practicable.
D. cost or deprival value, whichever is the lower, for classes of inventories.

25. AASB 102 provides that not-for-profit entities:

A. must value their assets at the lower of cost or net realisable value to allow reports to be compared.
B. should only report inventories at cost for simplicity.
C. should value their assets at either cost or current replacement cost, whichever is more beneficial.
D. will record the inventories at the lower of cost or current replacement cost.

26. The cost of inventory is defined by AASB 102 as including:

A. the cost of purchase and conversion.
B. duties and taxes on purchase of goods or services for sale.
C. the cost incurred in the normal course of operations to bring the inventories to their present location and condition.
D. all of the given answers.

27. Fixed production costs are those that, within normal operating limits:

A. vary in relation to production volume by a fixed amount.
B. remain a constant per unit amount as volume changes.
C. vary in relation to the levels of input but remain constant at varying levels of output.
D. remain a constant amount at varying production volume levels.

28. The two main methods for dealing with fixed costs in relation to the production of inventory are:

A. variable costing and incremental costing.
B. absorption costing and direct costing.
C. overhead costing and ABC costing.
D. relevant costing and incremental costing.

29. Which of the following statements is correct in relation to the costing of inventories?

A. Direct costing treats fixed production costs as an expense of the period and is not permitted as a method for valuing inventories under AASB 102.
B. Absorption costing treats fixed production costs as a product cost, allocating them to the goods produced, and is not permitted as a method for valuing inventories under AASB 102.
C. Absorption costing treats fixed production costs as an expense of the period and is the required method for valuing inventories under AASB 102.
D. Direct costing treats fixed production costs as a product cost, allocating them to the goods produced, and is not permitted as a method of valuing inventory under AASB 102.

30. Standard costs are able to be used under AASB 102 where:

A. they have been properly set and maintained.
B. they are realistically attainable and are reviewed regularly.
C. they are assessed to be a sound basis for the purpose of inventory valuation.
D. they are revised in the light of current conditions as necessary.

31. Digitoll Ltd produces a range of computer accessories. One product is a webcam. The following are the summary costs for the web-cam for the period ended 31 December 2012:

The production level this period was normal at 10 000 units. What is the cost per unit (rounded to the nearest cent) in accordance with AASB 102 requirements?

A. $11.00
B. $10.40
C. $14.10
D. $11.90

32. Handy Ltd produces a line of brooms. The summary cost information for brooms for the year ended 30 June 2012 is:

The level of output for the period was the normal level of production of 290 000 units. What is the cost per broom (rounded to the nearest cent) in accordance with AASB 102 requirements?

A. $4.13
B. $2.00
C. $0.13
D. $2.06

33. Toey Ltd has provided the following information about the total production cost and estimates of realisable value of three lines of shoes they produce within the same class of inventory:

Packaging and freight are necessary in order to be able to sell the shoes. What is the value of the inventory in accordance with AASB 102?

A. $34 000
B. $40 000
C. $32 000
D. $24 000

34. The following information relates to the total production costs and estimates of realisable value for a line of water pistols produced by Splash Happy Co Ltd.

Packaging and transport costs are necessarily incurred in order to be able to sell the inventory. What is the value of the inventory in accordance with AASB 102?

A. $37 000
B. $21 000
C. $39 000
D. $36 000

35. Balmoral Ltd commenced business on 1 July 2011. The company manufactures bookcases. Summary data for Balmoral's first full year of operations are:

Packaging and delivery are essential to be able to sell the product. What total value should be attributed to finished goods inventory in the financial statements in accordance with AASB 102?

A. $58 950
B. $63 000
C. $49 500
D. $69 660

36. Video Productions Ltd commenced business manufacturing video tapes on 1 July 2011. Summary data for the first full year of production are:

Packaging and delivery are essential to be able to sell the product. What total value should be attributed to finished goods inventory in the financial statements in accordance with AASB 102?

A. $66 400
B. $72 000
C. $46 400
D. $50 000

37. Under AASB 102 revaluations are permitted:

A. only in the form of a write-down.
B. only when an independent valuation is made by an external party.
C. only if upward revaluations are credited to an inventory revaluation reserve.
D. only if the replacement cost of the asset is higher than the historical cost.

38. According to AASB 102, one or more of which set of methods should be used to apply the costs of inventories to particular items of inventory?

A. Specific identification, LIFO or FIFO.
B. Absorption costing, weighted average costing or LIFO.
C. FIFO, specific identification or weighted average cost.
D. Weighted average costing, ABC costing or FIFO.

AACSB: Analytic
Difficulty: Easy
Learning Objective: 07-05 Understand why there is typically a necessity to make inventory cost-flow assumptions.
Learning Objective: 07-06 Be able to apply the inventory cost-flow assumptions permitted by AASB 102.
Section: Inventory cost-flow assumptions
Topic: Cost-flow assumptions

39. AASB 102 requires that the specific identification method of assigning cost to items of inventory be applied:

A. wherever possible in order to achieve the most accurate cost figure.
B. to items of inventory that are ordinarily interchangeable or identical and have significant individual dollar value.
C. wherever items are separately identifiable and of significant individual dollar value.
D. to items of inventory that are not ordinarily interchangeable or are produced and segregated for specific projects.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 07-02 Be able to calculate the cost of inventory pursuant to AASB 102 Inventories.
Section: Inventory cost-flow assumptions
Topic: Assigning costs

40. In times of rising prices for inventory, which of the following is ?

A. LIFO adopters would report higher cost of goods sold and lower ending inventory than FIFO adopters.
B. FIFO adopters would report higher profits and lower ending inventory than LIFO adopters.
C. LIFO adopters would report higher profits and higher ending inventory than FIFO adopters.
D. FIFO adopters would report higher cost of goods sold and higher ending inventory than LIFO adopters.

AACSB: Analytic
Difficulty: Medium
Learning Objective: 07-05 Understand why there is typically a necessity to make inventory cost-flow assumptions.
Learning Objective: 07-06 Be able to apply the inventory cost-flow assumptions permitted by AASB 102.
Section: Inventory cost-flow assumptions
Topic: Cost-flow assumptions

41. Use of the LIFO method has been deemed unacceptable under AASB 102 because:

A. it presents too many options to report preparers and may confuse them.
B. this method allows profits to be manipulated by purchasing items at year's end even though they have not been sold.
C. it can result in higher cost of goods sold figures and therefore lower taxes.
D. this method did reflect the actual physical flow of inventories.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 07-06 Be able to apply the inventory cost-flow assumptions permitted by AASB 102.
Section: Inventory cost-flow assumptions
Topic: Cost-flow assumptions LIFO

42. In addition to the cost-flow assumption, the system used to record movements in inventory also affects the determination of the cost of inventory. What are the systems commonly in use for recording the movement of inventory?

A. continuous and cyclic
B. ABC costing and overhead allocation
C. positive and periodic
D. periodic and perpetual

43. The periodic inventory system operates by:

A. keeping track of inventory as it comes into the organisation and as it leaves.
B. counting inventory at regular intervals to establish how much of each item is on hand.
C. assuming that the inventory that came in first is the first to be sold.
D. tracking the cost of specific items of inventory to the products sold by grouping items according to cost drivers.

44. Big Games for Big Kids sell a variety of gaming consoles and games. The company has presented you with the following information for the sales of a new product, Angel's Hat 2, for the three months from November to January. They began in November with 50 units on hand valued at $1500. In the lead up to Christmas each unit sold for $90 but in the post-Christmas sales in January this price was reduced to $50.

Big Games for Big Kids use the periodic system to record inventory. A physical stock take reveals 30 units on hand at the end of January. What is the cost of sales and value of ending inventory using the FIFO cost-flow assumption?

A. cost of sales: $14 190; ending inventory: $1290
B. cost of sales: $14 060; ending inventory: $1420
C. cost of sales: $14 060; ending inventory: $1260
D. cost of sales: $24 850; ending inventory: $1420

AACSB: Reflective thinking
Difficulty: Hard
Learning Objective: 07-05 Understand why there is typically a necessity to make inventory cost-flow assumptions.
Learning Objective: 07-06 Be able to apply the inventory cost-flow assumptions permitted by AASB 102.
Section: Inventory cost-flow assumptions
Topic: Cost-flow assumptions

45. Using the periodic system of inventory:

A. gives the same results as a perpetual system when FIFO is applied but without some of the extra detail.
B. is much more cost-effective as a perpetual system requires a computer.
C. does not require a stock take each year and is therefore more accurate.
D. accurately reports all stock movements which assists with decision making.

46. Oblong Ltd manufactures cardboard boxes for a variety of purposes. The following information relates to the production of the extra-large packing boxes used by removalists for the period ended 30 June 2012.

The company uses a perpetual inventory system. The net realisable value per extra-large cardboard box is $3.15 at the end of the period. What are the costs of sales and the value of ending inventory for Oblong Ltd assuming the FIFO cost-flow assumption is used?

A. cost of sales: $3460.40; ending inventory: $380.00
B. cost of sales: $3453.90; ending inventory: $386.50
C. cost of sales: $3459.41; ending inventory: $380.99
D. cost of sales: $3453.90 ending inventory: $393.75

AACSB: Reflective thinking
Difficulty: Hard
Learning Objective: 07-07 Understand the difference between a perpetual and a periodic inventory system and how this influences inventory valuation.
Section: Inventory cost-flow assumptions
Topic: Cost-flow assumption

47. Rectangle Ltd manufactures cardboard boxes for a variety of purposes. The following information relates to the production of the extra-large packing boxes used by removalists for the period ended 30 June 2012.

The company uses a perpetual inventory system. The net realisable value per extra-large cardboard box is $3.15 at the end of the period. What are the costs of goods sold and the value of ending inventory for Rectangle Ltd assuming the LIFO cost-flow assumption is used?

A. cost of sales: $3460.40; ending inventory: $380.00
B. cost of sales: $3453.90; ending inventory: $393.75
C. cost of sales: $3459.41; ending inventory: $380.99
D. cost of sales: $3453.90; ending inventory: $386.50

48. Circle Ltd manufactures polystyrene trays for a variety of purposes. The following information relates to the production of the medium trays used by meat packing companies for the period ended 30 June 2012.

The company uses a perpetual inventory system. The net realisable value per extra-large cardboard box is $0.17 at the end of the period. What are the costs of sales and the value of ending inventory for Rectangle Ltd assuming the FIFO cost-flow assumption is used?

A. cost of sales: $633.80; ending inventory: $83
B. cost of sales: $654.55; ending inventory: $62.25
C. cost of sales: $657.19; ending inventory: $59.61
D. cost of sales: $633.80; ending inventory: $70.55

49. According to AASB 102 material information relating to which of the following must be disclosed?

A. The carrying amount of closing inventories included in equity accounted profits.
B. The carrying amount of inventories classified as non-current assets.
C. The aggregate amount of inventory recorded at recoverable amount.
D. The carrying amount of inventories revalued upwards as at the end of the period.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 07-08 Know the disclosure requirements of AASB 102.
Section: Disclosure requirements
Topic: Disclosure of inventories under AASB 102

50. The valuation of inventories may be on the basis of:

A. the lower of direct cost and recoverable amount.
B. regular revaluations by classes of inventories undertaken at the end of the period.
C. the weighted average of market value and absorption cost over the period.
D. the lower of cost and net realisable value.

51. Kensington Ltd is an importer and retailer of European made glass crystals. For the year ended 30 June 2008, Kensington Ltd still holds 30 units of an item originally purchased for $10 000 each and a net realisable value of $8000. On 1 June 2009 the TV show Home Improvement featured a similar item prompting an increase in demand for this glass crystal. Management believes that the net realisable value of this item is now $15 000. All 30 items remain unsold on 30 June 2009. What is the effect of holding this inventory on the statement of comprehensive income of Kensington Ltd for the years ended 30 June 2008 and 2009?

A. No effect on both years because the inventory items are still unsold.
B. Decrease profit by $60 000 in 2008; increase profit by $210 000 in 2009.
C. Decrease profit by $60 000 in 2008; no effect in 2009.
D. Decrease profit by $60 000 in 2008; increase profit by $60 000 in 2009.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 07-03 Understand how to apply the lower of cost and net-realisable value rule for measuring inventory.
Section: The general basis of inventory measurement
Topic: Inventory valuation and profit

52. AASB 102 requires, among others, disclosure of which of the following pieces of information?

A. Accounting policy adopted for measuring inventories.
B. Carrying amount of inventories for each classification of inventory appropriate to the entity.
C. Amount of any write-down during the period.
D. All of the given answers.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 07-08 Know the disclosure requirements of AASB 102.
Section: Disclosure requirements
Topic: Inventories disclosure

53. Randwick Ltd has a year-end of 30 June 2009. During the year the following errors were discovered.

– Merchandise inventory at the factory had been understated by $44 000.

– Goods on consignment from a supplier for $13 000 were included in inventory at the shops.

– Physical inventory for one warehouse had a shortage of $58 000.

What is the net effect of above errors in the statement of comprehensive income and statement of financial position (inventory) accounts of Randwick Ltd?

AACSB: Reflective thinking
Difficulty: Hard
Learning Objective: 07-04 Understand how and when to reverse a previous inventory write-down.
Section: Reversal of previous inventory write-downs
Topic: Reversal of a previous inventory write-down

54. Consistent with positive accounting theory, an entity close to breaching their debt covenant will:

A. prefer LIFO method over FIFO method.
B. prefer FIFO method over LIFO method.
C. prefer weighted average method over FIFO method.
D. prefer moving average method over FIFO method.

AACSB: Analytic
Difficulty: Medium
Learning Objective: 07-05 Understand why there is typically a necessity to make inventory cost-flow assumptions.
Learning Objective: 07-06 Be able to apply the inventory cost-flow assumptions permitted by AASB 102.
Section: The general basis of inventory measurement
Topic: Cost-flow assumption
Topic: Managerial choices and debt covenants

55. David Gordon is an accountant for Bronte Ltd. At the end of the year he realised that ending inventory was overstated but the purchases account was recorded correctly. What is the effect of correcting the above error in the statement of comprehensive income and statement of financial position (inventory) accounts of Bronte Ltd?

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 07-08 Know the disclosure requirements of AASB 102.
Section: The general basis of inventory measurement
Topic: Disclosure of inventories

56. Bondi Ltd is a small sport shop. At the beginning of the period, Bondi Ltd had 30 tennis racquets on hand costing $50 each. On 31 October 2009, the shop sold 20 racquets to a tennis instructor for $80. A delivery of 50 racquets was received on 15 November 2009 at $50 but received 2% discount if the account is paid within 30 days. What are the appropriate journal entries to recognise the above transactions using the periodic system?

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 07-07 Understand the difference between a perpetual and a periodic inventory system and how this influences inventory valuation.
Section: Inventory cost-flow assumptions
Topic: Periodic inventory system

57. Which accounting policy for manufacturing fixed costs is likely to favour managers whose firms are subject to political scrutiny?

A. Direct costing.
B. Absorption costing.
C. LIFO assuming prices are falling.
D. FIFO assuming prices are rising.

58. Which of the following statements is correct with respect to positive accounting theory?

A. Managers of firms with bonus-based contracts prefer LIFO method of valuation basis, if permitted.
B. Managers of firms with bonus-based contracts prefer FIFO method of valuation basis.
C. Managers prefer the FIFO method of valuation basis.
D. Managers with debt covenants prefer LIFO method, if permitted.

59. The inventory record of Palm Springs Ltd shows 1000 surf boards on stock that cost $50 each. During the last stocktake, the accountant noted 100 old style surf boards with net realisable amount of $15. What journal entry would be required of Palm Springs to comply with AASB 102?

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 07-02 Be able to calculate the cost of inventory pursuant to AASB 102 Inventories.
Learning Objective: 07-03 Understand how to apply the lower of cost and net-realisable value rule for measuring inventory.
Section: Inventory cost-flow assumptions
Topic: Recording inventories and applying lower of cost and net-realisable value

60. Paris Merchandising Ltd sells ladies skirts. The opening stock consisted of 300 skirts with purchase price of $50 each. Subsequent purchases during the period include: 400 at $60 each and another 200 for $70 each. A total of 700 skirts were sold during the period. What is ending inventory using FIFO method?

A. $10 000
B. $11 800
C. $12 000
D. $14 000

61. Las Vegas Ltd sells second hand luxury cars of various makes and models, and uses the FIFO cost-flow assumption to ascertain the cost of ending inventory. This would be incorrect because:

A. this is not the practice used by other car dealerships.
B. this method will overstate profit.
C. this method will not capture unique characteristics of items held in inventory.
D. this method requires detailed bookkeeping.

62. Phoenix Ltd sells hard disks of similar make and model and reports an opening inventory on 1 July 2012 of 20 units purchased at $60. Its purchases during are as follows:

September 90 units @ $70

November 110 units @ $75

March 70 units @ $80

Phoenix Ltd sold 260 units during the year.

What is the cost of ending inventory using FIFO and weighted average method respectively (rounded to the nearest dollar)?

A. $2100; $2209
B. $2100; $2250
C. $2400; $2209
D. $2400; $2250

63. When calculating cost of inventory AASB 102 requires which of the following costs are to be excluded?

A. Abnormal amounts of wasted materials.
B. Selling costs.
C. Administrative overheads.
D. All of the given answers should be excluded.

64. AASB 102 require that inventories be reinstated to the extent that the new carrying amount does not:

A. exceed the net realisable value in the previous period.
B. exceed the lower of the original cost.
C. exceed the net realisable value in the current period.
D. exceed the lower of the original cost or the net realisable value in the current period.

65. Weighted-average cost will generate results that are:

A. higher value that LIFO.
B. higher value than FIFO.
C. in between LIFO and FIFO.
D. higher value that LIFO and FIFO.

66. Under the perpetual system, a difference with the stocktake records might indicate:

A. damaged stock.
B. theft of stock.
C. obsolete stock.
D. all of the given answers.

67. Which of the following is correct?

A. When prices of inventory are rising, FIFO will result in a higher COGS, lower gross profit and a lower total assets than weighted average.
B. When prices of inventory are rising, FIFO will result in a lower COGS, higher gross profit and a higher total assets than weighted average.
C. When prices of inventory are falling, FIFO will result in a lower COGS, higher gross profit and a higher total assets than weighted average.
D. When prices of inventory are falling, FIFO will result in a higher COGS, higher gross profit and a higher total assets than weighted average.

AACSB: Analytic
Difficulty: Medium
Learning Objective: 07-06 Be able to apply the inventory cost-flow assumptions permitted by AASB 102.
Section: Inventory cost-flow assumptions
Topic: Inventory cost-flow assumptions

68. Which of the following is correct about inventories?

A. Inventories are tested annually for impairment.
B. Inventories are said to have their own in-built test of impairment as they are measured at the lower of cost or net realisable value.
C. Inventories must be measured only when sold.
D. Inventories are said to have their own in-built test of impairment as they are measured at the higher of cost or net realisable value.

69. Which of the following policy changes would you not recommend be adopted if an entity has a profit-decreasing strategy to avoid regulatory intervention?

A. Capitalising development expenses instead of expensing.
B. Straight-line instead of reducing balance depreciation of property and equipment.
C. FIFO instead of weighted average for inventory (prices have been increasing).
D. Changing doubtful debt policy from 5% of sales to 15%. Sales remain constant.

70. Mascot Ltd’s management is considering changing an accounting policy and as their profit target has been met they are interested as to which of the following policy changes would not affect the current period’s net profit?

A. Capitalising development expenses instead of expensing.
B. Using the revaluation method instead of historical cost for buildings (prices have been increasing).
C. Changing doubtful debt policy from 10% of sales to 5%. Sales remain constant.
D. FIFO instead of weighted average for inventory (prices have been increasing).

71. Which of the following policy changes would you recommend if Cremorne Ltd has a profit-increasing strategy to obtain management bonuses?

A. Reducing balance instead of straight-line depreciation for property and equipment.
B. FIFO instead of weighted average for inventory (prices have been increasing).
C. Expensing development expenses instead of capitalising.
D. Using the revaluation method instead of historical cost for property (prices have been decreasing).

Chapter 07 Testbank Summary

Category	# of Questions
AACSB: Analytic	10
AACSB: Reflective thinking	61
Difficulty: Easy	36
Difficulty: Hard	5
Difficulty: Medium	30
Learning Objective: 07-01 Understand the meaning of 'inventory'.	7
Learning Objective: 07-02 Be able to calculate the cost of inventory pursuant to AASB 102 Inventories.	23
Learning Objective: 07-03 Understand how to apply the lower of cost and net-realisable value rule for measuring inventory.	8
Learning Objective: 07-04 Understand how and when to reverse a previous inventory write-down.	2
Learning Objective: 07-05 Understand why there is typically a necessity to make inventory cost-flow assumptions.	14
Learning Objective: 07-06 Be able to apply the inventory cost-flow assumptions permitted by AASB 102.	19
Learning Objective: 07-07 Understand the difference between a perpetual and a periodic inventory system and how this influences inventory valuation.	9
Learning Objective: 07-08 Know the disclosure requirements of AASB 102.	4
Section: Definition of inventory	3
Section: Disclosure requirements	3
Section: Introduction	3
Section: Inventory cost-flow assumptions	29
Section: Reversal of previous inventory write-downs	2
Section: The general basis of inventory measurement	33
Topic: Assigning costs	1
Topic: Biological assets	1
Topic: Cost of inventories calculation	1
Topic: Cost of inventory	1
Topic: Cost-assumption FIFO	1
Topic: Cost-flow assumption	3
Topic: Cost-flow assumption LIFO	1
Topic: Cost-flow assumptions	6
Topic: Cost-flow assumptions FIFO	2
Topic: Cost-flow assumptions LIFO	1
Topic: Costing inventory at the per unit level	2
Topic: Costing of inventories	1
Topic: Definition of inventories	2
Topic: Disclosure of inventories	1
Topic: Disclosure of inventories under AASB 102	1
Topic: Estimation of finished goods inventory valuation	2
Topic: Estimation of inventory valuation	2
Topic: FIFO method	2
Topic: Fixed costs	2
Topic: Inventories as a concept	1
Topic: Inventories disclosure	1
Topic: Inventories includes	1
Topic: Inventories: what do they include?	2
Topic: Inventory cost-flow assumptions	4
Topic: Inventory valuation	2
Topic: Inventory valuation and profit	1
Topic: Inventory valuation under international accounting standards and Australian standards	1
Topic: Lower of cost and net realisable value	1
Topic: Managerial choice and cost-flow assumptions	1
Topic: Managerial choices and cost-flow assumptions	1
Topic: Managerial choices and debt covenants	1
Topic: market forces, inventory valuation method and cost of goods sold, ending inventory values	1
Topic: Measurement of inventory	1
Topic: Not-for-profit valuation of inventories	1
Topic: Periodic inventory system	2
Topic: Perpetual inventory system	2
Topic: Perpetual system	1
Topic: Recording inventories and applying lower of cost and net-realisable value	1
Topic: Reinstate inventories	1
Topic: Revaluation of inventories	1
Topic: Revaluation of inventory	1
Topic: Reversal of a previous inventory write-down	2
Topic: Reversal of previous inventory write-downs	1
Topic: Standard cost	2
Topic: The general basis of inventory measurement	1
Topic: Valuation of inventory	1
Topic: What is included in inventory?	3

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Created Date:

Aug 21, 2025

Chapter Name:

Chapter 7 Measurement issues

Author:

Deegan

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