QUESTION 8 If a company overstates its ending inventory balance for 2017 by $10,

Question

QUESTION 8

If a company overstates its ending inventory balance for 2017 by $10,000, and overstates its ending inventory balance for 2016 by $5,000 what are the effects on its net income for 2017 and 2016?

Effect on 2017 Net Income                       Effect on 2016 Net Income

Overstated by $15,000                             Overstated by $10,000

Effect on 2017 Net Income                       Effect on 2016 Net Income

Understated by $5,000       Overstated by $10,000

Effect on 2017 Net Income                       Effect on 2016 Net Income

Overstated by $5,000 Overstated by $5,000

Effect on 2017 Net Income                       Effect on 2016 Net Income

Overstated by $10,000 Overstated by $5,000

1 points   

QUESTION 9

Which of these is not an acceptable inventory costing method under IFRS?

  FIFO

  LIFO

  Specific Identification

  Average cost

1 points   

QUESTION 10

A company lost all but $50 of its inventory in a fire on Feb. 22, 2017. The company’s financial records are listed below:

2015                       2016                   

Net Sales                     10,000                      12,300                   

COGS                           6,500                        7,995                   

       Gross Profit                  3,500                        4,305                   

       Operating Exp.             2,000                        2,500                   

       Net Income                   1,500                        1,805                   

              For 2017 the company’s records showed beginning inventory of $350, purchases of $500 and purchase returns of $90.  

        Net sales for the first part of the year totaled $1,000.

      Determine the amount of inventory destroyed in the fire. (You must first calculate the company’s historical gross profit percentage.)

  $240

  $360

$ 60  

  $150        

  $110

Effect on 2017 Net Income                       Effect on 2016 Net Income

Overstated by $15,000                             Overstated by $10,000

Effect on 2017 Net Income                       Effect on 2016 Net Income

Understated by $5,000       Overstated by $10,000

Effect on 2017 Net Income                       Effect on 2016 Net Income

Overstated by $5,000 Overstated by $5,000

Effect on 2017 Net Income                       Effect on 2016 Net Income

Overstated by $10,000 Overstated by $5,000

Explanation / Answer

Question no 8:

Generally, if closing inventory increased then profit may be increased and opening inventory increased then profit may be decreased.

In our given problem, company overstates its ending inventory balance for 2017 by $10,000, and overstates its ending inventory balance for 2016 by $5,000. That is 2017 profit inceased by $10,000 (due to overstated its 2017 ending inventory) and simultaneously decreased by $5,000 (due to overstated its 2016 ending inventory, ie., the opening inventory of 2017)

So, in the year 2017, profit $10,000 increased $5,000 decreased. Finally it leads to overstated of profit by $5,000.

Same way in 2016, the profit increased by $5,000.

So, the anwer C is correct ( Effect on 2017 Net Income Overstated by $5,000 and Effect on 2016 Net Income Overstated by $5,000).

Question no 9:

The Last-In-First-Out (LIFO) method of inventory valuation , while permitted under the US Generally Accepted Accounting Principles (GAAP), is prohibited under the International Financial Reporting Standards (IFRS). As IFRS rules are based on principles rather than exact guidelines, usage of LIFO is prohibited due to potential distortions it may have on a company’s profitability and financial statements. In principle, LIFO may create a distortion to net income when prices are rising (inflation), LIFO inventory amounts are based on outdated and obsolete numbers, and LIFO liquidations may provide unscrupulous managers with the means to artificially inflate earnings.

Remaining FIFO, Specific identification and Average cost methods are acceptable by the IFRS

The answer is B.

Question no 10:

2015 Gross profit ratio = gross profit/net sales *100 = 6,500/10,000*100 = 65%

2016 Gross profit ratio = gross profit/net sales*100 = 7,995/12,300*100 =65%

So the Gross profit ratio is 65%

Calculation of amount destroyed in fire as on feb,22 , 2017:

2017 net sales $1,000

Therefore cost of Goods Sold =1000*65/100 =$650

Total value of inventory available as on 22 feb,2017=

{(Opening inventory+purchase-Purchase retuned)= ($350+$500-$90) =$760}

So value of goods lost in fire = $760- $650 =$110

The answer is E.

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