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The MCQs below are drawn from the Accountancy & Auditing subject category.
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4571
If the inventory valuation at 31 December 2017 was overstated by $6,000, what is the impact on the gross profit for the year ending 31 December 2018?
Closing inventory for 2017 becomes the opening inventory for 2018. If 2017 closing inventory is overstated, the opening inventory for 2018 is also overstated. Since Cost of Goods Sold = Opening Inventory + Purchases - Closing Inventory, an overstated opening inventory increases the cost of goods sold, thereby reducing the gross profit for 2018 by the same amount.
4572
If a company discovers that the previous year's closing stock was overestimated by 50,000, how does this affect the company's reported profits?
Closing stock is a component of the cost of goods sold calculation. Overstating the closing stock in the previous year artificially reduces the cost of goods sold, thereby overstating the previous year's profit. Since the closing stock of the previous year becomes the opening stock of the current year, the current year's cost of goods sold is overstated, which results in an understatement of the current year's profit.
4573
Which account is debited when recording the adjusting entry for closing stock at the end of the period?
When adjusting for closing stock, the Closing Stock account is debited to recognize the asset on the balance sheet, and the Trading Account is credited to reduce the cost of goods sold. This ensures that the value of unsold inventory is correctly reflected in the financial statements.
4574
Where is the closing stock value typically reported in the final financial statements?
Closing stock is recorded in the Trading Account to determine the gross profit by adjusting the cost of goods sold. It is also recorded in the Balance Sheet as a current asset, representing the value of unsold inventory held by the business at the end of the accounting period.
4575
If the closing stock is listed within the trial balance, where should it be recorded in the final accounts?
When closing stock appears inside the trial balance, it indicates that the adjustment has already been made to the cost of goods sold. Therefore, it is treated as an asset and recorded solely in the balance sheet, rather than being included in the trading account.
4576
What is the correct accounting adjustment when inventory worth 800 is destroyed by fire, and an insurance claim of 600 is accepted?
The total loss of 800 is removed from the Trading Account (credited). The amount recoverable from the insurance company (600) is debited to the Insurance Company account as an asset. The remaining loss (200) is debited to the Profit and Loss account as an abnormal loss. This ensures the financial statements accurately reflect both the reduction in inventory and the expected insurance recovery.
4577
What is the standard valuation basis for closing stock?
Closing stock is valued at the lower of cost or market price (net realizable value) to comply with the principle of prudence. This ensures that potential losses are recognized immediately, while potential profits are not anticipated until realized. By choosing the lower value, the financial statements provide a more conservative and realistic view of the business's current financial position.
4578
To which account is the balance of the Bad Debts Recovered account typically transferred at the end of the period?
When previously written-off bad debts are recovered, the amount represents a gain. This gain can be credited to the Profit and Loss Account as other income, or it can be credited to the Provision for Doubtful Debts account to offset the existing provision balance, thereby reducing the net expense for the period.
4579
During the preparation of final accounts, to which account is the 'Bad Debt Recovered' balance transferred?
Bad debt recovered represents the recovery of an amount previously written off as a bad debt. Since this recovery is considered a gain for the business, it is credited to the Profit and Loss Account during the finalization of accounts to reflect the increase in net income for the period.
4580
According to general accounting principles, what is the likely outcome for a debt that remains outstanding for an extended period?
As a debt ages, the probability of collection decreases significantly. Accounting principles suggest that the longer a receivable remains unpaid beyond its due date, the higher the risk that the debtor will default. Consequently, such debts are increasingly likely to be classified as bad debts, requiring write-offs or increased provisions.
