Financial Reporting And Analysis MCQ - Financial Reporting And Analysis Section 1

41 Mega Games Ltd. started business on January 1, 2012. On January 15, it purchased 1000 games at a cost of $75 each. 900 of these were sold in the first quarter at a price of $100 each. On April 1, more inventory was purchased comprising of 500 games at $80 each. In the second quarter, 550 games were sold. What is the ending inventory most likely to be if the inventory costing method followed is LIFO?

Under the LIFO method it is assumed that the inventory bought last is sold first. Hence the remaining inventory is valued at the earlier price which is $75. The remaining inventory is 50 and the value is 50 x 75 = $3,750.

42 Which of the following statements is most likely to be correct?

Statement A is incorrect because the matching principle requires the company to estimate the uncollectible accounts and not adopt the direct write off method. Statement B is incorrect because the estimate is recorded as an expense. Statement C is correct.

43 Lavish Leathers Ltd. purchased a machine worth $100,000. The machine will be used for five years. The estimated salvage value at the end of Year 5 is $15,000. The company charges depreciation using the straight line method. Which of the following is most likely to be the net book value of the machine at the end of Year 3?

Depreciation Expense = Purchase price - Residual Value / Life of Asset = (100,000 - 15,000) / 5 = 17,000 Balance of machine after three years = 100000 - (17000 * 3) = $49,000.

44 Lazy Leathers Ltd. purchased a machine worth $100,000.The machine will be used for five years. The estimated salvage value at the end of Year 5 is $15,000. The company charges depreciation using the double declining balance method. Which of the following is most likely to be the depreciation expense of the machine for Year 1?

With the double declining method, depreciation is twice that compared to straight line depreciation. Since the straight line depreciation would be 20%, the double declining method depreciation is 40%. Hence, the depreciation is 40,000 for Year 1.

45 An analyst is estimating the net profit margin of a manufacturing company for next year. The method he adopts is to average the net profit margin for the past five years. Which of the following statements is most likely accurate with respect to the items used for his projections?

Investments are not part of the core business. Discontinued operations are non-recurring items.