Financial Reporting And Analysis - Financial Reporting And Analysis Section 1
- Option : A
- Explanation : 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?
- A
The matching principle requires the adoption of the direct write-off method where a loss is only recognized when the customer actually defaults.
- B
A company estimates uncollectible accounts based on previous experience and this is recorded as a direct reduction of revenues.
- C
Under the matching principle, the estimated warranty expense is recognized in the period of the sale and not when the cost is actually incurred.
- Option : C
- Explanation : 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.
- Option : C
- Explanation : 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.
- Option : B
- Explanation : 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.
- Option : A
- Explanation : Investments are not part of the core business. Discontinued operations are non-recurring items.
