Inventory is tangible goods held for resale in the normal course of business or that

will be used in producing goods (manufacturer) for sale. Assets not normally held for
resale are excluded from merchandise inventory. An important aspect of inventory
accounting is determining inventory ownership.
If the buyer is responsible for freight charges (FOB factory or shipping point),
ownership passes to the buyer as soon as goods are loaded. 
If the seller pays for the freight charges (FOB destination), ownership passes to the
buyer only when the goods arrive at the destination.
The cost of inventory includes all expenses made in bringing the goods or assets to
their existing condition and location for sale. Inventory cost therefore equals invoice
price less discounts (if any), plus transportation, storage, import duties, insurance, and
other costs of preparing the inventory for sale. These additional or incidental costs add
value to the inventory and should be included in the purchase cost.

1. Inventory Valuation System

Merchandising companies use one of two systems to account for inventory:
 

 1.1 Perpetual Inventory System

A Perpetual Inventory System is one in which continues stock records of inflow and
outflow of inventory are kept. Every time a unit of good is bought or sold, such a transaction is
updated in the stock records. By doing so, the enterprise can determine the cost of goods on hand (Closing
stock) by just looking at the stock records, without the need to perform a stock count.  Under this inventory
method, the cost of goods sold is determined each time a sale is made. The company’s cost of the merchandise
is debited to the CGS expense account at the time of each sale to a customer. Purchases of merchandise are
recorded (as increases or debits) in the Inventory The Inventory account is reduced (or credited) each time a
sale is made by whatever amount the goods cost the company.
 

 1.2 Periodic / Physical Inventory System

A Periodic Inventory system determines the inventory at the beginning and end of
certain periods of time (by physical count) such as annually, semi-annually, quarterly,
or monthly. When a business maintains a periodic inventory system, it does not consistently update
information about the cost of goods sold, or the stock balance on a particular day. As merchandise is purchased
its cost is recorded in the purchase account. No entry is made for cost of goods sold. Therefore, at the end of
the period, opening and ending inventories are adjusted against cost of goods sold account or profit and loss
account.
 
2. Inventory Valuation Methods
Two methods are used to value the inventory:

2.1 Specific Identification Method

The Specific Identification Method can only be used for items that can in some way
be labeled and identified (Heterogeneous). The specific identification inventory costing method
identifies and uses the purchase invoice of each item sold to determine the cost assigned to cost of goods sold
and to the ending inventory. Specific identification will produce identical results under either a perpetual or a
periodic inventory system.

2.2 Cost Flow Assumptions

Three Cost Flow Assumptions are used, discuss below both for perpetual inventory
system and periodic inventory system:
2.2.1 First in First Out (FIFO)
The first-in, first-out inventory costing method is based on the assumption that the
first items received were the first items sold. In other words, items in the beginning
inventory or the oldest items are assumed to be sold first. The most recent inventory
purchased is assumed to remain in ending inventory.
>> Practice Inventory Valuation MCQs.
 

Example 1:
You are required to value the inventory by FIFO (Perpetual System). Opening
Inventory is 8 Units at Rate of Rs. 10 at start of December and during the year the
following were the purchases and sales of inventory:

Solution:
 
>> Further Reading Cost of Goods Sold.
 
2.2.2 Last in First Out (LIFO)
 The last-in, first-out inventory costing method is based on the assumption that the last items
received were the first items sold. In other words, the most recent purchases are assumed to be
sold first and the old goods remain in inventory. However, the assumed flow of goods can differ
from the actual physical flow. During inflationary times, recent costs are higher than old costs,
resulting in higher cost of goods sold, lower net income, and lower income taxes.
 

Example 2:
You are required to value the inventory by LIFO (Perpetual System). Opening Inventory is 8
Units at Rate of Rs. 10 at start of December and during the year the following were the purchases
and sales of inventory:
Solution:
 

 
>> Practice Inventory Valuation Problems and Solutions.
 
2.2.3 Average or Weighted Average
The weighted-average inventory costing method uses a weighted-average cost per
inventory unit in assigning cost to units sold and to inventory. A weighted-average is
recalculated at the time of each purchase.
 

Example 3:
You are required to value the inventory by weighted average (Perpetual System).
Opening Inventory is 8 Units at Rate of Rs. 10 at start of December and during the
year the following were the purchases and sales of inventory:

Solution:
 
 
>> Practice Inventory Valuation Problems and Solutions.
 

Video Lecture: Costing Concepts in Urdu & Hindi-

Workbook Practice
 

Click Here To Download Workbook Used in Video

Click Here To Download Workbook Used in Video

Results Variation in Inventory Valuation Methods

Each method is based on a different assumption about the cost of the merchandise that
are sold and the cost of the merchandise that are left in ending inventory:
Impact of LIFO and FIFO in Periods of Rising Prices
Following are some impact on financial by using LIFO or FIFO:

>> Further Practice Inventory Management Problems and Solutions.

 

Cost flow Assumption under Periodic Inventory

System
In physical inventory system stock taking are done at the end of period. No up-to-date
record for cost of sales are available. In this type of problems issuing date are not mention.
 
>>> Practice Inventory Valuation Problems and Solutions.
 
Example 4:
You are required to value the inventory (Cost of Sales and Ending Inventory) by
FIFO, LIFO and Weighted average (Periodic System) and Comparative Cost Sheet in
amount:
Date         Units @            Total
1 Jan   Balance   100   @ 10  Rs. 1,000
5 Jan   Purchases   100 @ 11       1,100
10 Jan  Purchases 150  @ 12        1,800
During the period 300 unit were sold @ Rs. 15 per unit
 

Solution:
 
  

Inventory Management
From the inventory management point of view, the following are some important
requirements of the effective material control:
 That no inventory is purchased without proper authority
 That the quantity of inventory purchased is in fact received
 That there should be proper storage facilities
 That no material is issued without proper authorization and the purpose for which the
material is required is recorded
 That the accounts provide a running balance of the value of the inventory on hand
 Large business have specialized purchase departments for effective inventory control

 
Purchase Process
  
>> Practice Inventory Management Problems and Solutions.
 

Levels of Inventory
In order to ensure that the optimum quantity of materials is purchased and stock—neither less
nor more. The storekeeper applies scientific techniques of materials management. Fixing of certain levels for
each item of materials. The following levels are generally fixed: 
 Order level
 Maximum level
 Minimum level
 Danger level
 
Order Stock Level/point
 It is also known as Re-ordering level/point in relation with an item of stock. It is the point at which
it becomes essential to initiate purchase orders for its fresh supplies. Normally, re-ordering level is a point
between the maximum and the minimum stock levels. Fresh orders must be placed before the actual stocks
touch the minimum level, so as to take care of lapse in time the placing of the order and the receipt of materials
in stores:
 
Formula 

 
The maximum consumption: This is the maximum quantity of the material that is expected to be
consumed in a day or in a week or in a month time
 Lead time: This is the estimated time period in number of days or in weeks or in months, which
is necessarily required for placing an order and finally receiving it in the stores
 
Maximum Stock Level
 The maximum stock level indicates the maximum quantity of an item of material which can be
held in stock at any time:
 
Formula 

Re-ordering level: It is the point at which it becomes essential to initiate purchase orders for its fresh
supplies. Normally, re-ordering level is a point between the maximum and the minimum stock levels.
Minimum consumption: This is the minimum quantity of the material that is expected to be
consumed in a day or in a week or in a month time.
Lead time: This is the estimated time period in number of days or in weeks or in months, which
is necessarily required for placing an order and finally receiving it in the stores.
Economic ordering quantity: It is the level where the ordering quantity will be most
economical for organization.
 
Minimum Stock Level
This represents the quantity below which the stock of any item should not be allowed to fall. In
other words, an enterprise must maintain minimum quantity of stock so that the production is not adversely
affected due to non-availability of materials:
 
Formula 
Re-ordering level: It is the point at which it becomes essential to initiate purchase orders for its fresh supplies.
Normally, re-ordering level is a point between the maximum and the minimum stock levels
Lead time: This is the estimated time period in number of days or in weeks or in months, which
is necessarily required for placing an order and finally receiving it in the stores
Average consumption: This is the average quantity of the material that is expected to be
consumed in a day or in a week or in a month time
 
Danger Stock Level
The danger level is below the minimum level and represents a stage where immediate steps are
taken for getting stock replenished. When the stock reaches danger level it is indicative that if no
emergency steps are taken to restock the materials, the stores will be completely exhausted and normal
production stopped Generally, the danger level of stock is fixed below the minimum level
Formula 

 
>> Practice Inventory Management Problems and Solutions.

Example 3:
 In manufacturing its Products, a Company uses three raw materials. A, B and C, in
respect of which the following apply on monthly basis.
Requirements:
(a) Re-order level       (b) Maximum stock     (c) Minimum stock       (d) Danger stock
level

Problem # 1:
These data relate to Zakar Co.’s July 2017 operations:
 
Factory overhead is applied at the rate of 80% of direct labor cost.
Requirement:
Cost of materials purchased, Cost of goods manufactured, Cost of goods sold and
Conversion Cost.
 
Solution: 
Zakar Company
Cost of Goods Sold Statement
For the Ended July, 2017

Opening Inventory 7,000

Net Purchases (Calculated) 48,400

Direct Expenses 400

Material Available for use 55,800
Closing Inventory (9,000)
Direct Material used 46,800
Direct Labor (80% of direct labor cost) 8,000
Prime Cost 54,800
Factory Overhead Cost 6,400
Total Factory Cost 61,200
Opening Work in Process 7,500
Cost of Goods Available for Manufactured 68,700
Closing Work in Process (3,500)
Cost of Goods Manufactured 65,200
 Opening Finished Goods 10,000
Cost of Goods Available for Sold 75,200
Closing Finished Goods (12,000)
Cost of Goods Sold Rs. 63,200
 
Conversion Cost = Direct Labor + FOH = 8,000 + 6,400 = Rs. 14,400
 
>> Practice Cost of Goods Sold MCQs for thorough understanding of Cost of
Goods Sold Problems and Solutions.
 
Problem # 2:
Following are data Extracted from Ahmadullah Pvt. Ltd. at the end of December 31 st,
2017.

During the year 25,000 units were completed.

 
Requirements:
(1) Total Factory Cost                                        (2) Cost of Goods Manufactured
(3) Cost of Goods Sold                                      (4) Gross Profit and Net
Profit                          
(5) Per Unit Cost of Goods Manufactured
 
Solution: 
Ahmadullah Pvt. Ltd.
 Cost of Goods Sold Statement
For the Ended December, 2017

Opening Inventory 176,000

Net Purchases 2,400,000

Transportation inward 32,000

Material Available for use 2,608,000

Closing Inventory (196,000)

Direct Material used 2,412,000

Direct Labor 3,204,000

Prime Cost 5,616,000

Factory Overhead Cost 1,885,600

Total Factory Cost 7,501,600

Opening Work in Process 129,800
Cost of Goods to be Manufactured 7,631,400
Closing Work in Process (136,800)
Cost of Goods Manufactured 7,494,600
Opening Finished Goods 620,000
Cost of Goods to be Sold 8,114,600
Closing Finished Goods (467,400)
Cost of Goods Sold Rs.7,647,200
Gross Profit    =   Net Sales – CGS     = (14,000,500 – 25,200) – 7,647,200       
=      Rs. 6,328,100
Net Profit        =   Gross Profit – Indirect Expenses   6,328,100 – (200,000 +
65,000+155,000)
=      Rs. 5,908,100
Per unit Cost of goods manufactured =                   7,494,600 / 25,000         =     Rs. 300
Per Unit
 
>> Practice using Cost of Goods Sold Format for better understanding.
 
Problem # 3:
Account Department of the Aqib Khan Co. provides the following  data at end of June
2017, you are required to prepare Cost of Goods Manufactured; Cost of Goods Sold;
find out Gross Profit / Loss & Net profit / Loss and Per unit Manufacturing Cost at the
Year ended May 30th, 2009, assuming that Net Sales of Rs. 72,000, Marketing
Expense 5%, Advertising Expense 1 % and Other Expense 3% of Net Sales; Net
Purchases Rs. 36,000 and Direct Expenses are 1 % of Net Purchases; FOH 2/3 of
Direct Labor and Direct Labor cost is Rs. 15,000. Units are produced during the
period was 5,000.

 
Solution: 
Aqib Khan Co.
Cost of Goods Sold Statement
For the Ended June, 2017
Beginning Inventory 8,000

Net Purchases 36,000

Direct Expense (36,000*1%) 360

Material available for used 44,360

Ending Inventory 8,500

Material Used 35,860

Direct Labor 15,000

 Prime Cost 50,860

FOH (2/3 of 15,000) 10,000

Total Factory Cost 60,860

Work in Process beginning 8,000

Cost of goods to be manufactured 68,860

Work in Process Ending (15,000)

Cost of goods manufactured 53,860

Finished Goods Beginning 7,000
Cost of goods available for sales 60,860
Finished Goods Ending (10,200)
Cost of Goods Sold Rs. 50,660
 
  Gross Profit = Net Sales – CGS = 72,000 – 50,660                          =            Rs. 21,340
  Net Profit =Gross Profit – All indirect expenses of office     =    21,340 – (72,000 *5%)-
(72,000 *1%)-(72,000 *3%) = 21,340 – 3,750 – 750 – 2,250                               =           Rs.
14,590
  Per Unit Cost = Cost of goods manufactured / No. of Units Produced = 53,860 / 5,000
= Rs. 11 per Unit
11. When bank statement shows a debit
balance, it means?
(a) Overdraft balance as per cash book

(b) Unfavorable balance as per cash book

(c) Unfavorable balance as per bank book

(d) None of the above

12. The check which is deposited into bank but
not cleared at the end of a particular year is
called?
(a) Uncredited check

(b) Unpresented check

(c) Omitted check

(d) Dishonored check

13. When dealing with Bank reconciliation

statement while using missing method the
credit side of cash book corresponds to?
(a) Debit side of cash book

(b) Credit side of Bank statement

(c) Debit side of Bank statement

(d) None of them

14. In cash book bank charges recorded?

(a) Credit side

(b) Debit side

(c) both a & b

(d) None of them

15. Credit balance as per pass book is?

(a) Unfavorable balance

(b) Favorable balance

(c) Both a & b

(d) None

16. When cash is deposited into bank then the

following account would be debited in the
company accounts?
(a) Cash account

(b) Overdraft account

(c) Bank account

(d) None

17. Which of the following would not affect

bank reconciliation?
(a) Dishonored cheque

(b) Discount received

(c) Bank interest

(d) Check not presented

18. An amount of Rs. 1,000 is debited twice in

the bank statement. When overdraft as per the
cash book is the starting point?
(a) Rs. 1,000 will be deducted

(b) Rs. 1,000 will be added

(c) Rs. 2,000 will be deducted

(d) Rs. 2,000 will be added

19. Which one of the following is not missing
of cash book?
(a) Mistakes in cash book

(b) Outstation check

(c) Bank charges debited in bank statement?

(d) Interest credited in bank statement

20. If any amount is directly deposited into

the bank then?
(a) Cash book will show less balance & bank book will show more

(b) Cash book will show more balance & bank book will show less

(c) Cash book will show double balance

(d) Bank book will show double balance

1. Which of the following does not describe
accounting?
(a) Language of business

(b) Useful for decision making

(c) Is an end rather than a mean to an end?

(d) Financial accounting and accounting systems

2. The two most common specialized fields of

accounting in practice are?
(a) Environmental accounting and financial accounting

(b) Managerial accounting and financial accounting

(c) Managerial accounting and tax accounting

(d) Financial accounting and accounting systems

3. Which of the following user groups required

the most detailed financial information?
(a) Lenders

(b) Investor and potential investors

(c) Government agencies

(d) The management

4. AAA stands for?

(a) American accounting agency

(b) American accounting association

(c) Asian accounting association

(d) Australian accounting association

5. Which one of the following statement

completely and correctly describes
accounting?
(a) Recording, classifying and summarizing economic activities in systematic way

(b) Recording, classifying and summarizing all activities in useful manner

(c) Accounting is the systematic process of recording social activities only

(d) Recording, classifying and summarizing economic activities in informal manner

6. Which of the following provides information

about the financial information’s, obligations
and activities on the economic entity that is
intended for use primarily by external decision
makers?
(a) Management accounting

(b) Financial accounting

(c) Tax accounting

(d) Environmental accounting

7. Which of the following statement is true

about purpose of accounting?
(a) The purpose of accounting provide information to manager

(b) Accounting purpose gives quantitative information to economic decision makers

(c) Provision of base for decision making is purpose of accounting

(d) All of above statement are true regarding purpose of accounting

8. External reporting is the result of?

(a) Financial accounting

(b) Management accounting

(c) Cost accounting

(d) Social accounting

9. How many approaches accounting has?

(a) One

(b) Two

(c) Three
(d) None

10. Accounting is the language of?

(a) Proprietor

(b) School

(c) Business

(d) Management
 
>> Read theory of Accounting Basics

MCQs 11 To 20
 
11. To understand and use accounting
information in making economic decisions,
you must understand?
(a) The nature of economic activities that accounting information describes

(b) The assumptions and measurement techniques involved in developing accounting

information

(c) Which information is relevant for a particular type of decision that is being made?

(d) All of Above

12. The controller's responsibilities are

primarily in nature, while the treasurer's
responsibilities are primarily related to?
(a) Operational; Financial accounting

(b) Accounting; Financial management

(c) Financial management; Operations

(d) Financial management; Accounting

13. The outcome of financial accounting is to?

(a) Record all transactions in the books of accounts

(b) Provide management with detailed analyses of costs

(c) Present the financial results to the organization by means of recognized financial
statements

(d) Calculate profit

14. Internal users of accounting information

include all of the following except?
(a) Store manager

(b) Creditor

(c) Chief executive officer

(d) Chief financial officer

15. Accounting is an information and

measurement system that does all of the
following except?
(a) Analyze transactions

(b) Handle routine book-keeping tasks

(c) Structure information

(d) Recording social activities

16. External users of accounting information
include all of the following except?
(a) Investors

(b) Labor Union

(c) Line Manager

(d) General Public

17. Which of the following groups use financial

accounting information?
(a) Management, employees, shareholders and lenders

(b) Suppliers, customers and competitors

(c) Tax authorities, government and general public

(d) All of the above

18. Which of the following persons are most

likely to use accounting information?
(a) Business owners

(b) Lending institutions

(c) All of the above

(d) None of the above

19. Someone who uses accounting information

is?
(a) A user

(b) An external user

(c) An internal user

(d) A manager

20. External users include all of the following

except?
(a) Lenders

(b) Customers

(c) Officers

(d) Employees

1. Which of the following statements is

incorrect?
(a) Liabilities + Assets = Capital

(b) Assets – Liabilities = Capital

(c) Liabilities + Capital = Assets

(d) Assets - Capital = Liabilities

2. On January 1st, 2009 an entity's balance

sheet showed total assets of Rs. 750 and
liabilities of Rs. 250. Owners' equity at
January 1st was?
(a) Rs. 750

(b) Rs. 1,000

(c) Rs. 500

(d) Rs. 250

3. If the assets of a business are Rs. 100,000
and equity is Rs. 20,000, the value of liability
will be?
(a) Rs. 100,000

(b) Rs. 80,000

(c) Rs. 120,000

(d) 20,000

4. Find out the missing value liabilities in an

accounting equation with the help of given
data?

(a) Rs. 201,000 liabilities

(b) Rs. 111, 000 liabilities

(c) Rs. 290, 000 liabilities

(d) Rs. 291, 000 liabilities

5. The accounting equation should remain in
balance because every transaction affects how
many accounts?
(a) Only one

(b) Only two

(c) Two or more

(d) All of given options

6. Which of the following is not a correct form

of the Accounting Equation?
(a) Assets = Claims

(b) Assets = Liabilities + Owner Equity

(c) Assets – Liabilities = Owner’s Equity

(d) Assets + Owner’s Equity = Liabilities

7. Consider the following data?

(a) Rs. 49,000

(b) Rs. 55,000

(c) Rs. 440,000

(d) Rs. 198,000

8. Find out value of account receivable from

following Cash Rs. 48,000 account payable Rs.
33,000 office equipment Rs. 21,000 owner
equity Rs. 77,000?
(a) Rs. 21,000

(b) Rs. 41,000

(c) Rs. 15,000

(d) Rs. 110,000

9. During a reporting period, a company’s

assets increase by Rs. 80,000,000. Liabilities
decrease by Rs. 20,000,000. Equity must
therefore?
(a) Decrease by Rs. 100,000,000

(b) Increase by Rs. 100,000,000

(c) Decrease by Rs. 60,00,000

(d) Increase by Rs. 60,000,000

10. Which one of the following equations

correctly expresses the relationship between
assets (A), liabilities (L), revenues (R),
expenses (E) and capital (C)?
(a) A = L + R + E + C
(b) A = C + L + (R-E)

(c) A = C - (R - E) + L

(d) A = (L - C) + (R - E)
 
>> Read Accounting Equation.
 
MCQs 11 To 20
 
11. The liabilities of a business are Rs. 30,000;
the capital of the proprietor is Rs. 70,000. The
total assets are?
(a) Rs.70,000

(b) Rs. 30,000

(c) Rs.40,000

(d) None

12. Which of the following account is affected

from the drawings of cash in sole-
proprietorship business?
(a) Shareholder account

(b) Capital account

(c) Liability account

(d) Expense account

13. Mr. “A” borrowed money from bank; this
transaction involves which one of the
following accounts?
(a) Cash & Bank Loan

(b) Bank & Debtors

(c) Drawing & Cash

(d) Cash & Bank

14. Mr. A provided the following information

from his books of accounts at the end of the
month. What is the amount of his capital?

(a) Rs. 200

(b) Rs. 900

(c) Rs. 1,200

(d) Rs. 1,300

15. Which of the following accounts will be
used in equation, if the goods are sold on
credit to Mr. Mahmood?
(a) Cash account and Owner’s equity

(b) Account Receivable and Owner’s equity

(c) Cash and Account Receivable

(d) Account Payable and Owner’s Equity

16. The favorable balance of profit and loss

account should be?
(a) Added in liabilities

(b) Subtracted from current assets

(c) Subtracted from liabilities

(d) Added in capital

17. Which of the following is not a satisfactory

statement of the balance sheet equation?
(a) Assets = liabilities + owner’s equity

(b) Assets - liabilities = owner’s equity

(c) Assets = liabilities - owner’s equity

(d) Assets - owner’s equity = liabilities

18. Revenue of the business includes?

(a) Cash sales only

(b) Credit sales only

(c) Credit purchases only

(d) Both cash sales and credit sales

19. Which one of the following represents the

expanded basic accounting equation?
(a) Assets = Liabilities + Common Shares + Dividends – Revenue – Expenses

(b) Assets + Dividends - Expenses = Liabilities + Common Shares + Revenues

(c) Assets – Liabilities – Dividends = Common Shares + Revenues – Expenses

(d) Assets = Revenues + Expenses – Liabilities

20. Which of the following transactions would

have no impact on stockholders' equity?
(a) Purchase of land on credit

(b) Dividends to stockholders

(c) Net loss

(d) Investment in cash by stockholders

1. Double entry bookkeeping means that?

(a) Entry in two sets of accounting books

(b) Entry at two dates

(c) Entry for two aspects of transaction

(d) All of above

2. Which one the following document is

prepared for documentary evidence by
business?
(a) Invoice

(b) Voucher

(c) Receipt

(d) All of above

3. The basic sequence in the accounting

process can best be described as?
(a) Transaction, journal entry, source document, ledger account, trial balance

(b) Source document, transaction, ledger account, journal entry, trial balance

(c) Transaction, source document, journal entry, ledger account, trial balance

(d) Transaction, source document, journal entry, trial balance, ledger account

4. Revenue is generally recognized being

earned at the point of time when?
(a) Cash is received

(b) Billed to customers

(c) Production is completed

(d) Goods are delivered

5. The accounting system, in which accounting

entries are made on the basis of amount
having become due for payment or receipt, is
known as?
(a) Cash system of accounting

(b) Current accounting period

(c) Accrual system of accounting

(d) None of the given options

6. Bookkeeping is mainly concerned with?

(a) Recording the Economic Activities

(b) Interpreting the data

(c) Designing the systems for recording, classifying and summarizing

(d) All of Above

7. Which one of the following system of

recording transaction has a dual aspect
concept of accounting?
(a) Cash system of accounting

(b) Single entry system

(c) Accrual system of accounting

(d) Double entry system

8. The documents relating to purchase of asset

must be authorized by?
(a) Senior management

(b) Middle management

(c) Lower level management

(d) None

9. Accrual-basis of accounting?
(a) Result in higher income than Cash-basis of accounting ?
(b) Is not acceptable under GAAP

(c) Leads to the reporting of more complete information than does cash-basis

(d) Non of Above

10. A manufacturer is considering the point at

which a transaction can be recognized within
its profit and loss account. At which of the
following stages is this permitted?
(a) Products accepted by customer

(b) Product manufactured

(c) Sample products requested by customer

(d) Order placed for the goods

 
>> Read Accounting Cycle.
 
MCQs 11 To 20
 
11. A company sold Rs. 400,000 of
merchandise for cash and Rs. 120,000 of
merchandise to credit customers who will pay
for the merchandise in a later time period.
How much revenue should be reported on the
income statement of the current time period?
(a) Rs. 120,000

(b) Rs. 280,000

(c) Rs. 400,000

(d) Rs. 520,000

12. Voucher is used to record transactions that

do not affect cash or bank?
(a) Payment Voucher

(b) Cash Voucher

(c) Journal Voucher

(d) None of these

13. Items such as a sales slip, a check, a bill, or

invoices are examples of?
(a) Balance sheet accounts

(b) Income statement accounts

(c) Cost of goods sold

(d) Source documents

14. In the purchasing procedure which

document will usually follow the goods
received note?
(a) Delivery note

(b) Invoice

(c) Statement

(d) Advice note

15. Which of the following is an advice of

employee earning?
(a) Advice note

(b) Purchase order

(c) Pay slip

(d) Quotation

16. A Journal entry which requires more than

two accounts is called?
(a) Double entry

(b) Compound entry

(c) Combined entry

(d) None

17. Accounting which recognizes an event as

the transaction when cash is received or paid?
(a) Cash basis of accounting

(b) Accrual basis of accounting

(c) Cost accounting

(d) None of the above

18. Which of the following presents key

aspects of the process of accounting in the
correct chronological order?
(a) Communicating, recording, and identifying

(b) Recording, identifying, and communicating

(c) Recording, totaling, and identifying

(d) Identifying, recording, and communicating

19. Losses normally have?

(a) Credit balance

(b) Debit balance

(c) Not mentioned

(d) a and b

20. Which of the following is not a voucher?

(a) Receipt voucher

(b) Payment voucher

(c) Journal voucher

(d) Ledger voucher

1. The amount brought in by owner of the

business should be credited to?
(a) Owner Equity

(b) Drawing

(c) Cash

(d) All of above

2. Which of the following transactions would

have no impact on stockholders' equity?
(a) Purchase of the land from the proceeds of bank loan
(b) Dividends to stock holders

(c) Net loss

(d) Investment of cash by stockholders

Wrong!

3. Which of the following transactions occurs

on daily basis in a large business organization?
(a) Purchaser of equipment

(b) Payroll

(c) Credit sales

(d) Payment of suppliers

4. How much types a transaction has?

(a) One

(b) Two

(c) Three

(d) Four

5. Transactions are initially recorded in the?

(a) Book of Final Entry

(b) Accounting Equation

(c) T Accounts

(d) Book of Original Entry

6. Of the following account types, which would
be increased by a debit?
(a) Liabilities and expenses

(b) Assets and equity

(c) Assets and expenses

(d) Equity and revenues

7. Sales made to Ahmed on credit should be

debited to?
(a) Account Receivable

(b) Cash

(c) Account Receivable-Ahmed

(d) Sales

8. According to the rules of debit and credit

for balance sheet accounts?
(a) Increase in assets, liabilities and owner equity recorded by debit

(b) Decrease in asset and liability are recorded by credit

(c) Increase in asset and owner’s equity are recorded by debit

(d) Decrease in liability and owner’s equity are recorded by debit

9. In which order does the Journal list

transactions?
(a) Chronological

(b) Decreasing
(c) Increasing

(d) Alphabetical

10. All of the following are true regarding

journal entries except?
(a) Journal entries show the effects of transactions

(b) Journal entries provide account balances

(c) The debited account titles are listed first

(d) Each journal entry should begin with a date

 
>> Read Journal Entry.

MCQs 11 To 20
 
11. Which of the following accounts would be
increased with a debit?
(a) Contributed Capital

(b) Retained Earnings

(c) Expenses

(d) Revenues

12. Which of the following account will be

credited in the books of XYZ Co. Ltd, if the
business purchased a vehicle though cheque?
(a) Vehicle account

(b) Cash account

(c) Business account

(d) Bank account

13. The abbreviations for debit and credit (Dr.

and Cr.) come from what language words?
(a) Latin, debere and credere

(b) Latin, debtor and creditor

(c) Greek, debere and credere

(d) Greek, debtor and creditor

14. Which one of the following is used to

record financial transactions in date wise
order?
(a) Account

(b) Voucher

(c) General Journal

(d) General Ledger

15. Accrued expenses are also called?

(a) Accrued liabilities

(b) Expenses incurred but not paid

(c) Both A & B

(d) None

16. Which one of the following is called book

of original entry?
(a) General Journal

(b) General Ledger

(c) Trial Balance

(d) Receipt and Payment Account

17. Which of the following account/s will be

affected under the rule of accrual accounting,
when furniture is purchased on cash?
(a) Only Cash Account

(b) Only Furniture Account

(c) Cash & Furniture Account

(d) Only Purchases Account

18. Purchased goods from Ahmed for cash

should be credited to?
(a) Account Payable _ Ahmed

(b) Cash A/c

(c) Purchases A/c

(d) Account Receivable _ Ahmed

19. Credit terms of 1/10, n/30 mean that?

(a) Payment in full is due 10 days after date of the invoice

(b) If the invoice is paid within 10 days of its date, a 1% discount may be taken;
otherwise the total amount is due in 20 days

(c) Payment in full is due 30 days after date of the invoice

d) If the invoice is paid within 10 days of its date, a 1% discount may be taken;
otherwise the total amount is due in 30 days

20. Commission received is an example of?

(a) Real A/c

(b) Personal A/c

(c) Nominal A/c

(d) None

1. The appropriate journal entry to record

equipment depreciation expense would consist
of a debit to Depreciation Expense and a credit
to which of the following accounts?
(a) Owner equity

(b) Cash

(c) Retained earnings

(d) Accumulated depreciation: Equipment

2. Payment for a two year insurance policy

requires a debit to at the time of adjustments?
(a) Insurance Expenses

(b) Prepaid Insurance

(c) Cash

(d) Creditors
3. The entry to recognize depreciation
expense?
(a) Is closing entry

(b) Is Adjusting entry

(c) Is Cash expense

(d) Non of before

4. Accrued revenue is also called?

(a) Not earned revenue

(b) Revenue earned and received

(c) Receivable Revenue

(d) None

5. Adjusting entries are required?

(a) When the firm uses the Cash-basis of accounting

(b) For discrete Transactions

(c) When the firm uses the Accrual-basis of accounting

(d) Both a and c

6. Depreciation is?
(a) The amount spent to buy a fixed asset

(b) The salvage value of a fixed asset

(c) The amount of money spent in replacing assets

(d) The part of the cost of the fixed asset consumed during its period
7. The amount reserved for doubtful debts is
called?
(a) Bad debts

(b) Doubtful receivables

(c) Provision for bad debts

(d) Reserve for receivables

8. Unearned revenue of Rs. 2,000 now earned.

The entry is?
(a) Cash to revenue

(b) Unearned revenue to revenue

(c) Revenue to Unearned revenue

(d) None of above

9. Accounting Period can be?

(a) Weekly

(b) Monthly

(c) Yearly

(d) All of before

10. For purposes of measuring business

income, the life of a business is?
(a) Divided into specific points in time

(b) Divided into irregular cycles

(c) Divided into discrete accounting periods

(d) Considered to be a continuous cycle
 
>>> Read Adjusted Trial Balance explanation, format and problems.

MCQs 11 To 20
 
11. Nabeel Law Associates began business in
November with office stationery of Rs. 160.
During the month, the firm purchased
stationery of Rs. 290. On November 30,
stationery of Rs. 210 was on hand. Stationery
expense for period is?
(a) Rs. 210

(b) Rs. 240

(c) Rs. 290

(d) Rs. 450

12. When a concert promoting company

collects cash for tickets sales two months in
advance of the show date, whish of the
following account is recorded?
(a) Accrued expense

(b) Accrued revenue

(c) Deferred expense

(d) Unearned revenue

13. At the end of the fiscal year, Accounts
Receivable has a balance of Rs. 100,000 and
Allowance for Doubtful Accounts has a balance
of Rs. 7,000. The expected net realizable value
of the accounts receivable is?
(a) Rs. 100,000

(b) Rs. 93,000

(c) Rs. 107,000

(d) Rs. 7,000

14. Adjusting entries includes?

(a) Cash sales

(b) Cash purchases

(c) Inventory adjustments

(d) None

15. The adjusting entry to record unpaid

salaries is?
(a) Salary Expense (Dr) & Cash (Cr)

(b) Salary Payable (Dr) & Salary Payable (Cr)

(c) Salary Expense (Dr) & Salary Payable (Cr)

(d) Salary Payable (Dr) & Cash (Cr)

16. The receipt of Rs. 5,000 of unearned
revenue would be recorded by debiting Cash
and what account should be credited?
(a) Cash

(b) Revenue

(c) Unexpired Revenue

(d) Prepaid Revenue

17. The balance on the unearned rent account

for Jones Co. as of 12/31 is Rs. 1,200. If Jones
Co. failed to record the adjusting entry for Rs.
600 of rent earned during December, the
effect on the balance sheet and income
statement for December is?
(a) Liabilities overstated Rs. 600; net income overstated Rs. 600

(b) Liabilities overstated Rs. 600; net income understated Rs. 600

(c) Assets understated Rs. 600; net income overstated Rs. 600

(d) Liabilities understated Rs. 600; net income understated Rs. 600

18. Expense and income must be matched in

the?
(a) Same year

(b) Previous year

(c) Next year

(d) All of before

19. Which of the following is a non-cash
expense that reduces the value of intangible
fixed asset with the passage of time?
(a) Depreciation

(b) Amortization

(c) Depletion

(d) Appreciation

20. Accrued expenses are also called?

(a) Accrued liabilities

(b) Expenses already incurred but not yet paid

(c) Both a & b

(d) None