Quiz: Accounting Model and Asset Measurement — 58 questions

1. What does accounting primarily do as an information system?

A. Records business activities and transactions as figures in a database

B. Approves customer contracts before products are delivered

C. Forecasts future sales without recording completed transactions

D. Sets employee performance targets using operational dashboards

Answer: (A)

Explanation

Accounting functions as an information system by converting business activities and transactions into numerical records stored in a database. Operational dashboards may support management, but they do not define accounting’s core information-system role.

2. A manager wants to measure the revenue generated by one specific product, while investors want the company’s overall profit. Which accounting approach best fits each need?

A. Financial accounting for both results because it produces published information

B. Financial accounting for the product result and management accounting for overall profit

C. Management accounting for both results because it serves detailed analysis

D. Management accounting for the product result and financial accounting for overall profit

Answer: (D)

Explanation

Management accounting uses highly detailed data to determine partial results such as revenue by product, whereas financial accounting uses less detailed data to determine comprehensive results such as profit. Financial accounting is therefore not the best fit for the product-level analysis.

3. Why must financial accounting information be disclosed outside the company?

A. Internal users require published reports to calculate every operating result

B. External users lack direct access to company data and need it for decisions

C. Internal users cannot interpret accounting records without public disclosure

D. External users prepare the company’s transactions before they are recorded

Answer: (B)

Explanation

External users need disclosed information because they cannot directly access the company’s underlying data and may use it when deciding whether to buy a business or grant credit. Internal users generally already have access to company information, so public disclosure is not primarily for them.

4. How does financial accounting help reduce information asymmetry between shareholders and management?

A. It gives shareholders information for assessing the quality of the CEO’s management

B. It allows shareholders to control daily transactions through the accounting database

C. It replaces creditors’ evaluations with a company-wide operating budget

D. It gives management exclusive authority to approve shareholders’ investment decisions

Answer: (A)

Explanation

Financial accounting reduces information asymmetry by informing shareholders about the quality of the CEO’s management and by supporting creditors’ decisions. It does not give shareholders direct control over daily operations or replace creditor analysis.

5. What role does net income often play in financial and legal decisions?

A. It determines employee salaries and serves as the final measure of inventory quantities

B. It often provides the legal basis for dividends and a starting point for profit-tax calculations

C. It replaces reported revenue when lenders assess a company’s creditworthiness

D. It establishes supplier prices and determines the amount of customer payments

Answer: (B)

Explanation

Net income is often used as the legal basis for calculating dividends and, in many countries, as the starting point for determining tax payable on profits. It is not the direct legal measure for setting salaries, inventory, or supplier prices.

6. What does the abbreviation GAAP refer to in financial accounting?

A. Government-Approved Analysis Policies

B. Global Auditing and Assurance Procedures

C. Generally Accepted Accounting Principles

D. Generalized Annual Accounting Publications

Answer: (C)

Explanation

GAAP stands for Generally Accepted Accounting Principles and refers to rules regulating financial accounting and financial information. IFRS is a separate term referring to International Financial Reporting Standards, not the expansion of GAAP.

7. Which statement correctly distinguishes national GAAP from IFRS?

A. National GAAPs form one global system, whereas IFRS applies within a single country

B. National GAAPs may differ by country, whereas IFRS is intended as an international framework

C. National GAAPs report tax payments, whereas IFRS records internal management results

D. National GAAPs govern auditing practices, whereas IFRS governs employee compensation

Answer: (B)

Explanation

Countries can apply different national GAAPs, such as French, German, or U.S. GAAP, while IFRS was created to provide international financial reporting standards. IFRS is therefore not a framework limited to one country.

8. Which combination best describes high-quality financial information?

A. It is flexible between companies, based on management preference, and reported irregularly

B. It is focused on internal decisions, unaffected by accounting rules, and difficult to compare

C. It is confidential, highly detailed, and prepared without independent verification

D. It is comparable, sufficiently objective, and reliable through external auditor verification

Answer: (D)

Explanation

High-quality financial information should support comparison over time and between companies, be sufficiently objective, and gain reliability through external verification by an auditor. Confidentiality and management preference do not provide the required comparability or independent verification.

9. Which set contains the main financial statements used to report a company’s financial information?

A. Cash flow statement, inventory list, bank statement, and budget

B. Balance sheet, budget, tax return, and audit report

C. Balance sheet, income statement, cash flow statement, and notes

D. Income statement, sales forecast, payroll register, and notes

Answer: (C)

Explanation

The main financial statements are the balance sheet, income statement, cash flow statement, and notes. A budget, tax return, or operational register may be useful, but it is not one of the main financial statements listed here.

10. Which report presents a company’s financial position at a specific date, including its debt and how funds have been used?

A. The income statement

B. The cash flow statement

C. The notes to the accounts

D. The balance sheet

Answer: (D)

Explanation

The balance sheet reports financial position at a given date, including resources, financing, and debt. The income statement instead reports performance over a period, while the cash flow statement explains changes in cash.

11. A manager wants to determine whether a company generated a profit during the last financial year. Which statement should be examined?

A. The cash flow statement

B. The income statement

C. The notes to the accounts

D. The balance sheet

Answer: (B)

Explanation

The income statement measures performance over a period by showing the profit or loss generated. The balance sheet gives position at a particular date rather than performance across the year.

12. What is the key difference between individual and consolidated accounts?

A. Individual accounts cover one company, while consolidated accounts cover a group controlled by one parent

B. Individual accounts measure performance, while consolidated accounts measure financial position

C. Individual accounts report cash movements, while consolidated accounts report only long-term assets

D. Individual accounts cover a group, while consolidated accounts cover one company’s departments

Answer: (A)

Explanation

Individual accounts concern one company, whereas consolidated accounts combine companies controlled by the same parent into a group view. The other distinctions confuse reporting scope with the type of financial information presented.

13. What do assets represent on a company’s balance sheet?

A. The profit earned from selling goods and services during the year

B. The cash collected from customers and paid to suppliers during the year

C. The investments and other resources resulting from the use of financing

D. The shareholders’ contributions and lenders’ claims providing the financing

Answer: (C)

Explanation

Assets show how financing has been used and represent the company’s investments and other resources at a given time. Equity and liabilities describe the sources of that financing, not its use.

14. What does share capital represent on a company’s balance sheet?

A. Borrowed funds obtained from lenders and repayable under agreed terms

B. Profit retained from prior periods and transferred into current expenses

C. Funds invested by shareholders in exchange for shares and related shareholder rights

D. Cash generated from operations after paying suppliers and employees

Answer: (C)

Explanation

Share capital is shareholder financing exchanged for shares that provide voting rights and the possibility of dividends. Financial debt, by contrast, is borrowed financing that must be repaid.

15. A company has assets of $900,000 and equity of $350,000. What amount of liabilities must it report to satisfy the balance-sheet equation?

A. $550,000

B. $900,000

C. $1,250,000

D. $350,000

Answer: (A)

Explanation

The balance-sheet equation is $\text{Assets} = \text{Equity and liabilities}$, so liabilities equal $\text{Assets} - \text{Equity} = \$900{,}000 - \$350{,}000 = \$550{,}000$. Adding equity and liabilities instead would exceed the reported assets.

16. Which formula correctly defines net income?

A. $\text{Net income} = \text{Revenues} + \text{Expenses}$

B. $\text{Net income} = \text{Revenues} - \text{Expenses}$

C. $\text{Net income} = \text{Expenses} - \text{Revenues}$

D. $\text{Net income} = \text{Cash receipts} - \text{Cash payments}$

Answer: (B)

Explanation

Net income is calculated by deducting expenses from revenues, expressed as $\text{Net income} = \text{Revenues} - \text{Expenses}$. Cash receipts and payments belong to cash-flow analysis and may differ from revenues and expenses.

17. In the Red Coat example, what was the reported net income?

A. €60,000

B. €90,000

C. €120,000

D. €150,000

Answer: (A)

Explanation

The Red Coat example reported net income of €60,000 after accounting for materials and services, labour, depreciation, interest, and income tax. The other amounts do not match the stated final result.

18. Why can cash differ from net income during an accounting period?

A. Some sales and purchases are unpaid, while depreciation affects income without a cash outflow

B. Cash changes only through sales, while net income changes through purchases and depreciation

C. Cash and income measure the same transactions but use different presentation formats

D. Net income includes financing receipts, whereas cash excludes payments for operating activities

Answer: (A)

Explanation

Cash and net income differ because transactions may be unpaid, some cash movements do not affect income, and depreciation lowers income without creating a cash outflow. Treating the two measures as identical overlooks accruals and non-cash expenses.

19. What does the cash flow statement explain?

A. The difference between revenues and expenses through production, sales, and tax activities

B. The change from opening assets to closing equity through shareholder and lender claims

C. The change from initial cash to ending cash through operating, investing, and financing flows

D. The amount of profit available for dividends after recording depreciation and interest

Answer: (C)

Explanation

The cash flow statement explains how initial cash changed into ending cash through operating, investing, and financing cash flows. Profit measurement belongs primarily to the income statement, not the cash flow statement.

20. What does double-entry accounting record for each business transaction?

A. Both the financing method and the transaction’s economic nature

B. Cash receipts and payments without recording the underlying activity

C. The transaction date and the names of everyone involved

D. Personal bank movements and the owner’s private withdrawals

Answer: (A)

Explanation

Double-entry accounting uses at least two accounts to show both how a transaction is financed or paid for and what economic activity occurred. Recording personal bank movements describes the documented confusion with single-entry accounting, not double-entry accounting.

21. Which transaction affects cash and debt without affecting net income?

A. Paying an employee for services already received

B. Receiving proceeds from a bank loan

C. Recognizing revenue from a completed cash sale

D. Selling goods to a customer on credit

Answer: (B)

Explanation

A loan increases cash and debt while leaving income unchanged because it is financing rather than revenue. A credit sale, in contrast, affects revenue and a balance-sheet item such as receivables.

22. Which combination describes a type 3 balance-sheet transaction?

A. A decrease in an asset and a decrease in a liability

B. An increase in one asset and a decrease in another asset

C. An increase in an asset and an increase in a liability

D. An increase in one liability and a decrease in another liability

Answer: (C)

Explanation

Type 3 transactions increase an asset and a liability, such as acquiring inventory on credit. Increasing one asset while decreasing another is type 1, not type 3.

23. When goods are sold on credit, which pair of changes represents the revenue side of the transaction?

A. Inventory increases and accounts payable increases

B. Expense increases and accounts payable increases

C. Cash decreases and inventory decreases

D. Revenue increases and accounts receivable increases

Answer: (D)

Explanation

A credit sale increases revenue and the receivable owed by the customer, which is the type 5 pattern. Increasing inventory and accounts payable describes purchasing goods on credit before they are sold.

24. What is the main purpose of a T-account?

A. To display account movements and explain the ending balance

B. To calculate tax rates from the company’s annual revenue

C. To replace financial statements with a chronological cash record

D. To list customers according to the dates they made payments

Answer: (A)

Explanation

A T-account presents the movements affecting a financial-statement item and shows how those movements produce its ending balance. It is not a customer register or a substitute for the financial statements.

25. Where is an increase recorded in an asset account and in a liability account?

A. On the right for the asset and on the left for the liability

B. On the right for both the asset and the liability

C. On the left for the asset and on the right for the liability

D. On the left for both the asset and the liability

Answer: (C)

Explanation

Asset increases are recorded on the left, whereas liability increases are recorded on the right. Reversing these positions would conflict with the normal balance rules for the two account types.

26. Where are increases in revenue and expenses recorded in T-accounts?

A. Both revenue and expense increases on the left

B. Both revenue and expense increases on the right

C. Revenue increases on the left and expense increases on the right

D. Revenue increases on the right and expense increases on the left

Answer: (D)

Explanation

Revenue increases are placed on the right side, while expense increases are placed on the left side of T-accounts. Treating both categories as having the same side would ignore their opposite account behavior.

27. What must a double-entry bookkeeping entry contain to preserve accounting balance?

A. Equal amounts on the left and right sides of the affected accounts

B. A larger amount on the asset side than on the liability side

C. Equal numbers of accounts regardless of the amounts recorded

D. An entry in one account followed by a later adjustment

Answer: (A)

Explanation

Double-entry bookkeeping requires the total amount recorded on the left to equal the total amount recorded on the right. A one-sided entry or unequal amounts would fail to preserve the accounting balance.

28. How should the credit sale of 1,000 tablets be recorded when each tablet costs €120 and sells for €300?

A. Increase cash and sales by €300,000, and increase inventory while recording €120,000 of cost

B. Increase receivables and sales by €300,000, and decrease inventory while recording €120,000 of cost

C. Increase inventory and accounts payable by €132,000, with no revenue or cost recorded

D. Increase receivables and sales by €120,000, and decrease inventory by €300,000

Answer: (B)

Explanation

The sale creates €300,000 of receivables and sales revenue, while the tablets’ €120,000 cost reduces inventory and is recognized as cost of tablets sold. The €132,000 inventory purchase amount relates to buying 1,100 tablets, not selling 1,000.

29. What gross margin results from selling the tablets for €300,000 when their cost is €120,000?

A. €120,000, which equals 40% of sales revenue

B. €180,000, which equals 60% of sales revenue

C. €72,000, which equals 24% of sales revenue

D. €300,000, which equals the full invoiced amount

Answer: (B)

Explanation

Gross margin is sales revenue minus the cost of tablets sold, so €300,000 minus €120,000 equals €180,000, or 60% of revenue. The €120,000 figure is the cost, not the margin.

30. Which entry correctly describes collecting €270,000 from customers and paying €118,000 to suppliers?

A. Cash decreases and receivables increase; cash increases and payables increase

B. Inventory decreases by €270,000; revenue increases by €118,000

C. Cash increases and receivables decrease; cash decreases and payables decrease

D. Revenue increases by €270,000; expense decreases by €118,000

Answer: (C)

Explanation

Collection converts receivables into cash, while payment to suppliers reduces both cash and accounts payable. These settlement transactions do not change net income because the related revenue or expense was recognized separately.

31. What happens to account balances at the end of an accounting period?

A. They are recorded as cash flows before revenues and expenses are compared

B. They remain in T-accounts until the following accounting period begins

C. They are transferred directly to equity without passing through financial statements

D. They are transferred to the balance sheet and income statement after determining net income

Answer: (D)

Explanation

Period-end balances are used to prepare the balance sheet and income statement, with expenses deducted from revenues to determine net income before it is carried to the balance sheet. T-accounts are intermediate records, not the final presentation of the balances.

32. A company makes a €3,000 bank transfer consisting of €2,000 loan repayment and €1,000 interest. What is the effect on net income?

A. Net income decreases by €1,000 because the interest is an expense

B. Net income decreases by €2,000 because debt repayment reduces reported profit

C. Net income is unchanged because the transfer settles an existing obligation

D. Net income decreases by €3,000 because the entire transfer is an expense

Answer: (A)

Explanation

The €1,000 interest payment is an expense that reduces net income, while the €2,000 loan repayment reduces financial debt without affecting profit. Treating the full transfer as an expense confuses debt repayment with interest expense.

33. Which characteristic distinguishes a non-current asset from a current asset?

A. It is expected to provide benefits over a period exceeding 12 months

B. It is expected to be converted into cash during the next operating cycle

C. It is acquired through a transaction involving a physical supplier

D. It is recorded as an expense when the related payment is made

Answer: (A)

Explanation

A non-current asset is a controlled resource expected to generate future economic benefits and to have a useful life longer than 12 months. Conversion into cash during the next operating cycle is associated with current assets rather than non-current assets.

34. Which classification lists the three categories of non-current assets?

A. Tangible assets, operating expenses, and internally generated assets

B. Intangible assets, tangible assets, and financial non-current assets

C. Inventory assets, trade receivables, and financial non-current assets

D. Intangible assets, cash equivalents, and short-term financial investments

Answer: (B)

Explanation

Non-current assets are classified as intangible, tangible, or financial non-current assets. Inventory, receivables, cash equivalents, and short-term investments are generally current-asset categories rather than the three listed groups.

35. Why is acquired training expenditure generally recorded as an expense rather than as an intangible asset?

A. Training costs are treated as tangible assets because they involve employee activity

B. The company does not control training and human capital as identifiable resources

C. The expenditure is capitalized only after the trained employees leave the company

D. Training expenditure cannot create any economic benefit for the company

Answer: (B)

Explanation

Acquired intangible assets are recognized when they meet the asset criteria, but training and human capital are expensed because the company does not control them as assets. Training may generate benefits, but that benefit alone does not establish the required control.

36. Which item is excluded from the initial value of a non-current asset?

A. Training costs incurred to prepare employees to use the asset

B. Estimated costs of decommissioning the asset at the end of its use

C. The purchase price after applicable discounts have been deducted

D. Directly attributable acquisition costs needed to bring the asset into operation

Answer: (A)

Explanation

The initial value includes the discounted purchase price, directly attributable acquisition costs, estimated decommissioning costs, and sometimes financing costs, but it excludes training costs. Training prepares employees rather than forming part of the asset's recognized cost.

37. What is the main distinction between depreciation and impairment?

A. Depreciation applies to financial assets, whereas impairment applies to physical assets with limited lives

B. Depreciation is a temporary external loss, whereas impairment is an irreversible loss from routine use

C. Depreciation changes with market prices, whereas impairment follows a fixed schedule over useful life

D. Depreciation is an irreversible loss from use, whereas impairment may be reversible after an external event

Answer: (D)

Explanation

Depreciation reflects the irreversible consumption or use of an asset, while impairment reflects a potentially temporary and reversible loss caused by an external event. The reverse treatment would incorrectly exchange the defining features of the two concepts.

38. Which asset is depreciable under the definition of a depreciable asset?

A. A financial investment held without a contractual maturity or consumption pattern

B. A machine whose useful life is limited by physical wear and technological obsolescence

C. A trademark protected indefinitely under an arrangement with no foreseeable limit

D. A parcel of land whose useful life cannot be estimated because it has no defined endpoint

Answer: (B)

Explanation

Depreciable assets have limited useful lives because of wear, obsolescence, or the end of legal or contractual protection. Land and assets with unlimited or unestimable useful lives do not meet that defining condition.

39. A machine has a depreciation base of €90,000 and a useful life of six years. Under straight-line depreciation, what is its annual depreciation?

A. €84,000, calculated by subtracting one-sixth of the base from the base

B. €18,000, calculated as the depreciation base multiplied by one-fifth

C. €540,000, calculated as the depreciation base multiplied by six years

D. €15,000, calculated as the depreciation base multiplied by one-sixth

Answer: (D)

Explanation

The straight-line rate is $1 \div 6$, or approximately 16.67%, so annual depreciation is $€90{,}000 \times \frac{1}{6} = €15{,}000$. Multiplying by the useful life produces the total depreciable base, not the annual charge.

40. When should an impairment loss be recognized for an asset?

A. When its depreciation expense becomes larger than the asset's original purchase price

B. When its book value exceeds the higher of its net sales price and its value in use

C. When its market value rises above the carrying amount after an external event

D. When its book value falls below the lower of its net sales price and its value in use

Answer: (B)

Explanation

The impairment test compares book value with the higher of estimated net sales price and value in use, called the recoverable amount, and recognizes the excess of book value over that amount. Using the lower estimate would make the test more severe than the stated rule.

41. How does the historical-cost basis differ from the fair-value basis when valuing a non-current asset?

A. Historical cost uses expected selling price, while fair value uses accumulated depreciation.

B. Historical cost uses market value, while fair value uses original cost less losses in value.

C. Historical cost uses original cost less losses in value, while fair value uses market value.

D. Historical cost uses replacement cost, while fair value uses the original purchase price.

Answer: (C)

Explanation

Historical cost starts with the asset’s original cost and adjusts it for losses in value, whereas fair value reflects market value. Confusing the two bases reverses the valuation method assigned to each approach.

42. A company sells a non-current asset for more than its book value; how should the difference be recorded?

A. As an increase in the asset’s historical cost.

B. As a capital gain in the income statement.

C. As a capital loss in the income statement.

D. As a reduction in the company’s accounts receivable.

Answer: (B)

Explanation

When the sales price exceeds the asset’s book value, the excess represents a capital gain. A capital loss would arise when the sales price falls below book value, not when it exceeds it.

43. When should a probable risk or unrealized loss be recognized under the prudence principle?

A. After the risk has been eliminated and its final amount is known.

B. In the period when the related cash payment is eventually made.

C. When management decides that recognizing it would improve reported income.

D. In the period when the risk appears, through a provision or impairment expense.

Answer: (D)

Explanation

Prudence requires probable risks and unrealized losses to be recognized in the period in which they arise, using a provision or impairment expense. Waiting for payment would delay recognition beyond the period connected with the risk.

44. An inventory item cost €50,000 and has a net realizable value of €44,000; at what amount should it be measured?

A. €94,000, because cost and net realizable value are added for measurement.

B. €6,000, because the difference represents the inventory’s carrying amount.

C. €50,000, because inventory remains recorded at cost until it is sold.

D. €44,000, because inventory is measured at the lower of cost and net realizable value.

Answer: (D)

Explanation

Inventory is written down when its net realizable value is below cost, so this item is measured at €44,000. The €6,000 difference is the write-down, not the inventory’s resulting carrying amount.

45. How should the risk of default on accounts receivable be estimated at the closing date?

A. By applying an unsupported percentage to all receivables without reviewing the evidence.

B. By waiting until the following year to determine which balances remain unpaid.

C. Client by client from available information or systematically from reliable historical data.

D. By assessing only clients that have already failed to make a payment.

Answer: (C)

Explanation

The risk must be estimated using client-specific information or reliable historical data applied systematically. An unsupported general percentage does not provide a justified basis for recognizing doubtful-client impairments.

46. A client owes €200,000, and a 70% default is predicted; what impairment loss should be recorded?

A. €140,000 as an expense with a corresponding reduction in accounts receivable.

B. €70,000 as revenue because the expected collection represents a future gain.

C. €200,000 as a cash reduction because the predicted default reduces available funds.

D. €60,000 as an expense with a corresponding increase in accounts receivable.

Answer: (A)

Explanation

A 70% expected default on €200,000 equals $200{,}000 \times 0.70 = €140{,}000$, recorded as an expense and a reduction in accounts receivable. The impairment does not represent a cash movement, so cash should not be reduced at this stage.

47. After a €140,000 impairment, a doubtful client pays €20,000, and the remaining balance is written off; what is the effect of the further write-off?

A. It records a €140,000 cash expense and leaves the receivable unchanged.

B. It records a €40,000 bad-debt expense and reduces accounts receivable to zero.

C. It records a €40,000 gain and increases the closing accounts receivable balance.

D. It records a €20,000 reversal of impairment and increases accounts receivable.

Answer: (B)

Explanation

The €20,000 payment leaves €40,000 of the original €60,000 expected collection unresolved, so that amount is written off and reduces N+1 net income. The write-off eliminates the remaining receivable rather than increasing it or creating a gain.

48. A doubtful client later pays the full €200,000 after a €140,000 impairment was recorded; what accounting result follows?

A. Cash increases by €60,000, the receivable remains, and €140,000 is recorded as a new expense.

B. Cash increases by €140,000, the receivable remains, and €60,000 is recognized as income.

C. Cash increases by €200,000, the receivable disappears, and €140,000 of impairment is reversed as income.

D. Cash decreases by €200,000, the receivable disappears, and the impairment remains unchanged.

Answer: (C)

Explanation

Full payment removes the receivable and increases cash by €200,000, while the previously recognized €140,000 impairment is reversed into income. The payment does not leave the receivable outstanding or preserve the impairment after the risk has disappeared.

49. Which combination of conditions is required to recognize a provision at the closing date?

A. A past internal decision, a remote cash outflow, and an amount estimated from management preference.

B. A third-party obligation from a past event, a highly probable cash outflow, and a reliably estimable amount.

C. A management intention, a possible future event, a potential cash outflow, and an approximate amount.

D. A current asset, a probable future benefit, an uncertain outflow, and an amount based on market value.

Answer: (B)

Explanation

Provision recognition requires an existing obligation toward a third party caused by a past event, a highly probable cash outflow, and a reliably estimable amount. A management intention or a merely possible outflow does not satisfy these recognition conditions.

50. In practice, what probability of cash outflow permits recognition of a provision?

A. A probability below 50%, provided the obligation relates to a past event.

B. A probability above 50%, provided the other recognition conditions are satisfied.

C. A probability at or below 50%, provided management expects a material effect.

D. Any probability level, provided the amount can be estimated reliably.

Answer: (B)

Explanation

A provision is recorded in practice when the probability of cash outflow exceeds 50%, along with the other required conditions. A probability at or below 50% does not meet this practical threshold, even if the amount can be estimated.

51. When should a manufacturer recognize a provision for its two-year product warranty?

A. When historical data makes the expected repairs and costs reasonably estimable

B. When management announces a possible investment in new production equipment

C. When the warranty period ends and all customers submit repair claims

D. When the manufacturer receives an invoice for each individual repair

Answer: (A)

Explanation

A warranty provision is recognized because previous sales create an expected repair obligation whose amount can be estimated from historical statistics. A future voluntary investment does not arise from an existing obligation to customers and therefore does not create the same provision.

52. A fire destroys a warehouse, and the company intends to rebuild it without having a commitment to a third party. What accounting treatment is appropriate?

A. Defer recognition until construction begins and invoices are received

B. Record an impairment of €20,000 that reduces the warehouse’s book value to zero

C. Record a provision for the full estimated cost of rebuilding the warehouse

D. Recognize a liability because management has approved the rebuilding plan

Answer: (B)

Explanation

An intention to rebuild does not create a present commitment to a third party, so no provision is recorded; the destroyed warehouse is impaired by €20,000 to zero. A management plan by itself does not establish the liability required for provision recognition.

53. How is a provision presented when it is recognized in the financial statements?

A. As revenue in the income statement and an asset on the balance sheet

B. As an expense in the income statement and a liability on the balance sheet

C. As a deferred tax item in the income statement and inventory on the balance sheet

D. As an equity reduction in the income statement and a cash balance on the balance sheet

Answer: (B)

Explanation

Recognizing a provision records an expense in the income statement and a liability on the balance sheet. Its liability classification is current when settlement is expected within one year and non-current when settlement is expected later.

54. A company recognizes a €40,000 provision in year N and settles the obligation for €30,000 in N+1; what is recorded in N+1?

A. A €40,000 cash outflow and no effect on net income because the provision was recognized earlier

B. A €30,000 cash outflow and a €10,000 increase in net income from reversing the unused amount

C. A €10,000 cash inflow and a €30,000 decrease in net income from revising the obligation

D. A €30,000 cash outflow and a €40,000 expense because the original estimate remains unchanged

Answer: (B)

Explanation

Settlement produces a €30,000 cash outflow, while reversing the unused €10,000 provision increases N+1 net income. The original €40,000 estimate does not require the company to pay the unneeded portion.

55. What does the cut-off convention require when recording revenues and expenses?

A. Record them when cash is received or paid, regardless of when the transaction is generated

B. Record them when invoices are issued, even if the underlying activity occurs later

C. Record them in the period when they are generated and exclude amounts generated in other periods

D. Record them in the period when management expects the related transaction to be completed

Answer: (C)

Explanation

The cut-off convention assigns revenues and expenses to the period in which they are generated. Invoicing and cash timing can occur in a different period and therefore do not determine recognition under this convention.

56. A company delivers goods in December but invoices the customer in January; in which period should it record the sale?

A. In the period when the company closes its annual budget, because estimates control timing

B. In the period when the customer pays, because cash confirms the transaction

C. In December, because recognition follows the delivery of the goods

D. In January, because recognition follows the date on the customer invoice

Answer: (C)

Explanation

A sale of goods is recorded when delivery occurs, so the December delivery determines the accounting period. The January invoice date does not shift recognition into the following period.

57. When should revenue from a service sale be recognized?

A. When the customer requests a quotation for the service

B. When the service has been provided to the customer

C. When the customer deposits cash before the service begins

D. When the supplier sends an invoice before performing the service

Answer: (B)

Explanation

Service revenue is recognized when the service has been provided, because that is when the underlying activity is generated. A quotation, advance invoice, or deposit can precede performance and does not by itself establish earned revenue.

58. Speedfly receives €100,000 in December N for flights that will be provided in January and February N+1; how should the amount be treated in N?

A. Exclude it from N revenue and recognize a balance-sheet liability until the flights are provided

B. Recognize it as an N expense because the transportation service remains outstanding

C. Record it as N revenue because the tickets were issued before the year-end

D. Include it in N revenue because the customer has already paid the full amount

Answer: (A)

Explanation

The flights will be provided in N+1, so the €100,000 is excluded from N revenue and held as a balance-sheet liability until transportation occurs. Receiving cash does not make the related service revenue earned in N.