AFR

Accounting (AFR)– Question Pool

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1
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Answers
Question
Some people seem to like Breaking Bad, others like Prison Break. What is the percentage of people that
watch TV?
2
A. The Walking Dead
B. Depends on the year
C. All of them
D. Answer D because it is the best answer
Answer: C
Introduction question Question topic
The question
Difficulty
Answers
Correct
Answer

Fundamentals of Financial Accounting (FFA)
3

Answers
Question
Which of the following best describes Equity?
4
A. Economic obligations to suppliers that the company must pay at a future date
B. Claims against assets by creditors
C. Future economic benefits to which a company is entitled
D. Generally consists of retained earnings and paid-in capital
Answer: D
1. Nature of Accounts – Equity

1E. Nature Of Accounts – Equity
Answers
A. Economic obligations to suppliers that the company must pay at a future date
B. Claims against assets by creditors
C. Future economic benefits to which a company is entitled
D. Generally consists out of retained earnings and paid-in capital
5
Solution
A. Incorrect, obligations to suppliers are liabilities
B. Incorrect, claims by creditors are liabilities
C. Incorrect, these are assets
D. Correct

Answers
Question
The nature of an asset is best described as:
6
A. An economic resource that’s expected to benefit future operations
B. An economic resource with physical form that’s valued at cost in the accounting records
C. An economic resource owned by a business that has a ready market value
D. An economic resource representing cash or right to receive cash in the future
Answer: A
2. Nature Of Accounts – Assets

2E. Nature Of Accounts – Assets
Questions
A. An economic resource that’s expected to benefit future operations
B. An economic resource with physical form that’s valued at cost in the accounting records
C. An economic resource owned by a business that has a ready market value
D. An economic resource representing cash or right to receive cash in the future
7
Solution
A. Correct (assets are resources with economic value that is excepted to benefit the party that owns it
in the future)
B. Does not have to come in the form of a physical asset (can also be current, fixed, financial, and
intangible)
C. No, that describes fair-value related objects under fair-value accounting
D. Assets provide us with future benefits either through use or through the generation of cash flows.
Therefore, it does not only represent cash or the right to receive cash in the near future.

Answers
Question
A liability is defined as:
8
A. An economic benefit, which will result in the exchange of economic benefit to another party as a
result of a future transaction
B. An obligation, which will result in the exchange of economic benefit to another party as a result of
a future transaction
C. An economic benefit, which will result in the exchange of economic benefit to another party as a
result of a past transaction
D. An obligation, which will result in the transfer of economic benefit to another party as a result of a
past transaction
Answer: D
3. Nature Of Accounts – Liabilites

3E. Nature Of Accounts – Liabilites
Questions
A. An economic benefit, which will result in the exchange of economic benefit to another party as a
result of a future transaction
B. An obligation, which will result in the exchange of economic benefit to another party as a result of
a future transaction
C. An economic benefit, which will result in the exchange of economic benefit to another party as a
result of a past transaction
D. An obligation, which will result in the transfer of economic benefit to another party as a result of a
past transaction
9
Solution
A. Both parts are incorrect, we owe someone something (not a benefit) and wrong timing (resulting
from the past, not future)
B. First part is correct, obligation due to us owing someone something but wrong timing (resulting
from the past, not future)
C. Liabilities indicate instances where we owe someone something (not a benefit) but the timing is
correct (resulting from the past)
D. Correct (liabilities are obligations that result in a transfer of benefits to another party resulting
from a transaction in the past with this other party)

Answers
Question
Prepaid expense is a(n) …
10
A. Equity account
B. Contra equity account
C. Contra asset account
D. Asset account
Answer: D
4. Balance Sheet Items

4E. Balance Sheet Items
Assets
Current assets (less than a year)
1. Cash and cash equivalents
2. Receivables (accounts, notes, other)
3. Inventory
4. Prepaid expenses
Other
Long term assets (equal/more than 1 year)
5. Net Property, Plant, and Equipment (PPE)
• Accumulated Depreciation
6. Net intangibles
• Accumulated Amortization
Other
11
Liabilities
Current liabilities (less than a year)
7. Payable (accounts, notes, other)
8. Short-term debt
9. Unearned revenue
Other
Long term liabilities (equal/more than 1 year)
10. Long term debt
Other
Equity
11. Share capital
12. Retained earnings
• Revenue
• Expenses
• Dividends
“Other” is indicated to show it is not the FULL balance sheet. However it is sufficient for now.

Term Definition (1/2)
Current Assets
1. All the cash available to the company (in cash or on bank accounts) as well as any short-term
investment that can be turned into cash in a matter of hours (stocks and bonds)
2. Cash that will be received in the foreseeable future; two main categories for this course
A. Accounts: from your clients
B. Notes: from your debtors (people you gave cash to)
C. Other: interest, tax, …
3. All the items you plan on reselling or that you plan on using in the manufacturing process (raw
materials)
4. Pre-payment you made for services you will receive in the future (can be for rent, for utilities,
insurance, …)
12
Long-Term Assets
5. All the buildings, land, machines, and equipment (tangibles) you use to run your business
(manufacturing or not). Compared to inventory, you do not plan on reselling (at least in the short
term)
• Accumulated depreciation (contra account!): the book value your PPE lost over time
6. All the non-tangibles you use to run your business (logo, brand name, customer list, …). You also
do not plan on re-selling those.
• Accumulated amortization (contra account!): exact same mechanism as depreciation but for
intangibles

Term Definition (2/2)
Current & Long-Term Liabilities
7. Cash that will be paid in the foreseeable future; two main categories for this course
A. Accounts: to your suppliers
B. Notes: to your creditors (people you received Cash from)
C. Other: interest, tax, dividend …
8. Cash that you will pay back to the bank in the foreseeable future
9. Cash you received in advanced from your client for a future service or product
10. Cash you will pay back in the long run (more than 1 year) to the bank
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Equity
11. Cash invested by the company owners in the company (also called common stock if company has
shareholders)
12. Profit kept over the year (not paid as dividend)
– Calculated as: new retained earnings = old retained earnings + revenue – expense – dividends
• Revenue (temporary account): amount recognized in exchange of service or product given
• Expenses (temporary account): amount recognized in exchange of service or product received
• Dividends (temporary and contra account): amount recognized as a dividend (paid from retained
earnings) to the owners

Answers
Question
The Retained Earnings of a company are calculated based on the following:
14
A. Net Income, Equity and Earnings
B. Revenue, Expenses and Dividends
C. Earnings and Share Repurchases
D. Investments and Share Capital
Answer: B
5. Balance Sheet Items

5E. Balance Sheet Items
Questions
The Retained Earnings of a company are calculated based on the following:
A. Net Income, Equity and Earnings
B. Revenue, Expenses and Dividends
C. Earnings and Share Repurchases
D. Investments and Share Capital
15
Solution
A. First part is correct (however, last term “Earnings” is just a different term for Net Income/Loss) and
Equity includes Retained Earnings and other equity accounts
B. Beginning Retained Earnings + Net Income (also known as Revenue – Expenses) – Dividends =
Ending Retained Earnings
C. First part is correct (see A) but Share Repurchases have to effect on the Retained Earnings
D. First part describes an Asset and last part refers to part of the overall equity

Answers
Question
Revenue, expenses, and dividends are all…
16
A. Equity accounts
B. Contra accounts
C. Permanent accounts
D. Temporary and equity accounts
Answer: D
6. Types of Accounts and Treatment

6E. Types of Accounts and Treatment
17
*Expenses is not a contra account, but simply behaves like one
Temporary Accounts (know R-E-D)*
• Need to be closed at the end of year to close the book
• Closing entries set the balance of those temporary accounts to 0 by re-
allocating their balances to permanent accounts
• E.g. Revenue, expenses, and dividends accounts
Permanent account
• Can stay open
Contra
Accounts &
Companion
Accounts
Contra Accounts (know T-A-D-A-A)
• Accounts that are always attached to a companion account
• The contra account always behaves in the opposite way than the companion
account (its balance is a negative balance for the companion account)
• E.g. Accumulated depreciation (contra) and PPE (companion)
• Treasury Shares, Acc. Dep., Dividends, Acc. Amor., Allowance for Doubtful Acc.
Receivables
Companion accounts
• Accounts that have a contra account whose sole purpose is to decrease the
value of the companion account
Temporary
Accounts &
Permanent
Accounts

Answers
Question
Which of the following account is not a permanent account?
18
A. Allowance for uncollectible receivables
B. Accumulated amortization
C. Prepaid expense
D. Dividends
Answer: D
7. Permanent Accounts

7E. Types of Accounts and Treatment
19
*Expenses is not a contra account, but simply behaves like one
Temporary Accounts (know R-E-D)*
• Need to be closed at the end of year to close the book
• Closing entries set the balance of those temporary accounts to 0 by re-
allocating their balances to permanent accounts
• E.g. Revenue, expenses, and dividends accounts
Permanent account
• Can stay open
Contra
Accounts &
Companion
Accounts
Contra Accounts (know T-A-D-A-A)
• Accounts that are always attached to a companion account
• The contra account always behaves in the opposite way than the companion
account (its balance is a negative balance for the companion account)
• E.g. Accumulated depreciation (contra) and PPE (companion)
• Treasury Shares, Acc. Dep., Dividends, Acc. Amor., Allowance for Doubtful Acc.
Receivables
Companion accounts
• Accounts that have a contra account whose sole purpose is to decrease the
value of the companion account
Temporary
Accounts &
Permanent
Accounts

Answers
Question
Which of the following statements is true?
20
A. A contra account is an account which, if increased, decreases the balance sheet class it is in
B. A contra account is an account that increases the related companion account
C. Expense is a contra account
D. A contra equity account is actually an asset account
Answer: A
8. Contra Accounts

8E. Contra Accounts
Questions
A. A contra account is an account which if increased decreases the balance sheet class it is in
B. Prepaid expense is a contra account
C. Expense is a contra account
D. A contra equity account is actually an asset account
21
Solution
A. Correct (e.g. dividend decreases equity)
B. The contra account sole purpose is to decrease the value of the companion account
C. No, it just behaves like one
D. Absolutely not

Answers
Question
Which of the following should appear in a company’s statement of changes in equity?
(1) Total comprehensive income for the year
(2) Amortization of capitalized development costs
(3) Surplus on revaluation of non-current assets
22
A. Statement (1), (2) and (3) are correct
B. Statement (2) and (3) are correct
C. Statement (1) and (3) are correct
D. Statement (1), (2) are correct
Answer: C
9. Statement Of Changes in Equity

9E. Statement Of Changes in Equity
Questions
Which of the following should appear in a company’s statement of changes in equity?
(1) Total comprehensive income for the year
(2) Amortization of capitalized development costs
(3) Surplus on revaluation of non-current assets
23
Solution
A statement of change in equity (also referred to as statement of retained earnings) is a business'
financial statement that measures the changes in owners’ equity throughout a specific accounting
period. It covers the following elements:
• Net profit or loss
• Dividend payments
• Equity withdrawals
• Effect of accounting policies changes (e.g., revaluations)
• Effects of prior accounting period corrections
• Accumulated reserves and retained earnings

Answers
Question
Which of the following statements are TRUE of limited liability companies?
(1) The company’s exposure to debts and liability is limited
(2) Financial statements must be produced
(3) Most common form of business in the economy
24
A. Statement (1), (2) and (3) are correct
B. Statement (1) and (3) are correct
C. Statement (2) and (3) are correct
D. Statement (2) is correct
Answer: D
10. Business Forms

10E. Business Forms
Questions
Which of the following statements are TRUE of limited liability companies?
(1) The company’s exposure to debts and liability is limited
(2) Financial statements must be produced
(3) Most common form of business in the economy
25
Solution
(1) The shareholder’s exposure is limited, not the company’s
(2) Limited liability companies (LLCs) must show financial statements to the IRS as part of their tax
returns and in the event of an audit or request
(3) Sole proprietorships are the most common business form

Answers
Question
Which of the following would not balance?
26
A. Assets – Liabilities = Equity
B. Non-current assets + Current assets – Equity = Liabilities
C. Non-current assets – Working capital = Liabilities + Equity
D. Assets – Current liabilities = Equity + Non-current liabilities
Answer: C
11. Accounting Equation

11E. Business Forms
Questions
A. Assets – Liabilities = Equity
B. Non-current assets + Current assets – Equity = Liabilities
C. Non-current assets – Working capital = Liabilities + Equity
D. Assets – Current liabilities = Equity + Non-current liabilities
27
Solution
Working capital is current assets minus current liabilities. For equation C to balance, working capital
should be added to the left hand side of the equation, not deducted.

Accrual Accounting
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Answers
Question
Success Formula decided to expand in a new city. To do so, the owners injected 25,000€ of their own
money to finance the future costs. Directly, after receiving the money, Success Formula used 10,000€ of
this amount to pay a rent for a year in their new office. Additionally, they used the extra balance and
purchase inventory. Which of the following transactions depicts any of the actions aforementioned?
29
A. Credit cash by 25,000 and debit share capital by 25,000
B. Debit cash by 10,000 and credit unearned revenue by 10,000
C. Credit cash by 10,000 and debit prepaid expense by 10,000
D. Debit cash by 15,000 and credit inventory by 15,000
Answer: C
1. Transactions

1E. Transactions
Question
Success Formula decided to expand in a new city. To do so, the owners injected 25,000€ of their own
money to finance the future costs. Directly, after receiving the money, Success Formula used 10,000€ of
this amount to pay a rent for a year in their new office. Additionally, they used the extra balance and
purchase inventory. Which of the following transactions depicts any of the actions aforementioned?
30
Solution
All transactions to date
1. Debit cash by €25,000 and credit share capital by €25,000
2. Credit cash by €10,000 and debit prepaid expense by €10,000
3. Credit cash by €15,000 and debit inventory by €15,000

Answers
Question
Considering the following actions, what is the total impact of assets?
1. Success Formula borrowed 20,000€ from the bank for two years.
2. Success Formula bought a machine for 5,000€ with cash.
3. Success Formula received 10,000€ in cash from its students for the crash courses (during the
sessions).
4. Success Formula prepaid rent for 1 year for 25,000€.
5. Success Formula pays back a bank loan of 30,000€ with cash.
6. Success Formula received 15,000€ that were previously due.
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A. Increase of €15,000
B. No change
C. Decrease of €15,000
D. Increase of €20,000
Answer: B
2. Transactions Impact on Assets

2E. Transactions Impact on Assets
Question
Considering the following actions, what is the total impact of assets?
1. Success Formula borrowed 20,000€ from the bank for two years.
2. Success Formula bought a machine for 5,000€ with cash.
3. Success Formula received 10,000€ in cash from its students for the crash courses (during the
sessions).
4. Success Formula prepaid rent for 1 year for 25,000€.
5. Success Formula pays back a bank loan of 30,000€ with cash.
6. Success Formula received 15,000€ that were previously due.
32
Solution
All impacts
1. Asset (cash) +20,000 and liability (long term debt) +20,000
2. Asset (PPE) +5,000 and asset (cash) –5,000
3. Asset (cash) +10,000 and equity (revenue) + 10,000
4. Asset (cash) -25,000 and asset (prepaid expenses) +25,000
5. Asset (cash) -30,000 and liabilities (note payable) -30,000
6. Asset (cash) +15,000 and asset (accounts receivable) -15,000
Net asset impact: 0

Answers
Question
Considering the following actions, which statement is true?
1. Success Formula performed 20,000€ worth of service but was not paid yet
2. Success Formula borrowed 15,000€
3. Success Formula paid interest for 2,000€ for money borrowed this year
4. Success Formula paid its supplier for 5,000€ for goods received last year
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A. The cash basis accounting based profit is – 13,000
B. The cash basis accounting based profit is – 5,000
C. The accrual accounting based profit is 20,000
D. The accrual accounting based profit is 18,000
Answer: D
3. Accrual Versus Cash Basis

3E. Accrual Versus Cash Basis
Question
Considering the following actions, which statements is true?
1. Success Formula performed 20,000€ worth of service but was not paid yet
2. Success Formula borrowed 15,000€
3. Success Formula paid interest for 2,000€ for money borrowed this year
4. Success Formula paid its supplier for 5,000€ for goods received last year
34
Solution
Accrual Cash basis
1 +20,000 0
2 0 0
3 -2,000 -2,000
4 0 -5,000
Total 18,000 -7,000

Answers
Question
Success Formula borrowed 12,000€ for a year (paying all the interest at once next year) from the bank
on the first of September. At the end of the December, they need to …
35
A. Do nothing if they use cash basis accounting
B. Account for the accrued interest if they use cash basis accounting
C. Do nothing if they use accrual accounting
D. Account for the deferred interest if they use accrual accounting
Answer: A
4. Accrual Versus Cash Basis

4E. Accrual Versus Cash Basis
Question
Success Formula borrowed 12,000€ for a year (paying all the interest at once next year) from the bank
on the first of September. At the end of the December, they need to …
A. Do nothing if they use cash basis accounting
B. Account for the accrued interest if they use cash basis accounting
C. Do nothing if they use accrual accounting
D. Account for the deferred interest if they use accrual accounting
36
Solution
A. Correct, no cash transferred at the end of the December, so nothing to do
B. You should account for the accrued interest (pay late) not deferred (pay first)
C. You should account for the accrued interest
D. Accrued not deferred

Answers
Question
Success Formula has 320,000€ of revenue, 120,000€ of expense, 30,000€ of accounts receivable, and no
dividend accounts. Which of the following entry is a correct one when Success Formula wants to close
its books at the end of the year?
37
A. Credit revenue by 320,000 and debit income summary by 320,000
B. Credit accounts receivable by 30,000 and debit cash by 30,000
C. Credit expense by 120,000 and debit income summary by 120,000
D. None of the above
Answer: C
5. Temporary Accounts

5E. Temporary Accounts
Question
Success Formula has 320,000€ of revenue, 120,000€ of expense, 30,000€ of accounts receivable, and no
dividend accounts. Which of the following entry is a correct one when Success Formula wants to close
its books at the end of the year?
A. Credit revenue by 320,000 and debit income summary by 320,000
B. Credit accounts receivable by 30,000 and debit cash by 30,000
C. Credit expense by 120,000 and debit income summary by 120,000
38
Solution
A. You should debit revenue and credit income summary
B. No need to close this account
C. Correct
D. Answer is C

Answers
Question
Success Formula gave 12,000€ to one of its students on the first of November. The student promised to
pay back in 12 months with a yearly interest of 12% (paid in one year). On the last day of December,
Success Formula would like to actualize its book, what should they do?
39
A. Debit cash by 2,000 and credit interest revenue by 2,000
B. Debit interests receivable by 240 and credit interest revenue by 240
C. Debit interests receivable by 12,000 and credit interest revenue by 12,000
D. Nothing since there was no cash transfer
Answer: B
6. Adjusting Entries

6E. Adjusting Entries
Question
Success Formula gave 12,000€ to one of its students on the first of November. The student promised to
pay back in 12 months with a yearly interest of 12% (paid in one year). On the last day of December,
Success Formula would like to actualize its book, what should they do?
40
Solution
The full situation is
1. Credit cash by €12,000 and debit note receivable by €12,000
2. Debit interests receivable by €240 (2 months out of 12) and credit interest revenue by €240
3. Debit cash by €13,440, credit interests receivable by €240, credit note receivable by €12,000, and
credit interest revenue by €1200

Answers
Question
Success Formula received 2,000€ from its students as a payment in advance for its exam training. After
the exam training what should they do to actualize its book?
41
A. Debit prepaid expense by 2,000 and credit expense by 2,000
B. Debit unearned revenue by 2,000 and credit cash by 2,000
C. Debit unearned revenue by 2,000 and credit revenue by 2,000
D. Debit cash by 2,000 and credit revenue by 2,000
Answer: C
7. Adjusting Entries

7E. Adjusting Entries
Question
Success Formula received 2,000€ from its students as a payment in advance for its exam training. After
the exam training what should they do to actualize its book?
42
Solution
The full situation is
1. Debit cash by 2,000 and credit unearned revenue by 2,000
2. Debit unearned revenue by 2,000 and credit revenue by 2,000

Answers
Question
Which of the following cases is an example of an accrual?
43
A. You bought a car, and you depreciate it by 5,000 every year
B. You prepaid Success Formula for the exam training
C. You paid your gym membership for the coming year
D. You are paying your credit card bill
Answer: D
8. Deferrals and Accruals

8E. Deferrals and Accruals
Question
Which of the following cases is an example of an accrual?
A. You bought a car, and you depreciate it by 5,000 every years
B. You prepaid Success Formula for the exam training
C. You paid your gym membership for the coming year
D. You are paying your credit card bill
44
Solution
A. It’s depreciation (special kind of deferral)
B. It’s a deferral
C. It’s a deferral
D. It’s an accrual

Answers
Question
On 31.12.2021, the following require inclusion in a company’s financial statements:
(1) On 01.02.2021, the company made a loan of 12,000€ to an employee, repayable on 01.02.2022,
charging interest at 2% per year. On the due date she repaid the loan and the whole of the interest due
on the loan to that date.
(2) The firm paid an annual insurance premium of 9,000€ in 2021, covering the year ending 31.08.2022.
(3) On 01.01.2022, the company received rent of 4,000€ covering the 6 months to 31.12.2022.
For these items, what total figures should be included in the company’s statement of financial position
as of 31 December 2021?
45
A. Current assets 10,000€ Current liabilities 12,220€
B. Current assets 22,220€ Current liabilities 0€
C. Current assets 10,220€ Current liabilities 0€
D. Current assets 16,220€ Current liabilities 12,220€
Answer: B
9. Adjustment Entries

9E. Adjustment Entries
Question
On 31.12.2021, the following require inclusion in a company’s financial statements:
(1) On 01.02.2021, the company made a loan of 12,000€ to an employee, repayable on 01.02.2022,
charging interest at 2% per year. On the due date she repaid the loan and the whole of the interest due
on the loan to that date.
(2) The firm paid an annual insurance premium of 9,000€ in 2021, covering the year ending 31.08.2022.
(3) On 01.01.2022, the company received rent of 4,000€ covering the 6 months to 31.12.2022.
For these items, what total figures should be included in the company’s statement of financial position
as of 31 December 2021?
46
Solution
Current assets
• Note Receivable à 12,000€
• Interest Receivable (12,000 x 2% x 11/12) à 220€
• Prepayment of Insurance (8/12 x 9,000) à 6,000€
• Cash from Accrued Rent à 4,000€
Total à 22,220€

Answers
Question
Which of the following statements is FALSE?
47
A. If an expense which should be accrued is ignored at the year end, profit will be understated
B. A prepayment is an expense that has been paid but not used up in generating revenue
C. An accrued expense is also a liability
D. Accrued income is also an asset
Answer: A
10. Deferrals and Accruals

10E. Deferrals and Accruals
Question
A. If an expense which should be accrued is ignored at the year end, profit will be understated
B. A prepayment is an expense that has been paid but not used up in generating revenue
C. An accrued expense is also a liability
D. Accrued income is also an asset
48
Solution
A. Expenses would be understated (too low), so profit would be overstated
B. True, main example is Prepaid Rent
C. True, main example is Accounts Payable
D. True, main example is Accounts Receivable

Inventory Valuation
49

Answers
Question
Assume the following timeline happened knowing the starting inventory was composed of 100 units at
50€ each:
1. Bought 300 units at 45€ each
3. Sold 300 units
What is the cost of goods sold for the 300 units sold under FIFO?
50
A. 9,000€
B. 12,000€
C. 14,000€
D. 15,000€
Answer: C
1. FIFO Cost of Goods Sold

1E. FIFO Cost Of Goods Sold
Question
50€ each:
3. Sold 300 units
What is the cost of goods sold of the 300 units sold under FIFO?
51
Solution
FIFO means you sell the oldest unit first
• 100 at 50€
• 200 at 45€
100 ∗ 50€ + 200 ∗ 45€ = 14,000

Answers
Question
50€ each:
3. Sold 300 units
What is the value per unit of the ending inventory under LIFO?
52
A. 45.00€
B. 47.50€
C. 50.00€
D. 52.50€
Answer: B
2. LIFO Ending Inventory

2E. LIFO Ending Inventory
Question
50€ each
3. Sold 300 units
What is the value per unit of the ending inventory under LIFO?
53
Solution
In LIFO you sell the newest unit first
• 200 at 30€
• 100 at 45€
(you can’t sell the new 100 units at 50€ because you do not have them at the moment of the sale)
Inventory
• 100 at 50€ (starting inventory)
• 200 at 45€
• 100 at 50€
!""∗$"%&""∗'$%!""∗$"
'""
= 47.5

Answers
Question
What is the weighted average cost per unit of the units left in inventory considering the following
situation?
1. Bought 200 product A at 30€ each, selling price is 50€ each
2. Bought 300 product B at 50€ each, selling price is 45€ each
3. Bought 400 product C at 120€ each, selling price is 150€
The selling cost for all products is 5€
54
A. 73.33€
B. 75€
C. 76.67€
Answer: A
3. Weighted Average and Net Realizable Value

3E. Weighted Average and Net Realizable Value
Question
What is the weighted average cost per unit of the units left in inventory considering the following
situation?
1. Bought 200 product A at 30€ each, selling price is 50€ each
2. Bought 300 product B at 50€ each, selling price is 45€ each
3. Bought 400 product C at 120€ each, selling price is 150€
The selling cost for all products is 5€
55
Solution
Always compare the purchase price and the Net Realizable Value (selling price – selling cost) and pick
the lowest
1. 200 at 30€
2. 300 at 40€
3. 400 at 120€
200 ∗ 30€ + 300 ∗ 40€ + 400 ∗ 120€
900
= 73.33

Answers
Question
Calculate the gross profit under the weighted average cost method? The following timeline applies:
3. Sold 80 units at 50€
56
A. 1,100€
B. 1,333€
C. 1,600€
D. 1,638€
Answer: B
4. Gross Profit

4E. Gross Profit
Question
Calculate the gross profit under the weighted average cost method? The following timeline applies:
3. Sold 80 units at 50€
57
Solution
Gross Profit FIFO: 80*50€-(50*40€+30*30€)= 1,100€
Gross Profit WAC: Cost per unit =
𝟓𝟎∗𝟒𝟎€%𝟏𝟎𝟎∗𝟑𝟎€
𝟏𝟓𝟎
= 𝟑𝟑. 𝟑𝟑 à 80*50€-80*33.33€=1,333€
Gross Profit LIFO: 80*50€-80*30€=1,600€

Answers
Question
Which of the following statements is true?
58
A. If the unit price is increasing, the COGS under FIFO is the highest
B. If the unit price is increasing, the gross profit under LIFO is the highest
C. If the unit price is decreasing, the ending inventory cost under FIFO is the lowest
D. If the unit price is decreasing, the amount of tax paid under FIFO is the highest
Answer: C
5. Fluctuation in Price

5E. Fluctuation in Price
59
Increasing Prices (Under FIFO) Increasing Prices (Under LIFO)
Sell older
units
Keep newer
units
Lower COGS
(Higher profit)
Higher
inventory
Price
Time
Keep older
units
Sell newer
units
Higher COGS
(Lower profit)
Lower
inventory
Price
Time

Answers
Question
Which one of the following formulas would not give you the gross profit figure?
60
A. Net profit plus operating expenses
B. Sales less Cost of Goods Sold
C. Sales less purchases adjusted for change in stocks
D. Sales minus purchases minus opening stock plus closing stock
Answer: D
6. Gross Profit

6E. Gross Profit
Question
A. Net profit plus operating expenses
B. Sales less Cost of Goods Sold
C. Sales less purchases adjusted for change in stocks
D. Sales minus purchases minus opening stock plus closing stock
61
Solution
A. Correct. To calculate the net profit, you have to add up all the operating expenses first. Then you
add the total operating expenses, including interest and taxes, and deduct it from the gross profit
B. Correct, the amount of money a company retains after incurring the direct costs associated with
producing the goods it sells and the services it provides
C. Correct, because Sales minus Cost of Goods Sold = Gross Profit à Purchases + Inventory decrease -
Inventory increase = Cost of Goods Sold
D. False, as Gross Profit would be found by taking Sales minus purchases plus opening stock less
closing stock

Answers
Question
Success Formula normally sells it products for 20€ per unit, which includes a profit margin of 25%.
However, the selling price has fallen to €15 per unit. This company's current inventory consists 200
units purchased at 16€ per unit with a weighted average inventory cost per unit of 14€. Replacement
cost has now fallen to 13€ per unit.
What is the value of inventory based on the lower of cost or net realizable value concept?
62
A. 3,200€
B. 3,000€
C. 2,800€
D. 2,600€
Answer: D
7. NRV or Lower Of Cost

7E. NRV or Lower Of Cost
Question
Success Formula normally sells it products for 20€ per unit, which includes a profit margin of 25%.
However, the selling price has fallen to €15 per unit. This company's current inventory consists 200
units purchased at 16€ per unit with a weighted average inventory cost per unit of 14€. Replacement
cost has now fallen to 13€ per unit.
63
Solution
The lower of cost or net realizable value concept means that inventory should be reported at the lower
of its cost or the amount at which it can be sold.
Net realizable value is the expected selling price of something in the ordinary course of business, less
the costs of completion, selling, and transportation.
200 units x 13€ per unit = 2,600€

8. NRV or Lower Of Cost
Question
Success Formula Corporation sells three different products. The following information is available on
December 31st:
64
Inventory Item Units Cost per unit Selling price per unit
WM Slides 300 4.00€ 3.50€
CC Slides 600 2.00€ 1.50€
ET Slides 1,500 3.00€ 4.00€
Solution
A. 6,900€
B. 6,450€
C. 7,950€
D. 6,600€
Answer: B

8E. NRV or Lower Of Cost
Question
Success Formula Corporation sells three different products. The following information is available on
December 31st:
65
Solution
WM Slides à 300 units x 3.50€ = 1,050€
CC Slides à 600 units x 1.50€ = 900€
ET Slides à 1500 units x 3.00€ = 4,500€
1,050€ + 900€ + 4,500€ = 6,450€
Inventory Item Units Cost per unit Selling price per unit
WM Slides 300 4.00€ 3.50€
CC Slides 600 2.00€ 1.50€
ET Slides 1,500 3.00€ 4.00€

Answers
Question
Success Formula has properly recorded all of its purchases of merchandise inventory, but made an error
when counting its ending inventory. As a result of the error the company’s inventory account is
overstated by 24,000€. What is the impact of this error on the Success Formula's income statement this
period?
66
A. Success Formula’s assets are understated by 24,000€
B. Success Formula’s net income are understated by 24,000€
C. Success Formula’s revenue are understated by 24,000€
D. Success Formula’s expenses are understated by 24,000€
Answer: D
9. Inventory Error

Answers
Question
A. Success Formula’s assets are understated by 24,000€
B. Success Formula’s net income are understated by 24,000€
C. Success Formula’s revenue are understated by 24,000€
D. Success Formula’s expenses are understated by 24,000€
67
The company's profits are overstated by 24,000€ as too much of the cost of the goods available went to
inventory. As a result, the income statement item Cost of Goods Sold is understated. Understated Cost
of Goods Sold result in an overstated profit by 24,000€.
You might think of the accounting equation. If the asset Inventory is overstated, another part of the
accounting equation is improper. In this case, assets were overstated, and owner's (stockholders')
equity is overstated as a result of the current period's profit being overstated.
9E. Inventory Error

Answers
Question
Calculate Success Formula’s Inventory Turnover Ratio from the following information:
Opening Inventory: 50,000€
Purchases: 390,000€
Net Sales: 600,000€
Gross Profit Ratio: 30%
68
A. 3.6
B. 7.9
C. 8.4
D. 12
Answer: D
10. Inventory Ratios

Answers
Question
Calculate Success Formula’s Inventory Turnover Ratio from the following information:
Opening Inventory: 50,000€
Purchases: 390,000€
Net Sales: 600,000€
Gross Profit Ratio: 30%
69
Gross Profit = 600,000 – 30% of 600,000
Net Sales – Gross Profit = Cost of Goods Sold (COGS) à 600,000 – 180,000 = 420,000
COGS = Beg. Inventory + Purchases – End. Inventory à 420,000 = 50,000 + 390,000 – End. Inventory
End. Inventory = 50,000 + 390,000 – 420,000 = 20,000
Average Stock = (Opening Stock + Closing Stock)/2 à 50,000+20,000/2=35,000
Stock turnover ratio = Cost of Goods sold / Average Stock à 420,000/35,000 = 12 Times
10E. Inventory Ratios

Treatment of Receivables
70

Answers
Question
The two methods of accounting for uncollectible accounts are the direct write-off method and the …
71
A. Accrual Method
B. Net Realizable Method
C. Bad Debt Method
D. Allowance Method
Answer: D
1. Accounts Receivable Method

1E. Accounts Receivable Method
Question
The two methods of accounting for uncollectible accounts are the direct write-off method and the
A. Accrual Method
B. Net Realizable Method
C. Bad Debt Method
D. Allowance Method
72
Solution
A. Accrual Method refers to the timing of transaction recording
B. Related to Inventory Valuation
C. The expense to uncollectible accounts can also be called bad debt, but does not refer to the method
used
D. Correct

Answers
Question
At the start of 2019, Success Formula had a bad debt allowance of 7,000€. During the year, the
following happened:
1. Robert defaulted for 1,000€
2. Maria defaulted for 2,000€
3. Julius paid 3,000€ that he owed to Success Formula
4. Pedro defaulted for 3,000€
For 2020, we predict the allowance needs to be 6,000€, what should we do?
73
A. Credit allowance by 7,000 and debit allowance expense by 7,000
B. Debit allowance by 1,000 and credit allowance expense by 1,000
C. Credit allowance by 2,000 and debit allowance expense by 2,000
D. Credit allowance by 5,000 and debit allowance expense by 5,000
Answer: D
2. Allowance Adjustment

2E. Allowance Adjustment
Question
At the start of 2019, Success Formula had a bad debt allowance of 7,000€. During the year, the
following happened:
1. Robert defaulted for 1,000€
2. Maria defaulted for 2,000€
3. Julius paid 3,000€ that he owed to Success Formula
4. Pedro defaulted for 3,000€
For 2020, we predict the allowance needs to be 6,000€, what should we do?
74
Solution
The impacts of the timeline are:
1. Decrease the allowance to 6,000€
3. Nothing
If you want the allowance to be 6,000€, you need to increase it by 5,000€ since you have a beginning
balance of last year of 1,000€. You do so by crediting allowance (contra) and debiting allowance
expense.

Answers
Question
How does a company need to record estimated bad debt under the direct write-off method?
75
A. Debit allowance for uncollectible receivables and credit bad debt expense
B. Debit bad debt expense and credit allowance for uncollectible receivables
C. Debit allowance for uncollectible receivables and credit accounts receivable
Answer: D
3. Direct Write-off Method

3E. Direct Write-off Method
Question
76
Solution
When using the direct write-off method, a company does not record the estimate in the allowance for
uncollectible receivables account. Instead it directly expenses the write-off.

Answers
Question
Under the direct write-off method of accounting for uncollectible accounts, Bad Debt Expense is
debited
77
A. when a credit sale is past due
B. at the end of each accounting period
C. whenever a pre-determined amount of credit sales have been made
D. when an account is determined to be uncollectible
Answer: D
4. Direct Write-off Method

Question
78
Solution
When using the direct write-off method, a company does not record the estimate in the allowance for
uncollectible receivables account. Instead, it directly expenses the write-off.

Answers
Question
An aging of a company's accounts receivable indicates that 6,000€ are estimated to be uncollectible.
If Allowance for Doubtful Accounts has a 2,000€ debit balance, the adjustment to record bad debts for
the period will require a
79
A. Debit to Bad Debt Expense for 8,000€
B. Debit to Allowance for Doubtful Accounts for 8,000€
C. Debit to Bad Debt Expense for 4,000€
D. credit to Allowance for Doubtful Accounts for 4,000€
Answer: A
5. Allowance Method

5E. Allowance Method
Question
If Allowance for Doubtful Accounts has a 2,000€ debit balance, the adjustment to record bad debts for
the period will require a
A. Debit to Bad Debt Expense for 8,000€
B. Debit to Allowance for Doubtful Accounts for 8,000€
C. Debit to Bad Debt Expense for 4,000€
D. credit to Allowance for Doubtful Accounts for 4,000€
80
Solution
If the allowance for doubtful accounts (contra account) has a debit balance, this means that the amount
of account write-offs is greater than the amount of provisioned bad debt. As a result, the adjustment to
account for the debit balance (2,000€) as well as the write-off of (6,000€) needs to be account for.
2,000€ + 6,000€ = 8,000€

Answers
Question
If the Allowance Method is used and an adjustment to record bad debts for 6,400€ has been debited,
what is the balance of the account prior to the adjustment?
81
A. Debit balance of 1,100€
B. Credit balance of 1,100€
C. Debit balance of 13,900€
D. Credit balance of 13,900€
Answer: B
6. Allowance Method

Question
If the Allowance Method is used and an adjustment to record bad debts for 6,400€ has been debited,
what is the balance of the account prior to the adjustment?
A. Debit balance of 1,100€
B. Credit balance of 1,100€
C. Debit balance of 13,900€
D. Credit balance of 13,900€
82
Solution
If the allowance for doubtful accounts (contra account) has a credit balance, this means that the
amount of account write-offs is smaller than the amount of provisioned bad debt. As a result, the
adjustment only accounts for the difference between the credit balance (1,100€) and the write-off of
(7,500€). In other words, we already had an allowance that we could use and the remaining portion (of
the write off) needs to be account for.
Credit Balance + Bad Debt Exp = Write Off OR Write Off – Bad Debt Expense = Beg Balance (Credit)
X + 6,400€ = 7,500€ OR 7,500€ - 6,400€ = 1,100€

Answers
Question
A debit balance in the Allowance for Doubtful Accounts
83
A. is the normal balance for that account
B. indicates that actual bad debt write-offs have exceeded previous provisions for bad debts
C. indicates that actual bad debt write-offs have been less than what was estimated
D. cannot occur if the percentage of receivables method of estimating bad debts is used
Answer: B
7. Allowance for Doubtful Accounts

7E. Allowance for Doubtful Accounts
Question
A debit balance in the Allowance for Doubtful Accounts
A. is the normal balance for that account
B. indicates that actual bad debt write-offs have exceeded previous provisions for bad debts
C. indicates that actual bad debt write-offs have been less than what was estimated
D. cannot occur if the percentage of receivables method of estimating bad debts is used
84
Solution
A. Normal balance is credit for Allowance for Doubtful Accounts
B. If the allowance for doubtful accounts (contra account) has a debit balance, this means that the
amount of account write-offs is greater than the amount of provisioned bad debt.
C. See B.
D. Not true, irrespective of the percentage of receivables method

Answers
Question
Using the percentage-of-receivables method for recording bad debt expense, estimated
uncollectible accounts are 45,000€. If the balance of the Allowance for Doubtful Accounts is 6,000€
credit before adjustment, what is the amount of bad debt expense for that period?
85
A. 45,000€
B. 39,000€
C. 51,000€
D. 6,000€
Answer: B
8. Percentage-Of-Receivables Method

8E. Percentage-Of-Receivables Method
Question
Using the percentage-of-receivables method for recording bad debt expense, estimated
uncollectible accounts are 45,000€. If the balance of the Allowance for Doubtful Accounts is 6,000€
credit before adjustment, what is the amount of bad debt expense for that period?
A. 45,000€
B. 39,000€
C. 51,000€
D. 6,000€
86
Solution
With a credit balance of the Allowance Account (6,000€) and the estimated balance (ending allowance)
being 45,000€, we can figure out the remaining components. No write-off information is given, so we
assume no write-offs and just calculate the remaining component (bad debt expense)
6,000€ + X - 0 = 45,000
Beginning allowance
Bad debt
expense -
+ Ending
Allowance
=
Write offs
Bad debt expense

Answers
Question
In 2022 Success Formula Inc. had net credit sales of 2,250,000€. On January 1, 2022, Allowance for
Doubtful Accounts had a credit balance of 54,000€. During 2022, 90,000€ of uncollectible accounts
receivable were written off. Past experience indicates that the allowance should be 10% of the balance
in receivables (percentage of receivables basis).
If the accounts receivable balance on December 31 was 600,000€, what is the required adjustment to
the Allowance for Doubtful Accounts on December 31, 2022?
87
A. 60,000€
B. 25,000€
C. 96,000€
D. 90,000€
Answer: C
9. Allowance Method

Question
In 2022 Success Formula Inc. had net credit sales of 2,250,000€. On January 1, 2022, Allowance for
Doubtful Accounts had a credit balance of 54,000€. During 2022, 90,000€ of uncollectible accounts
receivable were written off. Past experience indicates that the allowance should be 10% of the balance
in receivables (percentage of receivables basis).
If the accounts receivable balance on December 31 was 600,000€, what is the required adjustment to
the Allowance for Doubtful Accounts on December 31, 2022?
88
Solution
To account for this, we first use the past experience indicates that the allowance should be 10% of the
balance in receivables (End Allowance = 10% * 600,000€ = 60,000€). Moreover, we know the beginning
balance was positive (credit 54,000€) and the write-offs (54,000€) are provided:
54,000€ + X - 90,000€ = 60,000€
Beginning allowance
Bad debt
expense -
+ Ending
Allowance
=
Write offs
Bad debt expense

Answers
Question
Under the allowance method of accounting for uncollectible accounts,
89
A. the cash realizable value of accounts receivable is greater before an account is written off than after
it is written off
B. Bad Debt Expense is debited when a specific account is written off as uncollectible
C. the cash realizable value of accounts receivable in the statement of financial positionis the same
before and after an account is written off
D. Allowance for Doubtful Accounts is closed each year to Income Summary
Answer: C
10. Allowance Method

Question
Under the allowance method of accounting for uncollectible accounts,
A. the cash realizable value of accounts receivable is greater before an account is written off than after
it is written off
B. Bad Debt Expense is debited when a specific account is written off as uncollectible
C. the cash realizable value of accounts receivable in the statement of financial position is the same
before and after an account is written off
D. Allowance for Doubtful Accounts is closed each year to Income Summary
90
Solution
A. Not correct, as receivable are always stated at the adjusted value due to the allowance account
B. Not correct, as we debit bad debt expense right at the receivable sale into allowance and take the
write-off from the allowance account
C. Correct, as receivables are always stated at the adjusted amount (Accounts Receivable – Allowance)
D. Allowance is a permanent account (only specific temporary accounts are close to Income Summary
– Revenue and Expense)

Long-Term Assets
91

Answers
Question
Success Formula bought a whiteboard for 100€ and decide to depreciate it using the units of production
method. The board can either be salvaged for 10€ or sold for 25€ after utilization. The owners estimate
that they can use the board for 1,000 sessions. At the end of the year, the board was used for 300
sessions, how much will the depreciation expense be?
92
A. 22.50€
B. 27.00€
C. 30.00€
D. 32.50€
Answer: A
1. Units of Activity Depreciation

1E. Units of Activity Depreciation
Question
Success Formula bought a whiteboard for 100€ and decide to depreciate it using the units of production
method. The board can either be salvaged for 10€ or sold for 25€ after utilization. The owners estimate
that they can use the board for 1,000 sessions. At the end of the year, the board was used for 300
sessions, how much will the depreciation expense be?
93
Solution
Residual = 25€ (highest of salvage or selling)
Depreciable amount = 100€ – 25€ = 75€
Depreciation per unit =
.$€
!"""
= 0.075€
Depreciation for the year = 0.075€ * 300 = 22.5€

Answers
Question
Johann now heard of the double declining balance depreciation and wonders how much Apple would
expense as depreciation in the second year and last years of using the machine. Knowing that the
machine is bought for €4,000 and sold for €500 after 5 years. Can you help him out?
94
A. €1,440 in the second year and €207 in the last year
B. €1,440 in the second year and €18 in the last year
C. €960 in the second year and €207 in the last year
D. €960 in the second year and €18 in the last year
Answer: D
2. Double Declining Balance

2E. Double Declining Balance
Question
Johann now heard of the double declining balance depreciation and wonders how much Apple would
expense as depreciation in the second year and last years of using the machine. Knowing that the
machine is bought for €4,000 and sold for €500 after 5 years. Can you help him out?
95
Solution
Year
Beg
Carrying Amount
Depreciation expense
Accumulated
Depreciation
End Carrying
Amount
0 4,000 0 0 4,000
1 4,000 1,600 1,600 2,400
2 2,400 960 2,560 1,440
3 1,440 576 3,136 864
4 864 346 3,482 518
5 518 18 3,500 500

Answers
Question
Florian is trying out a depreciation method for Success Formula and attempts to apply the double
declining balance method and wonders how much he would expense as depreciation in year 4 and 5,
respectively. Knowing that the machine is bought for €12,000 and sold for €1,800 after 5 years. Can you
help him out?
96
A. €1,038 in the fourth year and €622 in the last year
B. €1,038 in the fourth year and €246 in the last year
C. €792 in the fourth year and €246 in the last year
D. €792 in the fourth year and €0 in the last year
Answer: D

Question
Florian is trying out a depreciation method for Success Formula and attempts to apply the double
declining balance method and wonders how much he would expense as depreciation in year 4 and 5,
respectively. Knowing that the machine is bought for €12,000 and sold for €1,800 after 5 years. Can you
help him out?
97
Solution
Year
Beg
Carrying Amount
Accumulated
Depreciation
End Carrying
Amount
0 12,000 0 0 12,000
1 12,000 4,800 4,800 7,200
2 7,200 2,880 7,680 4,320
3 4,320 1,728 9,408 2,592
4 2,592 792 10,200 1,800
5 1,800 0 10,200 1,800

Answers
Question
Success Formula bought a car for 20,000€ and wants to depreciate it over 4 years. The depreciable
amount is 18,000€. If Success Formula uses the double declining balance method, what is the
depreciation expense in the last year?
98
A. 500€
B. 1,250€
C. 2,500€
D. 5,000€
Answer: A

Question
Success Formula bought a car for 20,000€ and wants to depreciate it over 4 years. The depreciable
amount is 18,000€. If Success Formula uses the double declining balance method, what is the
depreciation expense in the last year?
99
Solution
Year
Beginning
Carrying Amount
Accumulated
Depreciation
Ending
Carrying amount
0 20,000
1 20,000 10,000 10,000 10,000
2 10,000 5,000 15,000 5,000
3 5,000 2,500 17,500 2,500
4 2,500 500 18,000 2,000

Answers
Question
Success Formula bought a machine for 500€ with no residual value. They planned on using it for 5 years
and depreciate it with that exact lifetime. In the third year, Success Formula spent 100€ on a new
engine to increase the lifetime by 2 years and create a residual value of 50€. What will the depreciation
expense in the 3rd year be?
100
A. 70€
B. 80€
C. 100€
D. 120€
Answer: A
5. Straight Line Depreciation Readjustment

5E. Straight Line Depreciation Readjustment
Question
Success Formula bought a TV for 500€ with no residual they planned on using it for 5 years and
depreciate it with that exact lifetime. In the third year, Success Formula spent 100€ to increase the
lifetime by 2 years of the TV and create a residual value of 50€. What will the depreciation expense in
the 3rd year be?
101
Solution
The depreciation expense for the first 2 years is
$""
$
= 100
After two years, the carrying amount of the PPE is 500 − 100 ∗ 2 = 300
For the last years (3 years + 2 extra), the depreciation will become
/""%!""0$"
$
= 70

Answers
Question
Success Formula just expensed 300€ of depreciation, which of the following statements is true?
102
A. This depreciation will impact the cash balance
B. This expense will decrease the net income and decrease the cash flow from operation
C. The net income will be lower than the change in cash (everything else the same)
D. Depreciation is not allowed under IFRS
Answer: C
6. Depreciation Impact on Financial Statements

6E. Depreciation Impact on Financial Statements
Question
Success Formula just expensed 300€ of depreciation, which of the following statements is true?
A. This depreciation will impact the cash balance
B. This expense will decrease the net income and decrease the cash flow from operation
C. The net income will be lower than the change in cash (everything else the same)
D. Depreciation is not allowed under IFRS
103
Solution
A. Depreciation is a noncash expense
B. It does not decrease the cash flow from operation as it decreases the net income first then is added
back (null effect)
C. Correct as net income takes it in consideration and the cash does not
D. It is required for capital expenditures

Answers
Question
Success Formula Industries owns a PPE with a book value of €100,000 which it bought for €140,000.
How would it need to account for the entry if it sells the asset for €80,000?
104
A. Debit accumulated depreciation by €100,000, cash by €80,000 and credit PPE by €20,000.
B. Debit cash by €80,000, accumulated depreciation by €20,000 and credit PPE by €100,000.
C. Debit cash by €80,000, accumulated depreciation by €40,000 credit PPE by €100,000 and
gain on sale by €20,000
D. Debit accumulated depreciation by €40,000, cash by €80,000, loss on sale €20,000 and
credit PPE by €140,000.
Answer: D
7. Sale of PPE

7E. Sale of PPE
Question
Success Formula Industries owns a PPE with a book value of €100,000 which it bought for €140,000.
How would it need to account for the entry if it sells the asset for €80,000?
105
Solution
• First, if the asset is sold, all balances relating to the asset must be set to zero (PPE and accumulated
depreciation)
• Additionally, the PPE is sold for €80,000 in cash but was actually worth €100,000
à There will be a loss of the difference (€20,000)

Answers
Question
Equipment with a cost of 450,000€ has an estimated salvage value of 30,000€ and an estimated life
of 4 years or 10,000 hours. It is to be depreciated by the straight-line method. What is the amount of
depreciation for the first full year, during which the equipment was used 2,700 hours?
106
A. 112,500€
B. 105,000€
C. 113,400€
D. 108,750€
Answer: B
8. Straight Line Depreciation

Answers
Question
Equipment with a cost of 450,000€ has an estimated salvage value of 30,000€ and an estimated life
of 4 years or 10,000 hours. It is to be depreciated by the straight-line method. What is the amount of
depreciation for the first full year, during which the equipment was used 2,700 hours?
107
As we apply straight-line depreciation, we simply divide the depreciable amount (historical cost –
residual value) by the useful life
!"#,### %&#,###
!
= 105,000
8E. Straight Line Depreciation

Answers
Question
Success Formula has decided to change the estimate of the useful life of an asset that has been in
service for 2 years. Which of the following statements describes the proper way to revise a useful life
estimate?
108
A. Revisions in useful life are permitted if approved by the IRS and IFRS
B. Retroactive changes must be made to correct previously recorded depreciation
C. Only future years will be affected by the revision
D. Both current and future years will be affected by the revision
Answer: D
9. Depreciation Adjustment

Answers
Question
Success Formula has decided to change the estimate of the useful life of an asset that has been in
service for 2 years. Which of the following statements describes the proper way to revise a useful life
estimate?
109
A result of change in any of the estimates that the entity makes, will only affect assets in a
prospective manner (e.g., change will be implemented from the date of revision and onward). Previous
periods are not adjusted for change in estimates. As it is a change in estimate therefore, it will be
accounted for in prospective manner (from the date of revision until the end of useful life of asset). No
adjustments are made in previous years calculations.
9E. Depreciation Adjustment

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Question
Equipment that cost 144,000€ and on which 120,000€ of accumulated depreciation has been recorded
was disposed of for 36,000€ cash. The entry to record this event would include a
110
A. Gain of 12,000€
B. Loss of 12,000€
C. Credit to the Equipment account for 36,000€
D. Credit to Accumulated Depreciation for 120,000€
Answer: A
10. Disposal/Sale of PPE

Answers
Question
Equipment that cost 144,000€ and on which 120,000€ of accumulated depreciation has been recorded
was disposed of for 36,000€ cash. The entry to record this event would include a
111
10E. Disposal/Sale of PPE
Account Debit Credit
Cash (A+)
Accumulated Depreciation (A+)
Gain on Disposal (SE+)
PPE (A-)
Disposal/Sale of PPE
6,000
2,500
3,500

Current Liabilities
112

Answers
Question
Success Formula borrowed 15,000€ with 10% annual interest from one of the owners’ friends, which
needs to be paid back in one year. The loan was made on the 1st of September 2015. All the debit entries
needed when the loan is paid back are..
113
A. Interest revenue by €1,500 and notes payable by €15,000
B. Cash €15,000 and interest expense €1,000
C. Interest payable by €500, interest expense by €1,000 and notes payable by €15,000
D. Interest receivables by €500, interest revenue by €1,000 and notes payable by €15,000
Answer: C
1. Notes Payable

1E. Notes Payable
Question
Success Formula borrowed 15,000€ with 10% annual interest from one of the owners’ friends, which
needs to be paid back in one year. The loan was made on the 1st of September 2015. All the debit entries
needed when the loan is paid back are..
114
Solution
Here is the full situation:
1. Debit cash by €15,000 and credit notes payable by €15,000
2. Debit interest expense by €500 (1,500/12*4) and credit interest payable by €500
3. Credit cash by €16,500, debit notes payable by €15,000, debit interests payable by €500, and debit
interest expense by €1,000

Answers
Question
A company makes offers products with a one-year warranty. The beginning balance on 01.01.2018 in
the warranty payable account was $40,000. Assume all sales of €500,000 are made at year end and
warranty costs were estimated at 10%. During the year, $30,000 was paid to settle warranty claims. As a
result of these transactions, what is the amount of warranty expense for the year ?
115
A. 20,000
B. 30,000
C. 40,000
D. 50,000
Answer: C
2. Warranty Provision

2E. Warranty Provision
Question
A company offers products with a one-year warranty. The beginning balance on 01.01.2018 in the
warranty payable account was $40,000. Assume all sales of €500,000 are made at year end and warranty
costs were estimated at 10%. During the year, $30,000 was paid to settle warranty claims. As a result of
these transactions, what is the amount of warranty expense for the year ?
116
Solution
Beginning Provision: $40,000
Warranty expense: ?
Settlement of claims: $30,000
Ending Provision: $50,000
$40,000 + ? - $30,000 = $50,000 à ? = $40,000
Beginning Provision -
+ Ending
Provision
=
Settlement of Claims
Warranty Expense

Answers
Question
Which of the following items would appear in the current liabilities section of a statement of financial
position?
117
A. Accumulated depreciation
B. Increase in the provision for doubtful debts
C. Salespersons’ commission expense of the current year
D. Bank overdraft
Answer: A
3. Current Liabilities

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Question
Which of the following items would appear in the current liabilities section of a statement of financial
position?
118
A. Contra asset
B. Contra asset
C. Selling, general and administrative expense
D. Current Liability
Answer: D
3E. Current Liabilities

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Question
In financial accounting, what is the primary purpose of expense accruals?
119
A. To arrive at the correct liability balance at the end of a period
B. To correct errors made during the year
C. To reduce corporation tax payable of the company
D. To increase net profit of the organization
Answer: A

Answers
Question
In financial accounting, what is the primary purpose of expense accruals?
120
Expense accruals, also known as accrued liabilities, are liabilities that reflect expenses that have not yet
been paid or logged under accounts payable during an accounting period; in other words, a company's
obligation to pay for goods and services that have been provided for which invoices have not yet been
received. There main reason for existence is to properly reflect the correct amount of liabilities on the
balance sheet, regardless of the cash flow occurrence

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Question
Which of the following is not essential for recognition as a liability:
121
A. There should be a present obligation to transfer economic benefit
B. The obligation to transfer economic benefit should be certain
C. It should be possible to make a reliable estimate of the amount
D. The obligating event triggering the obligation should have already happened
Answer: B

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Question
Which of the following is not essential for recognition as a liability:
122
A. Correct, a future obligation to transfer resources (generally money, product or service)
B. A liability may be recognized if there is a present obligation, if the amount is uncertain then it may
be appropriate to create a provision
C. Correct, the potential size needs to be displayed on the balance sheet
D. Correct, it concerns a past event

Answers
Question
On 7th May 2022, Success Formula signed a contract with Study Association PLC for 12 million €. In
terms of this contract, Study Association PLC is required to supply 40,000 pens per year for three years
from 1st July 2022. By 31st December Study Association PLC has supplied 16,000 pens and has sent an
invoice for 4 million €. Success Formula has made no payment to Study Association PLC . How and at
what amount should Success Formula show the amount owed to Study Association PLC as of 31st
December 2022.
123
A. 1.6 million € as a provision
B. 4 million € as a provision
C. 1.6 million € as a liability
D. 4 million € as a liability
Answer: C
6. Provision versus Liability

Answers
Question
On 7th May 2022, Success Formula signed a contract with Study Association PLC for 12 million €. In
terms of this contract, Study Association PLC is required to supply 40,000 pens per year for three years
from 1st July 2022. By 31st December Study Association PLC has supplied 16,000 pens and has sent an
invoice for 4 million €. Success Formula has made no payment to Study Association PLC . How and at
what amount should Success Formula show the amount owed to Study Association PLC as of 31st
December 2022.
124
We estimate the total amounts of pens and compare them to the amounts of pens that have already
been delivered. In our case, 120,000 pens (40,00 over three years) compared to the 16,000 that have
been delivered. As a result, we owe 16,000/120,000 (= 13.33%) of the total 12 million € purchase price.
As the criteria of a liability are fulfilled, we need to record it as one on the balance sheet.
A liability is a present obligation of the entity arising from past events which is expected to be settled
by the outflow of economic benefits. A provision is a liability of uncertain timing or amount.
6E. Provision versus Liability

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Question
Which of the following is a current liability?
125
A. Unpaid dividend on cumulative preferred stock
B. A dividend payable in the form of additional shares of stock
C. A cash dividend payable to preferred stockholders
D. All of these
Answer: C

Answers
Question
Which of the following is a current liability?
A. Unpaid dividend on cumulative preferred stock
B. A dividend payable in the form of additional shares of stock
C. A cash dividend payable to preferred stockholders
D. All of these
126
A. Preferred stock shares are issued with a guarantee of a dividend payment, so if a company fails to
issue those payments as promised, the total amount owed to the investors is recorded as a note on
its balance sheet as dividends in arrears
B. A stock dividend is never treated as a liability of the issuer, since the issuance does not reduce
assets
C. Dividends Payable are classified as a current liability on the balance sheet since they represent
declared payments to shareholders that are generally fulfilled within one year
D. C is correct

Answers
Question
Success Formula signed a three-month, interest-bearing note on November 1, 2022, for the purchase of
250,000€ of inventory. The face value of the note was 253,675€. What is the adjusting entry made on
December 31, 2022?
127
A. Debit to Note Payable for 2,450€
B. Debit to Interest Expense for 2,450€
C. Credit to Note Payable for 2,450€
D. Credit to Interest Expense for 2,450€
Answer: B
9. Note Payable

Answers
Question
Success Formula signed a three-month, interest-bearing note on November 1, 2022, for the purchase of
250,000€ of inventory. The face value of the note was 253,675€. What is the adjusting entry made on
December 31, 2022?
128
We need to account for the interest that we already incurred (2 months of interest have already passed).
As we repay the whole amount at once, we account for 2/3 months (253,675€ – 250,000€ = 3,675€ à
3,675€ / 3 months * 2 months = 2,450€) of interest that we will pay in the future (Interest Payable).
been incurred and technically need to be
9E. Note Payable
Debit Credit
Interest Expense 2,450
Interest Payable 2,450
Interest Expense (SE-)
Interest Payable (L+)
Interest Expense Recognition
2,450
2,450

Answers
Question
Success Formula provides its employees two weeks of paid vacation per year. As of December 31, 65
employees have earned two weeks of vacation time to be taken the following year. If the average weekly
salary for these employees is 1,140€, what is the required journal entry?
129
A. Debit Salaries and Wages Expense for 148,200€ and credit Salaries and Wages Payable for 148,200€
B. No journal entry required
C. Debit Salaries and Wages Payable for 148,200€ and credit Salaries and Wages Expense for 148,200€
D. Debit Salaries and Wages Expense for 74,100€ and credit Salaries and Wages Payable for 74,100€
Answer: A
10. Wage Payable

Answers
Question
Success Formula provides its employees two weeks of paid vacation per year. As of December 31, 65
employees have earned two weeks of vacation time to be taken the following year. If the average weekly
salary for these employees is 1,140€, what is the required journal entry?
130
We need to account for the salary expense that we already incurred (2 weeks of paid vacation despite
the payment happening at a later point in time). As we owe the amount to the employee, we need to
account for it à 65 Employees * 1,140€ * 2 Weeks = 148,200€
Expenses increase on debit (SE-) and Credit Payable for future obligation to pay the vacation time (L+)
been incurred and technically need to be
10E. Wage Payable
Salaries and Wages Expense (SE-)
Salaries and Wages Payable (L+)
Salary Expense Recognition
148,200
148,200

Equity
131

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Question
In 2019, Success Formula issued 1,000 10% cumulative preference shares with a par value of €50 and
has 1,000 ordinary shares valued 100€ each. In 2019, Success Formula paid a dividend of 3,000€. In
2020, they paid a dividend of 9,000€, how much dividend did the ordinary shareholders receive in 2020?
132
A. 2,000
B. 3,000
C. 4,000
D. 5,000
Answer: A
1. Preference Share

1E. Preference Share
Question
In 2019, Success Formula issued 1,000 10% cumulative preference shares with a par value of €50 and
has 1,000 ordinary shares valued 100€ each. In 2019, Success Formula paid a dividend of 3,000€. In
2020, they paid a dividend of 9,000€, how much dividend did the ordinary shareholders receive in 2020?
133
Solution
The preference shares have a par value of 50€. On the par value, there is a 10% dividend, implying a 5€
dividend per share or 5,000€ for all preference shares.
In 2019, the dividend of 3,000€ was 2,000€ to little (should get 5,000€ but only got €3,000). The
remainder was reported to next year.
In 2020, 7,000€ (5,000 from the current year + 2,000€ from the previous year) was given to the
preference shareholders. The remainder of 2,000€ will be paid out to ordinary shareholders.

Answers
Question
Success Formula repurchased 2,000 shares for €100 on the 01.06.2019. One year later they reissue half
of the shares for €120. How does Success Formula need to account for the reissuance?
134
A. Debit cash by €120,000 and credit treasury shares by 120,000
B. Debit cash €120,000, credit gain on sale by €120,000
C. Debit treasury shares by €120,000 and credit gain on sales by €120,000
D. Debit cash by €120,000 and credit treasury shares by €100,000 and share premium by €20,000
Answer: D
2. Treasury Shares

2E. Treasury Shares
Questions
Success Formula repurchased 2,000 shares for €100 on the 01.06.2019. One year later they reissue half
of the shares for €120. How does Success Formula need to account for the reissuance?
135
Solution
1. The cash proceeds from the transaction are €120,000 (Half of the shares * €120).
2. Once the repurchase was made, the treasury share account was debited (contra equity account) by
€200,000. When half of the shares are reissued, the balance must be decreased (credit by half).
3. It is not allowed to record gains on the sale of treasury shares. A gain is instead depicted in the
increase of the share premium account.

Answers
Question
Success Formula issues 500 preference shares with a par value of €5 for €12. The entry to share
premium – preference shares will be?
136
A. Debit €3,500
B. Credit €3,500
C. Debit €6,000
D. Credit €6,000
Answer: B
3. Par Value

3E. Par Value
Question
Success Formula issues 500 preference shares with a par value of €5 for €12. The entry to share
premium – preference shares will be?
137
Solution
Cash (A+)
Share capital – preference shares (SE+)
Share premium – preference shares (SE+)
(Issuance of €5 par value shares)
6,000
2,500
3,500

Answers
Question
During the year, Success Formula had a revenue of 250,000€, expenses of 100,000€ (incl. 20,000€ of
depreciation). They paid a cash dividend of 10,000€ and gave a computer worth 500€ to each of the two
owners as a non-cash dividend. Additionally, they receive a loan of 10,000€ from BNP Paribas. What is
the total change in retained earnings?
138
A. 139,000
B. 140,000
C. 150,000
D. 160,000
Answer: A
4. Retained Earnings

4E. Retained Earnings
Question
During the year, Success Formula had a revenue of 250,000€, expenses of 100,000€ (incl. 20,000€ of
depreciation). They paid a cash dividend of 10,000€ and gave a computer worth 500€ to each of the two
owners as a non-cash dividend. Additionally, they receive a loan of 10,000€ from BNP Paribas. What is
the total change in retained earnings?
139
Solution
Change in retained earnings = Revenue – Expenses – Dividends
250,000 – 100,000 – 10,000 – 500 * 2 = 139,000

Answers
Question
The board of directors of Success Formula Corp. declared a cash dividend of 1.50€ per share on 42,000
shares of common stock on July 15, 2022. The dividend is to be paid on August 15, 2022, to stockholders
of record on July 31, 2022. The correct entry to be recorded on August 15, 2022, would be
140
A. Debit Dividends Payable 63,000€ and credit Cash 63,000€
B. Debit Cash Dividends 63,000€ and credit Cash 63,000€
C. Debit Cash 63,000€ and credit Paid-in Capital 63,000€
D. Debit Dividends Payable 63,000 and credit Paid-in Capital 63,000
Answer: A
5. Dividend Payment

5E. Dividend Payment
Question
The board of directors of Success Formula Corp. declared a cash dividend of 1.50€ per share on 42,000
shares of common stock on July 15, 2022. The dividend is to be paid on August 15, 2022, to stockholders
of record on July 31, 2022. The correct entry to be recorded on August 15, 2022, would be
141
Solution
Retained Earnings (SE-)
Dividend Payable (L+)
Dividend Declaration
Dividend Payable (L-)
Cash (A-)
Payment of Dividend
63,000
63,000
63,000
63,000

Answers
Question
Success Burrito Corporation began business in 2022 by issuing 50,000 shares of 5€ par common stock
for €8 per share and 5,000 shares of 6%, 10€ par preferred stock for par. At year end, the common stock
had a market value of 10€. On its December 31, 2022, balance sheet, Success Burrito Corporation would
report
142
A. Common Stock of 500,000€
B. Common Stock of 250,000€
C. Common Stock of 400,000€
D. Paid-in Capital of 330,000€
Answer: B
6. Common Stock

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Question
Success Burrito Corporation began business in 2022 by issuing 50,000 shares of 5€ par common stock
for €8 per share and 5,000 shares of 6%, 10€ par preferred stock for par. At year end, the common stock
had a market value of 10€. On its December 31, 2022, balance sheet, Success Burrito Corporation would
report
143
6E. Common Stock
Cash (A+)
Common Stock – (SE+)
Additional paid-in capital (APIC) (SE+)
(Issuance of 50,000 shares at €5 par value shares)
Cash (A+)
Share capital – preference shares (SE+)
(Issuance of 5,000 shares at €10 par value shares)
400,000
50,000
250,000
150,000
50,000

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Question
Outstanding stock of the SF Corporation included 40,000 shares of 5€ par common stock and
20,000 shares of 5%, 10€ par cumulative preferred stock. In 2021, SF did not declare or pay any
dividends. In 2022, SF declared and paid dividends of 24,000€. How much of the 2022 dividend was
distributed to preferred shareholders?
144
A. 14,000€
B. 18,000€
C. 10,000€
D. 20,000€
Answer: D
7. Preference Share

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Question
145
The basic two things to calculate the preferred dividend are given. We know the dividend rate and the
par value of each share and preferred shareholders always have preference with respect to the dividend
and still get unpaid amounts from last periods (if stock is cumulative and the firm did not pay a
dividend in the prior period(s)).
Par value * Rate of Dividend * Number of Preferred Stocks = Preferred Dividend Formula
10€ * 0.05 * 20,000 = 10,000€
It means that every year, SF’ preferred shareholders will get 10,000€ as dividends. So in total, the will
receive 20,000€ (this year and last year).

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Question
20,000 shares of 5%, 10€ par non-cumulative preferred stock. In 2021, SF did not declare or pay any
146
A. 14,000€
B. 18,000€
C. 10,000€
D. 20,000€
Answer: C
8. Preference Share

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Question
147
The basic two things to calculate the preferred dividend are given. We know the dividend rate and the
par value of each share and preferred shareholders always have preference with respect to the dividend.
However, this time the dividend is not cumulative.
Par value * Rate of Dividend * Number of Preferred Stocks = Preferred Dividend Formula
10€ * 0.05 * 20,000 = 10,000€
It means that every year, SF’ preferred shareholders will get 10,000€ as dividends. However, if the firm
is unable to pay a dividend, they won’t accumulated over the periods.

Answers
Question
If common stock is issued for an amount greater than par value, the excess should be credited to
148
A. Cash
B. Retained Earnings
C. Paid-in Capital in Excess of Par Value
D. Common Stock
Answer: C
9. Share Excess Accounting

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Question
If common stock is issued for an amount greater than par value, the excess should be credited to
149
The additional paid-in capital account represents the difference between the par value of the shares
issued and the subscription or issue price. It's also known as share premium and can be called paid-in
capital in excess of par value. This account is a statutory reserve account, one that's non-distributable.
9E. Share Excess Accounting

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Question
Stock splits and stock dividends have the following effects on retained earnings:
150
A. Stock Splits = Increase and Stock dividends = No change
B. Stock Splits = No change and Stock dividends = Decrease
C. Stock Splits = Decrease and Stock dividends = Decrease
D. Stock Splits = No change and Stock dividends = No change
Answer: B
10. Stocks and Their Effects

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Question
Stock splits and stock dividends have the following effects on retained earnings:
151
If the event is a stock split, there is no change in either Retained Earnings or Common Stock, only a
decrease in par value and an increase in the number of issued and outstanding shares.
Stock dividends have no effect on the total amount of stockholders’ equity or on net assets. They
merely decrease retained earnings and increase paid-in capital by an equal amount.
10E. Stocks and Their Effects

Cash Flow Statement
152

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Question
Success Formula net income for 2018 was 150,000€ (incl. 30,000€ of depreciation) and 200,000€ for
2019 (incl. 20,000€ of depreciation and 20,000€ of amortization). The current assets excluding cash
went up by 20,000€, the current liabilities decreased by 40,000€, and the non current assets went up by
30,000€ between 2018 and 2019. What is the cash flow from operation in 2019?
153
A. 180,000
B. 200,000
C. 220,000
D. 240,000
Answer: A
1. CFO Indirect

1E. CFO Indirect
Question
Success Formula net income for 2018 was 150,000€ (incl. 30,000€ of depreciation) and 200,000€ for
2019 (incl. 20,000€ of depreciation and 20,000€ of amortization). The current assets excluding cash
went up by 20,000€, the current liability excluding short term liability decreases by 40,000€, and the
non current assets went up by 30,000€ between 2018 and 2019. What is the cash flow from operation in
2019?
154
Solution
Cash flow from operating activities =
Net income of 2019 + Depreciation + Amortisation – Incr. in current assets – Decr. in current liabilities
200,000€ + 20,000€ + 20,000€ – 20,000€ - 40,000€ = 180,000€

Answers
Question
During the year, Success Formula bought 20,000€ worth of drinks, sold whiteboards for 1,000€,
generated 4,000€ from exam trainings, contracted a loan from a bank for 30,000€, bought back shares
for 10,000€, paid a dividend of 2,000€, and increased their accounts payable by 5,000€. What is the
financing cash flow for that year?
155
A. 18,000€
B. 22,000€
C. 42,000€
D. 50,000€
Answer: A
2. CFF Direct

2E. CFF Direct
Question
During the year, Success Formula bought 20,000€ worth of drinks, sold whiteboards for 1,000€,
generated 4,000€ from exam trainings, contracted a loan from a bank for 30,000€, bought back shares
for 10,000€, paid a dividend of 2,000€, and increased their accounts payable by 5,000€. What is the
financing cash flow for that year?
156
Solution
Cash flow from financing activities =
Net borrowing – Repurchase of shares – Dividend
30,000€ – 10,000€ – 2,000€ = 18,000€

Answers
Question
This year, company Duck had cost of goods sold of 200,000€, they increased their inventory by 50,000€,
increased their interest payable by 2,000€, the balance for their accounts payable was 10,000€ last year
and is now 15,000€. Knowing their revenue was 250,000€, what is the payment made to their inventory
suppliers?
157
A. 150,000€
B. 200,000€
C. 245,000€
D. 255,000€
Answer: C
3. CFO Direct

3E. CFO Direct
Question
This year, company Duck had cost of goods sold of 200,000€, they increased their inventory by 50,000€,
increased their interest payable by 2,000€, the balance for their accounts payable was 10,000€ last year
and is now 15,000€. Knowing their revenue was 250,000€, what is the payment made to their inventory
suppliers?
158
Solution
Payment to inventory suppliers = COGS + Change in inventory – Change in accounts payable
200,000€ + 50,000€ – 5,000€ = 245,000€

The Direct Way to Calculate CFO
+ Receipts from customers = (Revenue – Change in receivable)
+ Interest receipts from debtors
= (Interest revenue – Change in
interest receivable)
- Payments to (inventory)
suppliers
= (COGS + Change in inventory –
change in accounts payable)
- Payments to (other) suppliers
= (Operating expenses + change in prepaid
expenses – change in accrued liabilities)
- Payment to employees
= (Salary expense – Change in salary
payable)
- Interest payments to creditors
= (Interest expenses – Change in
interest payable)
- Payments to tax authorities
= (Income tax expense – Change
income tax payable)
159
Bold = most important to know

Answers
Question
Assume that SF Corporation uses the indirect method to depict cash flows. Indicate where, if at all, land
and building purchased with cash would be classified on the statement of cash flows
160
A. Operating activities section
B. Investing activities section
C. Financing activities section
D. Does not represent a cash flow
Answer: B
4. Classifying Activities

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Question
Assume that SF Corporation uses the indirect method to depict cash flows. Where, if at all, land and
building purchased with cash would be classified on the statement of cash flows
161
Operating activities section: These are the main or primary activities of a business. Operating activities
mainly deals with major activities of buying and selling of goods and services of a business firm.
Investing activities section: Investment activities are the other type of cash flow statement activities in
which cash transactions made on purchasing or sale of investments. These activities include money
spent on long-term assets, shares etc.
Financing activities section: Financing activities can be defined activities involving in the rise of the
company’s capital. These activities are confined mainly financial activities of the firm like trading of
company’s shares, adding or changing loans, or issuing more equity required.
4E. Classifying Activities

Answers
Question
Success Formula reported net income of 200,000€ for the year. During the year, accounts receivable
decreased by 10,000€, inventory increased by 8,000€, accounts payable increased by 6,000€,
depreciation expense of 10,000€ was recorded, and land was purchased for 150,000€ in cash. Net cash
provided by operating activities for the year is
162
A. 218,000€
B. 68,000€
C. 214,000€
D. 202,000€
Answer: A
5. CFO Calculation

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Question
Success Formula reported net income of 200,000€ for the year. During the year, accounts receivable
decreased by 10,000€, inventory increased by 8,000€, accounts payable increased by 6,000€,
depreciation expense of 10,000€ was recorded, and land was purchased for 150,000€ in cash. Net cash
provided by operating activities for the year is
163
Net Income + Depreciation & Amortization – ΔWorking Capital = Cash Flow from operating activities
200,000 + 10,000 + 10,000 - 8,000 + 6,000 = 218,000
For the ΔWorking Capital, you need to look at the respective current assets and liabilities and check
whether the respective change increases (decreases the amount of cash available. For example, a
reduction in accounts receivable normally follows a payment by the customer for a service/good, which
would increase the cash available (so we need to add it). For inventory, purchase of inventory is
normally related to a payment in cash, which reduces the the available cash flow. Lastly, an increase in
accounts payable indicates that a company has not immediately spent cash, which increases cash flow.
5E. CFO Calculation

Answers
Question
On the statement of cash flows using the indirect method, patent amortization expense will
164
A. be added to net income in the operating section
B. be deducted from net income in the operating section
C. appear as an inflow of cash in the investing section
D. appear as an outflow of cash in the investing section
Answer: A
6. Indirect Method

Answers
Question
On the statement of cash flows using the indirect method, patent amortization expense will
165
Amortization expense is a non-cash expense. Therefore, like all non-cash expenses, it will be added to
the net income when drafting an indirect cash flow statement. The same applies to depreciation of
physical assets, as well other non-cash expenditures, such as increases in payables and accumulated
interest expenses.

Answers
Question
Following SF Corporation’s annual transactions, what is the net cash provided by financing activities?
1. Issued 250,000€ of par value common stock for cash
2. Recorded and paid wages expense of 120,000€
3. Acquired land by issuing common stock of par value $100,000€
4. Declared and paid a cash dividend of 20,000€
5. Sold a long-term investment (cost 8,000€) for cash of $6,000€
6. Recorded cash sales of 800,000€
7. Acquired an investment in Zynga stock for cash of 42,000€
8. Repaid a 6-year note payable in the amount of 440,000€
166
A. (210,000)€
B. 790,000€
C. (292,000)€
D. 230,000€
Answer: A
7. CFF

Answers
Question
167
A. Financing Activity à +250,000 (issue shares, so more cash available)
B. Operating Activity à Not included
C. Investing Activity à Not included
D. Financing Activity à -20,000 (we pay a dividend, so less cash available)
E. Investing Activity à Not included
F. Operating Activity à Not included
G. Investing Activity à Not included
H. Financing Activity à -440,000 (we repay a note payable, so less cash available)
Total net cash provided by financing activities: 250,000€ - 20,000€ - 440,000€ = (210,000)€
7E. CFF

Answers
Question
Following SF Corporation’s annual transactions, what is the net cash provided by investing activities?
168
A. 864,000€
B. 424,000€
C. (36,000)€
D. (136,000)€
Answer: C
8. CFI

Answers
Question
169
A. Financing Activity à Not included
B. Operating Activity à Not included
C. Investing Activity (however, no cash flow as it is financed through common stock) à +-0
D. Financing Activity à Not included
E. Investing Activity à +6,000 (we have sold it, so more cash available)
F. Operating Activity à Not included
G. Investing Activity à -42,000 (we have bought it, so less cash available)
H. Financing Activity à Not included
Total net cash provided by investing activities: 6,000€ - 42000€ = (36,000)€
8E. CFI

Answers
Question
Which of the following activities would be classified as an investing activity?
170
A. Cash received from interest revenue
B. Cash paid (loaned) to a borrower as a loan
C. Cash received from dividend revenue
D. Cash paid to reacquire capital stock
Answer: B
6. Indirect Method

Answers
Question
Which of the following activities would be classified as an investing activity?
171
A. Interest on cash will typically be presented as a cash receipt within the other operating cash flows
section of the cash flow statement
B. Note receivable is an investment (due to its interest component)
C. Dividend income will typically be presented as a cash receipt within the other operating cash flows
section of the cash flow statement
D. Financing activities can be defined activities involving in the rise of the company’s capital. These
activities are confined mainly financial activities of the firm like trading of company’s shares,
adding or changing loans, or issuing more equity required

Answers
Question
During the year, ABC has sales of 670,000€. Knowing its beginning balance for receivables was 72,100€
and its ending balance 53,200€, its beginning balance for inventory was 60,400€ and ending 150,300€,
and the balance for their accounts payable was 10,900€ last year and is this year amounts to 15,100€,
what is the cash received from customers?
172
A. 760,900€
B. 742,100€
C. 688,900€
D. 616,800€
Answer: C
10. CFO Partial Calculation

Answers
Question
During the year, ABC has sales of 670,000€. Knowing its beginning balance for receivables was 72,100€
and its ending balance 53,200€, its beginning balance for inventory was 60,400€ and ending 150,300€,
and the balance for their accounts payable was 10,900€ last year and is this year amounts to 15,100€,
what is the cash received from customers?
173
Sales + Decrease (or - Increase) in Accounts Receivable = Cash Received from Customers
670,000€ + 72,100€ - 53,200€ = 688,900€
Sales (can come in both cash and/or receivable form – our starting point)
- Increases in receivables (we could have received more cash/cash flow, but we only get paid later)
+ Decreases in receivables (we got paid by our customer and have more cash/cash flow available)
= Cash Received from Customers
10E. CFO Partial Calculation

The Direct Way to Calculate CFO
+ Receipts from customers = (Revenue – Change in receivable)
+ Interest receipts from debtors
= (Interest revenue – Change in
interest receivable)
- Payments to (inventory)
suppliers
= (COGS + Change in inventory –
change in accounts payable)
- Payments to (other) suppliers
= (Operating expenses + change in prepaid
expenses – change in accrued liabilities)
- Payment to employees
= (Salary expense – Change in salary
payable)
- Interest payments to creditors
= (Interest expenses – Change in
interest payable)
- Payments to tax authorities
= (Income tax expense – Change
income tax payable)
174
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