BALIUAG UNIVERSITY

CPA Review Program

Theory of Accounts (FAR & AFAR)
_____________________________________________________________________________________________
Module 5: Nonfinancial Assets Part 1 LVC

I. Inventories (IAS 2)
 Definition of terms
 Inventories are assets:
a. held for sale in the ordinary course of business;
b. in the process of production for such sale; or
c. in the form of materials or supplies to be consumed in the production process or in the rendering of
services.
 Net realizable value – The estimated selling price in the ordinary course of business less the estimated costs of
completion and the estimated costs necessary to make the sale.
 Measurement of inventories
 Inventories shall be measured at the lower of cost and net realizable value.
 The cost of inventories shall comprise all costs of purchase, costs of conversion and other costs incurred in
bringing the inventories to their present location and condition.
 Costs of purchase include:
- The costs of purchase of inventories comprise the purchase price, import duties and other non-
recoverable taxes, and transport, handling and other costs directly attributable to the acquisition of
finished goods, materials and services.
- Trade discounts, rebates and other similar items are deducted in determining the costs of purchase.
 Costs of conversion include:
- The costs of conversion of inventories include costs directly related to the units of production, such as
direct labor.
- They also include a systematic allocation of fixed and variable production overheads that are incurred in
converting materials into finished goods.
 Other costs include:
- Other costs are included in the cost of inventories only to the extent that they are incurred in bringing the
inventories to their present location and condition.
- For example, it may be appropriate to include non-production overheads or the costs of designing
products for specific customers in the cost of inventories.
 Costs excluded from inventory (expensed outright)
- Abnormal amounts of wasted materials, labor or other production costs;
- Storage costs, unless those costs are necessary in the production process before a further production
stage;
- Administrative overheads that do not contribute to bringing inventories to their present location and
condition; and
- Selling costs.
 Inventories comprising agricultural produce that an entity has harvested from its biological assets are
measured on initial recognition at their fair value less costs to sell at the point of harvest (IAS 41).
 Inventory valuation
 Costs formulas (cost flow)
1. Specific identification
2. First-in, first-out (FIFO)
3. Weighted average cost formula (periodic or perpetual)
 Techniques for measurement of costs
1. Standard cost method
2. Retail method
 Write-down to net realizable value
 Any write-down to NRV should be recognized as an expense in the period in which the write-down occurs.
 Any reversal should be recognized in the income statement in the period in which the reversal occurs. The
reversal is limited to the amount of the original write-down.
 Disclosure requirements
a. The accounting policies adopted in measuring inventories, including the cost formula used.
b. The total carrying amount of inventories and the carrying amount in classifications appropriate to the entity.
c. The carrying amount of inventories carried at fair value less costs to sell.
d. The amount of inventories recognized as an expense during the period.
e. The amount of any write-down of inventories recognized as an expense in the period.

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f. The amount of any reversal of any write-down that is recognized as a reduction in the amount of inventories
recognized as expense in the period
g. The circumstances or events that led to the reversal of a write-down of inventories
h. The carrying amount of inventories pledged as security for liabilities.
 Illustration for inventory count
Indicate whether each item is included or excluded from the inventory count at year-end.
a. Goods counted in the warehouse included
b. Merchandise on counter for sale included
c. Merchandise in the store currently used for window display included
d. Unsold items in the hands of the consignee included
e. Goods held on consignment excluded
f. Items specifically segregated per contract of sale excluded
g. Ordered goods received from supplier but invoice not yet received included
h. Ordered goods invoiced but not yet received from supplier, freight is on seller excluded
i. Items sold and still in the shipping department included
j. Purchased goods in transit, FOB shipping point included
k. Purchased goods in transit, FOB destination excluded
l. Sold merchandise in transit, FOB shipping point excluded
m. Sold merchandise in transit, FOB destination included
n. Defective goods segregated as ‘return to vendor’ excluded
o. Returned merchandise received from customers included
p. Uncompleted goods in the production department included
q. Unsalable goods in the storage room excluded
r. Inventories pledged as security for liabilities included
 Illustration for inventory cost measurement
Indicate whether each item is included or excluded from the cost of inventory
a. Factory overhead included
b. Price of direct materials included
c. Factory supplies used in production included
d. Store supplies used in sales and promotion excluded
e. Customs duties and taxes included
f. Value added tax on purchases excluded
g. Value added tax on sales excluded
h. Brokerage commission for arranging imports included
i. Sales commission to agents excluded
j. Freight on purchases, FOB shipping point included
k. Freight on purchases, FOB destination excluded
l. Freight on sales, FOB shipping point excluded
m. Freight on sales, FOB destination excluded
n. Warranty cost on items sold excluded
o. Salaries and wages of factory personnel included as FOH
p. Salaries and wages of store personnel excluded
q. Trade and term discounts on purchases (deducted from purchase price)
r. Purchase price of the goods bought from suppliers included
s. Handling cost related to imports included
t. Packaging cost for shipment to customer excluded
u. Special handling charges on shipments to customer excluded
v. Insurance on shipment for purchased goods included
w. Handling cost of purchased items included
x. Insurance on factory building included as FOH
y. Insurance on store building excluded
z. Abnormal spoilage excluded
aa. Rework cost of defective finished goods included
 Inventory accounts classification
a. Merchandise inventory
b. Raw materials inventory
c. Work-in-process inventory
d. Finished goods inventory
e. Indirect materials

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 Accounting for inventory movement
a. Periodic method – It does not record the inventory inflow or outflow and requires physical count to determine
the inventory balance.
b. Perpetual method – It accounts for the inflow and outflow of the inventories.
 Recording methods for purchases
a. Gross method – Purchases and accounts payable is recorded at gross amount. Purchase discount is accounted
when availed.
b. Net method – Purchases and accounts payable is recorded at the amount net of purchase discount.

II. Property, Plant and Equipment (IAS 16)

 Definition
 Property, plant and equipment are tangible items that:
a. Are held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes; and
b. Are expected to be used during more than one period.
 Recognition
 The cost of an item of property, plant and equipment shall be recognized as an asset if, and only if:
a. It is probable that future economic benefits associated with the item will flow to the entity; and
b. The cost of the item can be measured reliably.
 Measurement at recognition:
 An item of property, plant and equipment that qualifies for recognition as an asset shall be measured at its
cost.
 The cost of an item of property, plant and equipment is the cash price equivalent at the recognition date.
 If payment is deferred beyond normal credit terms, the difference between the cash price equivalent and the
total payment is recognized as interest over the period of credit unless such interest is capitalized in
accordance with IAS 23.
 The cost of an item of property, plant and equipment comprises:
a. Its purchase price, including import duties and non-refundable purchase taxes, after deducting trade
discounts and rebates.
b. Any costs directly attributable to bringing the asset to the location and condition necessary for it to be
capable of operating in the manner intended by management.
c. The initial estimate of the costs of dismantling and removing the item and restoring the site on which it is
located, the obligation for which an entity incurs either when the item is acquired or as a consequence of
having used the item during a particular period for purposes other than to produce inventories during that
period.
 Measurement after recognition
 An entity shall choose either the cost model or the revaluation model as its accounting policy and shall apply
that policy to an entire class of property, plant and equipment.
1. Cost model: After recognition as an asset, an item of PPE shall be carried at its cost less any accumulated
depreciation and any accumulated impairment losses.
2. Revaluation model: After recognition as an asset, an item of PPE whose fair value can be measured
reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any
subsequent accumulated depreciation and subsequent accumulated impairment losses.
 Modes of acquisition of PPE:
Acquisition Mode Measurement
 Cash price equivalent
 Includes cash paid plus directly attributable costs (freight, installation cost, and
other costs necessary to bring the asset to the location and condition for its
Cash basis
intended use)
 For basket price or lump sum price acquisition, the single price is prorated based on
the relative fair value of the assets acquired.
On account with  Measurement is equal to the invoice price minus the cash discount.
cash discount  Discount is deducted whether taken or not.
 Cash price equivalent at recognition date.
 If cash price is not determinable, measurement shall be the present value of all
Installment basis
payments discounted using the implied interest rate.
 The excess is treated as interest amortized over the credit period.

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Acquisition Mode Measurement
 Order of priority:
Issuance of
a. Fair value of PPE
equity securities
b. Fair value of shares issued
(share capital)
c. Par or stated value of shares issued
 Order of priority:
Issuance of debt a. Fair value of issued debt security (i.e., bonds payable)
securities b. Fair value of PPE
c. Par or face value of issued debt security
 With commercial substance
o Order of priority
a. Fair value of PPE given
b. Fair value of PPE received
c. Carrying amount of PPE given
o Cash involved
a. Plus cash payment on part of payor
Exchange
b. Minus cash received on part of recipient
o Gain or loss on exchange is fully recognized
 Lacks commercial substance
o PPE acquired is measured at the carrying amount of the PPE given up.
o No gain or loss on exchange is recognized.
o Also cash involved is added on the part of payor and deducted on the part of
the recipient.
 Order of priority
Trade in a. Fair value of PPE given plus cash payment
b. Trade in value of PPE given plus cash payment (fair value of the PPE received)
 PPE received is measured at its fair value.
 Donated capital is credited if the donor is a shareholder.
Donation  When the donation is subsidy from non-shareholder, recognized as income
 When the donation is not a subsidy from non-shareholder, liability is recognized
then transferred to income when restrictions are met.
 Cost of self-constructed assets:
a. Direct materials
b. Direct labor
c. Indirect cost and incremental overhead specifically traceable to the
construction.
 Allocation of overhead may be done based on direct labor cost or direct labor
Construction
hours.
 Savings on construction is an internal profit but not recorded as income or gain.
 Loss on construction
a. Normal amount – Included in the cost of self-constructed PPE.
b. Abnormal amount – Excluded from the costs of self-constructed PPE. Treated
as loss.
 Cost of a new building constructed on the site of a previous building (PIC Q&A No. 2012-02)
 Accounting for the Allocated Cost or Carrying Value of the Old Building

Scenario 1: The entity intends to demolish the old building and will not use the old building prior to its
demolition.
A. New building will be used as an owner-occupied property
o The allocated cost of the old building shall not form part of the cost of the new building.
o The allocated cost of the old building should be de-recognized and the loss arising from
derecognition is included in profit or loss.
B. New building will be sold as an inventory
o Include any cost allocated to the old building as part of the cost of the new building or development
property that will be sold as an inventory.
C. New building will be held as an investment property
o Accounted same as owner-occupied property.

Scenario 2: The entity acquired the property in a prior reporting period and initially used the property as an
owner-occupied property. In the current reporting period, it decided to demolish the old building and replace
it with a new building.

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o The entity, at the time it makes the decision to demolish the old building at a specific date in the future,
has to re-compute the related depreciation charges on the building to depreciate the remaining carrying
value of the building over the remainder of its life (or the remaining period before it is demolished).
o Accounted as changes in accounting estimate (IAS 18)
o Hence, the old building will have a nil value at the date of the planned demolition.
o If for some reason there is a remaining carrying value of the old building at the time of demolition, such
amount shall not be capitalized as part of the cost of the new building; instead, such amount shall be
charged to profit or loss.
 Demolition costs of the old building to give way for the construction of the replacement building
o It is preferable to capitalize the demolition costs as part of the cost of the new building since the
demolition of the old building is a direct result of the decision to construct the new building.
 Illustration: Identify the cost to be included in Land, Building and Land Improvement accounts.
a. Purchase price allocated to land. Land
b. Escrow fee for the land purchased. Land
c. Unpaid real property tax on land assumed by buyer. Land
d. Construction cost of building. Building
e. Architect fee and superintendent fee. Building
f. Cost of option for land acquired. Land
g. Premium on insurance during construction. Building
h. Subsequent real property tax on land following the acquisition. Expense
i. Cost of razing the old building to give way for construction of new building. Land
j. Sale of scrap from old building demolished. Land as deduction
k. Cost of excavation done for construction of new building. Building
l. Permanent improvements such as grading and levelling. Land
m. Cost of option for alternative land not acquired. Expense
n. Temporary fence built for construction safety. Building
o. Cost of permanent fence built around the perimeter of the land. Land Improvement
p. Cost of temporary buildings used for construction purposes. Building
q. Cost to construct sidewalks, pavements, driveways and parking lot that is part of the blueprint of the new
building constructed. Building
r. Cost allocated to old building. The old building was not used and was subsequently demolished in order to
construct a new office building. Loss account per PIC 2012-02
s. Cost to construct sidewalks, pavements, driveways and parking lot that are built subsequently years after the
construction of the building. Land Improvement
t. Payment to tenants on the acquired land to vacate the premises. Land
u. Cost of landscaping, trees and shrubs. Land Improvement
v. Timber sold from trees felled during demolition of old building. Land as deduction
w. Cost of surveying before construction. Land
x. Cost of title to land. Land
y. Cost of removal of safety fences used during construction. Building as deduction
z. Special assessment charged by the local government to land owners as contribution to the cost of public
improvements. Land
aa. Safety inspection fee on construction. Building
bb. Premium paid on property insurance of the constructed building. Expense
cc. Cost of improvements made on the building such as replacing glass wall with shatter-proof glass. Building
dd. Cost of regular repairs and replacements made on the building. Expense
 Illustration: Identify whether each item is included in, excluded or deducted from the cost of machinery.
a. Cash price of machinery. Included
b. Labor cost on installation of the new machine. Included
c. Freight paid on the new machinery. Included
d. Term discount on purchased machinery. The discount was not taken. Deducted
e. Removal cost of the old machinery. Excluded
f. Testing cost incurred. Included
g. Property insurance on the new machinery. Excluded
h. Cost of the dismantling and restoring the site as required by the contract. Included
i. Safety device and parts added to the machine. Included
j. Continuing and frequent repairs. Excluded
k. Custom taxes for imported machines. Included
l. Value added tax on purchase on machineries. Excluded
m. Cost of training employees who will operate the machine. Excluded
n. Overhaul costs that will increase productivity of the machine. Included
o. Replacement cost for broken gear on a machine as part of routine maintenance. Excluded
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III. Intangible Assets (IAS 38)

 Specific intangible assets
Legal
Intangible
Definition Life/Amortization/Impairm
Asset
ent
An exclusive right granted for a product, process or an 20 years
improvement of a product or process which is new, inventive and
Patent useful which gives the inventor the right to exclude others from
making, using, or selling the product during the life of the patent.
(Intellectual Property Office of the Philippines)
The legal protection extended to the owner of the rights in an Life of the author plus 50
Copyright original work (every production in the literary, scientific and artistic years after his death
domain). (Intellectual Property Office of the Philippines)
Trademark/ A tool used that differentiates goods and services from each 10 years legal life but may
Tradename other. A trademark can be one word, a group of words, sign, be renewed. Normally not
/ Brand symbol, logo, or a combination of any of these. (Intellectual amortized but subject for
name Property Office of the Philippines) impairment.
An exclusive right granted by the franchisor (government or Amortize if with definite
private companies) to a franchisee to use the property or the period or tested for
Franchise
rights (trademark, patent and process of the franchisor) impairment if with
indefinite period
An asset representing the future economic benefits arising from Not amortized but tested
Goodwill other assets acquired in a business combination that are not for impairment at least
individually identified and separately recognized. (IFRS 3) annually
The right acquired by the lessee by virtue of a contract of lease to Amortized over the
Leasehold
use the specific property owned by the lessor for a definite period life/term of the lease
right
of time in consideration for a rent.
A permit from an authority to own or use something, do a If the term is renewable
Right or
particular thing, or carry on a trade. (i.e. broadcasting license, indefinitely, the license is
license
airline right) tested for impairment
Consists of information about customers such as their name and Tested for impairment
Customer contact information. A customer list also may be in the form of a
list database that includes other information about the customers
such as their order history and demographic information.
An arrangement whereby a government or other public sector Amortized over definite
Service
body contracts with a private operator to develop (or upgrade), period
concession
operate and maintain the grantor's infrastructure assets.
 Acquisition of intangible assets (Rules same as PPE)
a. Separate acquisition
b. Part of a business combination
c. Government grant
d. Exchange of assets
e. Self-creation (internal generation)
 The cost of a separately acquired intangible asset comprises:
 Purchase price, including import duties and non-refundable purchase taxes, after deducting trade
discounts and rebates; and
 Any directly attributable cost of preparing the asset for its intended use such as:
a. Costs of employee benefits (IAS 19) arising directly from bringing the asset to its working condition;
b. Professional fees arising directly from bringing the asset to its working condition; and
c. Costs of testing whether the asset is functioning properly.
 Examples of expenditures that are not part of the cost of an intangible asset
 Costs of introducing a new product or service (including costs of advertising and promotional activities);
 Costs of conducting business in a new location or with a new class of customer (including costs of staff
training); and
 Administration and other general overhead costs.
 Costs incurred while an asset capable of operating in the manner intended by management has yet to be
brought into use; and
 Initial operating losses, such as those incurred while demand for the asset’s output builds up.

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 Internally generated intangible assets
 To assess whether an internally generated intangible asset meets the criteria for recognition, an entity
classifies the generation of the asset into:
1. Research phase; and
2. Development phase.
 Internally generated goodwill shall not be recognized as an asset.
 Internally generated brands, mastheads, publishing titles, customer lists and items similar in substance
shall not be recognized as intangible assets.
 Research and development costs
 Charge all research cost to expense.
 Development costs are capitalized if, and only if, an entity can demonstrate all of the following:
1. The technical feasibility of completing the intangible asset so it will be available for use or sale.
2. Its intention to complete the intangible asset and use or sell it.
3. Its ability to use or sell the intangible asset.
4. The Intangible asset will generate probable future economic benefits. Among other things, the entity
can demonstrate the existence of a market for the output of the intangible asset or the intangible
asset itself or, if it is to be used internally, the usefulness of the intangible asset.
5. The availability of adequate technical, financial and other resources to complete the development and
to use or sell the intangible asset.
6. Its ability to measure reliably the expenditure attributable to the intangible asset during its
development.
 If an entity cannot distinguish the research phase of an internal project to create an intangible asset from the
development phase, the entity treats the expenditure for that project as if it were incurred in the research
phase only.
 Recognition of an expense
 Expenditure on an intangible item shall be recognized as an expense when it is incurred unless:
a. It forms part of the cost of an intangible asset that meets the recognition criteria; or
b. The item is acquired in a business combination and cannot be recognized as an intangible asset. If this is
the case, it forms part of the amount recognized as goodwill at the acquisition date
 Other examples of expenditure that is recognized as an expense when it is incurred include:
a. Expenditure on start-up activities (ie start-up costs), unless this expenditure is included in the cost of an
item of property, plant and equipment in accordance with IAS 16. Start-up costs may consist of
establishment costs such as legal and secretarial costs incurred in establishing a legal entity, expenditure
to open a new facility or business (i.e. pre-opening costs) or expenditures for starting new operations or
launching new products or processes (i.e. pre-operating costs).
b. Expenditure on training activities.
c. Expenditure on advertising and promotional activities (including mail order catalogues).
d. Expenditure on relocating or reorganizing part or all of an entity.
 Measurement subsequent to acquisition: intangible assets with finite lives
 The cost less residual value of an intangible asset with a finite useful life should be amortized on a systematic
basis over that life:
a. The amortization method should reflect the pattern of benefits.
b. If the pattern cannot be determined reliably, amortize by the straight line method.
c. The amortization charge is recognized in profit or loss unless another IFRS requires that it be included in
the cost of another asset.
d. The amortization period should be reviewed at least annually.
 Amortization of an intangible asset is over its legal life or useful life whichever is shorter.
 The residual value of an intangible asset is presumed to be zero unless a third party is committed to buy the
intangible asset at the end of its useful life or unless there is an active market.
 Measurement subsequent to acquisition: intangible assets with indefinite useful lives
 An intangible asset with an indefinite useful life should not be amortized.
 Its useful life should be reviewed each reporting period to determine whether events and circumstances
continue to support an indefinite useful life assessment for that asset.
 The change in the useful life assessment from indefinite to finite should be accounted for as a change in an
accounting estimate.
 The asset should also be assessed for impairment in accordance with PAS 36.
 Other accounting issues
 Legal fees for prosecuting or defending an intangible asset (patent, copyright, trademark), whether
successfully or unsuccessfully, shall be expensed.
 Cost of franchise includes the initial franchise fee plus directly attributable costs.
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Periodic payments made by the franchisee to the franchisor is considered as an outright expense.
Leasehold improvement is classified as property, plant and equipment
Service concession is accounted as an intangible asset if the operator receives a right to charge for use of a
public sector asset that it constructs or upgrades and then must operate and maintain for a specified period
of time. Service concession is accounted as a financial asset if the operator receives an unconditional con-
tractual right to receive a specified or determinable amount of cash or another financial asset from the gov-
ernment in return for constructing or upgrading a public sector asset, and then operating and maintaining
the asset for a specified period of time.
 Organization cost incurred in forming or organizing a business entity/corporation is expensed immediately.
 Internally developed computer software
a. Costs incurred in creating the computer software shall be charged to expense until a technical feasibility
has been established.
b. After technical feasibility, cost of coding and testing, and the cost to produce the product master shall be
charged to intangible asset.
c. Cost incurred to actually produce the software from masters and package the software for sale shall be
charged to inventory.
 Purchased software is accounted as:
a. Intangible asset is it is for licensing or rental to others
b. Inventory if it is for sale
c. Property, plant and equipment if for use and integral part to the hardware
 Website development costs
o When an entity is not able to demonstrate how a web site developed for promoting and advertising its
own products and services will generate probable future economic benefits, and consequently all
expenditure on developing such a web site shall be recognized as an expense when incurred. (SIC 32)
 Difference between Full IFRS and IFRS for SMEs
Full IFRS IFRS for SMEs
Internally generated intangible assets may be It does not allow for any internally generated
capitalized. intangible assets to be capitalized.
Initial measurement of intangible assets acquired by Initial measurement of intangible assets acquired
way of a government grant shall be measured at fair by way of a government grant must be measured
value of the grant or at nominal amount. at fair value.
Revaluation model may be applied It does not permit the application of the
revaluation model to intangible assets.
Intangible assets may have indefinite useful life. No It does not permit intangible assets to be
ten years presumed limit. classified as an asset with an indefinite life. A
useful life is required to be established for all
intangible assets, or it is assumed to be 10 years.
The entity will review at each reporting date whether There is no requirement to review amortization
there has been a change in useful life, residual amount method, useful life and residual values at each
or amortization method. If there is an indicator, this reporting date.
will be adjusted as a change in estimate.
 Illustration: Determine whether the cost item is capitalized as intangible asset, outright expense or others.
a. Internally developed publishing titles and mastheads expense
b. Acquired government license for a special type of operation intangible asset
c. Organization cost to set up the business expense
d. Cost of a building to be used for several R&D projects others
e. Depreciation of item (d) expense
f. Coding and testing costs in order to established feasibility of an internally generated software expense
g. Coding and testing costs after the establishment of technological feasibility of an internally generated software
intangible asset
h. R&D cost (laboratory research, employee benefits of scientist and engineers) expense
i. Patent applications and licensing fees intangible asset
j. Purchase cost of a software to be used as the entity’s accounting information system others
k. Research cost (satisfying all the requirements for capitalization under IAS 38) expense
l. Cost of an equipment used specifically only for a particular R&D project expense
m. Leasehold improvement others
n. Litigation cost incurred for the unsuccessfully defense a copyright expense
o. Purchase cost of a software to be leased out to clients intangible asset
p. Litigation cost incurred for the successfully defense a copyright expense
q. Customer list acquired from a third party intangible asset
r. Design cost of the trademark intangible asset

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s. Completion of detailed program design of internally generated software expense
t. Publicity cost to establish recognition of a trademark expense
u. Development cost (satisfying majority of the requirements for capitalization under IAS 38) expense
v. Legal and administrative cost incurred in the application of a patent intangible asset
w. Initial fees to acquire a franchise right intangible asset
x. Costs incurred but not specifically identifiable as research cost or development cost (satisfying all of the
requirements for capitalization under IAS 38) expense
y. Duplication of computer software (internally generated) from product master others
z. Packaging of computer software for sale (internally generated) others
aa. Internal expenditure for internally generated website (satisfying requirements of IAS 38) with probable future
economic benefits intangible asset
bb. Licensing cost to establish a new company expense
cc. Cost of product master of an internally generated software intangible asset
dd. Routine on-going efforts to refine and enrich existing products expense but not R&D
ee. Registration fees in the intellectual property office intangible asset
ff. Design cost incurred to add minor changes required by the Bureau of Patent intangible asset
gg. Additional development cost for the project applied for patent to ensure it is at operational stage intangible
asset
Multiple Choice Questions
1. Which of the following costs must be expensed under IAS 2?
A. Costs of purchase that are paid to the suppliers of raw materials
B. Import duties on raw materials that are paid to the authorities
C. Variable production overheads that are allocated to each unit based on actual usage
D. Selling and distribution overheads incurred in the ordinary course of business
2. Which of the following is not permitted as a cost of inventory?
A. Non-recoverable taxes C. Fixed manufacturing overheads
B. Shipping D. Storage costs
3. How are unallocated overheads treated as per IAS 2?
A. Recognize as an expense so long as there is a profit in the current period.
B. Recognize as an expense in the period in which they are incurred.
C. Treated as deferred expenditures.
D. Capitalized with the cost of inventories.
4. Under IAS 2, fixed production overheads should be allocated to items of inventory on the basis of ____ production
capacity.
A. Actual C. Theoretical
B. Normal D. Estimated
5. Which of the following items are excluded from the scope of IAS 2 – Inventories?
A. Agricultural produce at the point of harvest C. Assets held for sale in the ordinary course of business
B. Inventories stated at net realizable value D. Inventories whose fair value is more than the cost
6. The estimated selling price in the ordinary course of business less estimated cost of completion and estimated cost
of sale is called…
A. Market value C. Current value
B. Fair value D. Net realizable value
7. Fixed Production overheads are those…
A. Indirect costs of production that remain constant regardless of the volume of production.
B. Direct costs attributable to the product or service that remain constant regardless of the volume of production.
C. Indirect costs of production that vary directly with the volume of production.
D. Direct costs attributable to the product or service that vary regardless of the volume of production
8. Inventories are stated at:
A. Lower of cost and carrying value C. Lower of cost and net realizable value
B. Lower of fair value and net realizable value D. Cost of production
9. Inventory excludes…
A. Goods purchased for resale C. Construction works in progress
B. Finished goods produced D. Raw materials
10. Which of the following is allowed as a cost of inventory?
A. Variable manufacturing overheads C. Storage costs
B. Abnormal waste D. Selling costs
11. Which of the following costs are not included while computing the cost of purchase?
A. Purchase Price C. Import duties
B. Recoverable taxes D. Shipping costs
12. Inventory should be measured at the lower of cost and _____
A. Fair value C. Net realizable value
B. Market value D. Present value
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13. Which of the following items should be disclosed as per the requirements of IAS 2?
A. Average holding period of inventories of the entity as at the end of the reporting period.
B. List of major customers to whom the inventories were sold during the reporting period.
C. Average lead time of procurement for major classes of inventories.
D. Carrying amount of inventories pledged as security for liabilities
14. Inventories include…
A. Equipment used in the ordinary course of business.
B. Tangible assets lying in the store, which are intended for sale.
C. Machinery used in the production process which is for sale.
D. Materials and supplies used for maintaining property, plant and equipment
15. Any amount of write-down of inventories to net realisable value should be…
A. Treated as a deferred expense and written off based on the average inventory holding period.
B. Recognised as an expense in the period in which the write-down occurs.
C. Recognised as an expense in the subsequent period in which such write-down is warranted.
D. Recognized as a current liability in the Balance Sheet
16. Which of the following cost models is not permitted under IAS 2?
A. First in, First out (‘FIFO’) C. Weighted Average
B. Last in, Last out (‘LIFO’) D. Actual cost
17. What is the amount an asset is recognized at in the statement of financial position less any accumulated
depreciation or impairment losses?
A. Carrying amount C. Impairment amount
B. Residual value D. Fair value
18. What is an impairment loss?
A. The amount by which the carrying amount of an asset exceeds the recoverable amount.
B. The amount by which the market value of an asset exceeds the net present value.
C. The difference between the fair value of an asset and the net realisable value of the asset.
D. The amount by which the carrying amount of an asset exceeds the book value
19. If one large asset has a number of individual components with different useful lives, how should this be
depreciated?
A. Treat as one asset C. Expense it all
B. Break down into different parts D. Treat as one asset, but disclose in the notes FS
20. When an asset is sold or disposed of, where is the gain or loss recognized?
A. Asset disposal account C. Depreciation
B. Profit and loss D. Revaluation reserve
21. How should an asset be initially recognized in the financial statements?
A. Measure at cost C. Measure at net realizable value
B. Lower of cost or market value D. Measure at fair value
22. Under IAS 16, which two subsequent accounting treatments are allowed subsequently to initial recognition?
A. Cost model and present value model C. Fair value model and revaluation model
B. Cost model and revaluation model D. Fair value model and cost model
23. When it is _______ that future economic benefits associated with an asset will flow to the entity, and the costs can
be _____ measured, it should be recognised as an asset.
A. Possible, reasonably C. Probable, reliably
B. Possible, reliably D. Probable, reasonably
24. Under IAS 16, how often should the useful life of an asset be reviewed?
A. At least at each financial year end C. At management’s discretion
B. Every six months D. Depending on the useful life of the asset
25. What is the net amount an entity expects to obtain for an asset at the end of its useful life?
A. Residual value C. Present value
B. Depreciated value D. Fair value
26. If an asset decreases in value, the decrease is noted as…
A. A decrease in the “revaluation surplus” in the statement of financial position.
B. A decrease in retained earnings in the statement of financial position.
C. As “valuation deficit” in the statement of financial position.
D. An expense in the statement of comprehensive income.
27. Which of these is an allowable cost of an asset under IAS 16?
A. Professional fees C. Administration expenses
B. General overheads D. Initial operating losses
28. When an item of property, plant and equipment is revalued, what should be revalued?
A. A selection of assets decided by management C. The individual asset
B. The whole class of assets to which it belongs D. A selection of assets picked at random
29. Under IAS 16, if assets are exchanged in an arms length, commercial transaction, their value will be measured at:
A. Written down value C. Carrying value
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B. Fair value D. Net present value
30. Which of the following is covered by IAS 16 – Property, Plant and Equipment?
A. Assets held for sale C. Exploration assets
B. Biological assets related to agricultural activity D. Office buildings
31. If an asset increases in value, the increase is noted as…
A. An increase in net profit in the statement of comprehensive income.
B. An increase in retained earnings in statement of financial position.
C. An increase in revaluation surplus in the statement of financial position and other comprehensive income in
the statement of comprehensive income.
D. An increase in “other profit” in statement of comprehensive income.
32. Which of the following is not an asset that falls under the scope of IAS 16?
A. Tangible assets
B. Assets held for the production or supply of goods or services
C. Assets held for sale in the normal course of business
D. Assets expected to be used for more than one period
33. Under IAS 16, if an asset is idle…
A. Depreciation is paused C. Depreciation is ignored
B. Depreciation for the entire period does not apply D. Depreciation continues
34. Which of the following is not a component of cost of an asset?
A. Purchase price C. Estimate of compulsory future dismantling costs
B. Import duties D. Refundable sales tax
35. A company purchases land with an office building. The building has a useful life of 20 years. How should the land be
depreciated?
A. Depreciate over 20 years C. Don’t depreciate the land
B. Depreciate over useful life of the land D. None of these
36. Which of the following disclosures is not required when an asset is revalued?
A. Name of valuer C. Effective date of revaluation
B. Basis used D. Whether valuer was independent
37. Under IAS 16, which of the following is not allowable as a directly attributable cost of a machine?
A. Initial test batches C. Delivery
B. Site preparation D. Estimated dismantling costs
38. What is the amount an asset could achieve if sold between knowledgeable, willing parties in an arms length
transaction?
A. Current value C. Written down value
B. Net present value D. Fair value
39. A change in depreciation method is a…
A. Change in accounting policy C. Change in accounting method
B. Change in accounting estimate D. Change in accounting standard
40. If one intangible asset is exchanged for another, the cost of the intangible is measured at….
A. Book value C. Present value
B. Fair value D. Estimated value
41. Which of the following is not a requirement to capitalize development costs under IAS 38 – Intangible Assets?
A. It must be technically feasible
B. The entity intends to sell the completed intangible asset
C. The entity can demonstrate how the asset will generate future economic benefits
D. The commercial feasibility for the asset may be uncertain
42. Which of the following internally generated items may not be recognized as intangible assets?
A. Mastheads C. Publishing Titles
B. Customer lists D. All of these
43. Where is the amortization of an intangible asset recognized?
A. Profit or Loss C. Statement of Financial Position
B. Equity D. Statement of Cash Flows
44. Which of the following is an intangible asset under IAS 38?
A. Patent rights C. Customer loyalty
B. Market share D. All of the above
45. If an asset is revalued, and the revised valuation is less than its current valuation, where will the change be noted?
A. Statement of Financial Position under “Decrease in asset value”
B. Statement of Financial Position under “Revaluation deficit”
C. Equity under “Revaluation deficit”
D. Income Statement as an expense
46. What is the initial recognition measurement of an intangible asset?
A. Cost C. Net present value
B. Fair value D. Market value
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47. Which of the following is not a recognized n intangible asset under IAS 38?
A. Software patents C. Trademarks
B. Customer lists D. Training and development cost
48. When an intangible asset is sold, the gain or loss is recognised…
A. in Equity C. in the Statement of Financial Position
B. in the Profit or Loss D. in the Statement of Cash Flows
49. Which of the following measurement models is not permitted for the subsequent measurement of intangible
assets under IAS 38?
A. Cost model C. Revaluation model
B. Capital Assets pricing model D. None of these
50. If an intangible asset is revalued upwards, the increase in value should be credited…
A. to the Income Statement under “Other Income”
B. to the Income Statement under “Revaluation of Assets”
C. to the Statement of Financial Position under “Revaluation Surplus”
D. to Equity under “Revaluation Surplus”
51. When does amortization of an intangible asset commence?
A. When the asset is substantially complete C. When the asset is available for use
B. When management determine D. At the start of the accounting period
52. An intangible asset with a finite useful life should be amortized over…
A. Its expected useful life C. Five years
B. A period determined by management D. No foreseeable limit
53. How often should the useful life of an intangible asset with a finite useful life be reviewed?
A. Every six months C. Every five years
B. Every year D. At management’s discretion
54. What are intangible assets?
A. Monetary assets without physical substance C. Non-monetary assets without physical substance
B. Monetary assets with physical substance D. Non-monetary assets with physical substance

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