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IIA CIA Exam
Certified Internal Auditor Exam (Page 47 )

Updated On: 12-Jan-2026
Page 47 of 342
PDF with 1702 Questions

The cost of materials has risen steadily over the year. The entity uses its newest materials first when removing items from inventory. Which of the following methods of estimating the ending balance of the materials inventory account will result in the highest profit, all other variables held constant?

  1. Last-in-first-outLIFO).
  2. First-in-first-outFIFO).
  3. Weighted average.
  4. Specific identification.

Answer(s): B

Explanation:

The first-in-first-outFIFO) method assumes that the oldest and hence least costly units are used first, and the newest and most costly items remain in inventory. This method will
result in the highest inventory balance if costs rise steadily during the accounting period. Accordingly. FIFO results in the lowest cost of goods sold and the highest profit.



Now assume the terms required the seller to deliver to the destination instead of the shipping point. What is the correct amount of inventory and freight-in relating to this purchase on the Year 1 financial statements?

  1. Option A
  2. Option B
  3. Option C
  4. Option D

Answer(s): A

Explanation:

Title and risk of loss passed to the buyer at the destination, and the seller incurred the
erase of delivery to that point The goods did not arrive until after year-end, so they should not be included in Year 1 inventory. Freight-in should also not be recorded until Year 2.



An entity purchased US $1 .000 gross amount of inventory on account with terms of 2 f discount if paid within 10 days. The seller was responsible for delivery to the shipping point, with freight of US $30 prepaid by the seller. The entity records purchases at the net amount The journal entry to record payment 8 days after the invoice date is

  1. Option A
  2. Option B
  3. Option C
  4. Option D

Answer(s): A

Explanation:

Under the net method, the payable is initially credited at the discounted amount Because the payment was within the discount period and freight was prepaid. the buyer's remittance to the seller includes the freight cost of US $30 and the discounted price of the merchandise [US $1 .000 x1 0 - 1.02) = US $980], a total of US $1 .010. An entity with a December 31 year-end purchased US $2, 000 of inventory on account. The seller was responsible for delivery to the shipping point, with freight of US $50 paid at destination by the buyer. The invoice date was December 27. Year I). and the goods arrived on January 3, Year 2.



The following facts are presented for an entity that uses the retail inventory method_

What is the forgone sales revenue from inventory shrinkage?

  1. US $3.500
  2. US $5.000
  3. US $35.000
  4. US $45.000

Answer(s): B

Explanation:

The retail inventory method converts ending inventory at retail to cost by applying a cost- retail ratio. The advantage is that a physical inventory can be taken at retail without the necessity of counting individual items at cost. Because this method requires detailed inventory records to be kept at retail, lost sales revenueat retail) caused by inventory shrinkage can be calculated using the following retail data:



ABC Manufacturing Company ships merchandise U s $40.000 on consignment to XYZ Stores. ABC pays US $3, 000 of freight costs to a transport company, and XYZ pays US $2, 000 for local advertising costs that are reimbursable from ABC. By the end of the period the three, fourths of the consigned merchandise has been sold for US $50, 000 cash. XYZ notifies ABC of the sales, retains a 10% commission and the paid advertising costs and remits the cash due ABC. Select the journal entry that appropriately records the notification of sale and the receipt of cash by ABC.

  1. Cash US $40, 000
    Advertising expense 2, 000
    Commission expense 5, 000
    Freight expense 3, 000
    Revenue from consignment sales US $50, 000
  2. Cash US $43, 000
    Advertising expense 2, 000
    Commission expense 5, 000
    Revenue from consignment sales US $50, 000
  3. Cash US $40, 000
    Revenue from consignment sales US $50, 000
  4. Cash US $40, 000
    Commission expense 5, 000
    Revenue from consignment sales US $50, 000

Answer(s): B

Explanation:

ABC debits the cash received US $43, 000 [$50, 000 sales - $2, 000 advertising -$50, 000 $ _10) sales commission]. The advertising and commission expenses are debited for $2, 000 and $5, 000, respectively. Finally, US $50, 000 of gross revenue is credited.



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