CFA Practice Question

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CFA Practice Question

Throne's Party Palace had supplies on hand at the end of their first year of operations of \$200. If Throne's has one open (unpaid) supplies invoice for \$150 at year-end and they made cash payments of \$1,200 for supplies throughout the year, what amount should be recorded for supplies expense on their Year 1 income statement under the accrual basis?

A. \$850
B. \$1,150
C. \$1,250

This is the \$1,200 cash payment plus the \$150 unpaid invoice less the \$200 supplies on hand (which are not yet used up). Ending Supplies = Opening Supplies + purchases - supplies expense (200= 0 + 1350-X)

User Comment
gjwhite Even though \$1350 was spent on inventory, \$200 of it was unsold and not included in COGS, hence, via the Matching Principle inventory expense will be: \$1350 - \$200 = \$1150.
TheProfet For problems like these, always use the "B.A.S.E." technique. For Expense Accounts:

"B" (Beginning Balance) = 0
"A" (add Cash Payments and Liab Account Ending Balances) + 1,350 (1,200 + 150)
"S" (subtract Asset Acct Ending Balances) - 200
"E" (equals ending balance) = 1,150!
Bibhu Very good explantion TheProfet.
bahodir TheProfet's method is even more complicated to memorize.

Very good explanation gjwhite.
meghanchloe yes, Profet good tip!

Thanks,
Jurrens True bahodir, but his explaination can come in handy when you're looking for one component besides the ending balance, such as the "A" in they give you the "B" "S" and "E" part
2014 Thanks Profet
jonan203 BASE = brilliant

never heard of this mnemonic device when i took financial or managerial accounting...
leon121 BASE is excellent. You should understand though the the matching principle essentially MATCHES what was used for the given period into the expense so it's neither under/overstated.
zainabcmu Think in terms of a Supplies T A/c, where on debit side you will have opening balance and purchases (because they increased supplies) and you have closing balance on the right side. (next years opening balance appears on debit side) All you have to do is find missing number to balance the t account.