- CFA Exams
- CFA Exam: Level I 2021
- Study Session 7. Financial Reporting and Analysis (2)
- Reading 21. Understanding Income Statements
- Subject 1. Components and Format of the Income Statement
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?
B. $1,150
C. $1,250
A. $850
B. $1,150
C. $1,250
Correct Answer: B
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 Contributed Comments 10
| 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. |