Inventory Accounting: Master Inventory Management for Accurate Financial Reporting

Question 1

Which of the following is a disadvantage of using the weighted average cost method of inventory valuation?

Accepted Answer

Increases the impact of price fluctuations on reported financial results

Answer

Simplifies inventory cost calculations

Answer

Provides a more precise representation of ending inventory value

Answer

Requires less recordkeeping than FIFO or LIFO methods

Question 2

According to the lower of cost or market rule, inventory should be valued at:

Accepted Answer

Current replacement cost

Answer

Purchase invoice cost

Answer

Estimated selling price

Question 3

Physical inventory counts are critical for accurate:

Accepted Answer

Balance sheet valuation

Answer

Income statement reporting

Answer

Cash flow analysis

Question 4

The perpetual inventory system requires regular:

Accepted Answer

Journal entries

Answer

Physical inventory counts

Answer

Audits

Question 5

Which inventory costing method presumes that the earliest acquired items are sold first?

Accepted Answer

FIFO

Answer

LIFO

Answer

Weighted Average Cost

Question 6

Which inventory costing method results in the lowest cost of goods sold during periods of rising prices?

Accepted Answer

LIFO

Answer

FIFO

Answer

Weighted average cost

Question 7

Which of the following is a potential consequence of overestimating inventory?

Accepted Answer

Overstatement of assets and net income

Answer

Understatement of expenses

Answer

Lower tax liability

Question 8

During periods of rising prices, the LIFO inventory costing method typically results in:

Accepted Answer

Higher cost of goods sold (COGS)

Answer

Lower COGS

Answer

No change in COGS

Question 9

Under the WAC inventory costing method, the cost of inventory is calculated as:

Accepted Answer

The average cost of all units available for sale

Answer

The cost of the most recently acquired units

Answer

The cost of the oldest units in stock

Question 10

The lower of cost or market (LCM) rule requires that inventory be valued at:

Accepted Answer

Net realizable value

Answer

Replacement cost

Answer

Current market value

Question 11

True or False: The FIFO inventory costing method assumes that the oldest inventory is sold first.

Accepted Answer

True

Answer

False

Question 12

A company uses the FIFO inventory costing method. If the cost of the first 50 units in inventory is $10 per unit, and the cost of the next 50 units is $12 per unit, what is the average cost per unit?

Accepted Answer

$11.00

Answer

$10.50

Answer

$11.50

Question 13

Which of the following is NOT an accounting issue related to inventory management?

Accepted Answer

Depreciation of inventory

Answer

Inventory valuation

Answer

Inventory obsolescence

Question 14

True or False: The maintenance of accurate inventory records is crucial for financial reporting and decision-making.

Accepted Answer

True

Answer

False

Question 15

What is the primary advantage of using a perpetual inventory system?

Accepted Answer

Provides real-time information on inventory levels

Answer

Reduces the risk of inventory obsolescence

Answer

Simplifies inventory record-keeping

Question 16

Which of the following is NOT an accounting issue related to inventory management?

Accepted Answer

Estimation of potential revenue

Answer

Determination of inventory cost

Answer

Control over inventory

Question 17

What is the primary purpose of a physical inventory count?

Accepted Answer

To verify the accuracy of inventory records

Answer

To determine the cost of goods sold

Answer

To estimate future inventory needs

Question 18

When using the LIFO (Last-In, First-Out) inventory costing method, what is the impact on cost of goods sold if purchase prices decrease?

Accepted Answer

Cost of goods sold decreases

Answer

Cost of goods sold increases

Answer

Cost of goods sold remains the same

Question 19

In periods of rising prices, which inventory costing method will generally result in the lowest net income?

Accepted Answer

LIFO

Answer

FIFO

Answer

Weighted average cost

Question 20

Under the weighted average cost inventory costing method, which inventory layers are used to calculate the unit cost?

Accepted Answer

Both beginning and ending inventory

Answer

Beginning inventory only

Answer

Ending inventory only

Question 21

What is the primary purpose of an inventory adjustment entry?

Accepted Answer

To adjust inventory records to match physical counts

Answer

To record purchases of inventory

Answer

To record sales of inventory

Question 22

Which financial statement is primarily affected by the choice of inventory costing method?

Accepted Answer

Income statement

Answer

Balance sheet

Answer

Statement of cash flows

Question 23

When selecting an inventory costing method, which of the following factors should be considered?

Accepted Answer

Matching principle, consistency, and tax implications

Answer

Materiality, conservatism, and going concern

Answer

Liquidity, solvency, and profitability

Question 24

Which of the following is not an advantage of using the weighted average cost inventory costing method?

Accepted Answer

Minimizes tax liability

Answer

Provides a more accurate valuation of inventory

Answer

Simplifies inventory record-keeping

Question 25

Under the weighted average method, the cost of goods sold is calculated using the:

Accepted Answer

Average cost of all units available for sale during the period

Answer

Cost of units on hand at the beginning of the period

Answer

Cost of units purchased during the period

Question 26

Which of the following is a potential limitation of the LIFO inventory costing method?

Accepted Answer

Inaccurate inventory valuation during periods of fluctuating costs

Answer

Complex implementation process

Answer

Requirement for frequent physical inventory counts

Question 27

In a perpetual inventory system, the inventory account:

Accepted Answer

Is continuously updated as transactions occur

Answer

Is not affected by inventory transactions

Answer

Is only used for costing purposes

Answer

Is adjusted only at the end of the accounting period

Question 28

A primary reason for using the lower of cost or market valuation for inventory is to:

Accepted Answer

Recognize potential losses

Answer

Increase reported assets

Answer

Reduce reported expenses

Answer

Avoid taxation

Question 29

The primary goal of inventory accounting is to:

Accepted Answer

Determine the cost of goods sold

Answer

Maximize inventory turnover

Answer

Control physical inventory levels

Answer

Forecast future cash flows

Question 30

A characteristic of a perpetual inventory system is:

Accepted Answer

Continuous tracking of inventory balances

Answer

Lower accuracy compared to periodic system

Answer

Infrequent physical inventory counts

Question 31

The use of the average cost method in inventory accounting can:

Accepted Answer

Smooth out fluctuations in cost of goods sold

Answer

Result in higher reported inventory values

Answer

Lead to overstated financial performance

Answer

Increase the frequency of inventory adjustments

Question 32

A benefit of maintaining accurate inventory records includes:

Accepted Answer

Improved financial reporting

Answer

Increased customer loyalty

Answer

Lower cost of inventory management

Answer

Reduced storage space

Question 33

The specific identification method of inventory costing:

Accepted Answer

Assigns actual costs to specific units of inventory

Answer

Assumes the oldest units are sold first

Answer

Is prohibited under U.S. GAAP

Question 34

Under the periodic inventory system, the cost of goods sold is calculated:

Accepted Answer

Only at the end of the accounting period

Answer

Continuously throughout the period

Answer

Whenever inventory is purchased

Question 35

Which of the following is NOT a primary inventory costing method used in practice?

Accepted Answer

Standard Costing

Answer

Moving average

Answer

FIFO

Answer

LIFO

Question 36

Which of the following is a potential disadvantage of standard costing?

Accepted Answer

Increased variance analysis complexity

Answer

Improved inventory accuracy

Answer

Simplified variance analysis

Answer

More timely financial reporting

Question 37

When inventory is sold, which account is increased?

Accepted Answer

Cost of goods sold

Answer

Inventory

Answer

Retained earnings

Question 38

Which of the following is NOT a potential disadvantage of using the perpetual inventory system?

Accepted Answer

Higher inventory carrying costs

Answer

Less reliance on physical inventory counts

Answer

Improved accuracy of financial statements

Answer

More frequent inventory updates

Question 39

The periodic inventory system requires a physical count of inventory:

Accepted Answer

At the end of each accounting period

Answer

As frequently as possible

Answer

Only when inventory levels are low

Answer

At the beginning of each accounting period

Question 40

The lower of cost or market (LCM) rule for inventory valuation:

Accepted Answer

Ensures that inventory is not overstated on the balance sheet

Answer

Requires inventory to be valued at the current replacement cost

Answer

Is only applicable to finished goods inventory

Question 41

The gross profit method of inventory estimation:

Accepted Answer

Provides an approximation of ending inventory based on historical data

Answer

Is only suitable for estimating beginning inventory

Answer

Is the most accurate method of inventory estimation

Answer

Requires a physical inventory count

Question 42

The primary reason for using a perpetual inventory system is to:

Accepted Answer

Provide real-time inventory data

Answer

Comply with regulatory requirements

Answer

Facilitate the use of the LIFO inventory costing method

Answer

Reduce the cost of inventory tracking