MCQ’s on Inventory
- Which of the following is included in the definition of inventory?
(a) Assets held for sale in the ordinary course of business
(b) Assets in the process of production for sale
(c) Assets for consumption in the production of goods for sale
(d) All of the above
Answer: (d) All of the above - Which inventory valuation method assumes that the items of inventory purchased first are sold first?
(a) LIFO
(b) FIFO
(c) Weighted Average
(d) Specific Identification
Answer: (b) FIFO - The principle of valuing inventory at the lower of cost or net realizable value is based on which accounting principle?
(a) Consistency
(b) Prudence (Conservatism)
(c) Going Concern
(d) Materiality
Answer: (b) Prudence (Conservatism) - In the perpetual inventory system, the inventory is updated:
(a) Only at the end of the accounting period
(b) Continuously after each transaction
(c) Annually
(d) Quarterly
Answer: (b) Continuously after each transaction - Which of the following methods is NOT permitted under the Accounting Standards for inventory valuation?
(a) FIFO
(b) Weighted Average Price
(c) LIFO
(d) Specific Identification
Answer: (c) LIFO - Which inventory valuation method is best suited for interchangeable inventory items?
(a) Specific Identification
(b) FIFO
(c) Adjusted Selling Price
(d) LIFO
Answer: (b) FIFO - The cost of goods sold can be calculated using the formula:
(a) Opening inventory + Purchases Closing inventory
(b) Opening inventory + Purchases + Direct expenses Closing inventory
(c) Purchases Closing inventory + Direct expenses
(d) Purchases + Direct expenses
Answer: (b) Opening inventory + Purchases + Direct expenses Closing inventory - Under FIFO, the closing inventory is valued based on:
(a) The most recent purchases
(b) The oldest purchases
(c) An average of all purchases
(d) The highest purchase price
Answer: (a) The most recent purchases - In which method is inventory valued by reducing the selling price of inventory by an estimated percentage of gross margin?
(a) FIFO
(b) Adjusted Selling Price Method
(c) Weighted Average Price Method
(d) LIFO
Answer: (b) Adjusted Selling Price Method - Which of the following costs is NOT included in the cost of inventory?
(a) Normal wastage of materials
(b) Storage costs unrelated to the production process
(c) Direct labor costs
(d) Freight charges
Answer: (b) Storage costs unrelated to the production process - Inventory is classified as:
(a) A noncurrent asset
(b) A current asset
(c) A liability
(d) An intangible asset
Answer: (b) A current asset - In a Periodic Inventory System, the inventory is:
(a) Updated continuously after every transaction
(b) Updated only after a physical count of inventory at the end of a period
(c) Updated monthly
(d) Updated at the time of each sale
Answer: (b) Updated only after a physical count of inventory at the end of a period - Which of the following statements is TRUE regarding the LIFO inventory valuation method?
(a) It is widely accepted by Accounting Standards
(b) It results in the highest cost of goods sold in times of rising prices
(c) It is based on the assumption that the first items purchased are the first to be sold
(d) It gives the lowest value of closing inventory during inflationary periods
Answer: (b) It results in the highest cost of goods sold in times of rising prices - What is net realizable value (NRV)?
(a) The estimated selling price in the ordinary course of business less the estimated cost of completion and selling expenses
(b) The original cost of inventory less depreciation
(c) The difference between selling price and purchase price
(d) The cost incurred to replace an item in inventory
Answer: (a) The estimated selling price in the ordinary course of business less the estimated cost of completion and selling expenses - The Weighted Average Price Method takes into account:
(a) The cost of the most recent purchase only
(b) The average of all purchase prices without considering quantities
(c) The average of all purchases weighted by the quantity of each purchase
(d) The lowest purchase price during the period
Answer: (c) The average of all purchases weighted by the quantity of each purchase - Which of the following methods considers the quantities of each purchase to calculate an average cost?
(a) FIFO
(b) LIFO
(c) Weighted Average Price Method
(d) Specific Identification Method
Answer: (c) Weighted Average Price Method - Which of the following costs should be excluded from the cost of inventories?
(a) Normal wastage of materials
(b) Direct labor costs
(c) Selling and distribution costs
(d) Freight inwards
Answer: (c) Selling and distribution costs - Which of the following is an example of abnormal wastage that should not be included in inventory costs?
(a) Wastage due to spoilage in the normal production process
(b) Material lost due to inefficiency or negligence
(c) Standard production losses
(d) Losses due to evaporation during storage
Answer: (b) Material lost due to inefficiency or negligence - What is the impact of an overstatement of closing inventory on net income?
(a) Overstates net income
(b) Understates net income
(c) Has no effect on net income
(d) Decreases assets
Answer: (a) Overstates net income - Which method of inventory valuation matches current costs with current revenues?
(a) FIFO
(b) LIFO
(c) Weighted Average
(d) Specific Identification
Answer: (b) LIFO - Which of the following methods is generally used when goods are not ordinarily interchangeable?
(a) FIFO
(b) LIFO
(c) Specific Identification Method
(d) Weighted Average Method
Answer: (c) Specific Identification Method - Which method of inventory recordkeeping provides continuous information about inventory levels?
(a) Periodic Inventory System
(b) Perpetual Inventory System
(c) Weighted Average Method
(d) Adjusted Selling Price Method
Answer: (b) Perpetual Inventory System - Which of the following formulas is used to calculate the cost of goods sold?
(a) Opening inventory + Purchases Closing inventory
(b) Purchases + Closing inventory
(c) Opening inventory + Purchases + Closing inventory
(d) Closing inventory Purchases
Answer: (a) Opening inventory + Purchases Closing inventory - The specific identification method of inventory valuation is most suitable for:
(a) Bulk commodities
(b) Large and identical items
(c) Unique, highvalue items
(d) Interchangeable items
Answer: (c) Unique, highvalue items - The method where inventory is valued at estimated selling price less estimated costs of completion is called:
(a) Net Realizable Value
(b) Specific Identification Method
(c) FIFO
(d) Retail Inventory Method
Answer: (a) Net Realizable Value - Which inventory system requires actual physical count of inventory at the end of an accounting period?
(a) Perpetual Inventory System
(b) Periodic Inventory System
(c) FIFO
(d) Weighted Average Price
Answer: (b) Periodic Inventory System - Which cost is included in the inventory cost as per accounting standards?
(a) Selling and distribution costs
(b) Administrative overheads not related to production
(c) Abnormal wastage
(d) Freight and duties related to purchase
Answer: (d) Freight and duties related to purchase - Which inventory valuation method assumes that the most recently purchased goods are sold first?
(a) FIFO
(b) LIFO
(c) Weighted Average Price
(d) Specific Identification
Answer: (b) LIFO - If the cost of an item is $100 and its net realizable value is $80, at what value should the item be recorded in the books?
(a) $100
(b) $90
(c) $80
(d) $110
Answer: (c) $80 - Under which method are inventory costs assigned based on the actual physical flow of goods?
(a) FIFO
(b) LIFO
(c) Specific Identification Method
(d) Weighted Average Price Method
Answer: (c) Specific Identification Method - Which inventory valuation method leads to higher inventory values in a period of rising prices?
(a) FIFO
(b) LIFO
(c) Weighted Average Price
(d) Adjusted Selling Price Method
Answer: (a) FIFO - Which type of inventory typically includes raw materials, workinprogress, and finished goods?
(a) Trading Inventory
(b) Manufacturing Inventory
(c) Service Inventory
(d) Retail Inventory
Answer: (b) Manufacturing Inventory - The closing inventory of a trading business consists mainly of:
(a) Finished goods purchased for resale
(b) Raw materials
(c) Workinprogress
(d) Spare parts and consumables
Answer: (a) Finished goods purchased for resale - Which inventory valuation method is prohibited under Accounting Standards due to its mismatching of inventory flow with actual physical movement?
(a) FIFO
(b) LIFO
(c) Weighted Average Price
(d) Adjusted Selling Price
Answer: (b) LIFO - The Adjusted Selling Price Method is primarily used in:
(a) Retail businesses with large numbers of rapidly changing items
(b) Manufacturing businesses with highvalue items
(c) Service industries
(d) None of the above
Answer: (a) Retail businesses with large numbers of rapidly changing items - Inventory should be valued at:
(a) Historical cost only
(b) Net realizable value only
(c) Lower of cost or net realizable value
(d) Market value
Answer: (c) Lower of cost or net realizable value - Which of the following costs should be considered in the calculation of inventory conversion costs?
(a) Storage costs unrelated to production
(b) Direct labor costs
(c) Abnormal production costs
(d) Selling costs
Answer: (b) Direct labor costs - A manufacturing company uses the FIFO method. It made the following purchases: 100 units at $10, 200 units at $12. What will be the cost of goods sold for 150 units?
(a) $1,800
(b) $1,650
(c) $1,500
(d) $1,200
Answer: (c) $1,500 - Which method of inventory valuation is most affected by inflation?
(a) FIFO
(b) LIFO
(c) Weighted Average
(d) Specific Identification
Answer: (b) LIFO - Which of the following costs is normally excluded from inventory valuation?
(a) Freight charges
(b) Direct labor costs
(c) Administrative overheads unrelated to production
(d) Purchase price
Answer: (c) Administrative overheads unrelated to production - Which of the following methods is not suitable for valuing perishable goods?
(a) FIFO
(b) Weighted Average Price
(c) LIFO
(d) Specific Identification
Answer: (c) LIFO - Under inflationary conditions, which method will result in the highest reported income?
(a) FIFO
(b) LIFO
(c) Weighted Average Price
(d) Adjusted Selling Price
Answer: (a) FIFO - Which method of inventory record keeping provides more accurate financial information for interim periods?
(a) Periodic Inventory System
(b) Perpetual Inventory System
(c) FIFO
(d) LIFO
Answer: (b) Perpetual Inventory System - Which method assumes that the costs of the earliest goods acquired are the first to be charged to cost of goods sold?
(a) FIFO
(b)LIFO
(c) Weighted Average Price
(d) Specific Identification
Answer: (a) FIFO - If closing inventory is understated, what is the effect on net income?
(a) Overstated
(b) Understated
(c) Unaffected
(d) It depends on the method used
Answer: (b) Understated - In a perpetual inventory system, the cost of goods sold is determined:
(a) Only at the end of the year
(b) After every sale
(c) Only when physical inventory is taken
(d) After every purchase
Answer: (b) After every sale - In a periodic inventory system, what is the formula to calculate the cost of goods sold (COGS)?
(a) COGS = Purchases + Closing Inventory
(b) COGS = Opening Inventory + Purchases Closing Inventory
(c) COGS = Opening Inventory Purchases + Closing Inventory
(d) COGS = Purchases Opening Inventory
Answer: (b) COGS = Opening Inventory + Purchases Closing Inventory - Which method is generally used for goods that are interchangeable and frequently purchased?
(a) Specific Identification
(b) FIFO
(c) LIFO
(d) Weighted Average Price
Answer: (d) Weighted Average Price - Which of the following is a nonhistorical cost method?
(a) FIFO
(b) Weighted Average Price
(c) Adjusted Selling Price
(d) LIFO
Answer: (c) Adjusted Selling Price - The valuation of slowmoving inventory is important because:
(a) It affects the gross profit margin
(b) It helps in inventory management and financial reporting
(c) It reduces the administrative overheads
(d) It increases the cost of goods sold
Answer: (b) It helps in inventory management and financial reporting - Under perpetual inventory system, the balance of inventory at any time is:
(a) Always equal to the amount in physical stock
(b) The result of continuous records and periodic physical verification
(c) Calculated only at yearend
(d) Based on the last physical count
Answer: (b) The result of continuous records and periodic physical verification - Which of the following does the periodic inventory system NOT provide?
(a) Continuous record of inventory levels
(b) Cost of goods sold until the end of the period
(c) Inventory figures before physical stocktaking
(d) A detailed ledger of every inventory transaction
Answer: (a) Continuous record of inventory levels - Which of the following is true for the FIFO method in an inflationary period?
(a) It results in lower cost of goods sold than LIFO
(b) It results in higher cost of goods sold than LIFO
(c) It undervalues the closing inventory
(d) It does not affect the value of closing inventory
Answer: (a) It results in lower cost of goods sold than LIFO - Which inventory system allows realtime tracking of inventory balances?
(a) Periodic Inventory System
(b) Perpetual Inventory System
(c) Average Cost Method
(d) FIFO Method
Answer: (b) Perpetual Inventory System - In the retail method, inventory is valued by:
(a) Reducing the gross margin from the sales value of the inventory
(b) Adding gross margin to cost of goods sold
(c) Using the FIFO method to calculate ending inventory
(d) Using the LIFO method to calculate ending inventory
Answer: (a) Reducing the gross margin from the sales value of the inventory - Which method of inventory valuation is the least appropriate when prices are falling?
(a) FIFO
(b) LIFO
(c) Weighted Average Price
(d) Specific Identification
Answer: (b) LIFO - A trading company purchased 200 units at $10 each and later purchased 300 units at $12 each. If 250 units were sold, what is the value of closing inventory using FIFO?
(a) $2,400
(b) $2,600
(c) $2,800
(d) $3,000
Answer: (b) $2,600 - Which of the following would cause an increase in cost of goods sold?
(a) Overstating closing inventory
(b) Understating opening inventory
(c) Understating closing inventory
(d) Increasing purchases
Answer: (c) Understating closing inventory - Which of the following costs is considered abnormal and should not be included in inventory valuation?
(a) Normal wastage
(b) Abnormal production losses
(c) Freight charges related to purchases
(d) Direct labor costs
Answer: (b) Abnormal production losses - The perpetual inventory system records inventory:
(a) Only at the time of a sale
(b) Continuously as each transaction occurs
(c) Once a year after physical stocktaking
(d) Only when the stock reaches the reorder level
Answer: (b) Continuously as each transaction occurs - What is the main disadvantage of the periodic inventory system?
(a) It is timeconsuming
(b) It does not provide realtime inventory data
(c) It is expensive to implement
(d) It cannot calculate cost of goods sold
Answer: (b) It does not provide realtime inventory data - In an inflationary environment, which inventory method results in the lowest net income?
(a) FIFO
(b) LIFO
(c) Weighted Average
(d) Adjusted Selling Price
Answer: (b) LIFO - Which inventory method best matches current costs with current revenues?
(a) FIFO
(b) LIFO
(c) Weighted Average Price
(d) Specific Identification
Answer: (b) LIFO - Which inventory valuation method provides the most current inventory value in times of rising prices?
(a) FIFO
(b) LIFO
(c) Weighted Average Price
(d) Retail Method
Answer: (a) FIFO - What is the main benefit of using the Specific Identification Method?
(a) It simplifies inventory management
(b) It provides exact inventory costs for unique items
(c) It averages costs over all purchases
(d) It reduces overall inventory costs
Answer: (b) It provides exact inventory costs for unique items - Which of the following is NOT an advantage of the perpetual inventory system?
(a) Continuous update of inventory levels
(b) Realtime information about cost of goods sold
(c) Elimination of the need for physical inventory counting
(d) Better control over inventory management
Answer: (c) Elimination of the need for physical inventory counting - Which of the following methods assumes the cost of the most recent purchases are charged to cost of goods sold first?
(a) FIFO
(b) LIFO
(c) Weighted Average Price
(d) Specific Identification
Answer: (b) LIFO - Which method of inventory valuation is most appropriate for items that are distinct and easily identifiable, such as cars or real estate?
(a) Specific Identification
(b) FIFO
(c) Weighted Average Price
(d) Retail Method
Answer: (a) Specific Identification - Which inventory valuation method minimizes the impact of inflation on the cost of goods sold?
(a) LIFO
(b) FIFO
(c) Weighted Average
(d) Adjusted Selling Price
Answer: (b) FIFO - Which of the following is a disadvantage of the FIFO method in times of rising prices?
(a) Overstated cost of goods sold
(b) Understated closing inventory
(c) Overstated inventory value
(d) Lower net income
Answer: (c) Overstated inventory value - Under the retail inventory method, inventory is valued by applying a:
(a) Fixed markup percentage
(b) Variable markup percentage
(c) Gross margin percentage
(d) Net realizable value percentage
Answer: (c) Gross margin percentage - In a periodic inventory system, when is cost of goods sold determined?
(a) After each sale
(b) After a physical inventory count
(c) After each purchase
(d) Monthly
Answer: (b) After a physical inventory count - Which of the following is a benefit of the perpetual inventory system?
(a) Lower cost of implementation
(b) Continuous record of inventory levels
(c) Simplified yearend financial reporting
(d) Requires no physical stocktaking
Answer: (b) Continuous record of inventory levels - What effect does an understatement of closing inventory have on the balance sheet?
(a) Overstates total assets
(b) Understates total assets
(c) Overstates liabilities
(d) No effect
Answer: (b) Understates total assets - If ending inventory is overstated, the effect on the next period’s beginning inventory is:
(a) Understated
(b) Overstated
(c) No effect
(d) It depends on the inventory method used
Answer: (b) Overstated - Which of the following statements is true about the LIFO inventory valuation method?
(a) It results in higher closing inventory during periods of rising prices
(b) It results in lower closing inventory during periods of rising prices
(c) It is the preferred method under Accounting Standards
(d) It provides the highest reported income during periods of rising prices
Answer: (b) It results in lower closing inventory during periods of rising prices - Which of the following is NOT considered part of the cost of inventory?
(a) Direct labor costs
(b) Freight inwards
(c) Selling and distribution costs
(d) Purchase price
Answer: (c) Selling and distribution costs - Under a perpetual inventory system, inventory purchases are recorded in:
(a) Inventory account
(b) Cost of Goods Sold account
(c) Purchases account
(d) Sales account
Answer: (a) Inventory account - Which inventory valuation method results in the highest cost of goods sold during inflationary periods?
(a) FIFO
(b) LIFO
(c) Weighted Average Price
(d) Specific Identification
Answer: (b) LIFO - In which inventory valuation method are the oldest costs assigned to cost of goods sold?
(a) FIFO
(b) LIFO
(c) Weighted Average Price
(d) Retail Method
Answer: (a) FIFO - What is the effect of overstating beginning inventory on net income?
(a) Understates net income
(b) Overstates net income
(c) No effect
(d) Overstates assets
Answer: (a) Understates net income - Which of the following methods will result in the lowest value for closing inventory during a period of rising prices?
(a) FIFO
(b) LIFO
(c) Weighted Average
(d) Adjusted Selling Price
Answer: (b) LIFO - Which method is the best choice for a company that deals with highly perishable goods?
(a) LIFO
(b) FIFO
(c) Weighted Average
(d) Specific Identification
Answer: (b) FIFO - In a perpetual inventory system, what happens when a company purchases inventory?
(a) Inventory account is credited
(b) Purchases account is debited
(c) Inventory account is debited
(d) Cost of Goods Sold account is credited
Answer: (c) Inventory account is debited - Which of the following would be most affected by inventory valuation methods in an inflationary environment?
(a) Cash flow
(b) Total sales
(c) Net income
(d) Liabilities
Answer: (c) Net income - Which inventory system is most likely to detect theft or loss of inventory?
(a) Periodic Inventory System
(b) Perpetual Inventory System
(c) Weighted Average Method
(d) Retail Inventory Method
Answer: (b) Perpetual Inventory System - Which inventory valuation method results in a more accurate matching of current costs with current revenues?
(a) FIFO
(b) LIFO
(c) Weighted Average Price
(d) Adjusted Selling Price
Answer: (b) LIFO - The net realizable value of inventory is:
(a) The original cost of inventory less depreciation
(b) The selling price of inventory minus the costs to complete and sell
(c) The purchase price of inventory plus direct costs
(d) The replacement cost of inventory
Answer: (b) The selling price of inventory minus the costs to complete and sell - Which inventory method assumes that the most recent items added to inventory are the first to be sold?
(a) FIFO
(b) LIFO
(c) Weighted Average
(d) Specific Identification
Answer: (b) LIFO - Which inventory valuation method is generally preferred during periods of falling prices?
(a) FIFO
(b) LIFO
(c) Weighted Average
(d) Specific Identification
Answer: (a) FIFO - If closing inventory is overstated, what is the effect on gross profit?
(a) Overstated
(b) Understated
(c) No effect
(d) Decreased
Answer: (a) Overstated - Which method is most appropriate for valuing inventory when it is unique and has a high value?
(a) Weighted Average Price Method
(b) FIFO
(c) LIFO
(d) Specific Identification Method
Answer: (d) Specific Identification Method - What is the main disadvantage of the LIFO method in terms of inventory valuation?
(a) It reports higher net income during inflation
(b) It often leads to outdated inventory on the balance sheet
(c) It results in understated cost of goods sold
(d) It is not permitted under Accounting Standards
Answer: (b) It often leads to outdated inventory on the balance sheet - The weighted average cost method:
(a) Assigns the cost of the earliest purchases to cost of goods sold
(b) Assigns the cost of the latest purchases to cost of goods sold
(c) Calculates an average cost per unit based on total purchases
(d) Assigns specific costs to individual units
Answer: (c) Calculates an average cost per unit based on total purchases - Inventory is classified as which type of asset on the balance sheet?
(a) Noncurrent asset
(b) Intangible asset
(c) Current asset
(d) Deferred asset
Answer: (c) Current asset - Which inventory valuation method is most commonly used by companies that sell goods that are not interchangeable?
(a) Weighted Average Price
(b) Specific Identification
(c) FIFO
(d) LIFO
Answer: (b) Specific Identification - In a periodic inventory system, which account is used to record purchases of inventory?
(a) Inventory account
(b) Purchases account
(c) Cost of Goods Sold account
(d) Sales account
Answer: (b) Purchases account - When inventory is valued at the lower of cost or net realizable value, this is an application of the:
(a) Going concern concept
(b) Consistency principle
(c) Prudence (Conservatism) principle
(d) Matching principle
Answer: (c) Prudence (Conservatism) principle - Which of the following inventory valuation methods is likely to give the most accurate picture of replacement cost?
(a) FIFO
(b) LIFO
(c) Weighted Average Price
(d) Specific Identification
Answer: (a) FIFO - Which method results in lower taxes during periods of rising prices?
(a) FIFO
(b) LIFO
(c) Weighted Average Price
(d) Adjusted Selling Price
Answer: (b) LIFO
