Inventory managment

What is the primary purpose of depreciation in accounting?

• To determine the selling price of an asset.

• To allocate the cost of an asset over its useful life.

• To increase the value of an asset over time.

• To record the market value of an asset annually.

How does FIFO (First-In-First-Out) method work in inventory valuation?

• FIFO (First-In-First-Out) values inventory by assuming that the oldest items are sold first, impacting COGS and ending inventory valuation.

• FIFO is a method that values inventory by selling items randomly.

• FIFO values inventory by assuming that the newest items are sold first.

• FIFO calculates COGS based on the average cost of all items in inventory.

What are the advantages of using LIFO (Last-In-First-Out) for inventory management?

• Advantages of LIFO include reduced obsolescence risk, tax benefits during inflation, and better cash flow management.

• Increased inventory turnover

• Higher storage costs

• Simplified accounting procedures

Explain the Average Cost (AVCO) method in inventory accounting.

• The Average Cost (AVCO) method averages the costs of inventory items to determine their value for cost of goods sold and ending inventory.

• The AVCO method tracks each item's cost individually for precise valuation.

• The AVCO method calculates inventory value based on the highest cost of items.

• The AVCO method uses the most recent purchase price for inventory valuation.

What impact does depreciation have on a company's financial statements?

• Depreciation only affects cash flow and does not impact net income or asset values.

• Depreciation increases asset values on the balance sheet and boosts net income on the income statement.

• Depreciation has no effect on the balance sheet but increases expenses on the income statement.

• Depreciation decreases asset values on the balance sheet and reduces net income on the income statement.

How does the choice of inventory valuation method affect tax liabilities?

• It determines the selling price of products.

• It only affects inventory turnover rates.

• The choice of inventory valuation method affects tax liabilities by influencing the cost of goods sold and taxable income.

• It has no effect on tax liabilities.

What are the limitations of using the FIFO method?

• FIFO provides the most current inventory values

• FIFO ensures accurate profit margins during inflation

• FIFO simplifies inventory management processes

• Limitations of FIFO include outdated inventory values, potential misrepresentation of profit margins during inflation, and complexity in inventory management.

In what scenarios might a company prefer the LIFO method?

• A company may prefer LIFO during inflationary periods to reduce tax liability and improve cash flow.

• A company may prefer LIFO to increase inventory levels during a recession.

• A company may prefer LIFO to comply with international accounting standards.

• A company may prefer LIFO to simplify its accounting processes.

Describe how depreciation can affect cash flow management.

• Depreciation only affects long-term cash flow without tax implications.

• Depreciation can improve short-term cash flow by reducing tax liabilities, but it also signals future cash needs for asset replacement.

• Depreciation increases cash flow by enhancing asset value.

• Depreciation has no impact on cash flow management.

What is the matching principle in accounting, and how does depreciation relate to it?

• The matching principle states that all revenues must be recognized before any expenses are recorded.

• The matching principle ensures expenses are recorded in the same period as related revenues, and depreciation allocates asset costs to match these revenues.

• The matching principle requires all expenses to be recorded at the end of the fiscal year.

• Depreciation is only relevant for cash flow statements and not for matching revenues.