Inventory Accounting MCQs

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Inventory control includes the functions of Inventory ordering and purchasing, receiving goods into store, storing Issuing inventory and controlling levels of inventory.
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Inventory Accounting MCQs

Inventory control includes the functions of Inventory ordering and purchasing, receiving goods into store, storing Issuing inventory and controlling levels of inventory. Here on MCQs.club we have designed Multiple-Choice Questions (MCQs) that covers inventory accounting under a perpetual inventory system, periodic inventory system/ costing methods/accounting with examples. Our designed MCQs are useful for accounting and competitive exams.

  1. The receipt of materials from a supplier should also be documented, and the goods receipt note be compared to the purchase requisition and purchase order to make sure that the goods that were ordered have actually been delivered.
    1. The above statement is correct
    2. The above statement is incorrect
  2. Documentation of purchase process is needed:
    1. to ensure that the procedures for ordering, receiving and paying for materials has been conducted properly, and there is no error or fraud
    2. to provide a record of materials purchases for the financial accounts
    3. to provide a record of materials costs for the cost and management accounts
    4. to ensure physical controls over the materials and to ensure they are used not used improperly
      1. All of the above
      2. (I) (III) only
      3. Only (IV)
      4. None
  3. Inventory control includes the functions of:
    1. Inventory ordering and purchasing,
    2. Receiving goods into store, storing
    3. Issuing inventory and controlling levels of inventory
    4. All of the above
  4. Inventory may be classified as:
    1. Raw materials
    2. Spare parts/consumables
    3. Work in progress
    4. Finished goods
    5. All of the above
  5. Management may wish to control inventory for the following reasons:
    1. Holding costs of inventory may be expensive
    2. Production will be disrupted if we run out of raw materials
    3. Unused inventory with a short shelf life may incur unnecessary expenses
    4. All of the above
  6. Every movement of a material in a business should be documented using the following as appropriate:
    1. Purchase requisition; purchase order;
    2. GRN; materials requisition note;
    3. Materials transfer note and materials returned note
    4. All of the above
  7. Management must be kept of the physical procedures for ordering and receiving a consignment of materials to ensure the following.
    1. That enough inventory is held
    2. That there is no duplication of ordering
    3. That quality is maintained and there is adequate record-keeping for accounts purposes
    4. All of the above
  8. The invoice issued by the supplier may contain details relating to:
    1. Discounts, such as trade discounts,
    2. Quantity discounts (order in excess of a specified amount)
    3. Settlement discounts (payment received within a specified number of days)
    4. All of the above
  9. Where materials, having been issued to one job or cost centre, are later transferred to a different job or cost centre, without first being returned to stores, a ____________ should be raised.
    1. Material transfer note
    2. Materials returned note
    3. Materials/stores requisition
    4. None
  10. An inventory master file is a file that contain details for every category of inventory and will be updated for new inventory lines.
    1. Incorrect
    2. Correct
  11. What type of information do you think should be held on an inventory master file?
    1. Inventory code number, Cost per unit, Brief description of inventory item
    2. Selling price per unit (if finished goods), Reorder level, Amount in inventory
    3. Reorder quantity, Frequency of usage
    4. All of above examples
  12. Objectives of storing materials includes:
    1. Speedy issue and receipt of materials
    2. Full identification of all materials at all times
    3. Correct location of all materials at all times
    4. Protection of materials from damage and deterioration
    5. Provision of secure stores to avoid pilferage, theft and fire
    6. Efficient use of storage space
    7. Maintenance of correct inventory levels
    8. Keeping correct and up to date records of receipts, issues and inventory levels
      1. All of the above
      2. (I) (II) (III) only
      3. (VI) (VII) only
      4. None
  13. The most frequently encountered system for recording inventory movements is the use of:
    1. Bin cards
    2. Stores ledger accounts
    3. Both A&B
    4. None
  14. A bin card is a record of receipts, issues and balances of the quantity of an item of inventory handled by a store.
    1. Incorrect
    2. Correct
  15. A bin card shows the level of inventory of an item at a particular stores location. It is kept with the actual inventory and is updated by the storekeeper as inventories are received and issued.
    1. True
    2. False
  16. Materials held in stores are coded and classified. Advantages of using code numbers to identify materials is/are:
    1. Ambiguity is avoided and time is saved
    2. Descriptions can be lengthy and time consuming
    3. Production efficiency is improved and computerised processing is made easier
    4. Numbered code systems can be designed to be flexible, and can be expanded to include more inventory items as necessary
    5. All of the above
  17. Obsolete inventories are those items which have become out of date and are no longer required. Obsolete items are written off and disposed of.
    1. Correct
    2. Incorrect
  18. Inventory must be measured in the financial statements at the lower of:
    1. cost,
    2. net realizable value (NRV).
      1. (I) or (II)
      2. (I) and (II)
      3. Only (I)
      4. Only (II)
  19. Net realisable value is the amount that can be obtained from disposing of the inventory in the normal course of business, less any further costs that will be incurred in getting it ready for sale or disposal.
    1. False
    2. True
  20. Net realisable value is usually higher than cost. Inventory is therefore usually valued at cost.
    1. Correct
    2. Incorrect
  21. Inventory is valued at net realizable value when inventory loses value, perhaps because it has been damaged or is now obsolete.
    1. True
    2. False
  22. The historical cost of inventory is usually measured by:
    1. First in, first out (FIFO)
    2. Weighted average cost (AVCO)
    3. Last in, first out (LIFO)
    4. All of the above
  23. The FIFO and weighted average cost (AVCO) methods of inventory valuation are used within:
    1. Perpetual inventory systems
    2. Period-end inventory system
    3. Both A&B
    4. None
  24. To establish the cost of inventory using FIFO, it is necessary to keep a record of:
    1. The date that units of inventory are received into inventory, the number of units received and their purchase price (or manufacturing cost)
    2. The date that units are issued from inventory and the number of units issued
    3. Both A&B
    4. None
  25. With the weighted average cost (AVCO) method of inventory valuation it is assumed that all units are issued at the current weighted average cost per unit.
    1. Correct
    2. Incorrect
  26. The normal method of measuring average cost is the:
    1. Period method
    2. Perpetual basis method
    3. Both A&B
    4. None
  27. With the perpetual basis AVCO method, a new average cost is calculated whenever more items are purchased and received into store.
    1. False
    2. True
  28. The choice of valuation method _____________ affects the reported profit for each period.
    1. FIFO
    2. AVCO
    3. LIFO
    4. All of the above
  29. LIFO is not allowed as a valuation method in financial reporting, but it may be used in cost accounting systems.
    1. Correct
    2. Incorrect
  30. Using FIFO method, what would be the effect on cost of sales and the value of closing inventory during a period of high inflation.
    1. The cost of sales will be higher than the current replacement cost of materials used. The closing inventory value should be close to current value since they will be the units bought most recently (‘last’)
    2. The cost of sales will be lower than the current replacement cost of materials used. The closing inventory value should be close to current value since they will be the units bought most recently (‘last’)
    3. The cost of sales will be higher and the value of closing inventory lower than with FIFO valuation
    4. The cost of sales will be lower and the value of closing inventory higher than with FIFO valuation
  31. Using AVCO method, what would be the effect on cost of sales and the value of closing inventory during a period of high inflation.
    1. The cost of sales will be higher than the current replacement cost of materials used. The closing inventory value should be close to current value since they will be the units bought most recently (‘last’)
    2. The cost of sales will be lower than the current replacement cost of materials used. The closing inventory value should be close to current value since they will be the units bought most recently (‘last’)
    3. The cost of sales will be higher and the value of closing inventory lower than with FIFO valuation
    4. The cost of sales will be lower and the value of closing inventory higher than with FIFO valuation
  32. Advantages of using FIFO methods includes:
    1. Logical (probably represents physical reality)
    2. Easy to understand and explain to managers
    3. Gives a value near to replacement cost
    4. All of the above
  33. Disadvantages of using FIFO methods includes:
    1. Can be cumbersome to operate
    2. Managers may find it difficult to compare costs and make decisions when they are charged with varying prices for the same materials
    3. In a period of high inflation, inventory issue prices will lag behind current market value
    4. All of the above
  34. Advantages of using AVCO methods includes:
    1. Smoothes out price fluctuations
    2. Easier to administer than FIFO and LIFO
    3. Simple to operate-calculations within the inventory records are minimized
    4. All of the above
  35. Disadvantages of using AVCO methods includes:
    1. Issue price is rarely what has been paid
    2. Prices tend to lag a little behind current market values when there is gradual inflation
    3. Both A&B
    4. None
  36. Advantages of using LIFO methods includes:
    1. Produces realistic production costs
    2. More realistic/prudent profit figures
    3. Both A&B
    4. None
  37. Disadvantages of using LIFO methods includes:
    1. Produces unrealistically low inventory values
    2. Complicates inventory records as inventory must be analyzed by delivery
    3. It is not acceptable under IAS 2
    4. All of the above
  38. What would be a suitable control procedure when “ordering goods at inflated prices”.
    1. Use standard costs for purchases
    2. Quotation for special items
    3. Regular stocktaking
    4. A&B Only
  39. What would be a suitable control procedure when there seems “fictitious purchases”.
    1. Separation of ordering and purchasing
    2. Standard usage allowance
    3. Physical controls over materials, receipts, usage and inventory
    4. A&C only
  40. What would be a suitable control procedure when “shortages on receipts”.
    1. Checking in all goods inwards at gate
    2. Delivery signatures
    3. Both A&B
    4. None
  41. What would be a suitable control procedure when “losses from inventory” occurs.
    1. Regular stocktaking
    2. Physical security procedures
    3. Delivery signatures
    4. Only A&B
  42. What would be a suitable control procedure when “writing off obsolete or damaged inventory which is good”.
    1. Checking in all goods inwards at gate
    2. Controls of responsible official over all write offs
    3. Quotation for special items
    4. All of the above

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