CAT CAT Inventory & Asset Management 1 — Questions and Answers
Question 1: Under US GAAP, which inventory costing method assumes the most recently purchased items are sold first?
- LIFO (Last-In, First-Out) (Correct answer)
- FIFO (First-In, First-Out)
- Weighted Average Cost
- Specific Identification
Correct answer: LIFO (Last-In, First-Out)
LIFO assumes the last units purchased are the first units sold, often resulting in higher cost of goods sold in a rising price environment.
Question 2: Which inventory costing method is NOT permitted under IFRS but is allowed under US GAAP?
- LIFO (Correct answer)
- FIFO
- Weighted Average Cost
- Specific Identification
Correct answer: LIFO
IFRS prohibits LIFO because it can produce outdated balance sheet values and is considered less representative of actual inventory flow.
Question 3: What does 'lower of cost or net realizable value' (LCNRV) require for inventory reporting?
- Inventory must be written down if its net realizable value falls below its cost (Correct answer)
- Inventory is always recorded at purchase price
- Inventory is written up to market value when prices rise
- Net realizable value is used only for raw materials
Correct answer: Inventory must be written down if its net realizable value falls below its cost
LCNRV requires recognizing a loss when inventory's expected selling price minus completion costs is lower than its recorded cost.
Question 4: Which term describes the difference between a company's book inventory quantity and its actual physical count?
- Inventory shrinkage (Correct answer)
- Obsolescence
- Inventory turnover
- Write-down
Correct answer: Inventory shrinkage
Inventory shrinkage refers to losses from theft, damage, or administrative errors that reduce actual stock below recorded levels.
Question 5: How is inventory turnover ratio calculated?
- Cost of Goods Sold ÷ Average Inventory (Correct answer)
- Net Sales ÷ Ending Inventory
- Gross Profit ÷ Average Inventory
- Total Assets ÷ Cost of Goods Sold
Correct answer: Cost of Goods Sold ÷ Average Inventory
Inventory turnover measures how many times inventory is sold and replaced in a period, using COGS divided by average inventory.
Question 6: What is the purpose of a perpetual inventory system?
- To continuously update inventory records with every purchase and sale transaction (Correct answer)
- To count inventory once per year for the annual report
- To record inventory purchases only at year-end
- To calculate COGS at the end of each quarter
Correct answer: To continuously update inventory records with every purchase and sale transaction
A perpetual system maintains real-time inventory balances by recording each transaction immediately, improving accuracy and control.
CAT CAT Inventory & Asset Management 1
Under US GAAP, which inventory costing method assumes the most recently purchased items are sold first?