Multiple Choice
Which of the following is true about inventory errors in financial accounting?
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5. Inventory
Inventory Errors
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Which of the following would be relevant in the decision to sell or throw out obsolete inventory?
A
The depreciation method used for equipment
B
The original purchase cost of the inventory
C
The amount of inventory purchased in previous years
D
The expected selling price of the obsolete inventory
Verified step by step guidance1
Understand the concept of relevant costs: Relevant costs are those costs that will be directly affected by a specific decision. In this case, the decision is whether to sell or throw out obsolete inventory.
Analyze each option provided in the problem: Determine whether each factor (depreciation method, original purchase cost, amount of inventory purchased in previous years, expected selling price) has a direct impact on the decision to sell or discard the inventory.
Evaluate the depreciation method used for equipment: Depreciation is a non-cash expense and does not affect the decision to sell or throw out inventory. It is not relevant in this context.
Consider the original purchase cost of the inventory: The original purchase cost is a sunk cost, meaning it has already been incurred and cannot be recovered. Sunk costs are not relevant to future decisions.
Focus on the expected selling price of the obsolete inventory: The expected selling price is a future cash inflow that directly impacts the decision. If the selling price is higher than the cost of disposal, selling the inventory would be the better option. This is the relevant factor in the decision-making process.
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