Multiple Choice
Which of the following is NOT an inventory costing method?
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5. Inventory
Financial Statement Effects of Inventory Costing Methods
Multiple Choice
Financial risk refers to which one of the following?
A
The likelihood that reported net income will fluctuate due to changes in inventory costing methods.
B
The chance that a company will misstate its inventory due to errors in physical counts.
C
The risk that inventory will become obsolete or unsellable.
D
The possibility that a company will be unable to meet its financial obligations due to the use of debt financing.
Verified step by step guidance1
Understand the concept of financial risk: Financial risk refers to the possibility that a company may face difficulties in meeting its financial obligations, particularly due to the use of debt financing.
Analyze the options provided in the problem: Each option describes a different type of risk or issue, but only one aligns with the definition of financial risk.
Option 1: Fluctuations in reported net income due to changes in inventory costing methods are related to accounting policies and practices, not financial risk.
Option 2: Errors in physical counts leading to misstatements in inventory are operational risks, not financial risk.
Option 3: The risk of inventory becoming obsolete or unsellable is a business or inventory risk, not financial risk. The correct answer is Option 4, which directly addresses the possibility of a company being unable to meet its financial obligations due to debt financing.
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