Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

5. Inventory

Financial Statement Effects of Inventory Costing Methods

Financial Accounting

5. Inventory

Financial Statement Effects of Inventory Costing Methods

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Multiple Choice

Which of the following best describes how the finance function ensures that the company’s financial goals are achieved in relation to inventory costing methods?

By selecting inventory costing methods that align with the company's financial objectives and reporting requirements

By only using the FIFO method regardless of the company's goals

By delegating all inventory decisions to the marketing department

By ignoring the impact of inventory costing methods on financial statements

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Verified step by step guidance

Understand the role of the finance function in achieving a company’s financial goals. The finance function ensures that financial objectives are met by aligning accounting practices, such as inventory costing methods, with the company’s strategic goals and reporting requirements.

Review the concept of inventory costing methods. Common methods include FIFO (First-In, First-Out), LIFO (Last-In, First-Out), and Weighted Average Cost. Each method impacts the financial statements differently, particularly in terms of cost of goods sold (COGS) and inventory valuation.

Analyze how inventory costing methods affect financial statements. For example, FIFO typically results in higher inventory values and lower COGS during periods of rising prices, which can increase reported profits. Conversely, LIFO may reduce taxable income during inflationary periods by increasing COGS.

Evaluate the importance of selecting inventory costing methods that align with the company’s financial objectives. For instance, a company aiming to maximize reported profits might prefer FIFO, while one seeking tax advantages might opt for LIFO. The choice should also comply with reporting standards like GAAP or IFRS.

Eliminate incorrect options based on the analysis. Delegating inventory decisions to the marketing department or ignoring the impact of inventory costing methods on financial statements does not align with the finance function’s role. Using only FIFO regardless of goals is overly rigid and may not support the company’s objectives. The correct approach is to select methods that align with financial objectives and reporting requirements.