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

Inventory Errors

Financial Accounting

5. Inventory

Inventory Errors

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Multiple Choice

Firms keep supplies of inventory for which of the following reasons?

To minimize storage costs

To reduce the risk of obsolescence

To increase the cost of goods sold

To meet unexpected increases in customer demand

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Verified step by step guidance

Understand the concept of inventory: Inventory refers to the goods and materials that a business holds for the purpose of resale or production. It is a key asset for firms as it directly impacts their ability to meet customer demand.

Recognize the primary purpose of inventory: Firms maintain inventory to ensure they can meet customer demand, especially when there are unexpected increases. This helps avoid lost sales and maintain customer satisfaction.

Evaluate the incorrect options: Minimizing storage costs and reducing the risk of obsolescence are valid considerations, but they are secondary to the primary purpose of inventory. Increasing the cost of goods sold is not a reason for keeping inventory, as firms aim to minimize costs.

Identify the correct reason: The correct reason for keeping inventory is to meet unexpected increases in customer demand. This ensures the firm can respond quickly to market changes and maintain operational efficiency.

Relate this to financial accounting: Inventory management is crucial for accurate financial reporting. Proper inventory levels help firms avoid overstocking (which ties up capital) or understocking (which leads to lost sales), both of which impact the financial statements.