Question

Which of the following statements are true? (check all that apply)

1) Managers can choose the method of accounting for inventory cost that best fits their business
2) GAAP require that all companies in the same industry use the same method of accounting for inventory
3) using a different inventory accounting method leads to reporting a different amount for cost of goods sold
4) It doesn't matter which method you use to account for inventory as long as it mimics the actual physical flow of goods

Answer 1

Managers can select an inventory accounting method fitting their business, and using different methods can lead to varying COGS reports. GAAP does not mandate industry-wide uniform inventory accounting methods, but it does not simply condone any method regardless of the actual physical flow of goods.

Step-by-step explanation:

The question pertains to the accounting of inventory within the framework of Generally Accepted Accounting Principles (GAAP). Here's a breakdown of the true statements:

1. Managers can select the technique of inventory cost accounting that best suits their needs. This is true because there are different methods like First-In, First-Out (FIFO), Last-In, First-Out (LIFO), and average cost that a company may use depending on which reflects their business operations more accurately.
2. GAAP require that all companies in the same industry use the same method of accounting for inventory. This statement is false. GAAP does not require all companies within the same industry to use the same inventory accounting method; however, it encourages consistency and transparency in financial reporting.
3. Using a different inventory accounting method results in a different cost of goods sold reported. This is true as different inventory accounting methods can result in different cost valuations, affecting the reported cost of goods sold (COGS).
4. It makes little difference whether approach you employ to account for inventory as long as it closely resembles the real physical movement of items. This is partially true but misleading. While it is important that the accounting method provides a reasonable match to the physical flow of goods, some methods like LIFO may not reflect the actual flow but are still permissible under GAAP for financial reporting.