Ch.17 Verified Test Bank Financial Management Of Inventory

Chapter 17: Financial Management of Inventory

True or False Questions

1. Inventory from an accounting perspective is the amount of open supply invoices in accounts payable.
   1. True
   2. False
2. From an operations perspective, inventory represents a margin of safety to protect the business from unpredictable levels of demand.
   1. True
   2. False
3. Regardless of the method of inventory costing chosen, the value has to follow the “conservative” principle of accounting, which states inventory should be valued at the lower of cost or market.
   1. True
   2. False
4. Perpetual inventory systems have an unfortunate risk of increasing the probability of stockouts.
   1. True
   2. False
5. Expired or obsolete items are two causes of inventory shrinkage.
   1. True
   2. False
6. Inventory accounting errors generally should correct themselves in the subsequent accounting period.
   1. True
   2. False
7. Safety stock defines those items held in inventory to address life safety dangers or natural disasters.
   1. True
   2. False

Multiple Choice Questions

1. At a minimum, a hospital inventory policy will include all of the following except:
   1. Inventory valuation method
   2. What physicians are allowed to make supply recommendations
   3. Periodic versus perpetual accounting
   4. Inventory capitalization guidelines
2. Generally accepted inventory valuation methods include:
   1. FILO
   2. Hand count
   3. FIFO
   4. None of the above
3. Inventory turnover is calculated using which of these formulas?
   1. Total number of units on hand ÷ Average daily units used
   2. Cost of goods sold ÷ Average inventory
   3. Net income ÷ Inventory
   4. (Total book value - Observed value) ÷ Inventory
4. Return on Inventory is calculated using which of these formulas?
   1. Total number of units on hand ÷ Average daily units used
   2. Cost of goods sold ÷ Average inventory
   3. Net income ÷ Inventory
   4. (Total book value - Observed value) ÷ Inventory
5. Shrinkage is calculated using which of these formulas?
   1. Total number of units on hand ÷ Average daily units used
   2. Cost of goods sold ÷ Average inventory
   3. Net income ÷ Inventory
   4. (Total book value - Observed value) ÷ Inventory
6. Days inventory on hand (DIO) is calculated using which of these formulas?
   1. Total number of units on hand ÷ Average daily units used
   2. Cost of goods sold ÷ Average inventory
   3. Net income ÷ Inventory
   4. (Total book value - Observed value) ÷ Inventory
7. Given the following, calculate the EOQ for Mountaintop Medical Center:

Annual Usage in units 657

Cost per order $42

Annual carrying cost/unit 3.25

Average Lead Time for Delivery 1 Week

• 1. 10 units
  2. 72 units
  3. 92 units
  4. 130 units

1. EOQ works well when demand is stable. Describe how the EOQ formula can be used with variable demand.
2. Describe some limitations of inventory ratio use in hospitals. How can they be addressed?

3. Differentiate between the various inventory valuation techniques described in the text.

4. Differentiate between periodic and perpetual inventory systems.