ACCA Audit and Assurance (F8) Practice Exam

What are the critical cut-off points for inventory?

1. Purchase/Receipt

2. Sales/Dispatch

3. Goods in Transit to Finished Goods

4. Production to WIP

The correct answer is: Purchase/Receipt

The critical cut-off points for inventory are essential in ensuring accurate financial reporting and inventory management. The identification of these cut-off points is crucial for determining when inventory should be recognized in the accounts. The purchase or receipt of inventory marks the point at which a company officially takes ownership of stock. This is significant because it establishes the time when the inventory is recorded in the financial statements, impacting both the balance sheet and income statement. Properly recording purchases at the cut-off points ensures that the financial records reflect an accurate portrayal of the company's assets and liabilities, particularly important in periods of significant transactions. The importance of recognizing inventory at the purchase or receipt stage also relates to compliance with financial reporting standards. Inventory should not only include stock physically held but also items that have been purchased and are on their way to the company's premises—recorded at the point of receipt—ensuring that the inventory valuation is correct and complete for the reporting period. Other choices likely refer to broader operational aspects of inventory but do not capture the critical financial timing of when inventory is recognized. For example, sales or dispatch relates more to the revenue recognition phase, whereas goods in transit and production to work-in-progress focus on the flow of inventory rather than the point of recognition in financial statements, making