ACCA Audit and Assurance (F8) Practice Exam

When should you consider whether inventory is obsolete?

1. When costs are increasing

2. When error rates are low

3. When inventory balance is high

4. When sales return rates are low

The correct answer is: When costs are increasing

The determination of whether inventory is obsolete is crucial for accurate financial reporting and effective inventory management. Considering this, the reason for evaluating inventory for obsolescence when costs are increasing is linked to the relationship between production costs, sales prices, and the overall market demand. When costs rise, it becomes essential to assess whether the current inventory can be sold at a price that covers its cost. If the cost of producing or purchasing inventory exceeds the revenue generated from selling it, this could indicate that certain items are no longer sellable or have reduced demand, leading to obsolescence. Within the context of inventory management, this evaluation becomes critical because businesses must ensure they do not carry outdated products that may lead to financial losses. Monitoring inventory against increasing costs helps in recognizing items that could become obsolete and prompts necessary actions, such as discounting or writing off unsellable items. Other options do not directly connect to the core assessment of obsolescence in the same manner. For instance, high inventory balance doesn't inherently mean obsolescence, as demand and turnover rates can vary widely; low error rates or sales returns do not directly indicate the condition of inventory items regarding their relevance or marketability. Therefore, the key factor in determining obsolescence remains the impact of