ACCA Audit and Assurance (F8) Practice Exam

Which of the following describes an important aspect of inventory valuation?

1. Approval of supplier agreements

2. Costing must be correct

3. Examination of stock conditions

4. Documentation of discounts claimed

The correct answer is: Costing must be correct

An important aspect of inventory valuation is that costing must be correct. Accurate costing is fundamental to determining the value of inventory on hand and subsequently the cost of goods sold (COGS). This affects the financial statements significantly, as improper costing can lead to misstated profits, taxes, and overall financial position. The correct application of valuation techniques—such as FIFO (First-In, First-Out), LIFO (Last-In, First-Out), or weighted average cost—ensures that the inventory value reported on the balance sheet reflects the actual costs incurred to obtain or produce that inventory. This accuracy is crucial not only for compliance with accounting standards but also for providing stakeholders with reliable financial information. While aspects such as approval of supplier agreements, examination of stock conditions, and documentation of discounts claimed may play roles in inventory management and accounting, they do not directly pertain to the fundamental principle of ensuring that the costing used in financial reporting is accurate.