A Company Will Most Likely Use an Estimated Method of Determining

question 20

Multiple Choice

A company will most likely use an estimated method of determining inventory when

• A) the company decides not to do a physical inventory
• B) a natural disaster has destroyed most of the inventory
• C) the company has not kept up with its inventory records
• D) the company is preparing annual financial statements

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Definitions:

Section 1231

A tax provision related to the treatment of gains and losses on property used in a trade or business or held for the production of income.

Depreciation

A method of allocating the cost of a tangible asset over its useful life.

Short-Term Capital Loss

A loss realized from the sale of a capital asset, such as stock, held for one year or less, which can be used to offset capital gains for tax purposes.

Ordinary Loss

A loss incurred in the regular course of business or through investments, which can be used to offset ordinary income for tax purposes.