ACC 290 Principles Of Accounting: 18 Questions, 100-Word Ans

Acc290 Principles Of Accounting I8 Questions 100 Word Answers

Acc290 Principles Of Accounting I (8 questions 100 word answers). 1. What are the three different inventory cost flow assumptions commonly used in commerce today and allowed by generally accepted accounting principles? Pick one and describe in detail how it works. How does your company, or a company you are familiar with, determine what cost flow assumption it should use? 2. How do the three inventory cost flow assumptions compare when reporting profit in the income statement and inventory on the balance sheet in a period of rising prices? 3. Describe the lower of cost or market inventory valuation method and why it is used. How does this follow the convention in conservatism in accounting? 4. In your own words describe the inventory turnover ratio and days in inventory calculation. Why are these calculations important to merchandising companies? 5. What is the primary basis of accounting for inventories? 6. What is the major advantage and major disadvantage of the specific identification method of inventory costing? 7. Why is it inappropriate for a company to include freight out expense in the Cost of Goods Sold account? 8. How does the average cost method of inventory costing differ between a perpetual inventory system and a periodic inventory system? how the Sarbanes‐Oxley Act has increased the importance of internal control to top managers of a company. 6. 6. How do documentation procedures contribute to good internal control? What internal control objectives are met by physical controls? 7. 7. Explain the control principle of independent internal verification. What practices are important in applying this principle? 8. 8. How do these principles, (a) Physical controls and (b) Human resource controls. apply to cash disbursements?

Paper For Above instruction

The principles of inventory accounting play a vital role in financial reporting, influencing how companies present their assets, profitability, and operational efficiency. This paper explores critical concepts such as the inventory cost flow assumptions, valuation methods, and internal control mechanisms within the context of contemporary accounting practices and regulatory frameworks like the Sarbanes-Oxley Act.

1. Inventory Cost Flow Assumptions

The three primary inventory cost flow assumptions used are FIFO (First-In, First-Out), LIFO (Last-In, First-Out), and the weighted-average method. FIFO assumes that the earliest goods purchased are sold first, leaving the most recent purchases in inventory. LIFO, conversely, presumes that the latest inventory costs are assigned to cost of goods sold, which can impact profit and inventory valuation especially in inflationary periods. The weighted-average method calculates an average cost for all inventory items. For example, a retail company may choose FIFO to match physical flow or LIFO for tax advantages, depending on economic conditions and strategic goals. Selection depends on inventory turnover, profitability, and regulatory considerations.

2. Impact of Cost Flow Assumptions in Rising Prices

In times of rising prices, FIFO produces higher ending inventory values and lower cost of goods sold, resulting in higher reported profits. LIFO produces lower ending inventory and higher cost of goods sold, which reduces taxable income. The weighted-average method smooths out price fluctuations, providing moderate results. These differences significantly influence financial metrics and tax liabilities, guiding managerial decisions and investor perceptions.

3. Lower of Cost or Market (LCM) Inventory Valuation

The LCM rule assigns inventory the lower value of either the historical cost or current market price, intended to prevent overstatement of assets and income. This conservative approach aligns with accounting's principle of prudence, ensuring that assets are not inflated in financial statements. It is particularly relevant in declining price environments, protecting stakeholders against overstated asset values and misrepresented profitability.

4. Inventory Turnover Ratio & Days in Inventory

The inventory turnover ratio measures how many times a company sells and replaces inventory over a period, indicating operational efficiency. The days in inventory calculation determines the average number of days inventory is held before sale. High turnover typically signifies efficient sales, while excessive days may suggest overstocking or slow-moving inventory—key indicators for management to enhance cash flow and reduce storage costs.

5. Primary Basis of Inventory Accounting

The primary basis for inventory accounting is that inventory is valued at the lower of cost or net realizable value, reflecting prudence and relevance. Accurate measurement relies on consistent application of cost flow assumptions, valuation methods, and proper documentation.

6. Specific Identification Method

This method tracks the actual cost of specific units sold, offering precise profit measurement. Its major advantage is accuracy, especially for unique or high-value items, but it is costly and impractical for large volumes of uniform goods. It is best suited for luxury goods or automobiles where specific identification is feasible.

7. Freight Out Expense and Cost of Goods Sold

Including freight out expense in COGS is inappropriate because it relates to distribution costs rather than the cost of acquiring inventory. Proper allocation separates selling and distribution expenses from inventory costs, maintaining accurate gross profit margins and aligning with accounting principles of matching expenses with revenue.

8. Average Cost Method in Different Systems

The perpetual inventory system updates the average cost after each purchase, providing real-time inventory costing. In contrast, the periodic system calculates the average cost at the period's end, based on total purchases and beginning inventory. This affects inventory valuation, COGS calculation, and managerial reporting, making perpetual systems more detailed and responsive.

9. Sarbanes-Oxley and Internal Controls

The Sarbanes-Oxley Act heightened the importance of internal controls to ensure financial accuracy and prevent fraud. Top management must evaluate and maintain effective internal control systems, including documentation, physical safeguards, and independent verification, to comply with regulatory requirements and protect company assets.

10. Documentation Procedures and Physical Controls

Proper documentation procedures support internal control by establishing audit trails, facilitating accountability, and ensuring data accuracy. Physical controls, such as locks and security cameras, safeguard assets, including inventory and cash, and help prevent theft and fraud, aligning with the control objectives of safeguarding assets.

11. Independent Internal Verification & Practices

Independent internal verification involves periodic review and reconciliation by staff not responsible for transactions. Practices include surprise audits, bank reconciliations, and management reviews, ensuring financial data accuracy and operational integrity, and deterring fraudulent activities.

12. Controls on Cash Disbursements

Physical controls, like cash registers and safes; and human resource controls, such as segregation of duties, are essential for cash disbursement integrity. These controls prevent unauthorized payments and ensure proper authorization, reducing the risk of embezzlement or errors.

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