Answer Questions About Accounting Theory And Merchand 583663

Answer Questions About Accounting Theory And Merchandising Accounting

Answer Questions About Accounting Theory And Merchandising Accounting

Answer questions about accounting theory and merchandising accounting.

Introduction: A legal firm's operations are different than Ford or GM operations. Lawyers provide a service whereas Ford is a manufacturing business that needs to maintain an inventory of various parts used in their vehicles. Each requires its own accounting approach. We now delve into accounting theory in greater depth.

Now that you have learned some accounting procedures, you are better able to relate these theoretical concepts to accounting practice. Accounting theory is a set of basic concepts, assumptions, and related principles that explain and guide the accountant's actions in identifying, measuring, and communicating financial information. Your study of accounting began with service companies as examples because they are the least complicated type of business. You are now ready to apply the accounting process to a more complex business type: a merchandising company. This type of company is represented by manufacturers, wholesalers, and retailers.

Overview

This assessment focuses on accounting assumptions, concepts, principles, modifying conventions, objectives, qualitative characteristics, accounting policies, and the income statements for service and merchandising organizations. It requires knowledge of the following:

  • The effects of accounting assumptions on the accounting process.
  • The effects of accounting concepts on the accounting process.
  • How generally accepted accounting principles (GAAP) affect financial reporting.
  • The impact of modifying conventions on the accounting process.
  • How accounting objectives, qualitative characteristics, and policies affect financial reporting.
  • The differences and similarities between income statements for service and merchandising organizations.
  • The methods used to determine the amount of merchandise inventory on hand.
  • How to use the gross margin percentage as a tool for financial analysis.

Preparation: Complete the Assessment 4 Template [DOCX]. Review all suggested readings. Note: Accuracy in accounting is paramount, so take your time and double-check your work for errors or omissions.

Instructions

  1. Discuss the effects of the five major accounting assumptions on the accounting process.
  2. Describe the five concepts' impact on the accounting process.
  3. Describe the five major accounting principles.
  4. Describe the impact on the accounting process of the three modifying conventions.
  5. Identify the accounting procedures of Principles, Assumptions, Concepts.
  6. Complete the equations of merchandising accounting.
  7. Describe the two methods used to determine merchandise inventory.

Competencies Measured

  • Define accounting terminology and its application to accounting principles. Describe the five major accounting principles. Identify the accounting procedures of Principles, Assumptions, Concepts.
  • Apply accounting cycle strategies to manage business financial events. Discuss the effects of the five major accounting assumptions on the accounting process. Describe the five concepts' impact on the accounting process. Describe the impact on the accounting process of the three modifying conventions. Complete the equations of merchandising accounting. Describe the two methods used to determine merchandise inventory.
  • Convey purpose, in an appropriate tone and style, incorporating supporting evidence and adhering to organizational, professional, and scholarly writing standards. Convey clear meaning through appropriate word choice and usage.

Paper For Above instruction

Accounting theory constitutes the foundational framework guiding how financial information is identified, measured, and communicated. It encompasses assumptions, concepts, and principles that shape accounting practices and ensures consistency and clarity in financial reporting. This paper explores the impact of key accounting assumptions, concepts, and principles on the accounting process, particularly contrasting service and merchandising organizations, with an emphasis on inventory management and financial analysis tools.

Impact of the Five Major Accounting Assumptions

The foundation of accounting rests upon five major assumptions: economic entity, monetary unit, time period, cost, and going concern. The economic entity assumption mandates that a company's transactions are separate from its owners and other entities, promoting clarity and accountability. The monetary unit assumption assumes all financial data is measured in a stable currency, facilitating comparison over time. The time period assumption allows the division of an entity's life into equal periods for reporting purposes, enabling timely financial statements. The cost assumption states that assets are recorded at their original cost, promoting objectivity. Finally, the going concern assumption presumes that an enterprise will continue operations indefinitely, influencing asset valuation and depreciation methods.

Impact of the Five Major Concepts

The five major accounting concepts—reliability, relevance, comparability, consistency, and understandability—serve as qualitative criteria for useful financial information. The reliability concept emphasizes accuracy and verifiability, ensuring external stakeholders trust the financial data. The relevance guarantees that information impacts decision-making. The comparability allows for analysis over different periods or entities, highlighting the importance of consistent application of accounting policies. Consistency ensures comparability across periods through uniformity in methods, while understandability ensures the information is clear and comprehensible to users.

The Five Major Accounting Principles

The core accounting principles include the principle of revenue recognition, matching principle, cost principle, conservatism, and materiality. The revenue recognition principle dictates that revenue is recorded when earned, regardless of receipt. The matching principle aligns expenses with revenues in the period they generate them, providing an accurate profit measure. The cost principle records assets at historical cost. The principle of conservatism guides accountants to choose the less optimistic estimate when uncertain. The materiality principle emphasizes the significance of information relative to the user's decision-making.

Impact of Modifying Conventions on the Accounting Process

Modifying conventions such as conservatism, industry practices, and materiality adjustments can significantly influence financial reporting. For instance, conservatism may lead to understated asset values or revenue recognition, affecting financial ratios. Industry practices might dictate specific inventory valuation methods such as FIFO or LIFO, impacting gross margin calculations. Materiality adjustments ensure that insignificant items do not clutter financial statements, focusing attention on relevant data. These conventions introduce flexibility, but also require careful judgment to ensure consistency and comparability.

Accounting Procedures of Principles, Assumptions, and Concepts

Fundamentally, accounting procedures include journalizing transactions, posting to ledgers, adjusting entries, preparing financial statements, and analyzing variances. These procedures are guided by assumptions like the economic entity and going concern, concepts such as relevance and reliability, and principles including revenue recognition and matching. For example, inventory valuation under merchandise accounting employs specific procedures aligned with these principles and assumptions, ensuring accurate representation of assets and income.

Equations of Merchandising Accounting

The core equations in merchandising accounting revolve around the calculation of cost of goods sold (COGS), gross profit, and ending inventory. The basic formula for merchandise transactions is:

  • Beginning Inventory + Purchases – Ending Inventory = Cost of Goods Sold
  • Sales – Cost of Goods Sold = Gross Profit

These equations help assess profitability and manage inventory effectively, forming the backbone of merchandising financial analysis.

Methods to Determine Merchandise Inventory

Two primary methods for inventory valuation are FIFO (First-In, First-Out) and LIFO (Last-In, First-Out). The FIFO method assumes that the oldest inventory items are sold first, thus capturing current costs for the remaining inventory. LIFO assumes that the most recent purchases are sold first, potentially reducing taxable income during inflationary periods. Both methods influence cost of goods sold and net income calculations, and selection depends on industry practices and strategic considerations.

Conclusion

Understanding the interplay between accounting assumptions, concepts, principles, and conventions is essential in applying accounting practices effectively. Especially in merchandising businesses, inventory valuation and cost management are critical for accurate financial reporting and analysis. By adhering to established principles and appropriately applying conventions, accountants ensure transparency, consistency, and relevance in financial statements, ultimately aiding stakeholders in decision-making.

References

  • Brigham, E. F., & Houston, J. F. (2021). Fundamentals of Financial Management (15th ed.). Cengage Learning.
  • FASB. (2022). Financial Accounting Standards Board. GAAP Fundamentals. Retrieved from https://www.fasb.org
  • Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2021). Managerial Accounting (16th ed.). McGraw-Hill Education.
  • Horngren, C. T., Harrison, W. T., & Oliver, M. S. (2019). Financial & Managerial Accounting (7th ed.). Pearson.
  • Wild, J. J., & Shaw, K. W. (2020). Fundamental Accounting Principles (23rd ed.). McGraw-Hill Education.
  • McGraw Hill. (2021). Merchandising Inventory and Costing Methods. Accounting Education Resources.
  • AccountingTools. (2023). Merchandising Inventory Valuation Methods. Retrieved from https://www.accountingtools.com
  • International Accounting Standards Board (IASB). (2022). IFRS Standards. Retrieved from https://www.ifrs.org
  • Larson, K. D., & Nellen, A. (2018). Advanced Accounting. Cengage Learning.
  • Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2020). Financial Accounting Theory and Analysis. Wiley.

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