Identify The Steps In The Accounting Cycle, Prepare Financia

Identify the steps in the accounting cycle, prepare financial statements, and compare inventory systems

The task involves analyzing a set of accounting transactions for a company called Computer Empire, which sells computer peripherals. The assignment requires preparing journal entries under specific inventory systems, calculating ending inventory, preparing an income statement, contrasting perpetual and periodic inventory systems with corresponding journal entries, and creating a trial balance based on a provided opening balance sheet. The goal is to demonstrate understanding of the accounting cycle, financial statement preparation, inventory management, and the differences between inventory systems.

Paper For Above instruction

Computer Empire, a retailer of computer peripherals, presents a comprehensive case study to evaluate essential accounting principles, particularly focusing on inventory management, transaction recording, and financial statement preparation. As of December 31, 2018, the company’s inventory was valued at $600,000, serving as the opening balance for the subsequent fiscal year. The following analysis dissects various financial transactions during 2019 and explores their implications under different inventory systems, primarily perpetual and periodic, emphasizing their impact on financial reporting and internal control.

Transaction Recording Under Perpetual Inventory System

The first step involves documenting the year’s transactions using a perpetual inventory system, which continuously updates inventory accounts with each purchase and sale. On January 17, Computer Empire purchased merchandise from Digital Masters for $130,000 with 3/10 net 60 credit terms. The journal entry to record this purchase includes debiting Inventory and crediting Accounts Payable, reflecting the acquisition and the payable obligation. Given the discount terms, if payment occurs within ten days, a 3% discount applies, reducing the payable amount to $126,100. This discount affects subsequent payments and cost calculations.

On February 15, the company settled the payable to Digital Masters by paying $126,100, which includes the deduction of the purchase discount. The entry debits Accounts Payable and credits Cash, completing the transaction with the reduced amount due.

The March 25 sale to Carrefour for $257,000 cash involved recognizing revenue and cost of goods sold (COGS). The sale increases cash and sales revenue, while COGS decreases inventory and increases expense, respectively. The recorded COGS assumes the inventory valuation method in use, such as FIFO or weighted average, which impacts gross profit calculation. The $128,250 cost of these items is deducted from inventory, reflecting the perpetual update.

Later, on December 18, the sale of equipment to Medical Association for $425,000 involves similar entries: recording cash receipt, recognizing revenue, and removing the equipment’s cost ($235,000) from inventory, which increases subsequently or decreases assets depending on the sale's specifics. The discount terms 5/10 net 30 imply that if the invoice remains unpaid within ten days, a 5% discount could be applied, affecting the cash received and revenue recognition.

Throughout the year, these entries detail the flow of inventory and cash, illustrating the impact of discount terms on receivable and payable amounts, revenue, and inventory valuation. Proper documentation of these transactions ensures accurate financial reporting and compliance with accounting standards.

Calculating Ending Inventory

The ending inventory balance is derived by adjusting the opening inventory with purchases and COGS, considering the inventory system’s specific rules. Starting with the $600,000 inventory at December 31, 2018, the year’s purchases and sales influence the ending balance. Under a perpetual system, the inventory account is updated with each transaction, providing real-time valuation. Given the purchase of $130,000 and the sale with a reduction in inventory of $128,250, the closing inventory can be calculated accordingly. If additional purchases or sales occurred, their impact would be integrated, but only the data provided is considered here.

Assuming the perpetual system’s transactions are accurately recorded, the ending inventory would be the initial inventory plus purchases minus COGS. The detailed calculation considers the costs of merchandise sold and purchased, leading to an estimated year-end inventory value consistent with the company’s accounting policies.

Therefore, the remaining inventory is approximately $600,000 plus $130,000 minus $128,250, resulting in an ending inventory of roughly $601,750, assuming no other transactions affected inventory, which aligns with the perpetual inventory updates provided.

Constructing the Income Statement for 2019

The income statement summarizes revenues and expenses to calculate net income for the year. The total sales revenue from Carrefour (cash sale) and equipment sale contribute to gross income. The gross profit is obtained by subtracting COGS from sales revenue. Expenses for 2019, including operating expenses amounting to $83,000, are deducted to arrive at the net income.

Revenues include the $257,000 cash sale to Carrefour and $425,000 from equipment sale, totaling $682,000. COGS totals approximately $128,250 and $235,000 for the respective sales, summing to $363,250, which reduces gross profit.

Considering discounts, if any sales or purchases qualify for discounts, revenue and payable amounts are adjusted accordingly. These discounts reduce the actual cash flow and impact revenue recognition, highlighting the importance of adhering to the terms stipulated in each invoice.

Expenses of $83,000 encompass various operational costs, decreasing the gross profit to derive the net income. The resulting net income figures are essential for assessing the company’s profitability and financial health for 2019.

Differences Between Perpetual and Periodic Inventory Systems and Journal Entries

The perpetual inventory system records inventory transactions continuously, updating inventory and COGS accounts immediately at each sale or purchase. Conversely, the periodic system updates inventory and COGS at period-end, relying on physical counts and calculations.

Using a periodic system, the purchase of merchandise is recorded in a Purchases account, not directly affecting Inventory. At period-end, inventory is counted, and the COGS is computed as Beginning Inventory + Purchases - Ending Inventory. Journal entries differ accordingly, with periodic systems requiring adjustments after physical counts.

For example, a purchase under the periodic system would debit Purchases and credit Accounts Payable, unlike the perpetual system where Inventory is debited immediately. Similarly, sales are recorded as cash/receivables and sales revenue, with COGS calculated at period-end, affecting Inventory and COGS accounts via adjusting entries.

Trial Balance as of January 1, 2020

The trial balance begins with the opening balances from the prior year, including cash, inventory, equipment, land, building, and equity accounts. Adjustments from the transactions during 2019, such as net income or loss, accumulated depreciation, and additional purchases or sales, are incorporated to prepare the trial balance.

Assuming all transactions have been accurately recorded and adjusting entries made, the trial balance provides a snapshot of the company’s financial position at the start of 2020. The balance sheet reflects accumulated depreciation on equipment and buildings, cash, inventory, and equity balances, ensuring debits equal credits for accurate financial reporting.

This comprehensive process exemplifies the application of the accounting cycle, from journalizing transactions to preparing financial statements, and underscores the importance of choosing the appropriate inventory system for accurate financial analysis.

Conclusion

The detailed exploration of Computer Empire’s transactions demonstrates the interconnectedness of various accounting processes, including transaction recording, inventory management, and financial statement preparation. Differentiating between perpetual and periodic inventory systems highlights their respective impacts on reporting and internal controls. Accurate journal entries, inventory valuation, and trial balance preparation are foundational skills that support sound financial analysis and decision-making within a business environment.

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