Week 3 Discussions And Required Resources Part 1 And Part 2

Week 3 Discussions And Required Resourcespart 1 And Part 2 Must Be At

Part 1: Perpetual Inventory System Present a detailed explanation of the recording of purchases under a perpetual inventory system. Use hypothetical figures to illustrate the perpetual inventory system. After presenting your hypothetical figures, discuss how a perpetual inventory system is different from a periodic inventory system. Your answer should illustrate understanding of the perpetual inventory system.

Part 2: Inventory Valuation Methods Identify the differences between F.I.F.O., L.I.F.O., and the average-cost method of inventory valuation. Be sure to include the effects of each method on cost of goods sold and net income in your answer. Also discuss the differences between the physical movement of goods and cost flow assumptions. Your answer should illustrate understanding of the three major inventory valuation methods, and the relationship between physical inventory flow and cost flow assumptions.

Paper For Above instruction

The management of inventory is a crucial aspect of financial accounting, impacting a company's profitability and operational efficiency. The perpetual inventory system is a method that continuously updates inventory records with each purchase and sale, providing real-time data about inventory levels and cost of goods sold (COGS). This system contrasts with the periodic inventory system, which updates inventory and COGS at specific intervals, typically through physical inventory counts.

Under a perpetual inventory system, every purchase transaction is recorded directly into the inventory account along with the quantity and cost. For example, suppose a company purchases 100 units of a product at $10 each, totaling $1,000. The journal entry to record this purchase would be:

  • Debit Inventory $1,000
  • Credit Accounts Payable $1,000

Subsequently, when the company sells 20 units at $15 each, the sale is recorded, and the inventory account is updated simultaneously:

  • Debit Accounts Receivable (or Cash) $300
  • Credit Sales Revenue $300

At the same time, the cost of these 20 units is recognized:

  • Debit COGS $200
  • Credit Inventory $200

This process ensures inventory levels and COGS are updated perpetually, providing instant and accurate data. The key difference between perpetual and periodic systems lies in the timing of inventory updates. A periodic system only updates inventory and COGS at the end of an accounting period, based on physical counts, whereas the perpetual system updates in real-time with each transaction. This difference impacts the accuracy and timeliness of inventory and financial reporting, with perpetual systems offering more detailed and current information.

Inventory valuation methods such as FIFO (First-In, First-Out), LIFO (Last-In, First-Out), and the weighted-average cost method influence how inventory costs are assigned and reported. FIFO assumes that the oldest inventory costs are allocated to COGS, leaving the newer costs in ending inventory. This tends to produce higher net income during periods of inflation because older, lower costs are matched against current revenues. Conversely, LIFO assigns the most recent costs to COGS, which often results in lower net income during inflationary periods because higher costs are matched against revenue.

The weighted-average cost method calculates an average cost per unit based on total goods available for sale, smoothing out price fluctuations over accounting periods. Each method influences the reported gross profit and net income differently. For example, during inflation, LIFO typically results in higher COGS and lower net income, whereas FIFO yields lower COGS and higher net income.

The physical movement of goods through inventory (the actual order in which goods are received and sold) may not correspond directly to the flow of costs assumed by these methods. FIFO aligns with a physical flow of goods—oldest inventory sold first—while LIFO assumes the most recent inventory is sold first, regardless of actual physical movement in some cases. The weighted-average method is a cost flow assumption that averages the costs, regardless of physical movement.

Understanding these differences is vital for accurate inventory management and financial reporting. Companies select an inventory valuation method based on their financial strategy, tax considerations, and operational practices, recognizing that each method impacts reported profits, tax liabilities, and inventory valuation (Kimmel, Weygandt, & Kieso, 2016).

References

  • Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2016). Financial accounting: Tools for business decision making (8th ed.). Wiley.
  • Bloom, R., & Cenker, W. J. (2008). The death of LIFO?. Journal of Accounting.
  • Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2016). Financial accounting: Tools for business decision making. Wiley.
  • American Institute of CPAs. (2018). Inventory Measurement and Valuation. Journal of Accountancy.
  • Griffin, P., & Hegarty, M. (2019). Cost flow assumptions and inventory valuation. Accounting Review.
  • Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial accounting (16th ed.). McGraw-Hill Education.
  • Kaplan, R. S., & Anderson, S. R. (2004). Time-driven activity-based costing. Harvard Business Review.
  • Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2011). Financial accounting theory and analysis. Wiley.
  • Radebaugh, L. H., Gray, S. J., & Black, E. (2019). International accounting and multinational enterprises. Pearson.
  • Hampton, J. J., & Garrison, R. H. (2018). Cost flow assumptions and their impact on financial statements. Financial Analysts Journal.

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