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Inventory Methods Explanations

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Discussion Questions
1) Distinguish between the periodic and perpetual methods. Expand on response
2) Discuss the inventory cost flow methods. Which is the most accurate? Why? Expand on response
3) Define the LCM rule. Is it more or less applicable in 2016. Explain.

Textbooks
Introduction to Financial Accounting, 11/E, Charles T. Horngren, Stanford University, Gary L. Sundem, University of Washington, John A. Elliott, Baruch College, The City University of New York, Donna Philbrick, Portland State University,ISBN-10: 0133489361 | ISBN-13: 9780133489361 ©2014 • Prentice Hall • Cloth, 648 pp

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The response provides you a structured explanation of three accounting questions . It also gives you the relevant references.

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1) The periodic system of inventory means occasional physical count of inventory to ascertain the ending inventory balance. In contrast the perpetual method means continuous calculation of inventory balances. Specifically the inventory account and cost of goods sold accounts are continuously updated in the perpetual system but in the periodic inventory system they are updated only at the end of the period. In the periodic inventory system closing entries are required but these are not required in the perpetual system. Further, whenever there is sales transaction, in the perpetual system there are two journal entries one recording the sale value of inventory, and the other recording the cost of goods sold. In periodic system one entry is required. In the periodic system, the balance is constant, it does not include cost of purchases, and need a physical inventory at least once a year. In contrast in the perpetual system, the inventory account is debited when there is purchase; credit ...

Solution provided by:
Hatim Baxamusa, MBA
Education
  • BSc , University of Calcutta
  • MBA, Eastern Institute for Integrated Learning in Management
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