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Accounting Problems: inventory, R&D, fixed assets, goodwill

1 What are the differences between the periodic and the perpetual methods
for tracking inventory? What are some advantages and disadvantages to
each method?

2 Describe the differences between the FIFO and LIFO methods of inventory
valuation. What might be some reasons a company would pick one method
over another?

3 Under what circumstances would a company's cost of good solds be greater
under the FIFO method than under the LIFO method?

4 What are R&D costs and how should they be treated in the financial statements?

5 What is goodwill? How is goodwill created and what impact does it have on
a company's financial statements?

6 Many fixed assets are capitalized and then depreciated over time. Why
are fixed assets depreciated, and what impact does this depreciation expense
have on an company's cash flow for a period?

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Solution Preview

1. With the perpetual method, the cost of remaining inventory is currently stated at all times because inventory is relieved as part of every sale. Having current information makes it easier to adjust pricing, watch for fraud and to have the ability to produce financial statements with more accurate results. The periodic system doesn't require the more sophisticated 'point of sale' software, but does require closing the doors for a couple of days while the inventory is counted and priced. Sounds like the mom and pop grocery store over New Year's.

2. Both methods have to do with how to cost out inventory to sales. FIFO removes the cost of the oldest inventory in stock whereas LIFO takes the newest stuff first. In periods of rising prices, LIFO will do a better job of matching cost of goods sold to sales than FIFO will. In the same scenario, FIFO will tend to more accurately value inventory because the newer priced items will remain on the balance sheet. Companies may choose ...

Solution Summary

The 682 word solution presents a comprehensive response to each of the six questions plus a shart paragraph for each of three scenarios in the attached problem for KMP Corporation.