Module 3 Homework Answer Key
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Mrinmay kunduModule 3 Homework Answer Key
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Mrinmay kunduCommon questions
Powered by AIA business might prefer the FIFO method during periods of rising costs as it results in a lower cost of goods sold, thereby increasing net income and improving profitability appearance in financial reporting. FIFO uses the oldest, typically cheaper costs, which result in higher gross profits and net income, as demonstrated with FIFO having a higher gross profit compared to LIFO in cases where costs are rising . Additionally, higher ending inventory values improve balance sheet strength .
The perpetual inventory system continuously updates inventory balances and cost of goods sold after each transaction, offering real-time inventory data and requiring detailed record-keeping. This results in precise inventory levels and immediate financial impact, as seen in the regular adjustments of inventory records for purchases and sales . In contrast, the periodic system updates records at the end of an accounting period, requiring physical counts to determine inventory and COGS, which can lead to timing differences and less accuracy in interim periods .
The choice of inventory valuation methods like FIFO, LIFO, and Weighted Average affects the cost of goods sold (COGS) and thereby impacts the net income reported in financial statements. For instance, LIFO results in the highest net income of $258.00 when costs decrease, as it matches older, higher costs against current revenues . Conversely, FIFO results in the highest net income when costs are rising because it uses older, lower costs. Weighted Average usually results in a net income between FIFO and LIFO .
The Specific Identification inventory method is most advantageous for businesses dealing with unique or high-value items where each unit can be tracked individually, like jewelry or automobiles. It ensures precise matching of costs with revenues as seen in the calculations showing exact units and costs linked to ending inventory and cost of goods sold . This method offers accurate financial statements and profitability measures, which is vital for highly differentiated inventory items .
Shipping costs are added to the inventory account, increasing the value of inventory on hand and the total purchase cost. For example, Sydney recorded a shipping cost of $345 in the merchandise inventory account, reflecting the total acquisition cost and ensuring inventory is properly valued on the balance sheet . This practice ensures accurateness in financial statements by capitalizing costs directly related to inventory acquisition .
Shipping costs influence net income by increasing the amount capitalized in inventory and affecting the cost of goods sold once inventory is sold. These costs are added directly to inventory under methods like FIFO, LIFO, and weighted average. For example, the added shipping costs, when capitalized, shift part of the expense to assets rather than immediate expenses, impacting net income only upon sale of the inventory . This defers expenses, impacting each method differently based on how it values the ending inventory .
During periods of decreasing prices, FIFO reports a higher cost of goods sold as it uses the oldest, more expensive inventory first, resulting in lower net income compared to LIFO. In contrast, LIFO would result in a higher ending inventory valuation as it utilizes more recent, cheaper costs for sold goods. This is shown where FIFO's cost of goods sold was higher than LIFO's when prices decreased, impacting reported earnings .
Returns affect financial records by reversing part of the initial transaction entries. For buyers like Sydney, returns reduce accounts payable and merchandise inventory, as noted by an entry reducing original purchase liabilities . For sellers like Troy, returns decrease accounts receivable and increase sales returns and allowances, adjusting sales revenue. The cost side involves reducing cost of goods sold and increasing inventory, ensuring recorded inventory levels match physical goods .
Offering sales discounts can improve cash flow by encouraging quicker payment, as shown in the entries for both buyer Santa Fe and seller Mesa, who receive cash within the discount period . However, sales discounts reduce the amount of revenue recognized per sale, which can impact profitability. For example, Mesa recorded a sales discount of $720, reducing the receivable balance from $24,000 to $23,280, directly affecting net revenue from sales .
The calculation of cash payments reflects purchase discounts by reducing the amount paid if settled within the discount period, impacting both cash flow and recorded liabilities. For instance, Santa Fe's cash paid was $23,280 instead of $24,000 when utilizing a 3% discount, evidenced by the adjusted entry reflecting reduced accounts payable and cash outflow . This method incentivizes early payments and results in cost savings .