Question

1) What is a periodic inventory system, and what is a perpetual inventory system? Why might an organization choose one over the other?

2) How do accountants keep track of the number of units sold, if they are using the periodic inventory method? (Hint-basic equation).

3) What are the four basic cost flow methods for inventory valuation? Briefly describe each method and indicate the implications for financial reporting.

4.) How might IFRS affect inventory costing if incorporated into US GAAP?

Answer 1

1)a: Periodic inventory system:

In a periodic inventory system, updates are made on a periodic basis i.e occasionally.

B) Perpetual inventory method:

In a perpetual inventory method, accounting is done continually in case of inventory changes.

An organization might use the perpetual inventory method for more accurate reporting, restocking and to discover any sort of theft. Periodic inventory system can be used for it's convenience.

B) Under the periodic inventory method, new purchases are added to the opening balance of inventory and sales are deducted to arrive at the closing inventory balance which in turn should match with the physical closing inventory count.

3) Four basic cost flow methods:

Specific cost

Can be used when each item is identifiable.

Average cost

Same cost applied to all the units for valuation purpose.

FIFO

The first units purchased are the first units sold.Valuation for remaining units are done on the basis that units remaining are purchased at the latest price.

LIFO

This is the last in first out method. It implies that the units purchased last were sold first and thus the items remaining must be valued at the oldest rates.

4) IFRS forbids the use of the LIFO method which is allowed in US GAAP.Further, there is a difference in valuation as well since GAAP uses lower of cost and market value and IFRS uses lower of cost or net realizable value.