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In: Accounting

Determining the cost of goods in a perpetual or periodic inventory system? (what goes into the...

  1. Determining the cost of goods in a perpetual or periodic inventory system? (what goes into the cost of goods purchased) (what is included of the cost of reselling items on the shelf
  2. Calculation of gross profit rate and ratio (steps)
  3. What is FOB (given a situation on who owns the stuff when we are taking inventory)
  4. Using FIFO inventory calculate the amount of the ending inventory (steps)
  5. Using LIFO inventory calculate the amount of the ending inventory (steps)
  6. Question about net realizable value and how it relates to inventory (what’s the definition of net realizable value)
  7. Reverse of internal controls
  8. Describe a particular procedure and asks to identify a control principal (definition of control principal)
  9. Question about bank reconciliation (how to handle in particular bank rec item exp outstanding deposit in transit, outstanding checks, nsff check)
  10. Check was incorrectly was entered into the accounting records but the bank cashed it as the right amount hoe do we handle that?

Answer as many as you can please

Solutions

Expert Solution

Periodic and perpetual inventory systems are two contrasting accounting methods that businesses use to track the number of products they have available.

  • Perpetual inventory: Calculates cost of good sold for each sales and records a journal entry for cost of goods sold with each sales transaction.

By contrast, the perpetual system keeps track of inventory balances continuously, with updates made automatically whenever a product is received or sold. Purchases and returns are immediately recorded in the inventory account. As long as there is no theft or damage, the inventory account balance should be accurate. The cost of goods sold account is also updated continuously as each sale is made. Perpetual inventory systems use digital technology to track inventory in real time using updates sent electronically to central databases.

  • Periodic inventory: Follows the same basic principle but it calculates ONE cost of goods sold amount at the end of the month for all items based on the beginning inventory + all purchases and does not record cost of goods sold with each sales transaction.

Cost of goods sold under the periodic inventory system is calculated as follows:

Beginning Balance of Inventory + Cost of Inventory Purchases - Cost of Ending Inventory = Cost of Goods Sold

FIFO Method

Under the FIFO Method, we use the oldest inventory first and work our way forward until the sales are complete. Under the periodic inventory, cost of goods sold is assigned at the end of the period only and not with each sales transaction.

FIFO, the first (or oldest) costs are the first moved from the Inventory account and debited to the Cost of Goods Sold account. The end result under perpetual FIFO is the same as under periodic FIFO. In other words, the first costs are the same whether you move the cost out of inventory with each sale (perpetual) or whether you wait until the year is over (periodic).

LIFO Method

Under the LIFO Method, cost of goods sold is calculated using the most recent inventory first and then working our way backwards until the sales order has been filled.

LIFO, the last costs available at the time of the sale are the first to be removed from the Inventory account and debited to the Cost of Goods Sold account. Since this is the perpetual system we cannot wait until the end of the year to determine the last cost—an entry must be recorded at the time of the sale in order to reduce the Inventory account and to increase the Cost of Goods Sold account.

Gross profit ratio (GP ratio) is a profitability ratio that shows the relationship between gross profit and total net sales revenue. It is a popular tool to evaluate the operational performance of the business . The ratio is computed by dividing the gross profit figure by net sales.

Formula:

The following formula/equation is used to compute gross profit ratio:

When gross profit ratio is expressed in percentage form, it is known as gross profit margin or gross profit percentage.

FOB

The term FOB is an abbreviation of free on board. If goods are shipped FOB destina­tion, transportation costs are paid by the seller and title does not pass until the carrier delivers the goods to the buyer.

These goods are part of the seller’s inventory while in transit. If goods are shipped FOB shipping point, transportation costs are paid by the buyer and title passes when the carrier takes possession of the goods. These goods are part of the buyer’s inventory while in transit. The terms FOB destination and FOB shipping point often indicate a specific location at which title to the goods is transferred, such as FOB Denver. This means that the seller retains title and risk of loss until the goods are delivered to a common carrier in Denver who will act as an agent for the buyer. The rationale for these determi­nations originates in agency law, since transfer of title is conditioned upon whether the car­rier with physical possession of the goods is acting as an agent of the seller or the buyer.

Net Realizable Value

Net realizable value (NRV) is the cash amount that a company expects to receive. Hence, net realizable value is sometimes referred to as cash realizable value.

let's assume that a company's inventory has a cost of $15,000. However, at the end of the accounting year the inventory can be sold for only $14,000 after it spends $2,000 for packaging, sales commissions, and shipping. Therefore, the net realizable value of the inventory is $12,000 (selling price of $14,000 minus $2,000 of costs to dispose of the goods). In that situation the inventory must be reported at the lower of 1) the cost of $15,000, or 2) the NRV of $12,000. In this situation, the inventory should be reported on the balance sheet at $12,000, and the income statement should report a loss of $3,000 due to the write-down of inventory.

Control Prinicipal

The control principle is the concept that accounting systemsmust have procedures and processes in place to help managers monitor and regulate business activities. These processes are traditionally called internal controls.

The purpose of the control principle is to make sure the accounting system is working properly and business events are being recorded accurately. Obviously, managers can’t oversee every single employee, so there is a possibility that some errors will occur or some fraud could take place. The internal controls are put in place to make sure accounting errors are reduced, company assets are protected, and employees aren’t able to commit fraud.

Example

There are several different types of internal controls including segregating duties, mandatory employee rotation, and automated controls.

Bank Reconciliation

The key terms to be aware of when dealing with a bank reconciliation are:

  • Deposit in transit. Cash and/or checks that have been received and recorded by an entity, but which have not yet been recorded in the records of the bank where the entity deposits the funds. If this occurs at month-end, the deposit will not appear in the bank statement, and so becomes a reconciling item in the bank reconciliation. A deposit in transit occurs when a deposit arrives at the bank too late for it to be recorded that day, or if the entity mails the deposit to the bank (in which case a mail float of several days can cause a delay), or the entity has not yet sent the deposit to the bank at all.

  • Outstanding check. A check payment that has been recorded by the issuing entity, but which has not yet cleared its bank account as a deduction from cash. If it has not yet cleared the bank by the end of the month, it does not appear on the month-end bank statement, and so is a reconciling item in the month-end bank reconciliation.

  • NSF check. A check that was not honored by the bank of the entity issuing the check, on the grounds that the entity's bank account does not contain sufficient funds. NSF is an acronym for "not sufficient funds." The entity attempting to cash an NSF check may be charged a processing fee by its bank. The entity issuing an NSF check will certainly be charged a fee by its bank.


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