Question

• What are the different types of inventories?
• What is the difference in bookkeeping that takes place between the periodic and perpetual approaches?
• What are the complicating situations for determining which items should be counted as part of inventory?
• What are the three primary cost flow assumptions, and how would management choose among them?
• How do different cost flow assumptions impact what is reflected on the balance sheet and income statement?
• Why do we need to discuss LIFO liquidations in the notes to F/S? What do they tell F/S readers?

Answer 1

ANSWERS

(a) Different type of inventories

inventories can be classified under various base such as nature of business such as trading , manufacturing business .inventory araise from normal trading activity and inventory araised from manufacturing and selling of goods are manufacturing inventory .they are

• Raw material - it is the goods or materials purchased by the manufacture to which the manufacturing process are applied in order to get the desired finished  product.
• Work-in -progress - these are partly processed raw materials lying with production department.it is also called semi finished goods and that can be either salable or not .
• Finished goods - finished goods are the final product or output of manufacturing process .these unit are sold in the market.
• Goods in transit - During the entire business process goods such as raw material and  working progress may transport from different branch of business to other sites for sale ,purchase , for further processing of materials such unit are normally called goods in transit
• Safety stock - safety stock are goods or material purchased to meet the future uncertainity in production cycle.it is also called buffer stock

(b) Difference between periodic and perpectul bookkeeping technique

periodic inventory and perpectual inventory system are two different method of accounting inventory ,and cost of goods sold , finished goods .

periodic inventory system of book keeping  

• periodic inventory system which take physical count of iventory and cost of goods sold (COGS).
• it is mainly used by small business organisation having only lesser sales volume.
• under this method physical count of inventory and COGS are recorded at the end of set period .it may be one month , once a quarter, or once a year.
• periodic inventory is difficult for organisation having number of brances .and warehouses

Perpectual inventory system of book keeping

• under perpectual bookkeeping inventory balances are continously monitored updated and recorded automatically whenever the product purchased or sold
• suitableble for business with higher sales volume and myltiple outlets
• under this method only manger can mak proper decision regarding maintaing safety stock, economic reorder quantity and level.
• it provide accurate measurement of inventory and therby widely acepted bookkeeping system

(d) primary cash flow assumptions

Three main assumption of cashflow are classified as cash flow from operating , investment and financing activities

• Cash flow from Operating activities - cash flow from operating activities are primarily derived from principle revenue- producung actiites of enterprise.that is cash flow which effect the normal net profit of an organisation. cash sale of goods and rendering services , payment to suppliers and creditors, payment to and behalf of employees etc.are examples of cash flow from operating activities

• Cash flow from investment activities - investment activities include acqusition and disposal of long term assets and other investment and not include cash and cash equalents.examples of investment cash flows are cash payment to acquire fixed assets,cash receipts from disposal of fixed assets, cash advances and loan made to third parties, cash payment to future contracts , forward contracts etc..

• cash flow from financing activities - cash flow from financing actives are those activities which reult in change in size and composition of owners capital and borrowings of the organisation.examples of financing activities are cash proceeds from issuing shares or other similar instruments, cash proceeds from issuing debenture, repayment of longterm loan , payment of dividend .etc..

(e) cashflow has impact on the balances

Major cash flow assumptions of an enterprise are  operating activies , investment activities and financing activities.investment activity and financing activities of an enterprise make impact on the balancesheet .for eg an investment activity , cash payment to acquire a fixed asset including any intangible asset which increase the value of fixed asset in balanceheet and a financing activity cash from issuing shares is a cash inflow causing change in the composition of owners capital .and there by increase the value of shares held by the company.that means only investment and financing activity has impact on balancesheet of a firm.

income and expenditure account of an enterprise is influenced by operating activity because these activity are primarily derived from revenue producing activity. for example cash payment to employee is an operating activity for which we treat amount paid as salary expense in income and expense account.