Lesson 6 essay - Write a 500-1,000-word essay describing...

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Write a 500-1,000-word essay describing the four accounting principles that affect merchandise inventories. What is the goal of conservatism? Consistency Principle, disclosure principle, materiality concept and conservatism are accounting principles that affect merchandising inventories. These four accounting principles if followed allow companies to be accurate, to disclose their business accounts appropriately, conservatively choose proper options as well at simplify their accounting processes by only reporting significant items. “Consistency principles states that businesses should use the same accounting methods and procedures from period to period” (2014, page 364). Accurately, properly and always using the same method of accounting in necessary for investors and creditors. For example, suppose you were interested in investing in a company that net income went up in the second year. After thoroughly examining it though, you notice that sales were the same though. You would start to think, well inventory prices must have had a decrease. If the company in question kept a consistency in accounting methods you would be correct to assume so. But if the company used the LIFO (Last in, First out) accounting method the first year which would show a high amount of cost of goods and low gross profit. Then switched to FIFO, (First in, First Out) which would show a lower cost of goods because they use the oldest inventory on hand first, which is generally cheaper would get sold first. This change would show a greater gross profit because cost of goods would decrease. Even though the sales from one year to another are the same, the gross profit changed because accounting methods changed. Which is not an accurate account of data for outside investors or creditors to look at. Which is why consistency principles are important. Disclosure principle is how a company reports their business accounts to outsiders. One of the many things reported is what type of accounting method was used for the accounts. In the example of the consistency principles you can see why this is important. If a company switched accounting methods

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