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Unformatted text preview: FIFO, and the moving-average fell in between. Download free ebooks at bookboon.com 37 Perpetual Inventory Systems Current Assets: Part II The resulting financial data using the moving-average approach are: ACCOUNT: Inventory Date Description Jan. 1, 20XX Purchase transaction Apr. 17, 20XX Sale transaction Sept. 7, 20XX Purchase transaction Nov. 11, 20XX Sale transaction Credit Balance forward Mar. 5, 20XX Debit *** Balance G ONZALES CHEMICAL COMPANY Income Statement For the Year Ending December 31, 20XX $ 48,000 $ 96,000 144,000 $100,800 43,200 136,000 179,200 Net sales Cost of goods sold Gross profit Expenses The resulting financial data using the moving-average approach are: 97,745 81,455 $304,000 198,545 $ 94,000 ... ACCOUNT: Sales Date Description Debit Credit Balance Jan. 1, 20XX Balance forward Apr. 17, 20XX Sale transaction $154,000 $ 154,000 - Nov. 11, 20XX Sale transaction 150,000 304,000 G ONZALES CHEMICAL COMPANY Balance Sheet *** December 31, profit via As with the periodic system, observe that the perpetual system produced the lowest gross 20XX Assets LIFO, the highest with FIFO, and the moving-average fell in between. ... ACCOUNT: Cost of goods sold Date Description Debit Credit I nventory Balance Jan. 1, 20XX Balance forward Apr. 17, 20XX Sale transaction $100,800 $ 100,800 Nov. 11, 20XX Sale transaction 97,745 81,455 198,545 As with the periodic system, observe that the perpetual system produced the lowest gross profit via LIFO, the highest with FIFO, and the moving-average fell in between. Download free ebooks at bookboon.com 38 Lower of Cost or Market Adjustments Current Assets: Part II 8. Lower of Cost or Market Adjustments Although every attempt is made to prepare and present financial data that are free from bias, accountants do employ a degree of conservatism. Conservatism dictates that accountants avoid overstatement of assets and income. Conversely, liabilities would tend to be presented at higher amounts in the face of uncertainty. This is not a hardened rule, just a general principle of measurement. In the case of inventory, a company may find itself holding inventory that has an uncertain future; meaning the company does not know if or when it will sell. Obsolescence, over supply, defects, major price declines, and similar problems can contribute to uncertainty about the “realization” (conversion to cash) for inventory items. Therefore, accountants evaluate inventory and employ “lower of cost or market” considerations. This simply means that if inventory is carried on the accounting records at greater than its market value, a write-down from the recorded cost to the lower market value would be made. In essence, the Inventory account would be credited, and a Loss for Decline in Market Value would be the offsetting debit. This debit would be reported in the income statement as a charge against (reduction in) income. 8.1 Measuring Market Value Please click the advert Market values are very subjective. In the case of inventory, applicable accounting rules define “market” as the replacement cost (not sales price!) of the g...
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This note was uploaded on 06/07/2013 for the course BA 201 taught by Professor Cuongvu during the Fall '13 term at RMIT Vietnam.

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