The consistency principle requires that companies use

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…the consistency principle requires that companies use the same accounting methods period after period so the financial statements are comparable. The LIFO conformity rule states that if LIFO is used for taxes, then LIFO must also be used for financial reporting.
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17 Perpetual vs. Periodic Inventory System How often does a firm do inventory calculations: With each transaction (Perpetual) After specific period (Periodic) No matter which way, the relationship between beginning inventory, purchases, ending inventory and cost of goods sold are the same.
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18 The inventory account is continuously updated for the following items: Purchases Returns & Allowances Sales Detailed record-keeping has become much easier with current technology (bar coding). A physical count of the inventory is still required at the end of the accounting period. Perpetual Inventory Systems
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19 The ending inventory is determined by a physical count and costing. COGS is solved for as follows: Beg. Inv. + Purchases – End. Inv. = COGS (known) (known) (counted) (solved for) This system is being used less and less due to advancements in technology . Periodic Inventory Systems
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20 Ending inventory is reported at the lower of cost or market (“LCM”). Market refers to the replacement cost of the merchandise. This practice is in keeping with the generally accepted accounting principle of conservatism . If market is less than cost, recognize the loss now (not when sold) Lower of Cost or Market
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21 Inventory Ex: Periodic vs. Perpetual Beginning Inventory 15 units @ $20 each 1/5 purchased 20 units @ $21 each 3/6 sold 10 units 5/16 purchased 30 units @ $22 each 7/5 sold 20 units 9/3 purchased 10 units @ $23 each 15 @ $20 = $300 Beginning Inventory 20 @ $21 = $420 Purchased 1/5 30 @ $22 = $660 Purchased 5/16 10 @ $23 = $230 Purchased 9/3 75 $1610 Goods Available : Calculate Ending Inventory and Cost of Goods Sold under 1: FIFO perpetual 2: FIFO periodic 3: LIFO perpetual 4: LIFO periodic Perpetual Periodic
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22 FIFO--Perpetual Sale on 3/6 of 10 units comes from Beg Inv @ $20 each Sale on 7/5 of 20 units comes from Beg Inv ( 5 units @ $20) and from 1/5 purchase ( 15 units @ $21)
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  • Spring '08
  • YunhaoChen
  • Perpetual Inventory Systems, Periodic Inventory Systems, Beg inventory

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