3 cal and compute cos gross profit and ending invent

3. Cal and compute COS, gross profit, and ending invent
using different invent valuation methods and using
perpetual and periodic invent .system
a. Periodic inve. System: invent value and COGS
are determined at the end of the accounting
period. No detailed records of invent. Are
maintained; rather, invent acquired during the
period is reported in a purchase account. At the

end of the period, purchases are added to
beginning invent to arrive at cost of good
available for sale. To cal COGS, ending invent is
subtracted from goods available for sale.
b. Perpetual invent. System invent value and COGs
are updated continuously. Invent purchased and
sold is recorded directly in invent. When
transactions occur. Thus, there is no purchase
account.
c. For FIFO, specific identification, ending invent
value and COGS are the same whether periodic
or perpetual is used. b/c the first-in (and
therefore first-out) values are the same
regardless of subsequent purchases. But avg.
and LIFO both method result difference.
d. LIFO, periodic matches the total purchases for
the month with the withdrawals of invent units
for the month. Perpetual matched each unit with
drawn with the immediately preceding
purchases
4. Cal and explain how inflation and deflation of invent.
Costs affect the financial statements and ratios of
companies that use different inventory valuation
methods. >> it is not the older or newer physical
invent. Unites that are reported in the P/L or B/S , it is
the cost assigned to the units
a. Inflation period with stable or increasing invent
quantities(presumption), LIFO COGS is > FIFO
COGS. b/c the last units purchased have a higher
cost> first unit purchased. LIFO, the more costly

last units purchased are assumed to be the fist
sold (COGS), so higher COGS, lower GPM and
NIM
b. Deflationary and stable or increasing invent.
Quantities, LIFO COGS will < FIFO, and LIFO
ending invent will be higher. The most recent
lower-cost purchases are assumed to be sold
first under LIFO.
c. Stable price, all three cost flow method will yield
the same results for invent.COGS and Gross
profit.
The presumption in this section is invent Q are
stable or increasing.
d. Ending invent, when prices are rising or falling,
FIFO is more useful measure of ending invent.
This is a critical point. FIFO invent is the recent
purchase = better approximate current cost and
econ. Value.
e. COGS LIFO will > FIFO when prices are rising. b/c
COGS based on the most recent one, better
approximate of current cot in P/L
Method Assumptio
n
COGS
consist of
Ending
invent
consist of
Compar
e
FIFO Fist buy
first sold
First boy Last buy COS <,
ending
invent
and GP
>
LIFO Last buy,
first sold
Last buy First buy COS>,
ending

invent
and GP
<
Avg. cost Sold at the
mix of buy
Avg. Avg.