Information about Inventory Methods and Cost Flow Assumption

This document provides information about the different inventory methods and cost flow assumptions in accounting. It explains the perpetual and periodic inventory systems and their significance in recording transactions. The document also discusses the benefits of using Xero cloud-based accounting system for inventory management and decision making. It offers expert advice on accounting for inventory and highlights the advantages of computerized accounting systems.

ACCOUNTING 1
Accounting
[Name of Writer]
[Name of Institution]

ACCOUNTING 2
Question 1
To: Mr and Mrs Spot
From: Accounting Expert
Date: January 2019
Subject: Information about Inventory Methods and Cost Flow Assumption
There are two different approaches in accounting for merchandising transactions or inventory
transactions which are Perpetual and Periodic Inventory System. Perpetual Inventory System
requires to record transactions as they occur and keep records up to date. When sale is made, two
entries are required first to recognize revenue and second for cost of goods sold. Therefore, cost
of goods sold will remain update under perpetual system. While in periodic inventory system,
records are update at end. Cost of goods sold is found after taking physical inventory and a short
formula. Majority of businesses use perpetual inventory system. Cost flow assumption is
necessary to understand when identical products have different unit cost. At the time of
recording, which item should be included in cost of goods sold whether old inventory items or
recently purchased items. There are three types of cost flow assumption Average Method, First-
In-First-Out and Last-in-First-Out. Average method values all sold units and remaining units at
average per unit cost. FIFO assumes to sell units which are purchased earlier while LIFO
assumes to sell units which are recently purchased.
I hope this piece of information would help you in understanding the difference between two
inventory methods and cost flow assumptions.
Perpetual Inventory System:
Jan 1, 2018 Cash 20000
Paid in Capital 20000
Issued share capital of 20000 (10000 * 2)
Jan 3, 2018 Inventory 2400
Accounts Payable 2400
Purchased Inventory from Plush Toys Ltd on credit

ACCOUNTING 3
Jan 6, 2018 Accounts Receivables 1600
Sales 1600
COGS 960
Inventory 960
Sold 160 soft Toys to Preschool on credit
Jan 9, 2018 Inventory 2100
Bank Account 2100
Purchased 300 Soft Toys from Plush Toys Ltd
Jan 12, 2018 Accounts Payable 2400
Bank Account 2400
Paid Plush Toys Ltd for purchases made on 3 January
Jan 15, 2018 Cash 1600
Account Receivables 1600
Received $1,600 from Rainbow Preschool
Jan 20, 2018 Accounts Receivables 2000
Sales 2000
COGS 1200
Inventory 1200
Sold 200 soft Toys to Sydney Children’s Hospital on credit
Jan 22, 2018 Inventory 1050
Bank Account 1050
Purchased 150 Soft Toys from Plush Toys Ltd
Jan 24, 2018 Accounts Payable 1050
Bank Account 1029
Purchase Discount 21
Paid Plush Toys Ltd for purchases made on 22 January

ACCOUNTING 4
Jan 25, 2018 Bank Account 2400
Sales 2400
COGS 1360
Inventory 1360
Sold 200 soft Toys to Sydney Children’s Hospital on credit
Jan 31, 2018
No transaction is required for shrinkage because stocktake matches with accounting record.
Purchased Sold Balance
Date Unit
s
Unit Cost Total Units Unit
Cost
COGS Units Unit Cost Total
3 400 6 2400 400 6 2400
6 160 6 960 240 6 1440
9 300 7 2100 240 6
300 7 3540
20 200 6 1200 40 6
300 7 2340
22 150 7 1050 40 6
450 7 3390
25 40 6 290 7 2030
160 7 1360
Periodic Inventory System:
In periodic inventory system no entry is made for Cost of Goods Sold. Therefore, cost of
goods sold is determined at the end of period after taking physical inventory. The formula for
calculation of cost of goods sold under First-In-First-Out method is given below.
Purchase
Date Title Units Cost per unit Total
Beginning
Inventory
0 0 0
Jan 3 Purchase 400 6 2400
9 Purchase 300 7 2100
22 Purchase 150 7 1050
Available for Sale 850 5550
Sold 560
Ending Inventory 290

ACCOUNTING 5
Now we will work on ending inventory and find value of ending inventory to reach at
Cost of Goods Sold under FIFO method. Ending inventory in stock is given below along with
per unit cost.
150 units from purchase of 22 Jan @ 7 per unit 1050
140 units from purchase of 09 Jan @ 7 per unit 980
Total Ending inventory 2030
Cost of goods sold = 5550 – 2030
= 3520

ACCOUNTING 6
Question 2
Introduction
Accounting data is very important for decision making. Whether it is managerial data or
financial data both are equally important. Small businesses tend to rely on manual accounting
system to record and analyze accounting data but large businesses prefer accounting system.
Accounting system or accounting software is set of instructions and predefined formulas for
effectiveness and efficiency. As change is only factor that remain constant in business this is
because it helps to survive and compete.
Discussion
Computerized accounting systems can be sub-divided into traditional accounting systems
and cloud based accounting system. Traditional accounting systems are required to install in
computers and cannot be accessed remotely. It requires maintenance and license cost with no
flexibility to access accounting information when you are off- premises. These days,
organizations prefer cloud based accounting system which is ultimate solution of detailed and
complex accounting records. the use of cloud based accounting system is increasing significantly
because of tough competition in local markets. Rather than investing time in accounting
transaction and manual data entry, accountants and financial experts focus on decision making
and changing business environment. Cloud based accounting system is very simple hence
effective model for growing business due to many unbeatable features. One of the most
important feature of cloud based accounting system is accessibility (. Cloud based accounting
system is easily accessible anywhere just with internet connection. Cloud based accounting
system remotely takes your data, store and analyze then return back for easy access. Cloud based
accounting system is very secure as compared to traditional accounting systems.
Cloud based accounting system helps businesses to integrate different departments such
as sales department, production department, marketing department and accounting department to
share financial data. There is different cloud based accounting system available but Xero cloud
system is best suit for Spottie Ltd. Xero system helps to take accurate and timely decision by
provided overall status of your business. Xero provides exclusive feature of overall business
picture that is not available in other cloud based accounting systems. Apart from that it updates
your record every day soon as transactions take place. Xero enhances integration between
management, accountant and owners can access updated information even if you are away from
office.
Inventory is most important assets for merchandise business and cost of goods sold is
most important expense that’s why it is recorded separately in income statement. Accounting for
inventory is very chaotic and technical along with very complex relationship between different
transactions. Suppose periodic inventory system requires to post two different entries when item
is sold. First entry is for recording revenue and second is for reduction of inventory account
through cost of goods. It is necessary to maintain different subsidiary ledgers for each account.
For example, if there are 20 different products and 500 customers that purchase on credit so
business is required to maintain separate subsidiary leader for each product and customer.

ACCOUNTING 7
Inventory management is very important for successful business because merchandise
businesses invest huge amount in inventory. Xero cloud based accounting system will help
Spottie Ltd business to easily maintain hundreds of separate subsidiary ledgers just by posting
the transaction. Moreover, after each transaction accountants update controlling account to make
record smooth and clear. This task is no doubt very difficult when you are following periodical
inventory system. Xero will automatically update the controlling accounting as transaction is
journalized. Three exclusive benefits of Xero cloud based system are discussed below
1. Inventory Management
When it comes to inventory management, we know that managing inventory incur cost so
effective inventory management helps to avoid losses. Excess of inventory may cause inventory
shrinkage or handling cost therefore, determining and managing suitable level of inventory is
very important. Also, shortage of inventory is also loss because it reduces business credibility.
Xero cloud based system helps you to maintain certain level of inventory to avoid inventory
excess and shortage because Xero works on the principle of Just-in-Time inventory system.
Under Just-in-Time inventory system Xero will automatically order supplier to maintain standard
quantity of inventory.
2. Receivables Management
Another important aspect of accounting records is account receivable because
merchandising business cannot avoid selling on credit (Malaluan, 2018). Therefore, receivable
management is also very important for inventory intensive businesses. In order to reduce bed
debt and increase receivable conversion cycle Spottie Ltd should shift to Xero because it enables
you to send beautiful and customized invoices along will options for electronic payment.
3. Bank Reconciliation
Bank reconciliation is another important feature of Xero cloud based accounting system
that helps you to electronically reconcile bank disbursements. Technically speaking difference in
bank balance and balance in accounting record differs for many reason and is difficult to trace
but Xero can manage this easily.
Conclusion and Recommendation
Cloud based accounting system like Xero enables entrepreneurs and business owners to
easily understand the overall picture of the business (Brandas, Megan & Didraga, 2015). Mr and
Mrs Spot can save their time which they spend on hectic and time consuming accounting records
through Xero cloud based accounting system. Further, those owners who don’t know
technicalities and sensitivities of accounting can also effectively handle complex accounting and
inventory transaction. There are two different inventory method such as periodic and perpetual.
Both methods are very different and complex to understand but Xero cloud based accounting
system will help you shift to any inventory system. Spottie Ltd is growing business with many
product lines therefore, for effective data management and accuracy, Spottie Ltd should shift
from manual accounting system to computerized accounting system.

ACCOUNTING 8

ACCOUNTING 9
References
Malaluan, A. Q. (2018). Effectiveness of Working Capital Management of Merchandising
Industry in Lipa City, Batangas. International Journal of Recent Innovations in
Academic Research, 2(7), 288-305. https://www.ijriar.com/docs/volume2/issue7/IJRIAR-
30.pdf
Brandas, C., Megan, O., & Didraga, O. (2015). Global perspectives on accounting information
systems: mobile and cloud approach. Procedia Economics and Finance, 20, 88-93.
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