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Here's a couple of reasons/examples why profit is subjective:1) Inventory valuation methods (LIFO,FIFO, average cost, etc.)Change the inventory valuation method, and the reported profit will change also.2)Depreciation methods(straight line, double-declining balance, etc.)Again, if thedepreciation methodis changed, reported profit changes too.
Prospectively, like changes in accounting estimates
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You cannot switch in between inventory valuation methods to manipulate earnings. Disclosures are required in financial statements for the change in valuation methods.
Merchandise inventory is more liquid than store equipment. Merchandise inventory can change daily and be readily sold where equipment does not change daily and is not normally sold unless it is being replaced or the company is going out of business.
The full disclosure principle requires that the notes to the financial statements report a change in accounting method for inventory.
Here's a couple of reasons/examples why profit is subjective:1) Inventory valuation methods (LIFO,FIFO, average cost, etc.)Change the inventory valuation method, and the reported profit will change also.2)Depreciation methods(straight line, double-declining balance, etc.)Again, if thedepreciation methodis changed, reported profit changes too.
Prospectively, like changes in accounting estimates
The benefit of cost accounting is that you do not need to calculate the change in the costs when the price of your supplies increase. Your profits are simply your sales minus the cost of your inventory and minus the cost of your purchases. Cost accounting is ideal for a small operation.
The benefit of cost accounting is that you do not need to calculate the change in the costs when the price of your supplies increase. Your profits are simply your sales minus the cost of your inventory and minus the cost of your purchases. Cost accounting is ideal for a small operation.
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No. 1. If you do not have a computerized accounting system: Inventory manufactured or purchased for sale are first debited to "Inventory". When sold, you debit "bank, or accounts receivable" and credit "sales" At the end of the accounting period, which could be monthly or yearly, or anytime inbetween, usually after a physical inventory, you then reduce your inventory by crediting "Inventory" and charging the amount reduced to "Cost of Sales". 2. If you have a computerized accounting system: When you acquire the merchandise to be sold you debit it to a specific "card" in the program's memory of the "Inventory" account. When you sell it, you will debit "Bank or accounts receivable" and credit "Sales". In order to create your sales invoice, you will have to identify the "card" where the merchandise is posted. When you change accounting periods (a.i. May to June) the computerized accounting program will then process the sale by reducing the inventory and debiting "Cost of Sales" automatically.
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COGS is calculated by combining the purchases with the change in inventory. Example, At the beginning of the year Company A's inventory was counted and determined to be valued at $100,000. The Company purchased $1,000,000 in goods to sell from the beginning of the year to the end of the year. The inventory was counted and valued again at the end of the year and was valued at $300,000. Cost of good sold would be the combination of purchases ($1,000,000) and change in inventory which be beginning inventory less ending inventory or -$200,000. And COGS would be $800,000.
You cannot switch in between inventory valuation methods to manipulate earnings. Disclosures are required in financial statements for the change in valuation methods.
Change in accounting estimate. The switch from double-declining balance method to straight-line method should be treated as a change in accounting estimate and accounted for prospectively. This change should not be applied retroactively.
Merchandise inventory is more liquid than store equipment. Merchandise inventory can change daily and be readily sold where equipment does not change daily and is not normally sold unless it is being replaced or the company is going out of business.