0
How does the choice of inventory valuation method affect the amount of net income reported by a company?
The Choice here would be between WAC (Weighted Average Cost) and FIFO (First In First Out)
WAC= The total cost of all inventory on hand (i.e the respective total price)/ # of Units
FIFO= The cost of the latest sold item of inventory is the price of the oldest inventory on hand
Now depending on the way inventory purchase prices change the effect on net income could be either positive or negative .
If the oldest items of inventory are cheapest (as can be assumed as the norm) then FIFO would lead to a higher net income in the current period than using the WA method- whereas if the oldest items where the most expensive the opposite would be true.
However over many periods or years this effect would be eliminated. (As the FIFO cost of a set amount of inventory would continue to rise/fall where the WAC method would remain stable.)
Note: LIFO (Last In First Out) is still used in the US and Japan despite it being a means of Tax avoidance- IFRS has banned the use of LIFO.
What else can I help you with?
How does different inventory valuation method affect the profit of the manufacturing industries?
Revenue-Cost of Goods Sold(CGS)=Gross Margin. The valuation of inventory drives the cost of goods sold (CGS). The higher the value of your inventory, the higher your CGS, thus lower gross margin. The lower the valuation of your inventory, the lower your CGS, thus higher gross margins.
How do the consistency principle and the full disclosure principle affect inventory valuation?
Consistency principle indirectly affects inventory value as one would need to use the same cost assumption all the time (FIFO or avg cost). Full disclosure doesn't affect inventory valuation but one would need to disclose to investors the cost assumption used in the financial statements.
What factors affect operationg cycle?
The main factors that affect the operating cycle of a company include the efficiency of its inventory management, the speed at which it collects accounts receivable, and the time it takes to pay its accounts payable. These factors directly impact how quickly a company can convert its investments in inventory and accounts receivable back into cash.
What are the similarities between perpetual and periodic inventory system?
Perpetual: All inventory entries directly affect inventory Periodic: All inventory entries affect other accounts, which are then closed to inventory. Example: A company purchased $100 worth of inventory on account Perpetual: Inventory (Debit) 100 Accounts Payable (Credit) 100 Periodic Purchases (Debit) 100 Accounts Payable (Credit) 100 Later with Periodic (usually at the end of the reporting period) Inventory (Debit) 100 Purchases (Credit) 100 This last entry closes purchases and updates your inventory account.
What impact does a negative price to book ratio have on a company's financial health and valuation?
A negative price to book ratio indicates that the company's market value is lower than its book value, which may suggest that investors have low confidence in the company's future prospects. This can affect the company's financial health by making it harder to raise capital and potentially leading to financial difficulties. It can also impact the company's valuation by signaling to investors that the company may be overvalued or facing challenges.
Does inventory affect paper pricing?
Inventory adjustments can produce large swings in paper pricing
With inflation what are the implications of using LIFO and FIFO inventory methods and how do they affect the cost of goods sold?
LIFO inventory valuation assumes the latest purchased inventory becomes part of the cost of goods sold, while the FIFO method assigns inventory items that were purchased first to the cost of goods sold. In an inflationary environment, the LIFO method will result in a higher cost of goods sold figure and one that more accurately matches the sales dollars recorded at current dollars.
Inventory turnover ratio affect profit margin?
yes
Can you provide an example of how accounting for stock options impacts a company's financial statements?
When a company grants stock options to employees, it must account for this as an expense on its financial statements. This expense reduces the company's reported net income and earnings per share, which can affect how investors perceive the company's profitability.
What determines whether or not goods should be included in inventory?
Goods should be included in inventory if they are owned by the business, are intended for sale or production, and are available for sale at the time of assessment. Additionally, items that are in transit or being held for future sale may also be included, provided that ownership has transferred to the business. The decision may also depend on the accounting method used, such as FIFO or LIFO, which can affect valuation. Ultimately, proper inventory management ensures accurate financial reporting and efficient operations.
If you are in an accident that's your fault will it affect your rate increase if you fix the damage to your car with your own money?
If you have reported the accident and your insurance company has repaired the other driver's vehicle, it more than likely will affect your rate. When you are at fault, it always affects your insurnace.
How does working with a credit card settlement company affect your credit score?
It is recommended that you pay an old debt through the original creditor. Credit settlement companies are out to make a profit and they will negotiate terms that are not true. Also, it is possible that you can pay the settlement company but still owe the original creditor. It has happened to me. The negative information reported by the credit card settlement company will affect your score negatively.
