25.2: Inventory Systems

Question 1

What systems account for changes in the inventory? Explain each system.

Answer 1

1. Periodic inventory system determines inventory values and COGS at the end of the accounting period. Inventory acquired during the period is reported in a Purchases account and at the end of the period, purchases are added to beginning of inventory to arrive at COGS.
2. Perpetual inventory system updates inventory values and COGS continuously. Inventory purchased and sold is recorded directly in inventory when transactions occur such that a Purchases account is not necessary.

Question 2

Which valuation methods will differ in inventory and COGS under periodic and perpetual inventory systems? Which will not?

Answer 2

Inventory and COGS under LIFO and weighted average methods will produce different values.

Inventory and COGS remain the same under FIFO and specific identification.

Question 3

What happens to LIFO under inflationary environment with stable or rising prices?

Answer 3

COGS is higher, thereby reporting lower net income and gross profit. LIFO inventory and tax will also be smaller.

Question 4

What happens to FIFO under inflationary environment with stable or rising prices?

Answer 4

COGS is lower, thereby reporting higher net income and gross profit.

Question 5

What happens to LIFO under deflationary environment with stable or rising prices?

Answer 5

COGS is lower, thereby reporting higher net income and gross profit.

Question 6

What happens to FIFO under deflationary environment with stable or rising prices?

Answer 6

COGS is higher, thereby reporting lower net income and gross profit.