Business understood about inventory accounting systems and inventory

Business
Accounting is an interesting subject which helps me understand more about a
firm’s accounting activities. There are many topics being introduced in class
by Ms. Roberta such as: double entry accounting,
accounting equation, accounting cycle, perpetual and periodic inventory system
and inventory costing methods. The subject requires many calculations and
formats. I remember that inventory accounting systems and inventory costing methods
have been very challenging topics for me. To be honest, I was really stressed
up when I first got into the first lecture as I couldn’t understand much when Ms.
Roberta spoke further. I am writing this journal to
reflect how I can overcome my learning weaknesses and how well I understood
about inventory accounting systems and inventory costing methods inventory during learning process this semester.

There are two inventory accounting systems, periodic
and perpetual system; and four inventory costing methods as following LIFO,
FIFO, specific identification, and average method. In my learning experience, I
would highly recommend others to pay their attention to master the two new
accounting terms perpetual and periodic system before moving to the next four
types of cost flow assumptions LIFO, FIFO, specific identification, and average
method. Because the perpetual and periodic
system is completely new to accounting
learner. To solve this weakness, I always recite in my mind that perpetual is
‘continuously moving’ and periodic is ‘save for the last’ which means at the
end of the period. To remember what LIFO and FIFO are, I use the same way with
the perpetual and periodic system, but I
change some small points, FIFO is the newest items LIFO is the oldest items you
have in inventory.

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The ending inventory and cost of goods sales are
measured by the two decidedly different systems:

Perpetual system: inventory quantities are updated after each
transaction. We know exactly how many items were sold and how many items are
left.

Periodic system: inventory quantities are physical counted at the end
of the period. We do not track exactly how many items were sold and do not know
how many items are left until we count closing inventory.

 

Inventory plays a key role in any business and is recognized
as a current asset on the firm’s balance sheet.

As a crucial asset, inventory must be tracked tightly.
If a firm holds too much inventory in
their storage, they will face with cash flow problems, additional fees for storing and manage, and losses. However,
with the low storage rate of inventory can result in a decrease of their clients and income. The question here is what the
sufficient amount of inventory to minimize the costs of a firm. To answer this
question, as my research, it depends on what type of the business is. For
example, in a retail business, their inventories are always take up a large
portion of the asset; meanwhile, in a
service firm, they have no or tiny amount of inventory.

 

I used to ask myself some silly questions that why
people always make thing complicated. Instead of using four methods or also
known as four types of cash flow assumptions included LIFO, FIFO, specific
identification, and average method, they can use one method which is enough and
would be easier for accountants. It is difficult to remember all these methods
without doing exercises. Therefore, I tried my best to practice as much as
possible from not only the textbook but
also from other resources on the Internet. Based on my learning experiences, I found
that each method has its own disadvantages and advantages.

                                                                                                  

In my
opinion, perpetual inventory has more advantages
than periodic inventory

Firstly, the inventory amounts and the cost of
goods sold are continuously updated after
each transaction without taking a physical inventory count at the end of the
periodic. Secondly, it provides up-to-date information necessary to the firm’s
manager to adjust the inventory levels in order to minimize the additional
expense of storing and maximize the profit.

 

Comparison of costing methods

 

FIFO

LIFO

Average Cost

Unit sold include the:

Oldest costs

Newest costs

Average costs of units

Ending inventory includes the:

Newest costs

Oldest costs

Average costs of units

 

Learning and mastering inventory costing methods will
be a big advantage for me as I can improve my learning in later topics such as income statement and
balance sheet. After doing in-class activities and
exercise in the textbook, I found that when
switching to LIFO from FIFO and vice versa, the financial statements will be impacted,
especially income statement and balance
sheet. For example, when costs are increased, LIFO will heighten the cost of
goods sold expense of the firm, while lower the value of inventories at the end
of the period. In contrast, when costs are
decreases, LIFO will lower COGS expense, but heighten end-of-period inventory
values.

 

This reflective learning journal had nearly made me exhausted
when I was doing it. It’s an individual assignment that requires me to pay all my
attention to every topic. The learning journal has reminded me what the priorities to success in this unit are. Furthermore, the assignment has changed my
attitudes and ideas through the preparation process for this reflective diary.
For that reason, every single term and all the explanations were prepared very carefully and clearly
because once a mindset goes wrong, it will negatively influents not only the
whole learning process in the future, but also the prospective career.

 

Besides, I was given a big chance to warm up for the
final examination while doing this written reflective learning journal. Thanks
to this assignment, I learned how to interpret accounting terms by my own words.
This learning journal is a great way for me to double check how well I
understand the subject. As a result, I found out a lot of gaps in my knowledge.
It reminds me to practice more on this subject. Furthermore, I found that my reading
and research skills are upgraded. I tried my best to express all the accounting
terms in a simple way while remaining the conciseness and precision.