Master 1 Accounting

Activity 2 solution in English

In business, effective inventory management plays a crucial role in financial
performance and reporting accuracy. This diagram is a valuable tool for
visualizing the complex processes and key decisions involved in inventory
management, ultimately impacting the financial statements and overall success of
a business. Let’s delve deeper into the practical application of these concepts.
1. Inventory management systems:
a) Periodic: Companies update their inventory records periodically, usually at the
end of a defined period (monthly, yearly, etc.). This approach simplifies
recordkeeping but may not provide real-time data.
b) Perpetual: This system involves continuous and immediate monitoring of
stocks, which allows obtaining more precise and up-to-date information. This
allows for better decision-making regarding stock levels, replenishments and
potential stock-outs.
2. Inventory Valuation Methods:
a) Specific Identification: This method assigns individual costs to specific
inventory items, often used for unique or high-value items.
b) Average cost: This approach calculates the average cost of all units in the
inventory, which gives a balanced representation of unit cost.
c) FIFO (First In, First Out): This method assumes that the first items purchased
are the first sold, which generally reflects the actual flow of goods. This approach
can be beneficial during times of inflation because previous purchases were likely
made at lower costs.
d) LIFO (Last in, first out): This method assumes that the last items purchased
are the first sold, which can minimize the tax result in times of inflation because
the cost of recently purchased items (probably higher) is used . However, it may
not always reflect the actual flow of goods.
3. Inventory estimation methods:
a) Cost: This method determines the value of the stock based on the actual cost of
acquisition or production.
b) Market (if below cost): This method adjusts the inventory estimate to reflect
the current market value if it is below cost, which may reflect potential losses due
to obsolescence or market declines.
4. Application of the correspondence rule:
The matching rule ensures that expenses incurred are recognized in the same
accounting period as the corresponding revenues they generate, which contributes
to the accuracy of financial reporting. This provides a clearer picture of a
company's profitability and financial health.
5. Key elements:
Cost of goods available for sale: This is the total value of goods available for sale
during a specified period.
Cost of Goods Sold: This is the actual cost of goods sold during the period, which
has a direct impact on the profitability of the business.
Inventories: This is the remaining value of unsold goods at the end of the period,
which affects the financial health of the company and influences future strategic
decisions.

Conclusion :
Effective inventory management, powered by the information provided by this
diagram and its associated concepts, allows businesses to make informed
decisions regarding inventory levels, cost allocation and strategic planning. This
contributes to accurate financial reporting, compliance with accounting standards,
and ultimately improved profitability and financial stability.