Question

Explain why proper inventory valuation is so important to the calculation of a company's "bottom line" net income.

What is the meaning of taking a physical inventory and why is it important to take a physical inventory when using a perpetual inventory system.

Explain the accountant's role regarding taking a physical inventory.

Answer 1

1)Explain why proper inventory valuation is so important to the calculation of a company's "bottom line" net income-

Having an accurate valuation of inventory is important because the reported amount of inventory will affect

a) the cost of goods sold, gross profit, and net income on the income statement, and

b) the amount of current assets, working capital, total assets, and stockholders’ or owner’s equity reported on the balance sheet. An incorrect inventory valuation will cause two income statements to be incorrect. The reason is the ending inventory of one accounting period will automatically become the beginning inventory in the subsequent accounting period.

2)What is the meaning of taking a physical inventory and why is it important to take a physical inventory when using a perpetual inventory system-

Physical inventory is the process of performing a detailed check of the company’s inventory within financial books with the inventory present within their warehouses. Taking physical inventory is essential as it ensures that the business is being honest. This honesty automatically ensures continued customer confidence. Knowing the inventory of the entire business ensures customer satisfaction in the long run.

3)Explain the accountant's role regarding taking a physical inventory-

Though the actual taking of the inventory is not an accounting function, accountants oftenplan and coordinate the count. Proper forms are required to record accurate counts and dermine totals. Identification names or symbols must be chosen, and those persons who count, weigh, or measure the inventory items must know these symbols.