Explain the effects that inventory transactions have on the statement of cash flows.
- Under the indirect method of calculating cash flows from operating activities, both the changes in the Inventory account and the Accounts Payable account must be taken into consideration.
Explain the differences in the accounting for periodic and perpetual inventory systems and apply the inventory costing methods using a perpetual system (Appendix).
- The three inventory costing methods-FIFO, LIFO, and weighted average-may be used in combination with a perpetual inventory system.
- The inventory costing method is applied after each sale of merchandise to update the Inventory account.
- The results from using LIFO differ depending on whether a periodic or perpetual system is used. The same is true with weighted average, which is called moving average in a perpetual system.