9. Inventory

Question 1

Perpetual system, inventory updated continuously after every purchase, sale, return and cogs determined for each sale. Requires detailed and complex record keeping.

Periodic system makes no adjustment to inventory until the end of the accounting period, when a physical inventory count is performed, and cogs is recorded. Company must estimate its inventory during the year ie for interim statements. Since estimates are used, the record keeping is relatively simple.

Question 2

Lower of cost or Market method
Although market value is usually a replacement cost, it is subject to a ceiling and floor limitation.
* the ceiling or NRV (sales price - cost required to complete the inventory and any disposal costs) is the maximum amount that may be reported as market
* the floor (NRV - profit margin) is the lowest amount that may be reported as market
The Market Value is the middle value from the replacement cost, ceiling and floor cost.

Inventory adjustment is the $415 ending inventory - $410 Market value.