Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

4. Merchandising Operations

Cost of Goods Sold - Perpetual Inventory vs. Periodic Inventory

Financial Accounting

4. Merchandising Operations

Cost of Goods Sold - Perpetual Inventory vs. Periodic Inventory

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Multiple Choice

Under the perpetual and periodic inventory systems, what effect will a decrease in inventory have on free cash flows, assuming all other factors remain constant?

It will have no effect on free cash flows.

It will increase free cash flows because less cash is tied up in inventory.

It will decrease free cash flows because inventory purchases increase.

It will decrease free cash flows because cost of goods sold decreases.

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Verified step by step guidance

Understand the concept of free cash flows: Free cash flows represent the cash available to a company after accounting for capital expenditures and working capital needs. It is a measure of financial flexibility and liquidity.

Analyze the relationship between inventory and cash flows: Inventory is considered a current asset, and purchasing inventory ties up cash. A decrease in inventory means less cash is tied up, potentially freeing up cash for other uses.

Consider the perpetual and periodic inventory systems: Both systems track inventory levels, but the perpetual system updates inventory continuously, while the periodic system updates inventory at specific intervals. Regardless of the system, a decrease in inventory affects cash flows similarly.

Evaluate the impact of a decrease in inventory: If inventory decreases, it implies fewer purchases or a reduction in stock levels. This results in less cash being spent on inventory, thereby increasing free cash flows.

Conclude the reasoning: Since less cash is tied up in inventory due to the decrease, free cash flows increase, assuming all other factors remain constant.