OMM 622 Week 5 Discussion Ashford University

OMM 622 Week 5 Discussion Ashford University OMM 622 Week 5 Discussion Ashford University The Quality of Financial Information Referencing this week’s readings and lecture, describe the quality issues related to reporting revenue. What is the importance of understanding various inventory valuation methods in determining the quality of reported profits? Just as quality in products can influence a company’s reputation, so too can the quality of its financial reports. Investors, shareholders, and even employees are interested in knowing how a company is performing, and want confidence in financial performance indicators by knowing that the data behind company financial performance is based on standardized, regulated and generally accepted accounting practices. As noted in our weekly lecture, there are several checks and balances in place that ensure accurate and fair financial reporting: 1) the Financial Accounting Standards Board (FASB); 2) the Securities and Exchange Commission (SEC); and 3) the Financial Industry Regulatory Authority (FINRA) (“OMM 622: Week 5 Weekly Lecture,” n.d, para. 3). The FASB developed the generally accepted accounting practices (GAAP) that is used by non-government entities, monitors company financial reports and makes sure they meet the standards set by the FASB, the SEC regulates financial reporting and also ensures that financial reports meets the standards established by both the FASB and the SEC, and FINRA is a non-governmental organization that regulates member brokerage firms and exchange markets (Epstein, 2014, Section 5). A key component of accurate financial reporting is dependent on accurate inventory valuation. When companies manage inventory, they must use GAAP principles to assess and plan for inventory levels. Without this valuation, it would be difficult for companies to manage their inventory or know how well their sales force is performing. Inventory valuation is when companies assign a monetary value to inventory for record-keeping purposes by evaluating the inventory using a figure that is lower than the purchase price or market value (Petryni, n.d., para. 3). Inaccurate inventory valuation can affect “1) the cost of goods sold, gross profit, and net income on the income statement, and 2) the amount of current assets, working capital, total assets, and stockholders' or owner's equity reported on the balance sheet” (Averkamp, n.d., para. 1). When inventory valuation is done incorrectly, companies risk preparing incorrect income statements because ending inventory for one reporting period is used as the starting inventory of the next reporting period. Companies can conduct inventory valuation either periodically or perpetually. In period valuation, the company will conduct a physical inventory check on a period basis. In perpetual valuation, inventory is tracked up until the item is sold or disposed of. While perpetual inventory valuation provides a much more accurate picture of inventory, it requires companies to maintain detailed records. Periodic inventory valuation tends to be more cost effective because it doesn’t necessarily require a complex inventory management system to track inventory.