Answered ACC205 Week 2 – Discussion 1

Financial statements are a product of the accounting cycle.  Think about two different companies: a manufacturing company, and a retail company.  Why would different companies have different accounting cycles?  Would you expect the steps of the accounting cycle to be the same for each company?  Why, or why not?

ACC205 Week 2 – Discussion 1 Answer

The accounting cycle is a series of steps that businesses follow to record, summarize, and report financial information. While the basic accounting cycle steps are generally the same for all companies, the specific processes and emphasis on certain steps may vary based on the nature of the business. Let’s compare the accounting cycles of a manufacturing company and a retail company to understand why they might differ:

1. Nature of Operations:

• Manufacturing Company: Involves the production of goods. The accounting cycle needs to include detailed processes for tracking raw materials, work-in-progress, and finished goods inventory.
• Retail Company: Primarily involved in buying and selling finished goods. The emphasis may be more on managing inventory turnover and sales.

2. Inventory Management:

• Manufacturing Company: Focuses on tracking the costs associated with producing goods, including raw materials, labor, and overhead. The accounting cycle involves detailed cost accounting for each stage of production.
• Retail Company: Concentrates on buying and selling goods. Inventory management involves tracking the purchase and sale of finished goods.

3. Cost of Goods Sold (COGS):

• Manufacturing Company: COGS calculation involves complex calculations related to the cost of production, including direct materials, direct labor, and manufacturing overhead.
• Retail Company: COGS is more straightforward, representing the cost of purchasing finished goods for resale.

4. Work-in-Progress (WIP) vs. Merchandise Inventory:

• Manufacturing Company: Includes tracking the value of goods at various stages of the production process (WIP).
• Retail Company: Focuses on the value of goods ready for sale (merchandise inventory).

5. Overhead Allocation:

• Manufacturing Company: Involves allocating manufacturing overhead costs to produced goods.
• Retail Company: Overhead costs may be less complex as they don’t have the same manufacturing processes.

While the basic accounting principles and steps are the same, the emphasis and complexity of certain steps may differ. The accounting cycle for a manufacturing company tends to be more intricate due to the nature of production, whereas a retail company’s cycle may be more streamlined, focusing on buying and selling finished goods. Adaptations to the accounting cycle allow businesses to better capture and report the specific financial activities related to their operations.