ASSESS 5

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School

Western Governors University *

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3061

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Accounting

Date

Apr 3, 2024

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docx

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1. To place the proper valuation on inventory, a business must determine which costs should be included in inventory cost. Getting goods ready to sell should include what items? When getting goods ready to sell you want to make sure to include these costs in the inventory cost. Seller’s invoice price less than purchase discount- the cost to obtain the goods that are to be sold. Include the cost of the insurance to cover the goods that are shipped, which will protect from losses and reduce liability. You also want to include shipping costs to ship the goods. You also want to include handling cost so that the presentation of the goods when it is delivered meets the consumer’s expectations 2. If inventory is being valued at cost and the price, level is steadily rising, which of the three methods of costing—FIFO, LIFO, or weighted average cost—will yield the lowest annual after tax net income? Which method will yield the highest after tax net income in a scenario where the price level is steadily declining? When considering which method is the lowest after tax net income, it would be LIFO if the prices were steadily rising. It is the lowest annual after tax net income because when the prices are rising it shows the highest COGS out of the three methods and when the prices are declining it yields the highest after tax net income because it shows the lowest COGS. Therefore, either way LIFO is a better match with sales revenue with the current COGS 3. Some circumstances justify departures from the historical cost approaches of FIFO, LIFO, and weighted average cost. Several additional inventory methods may be used when circumstances warrant. Identify and describe each of these alternative methods. Include an example of when each method may be applied. The lower of cost or market method is a method that values the inventory at the lower of its cost historically and its current market cost. This method would be used typically when inventory has deteriorated or obsolete and the market prices have declined. The gross margin method is a method that estimates the ending inventory by subtracting estimated cost of goods that have sold versus cost of goods that are available for sale. The gross margin method might be useful to estimate each months ending inventory or to use it as part of a calculation to determine approximately the amount of inventory that has been lost due to theft, fire, or any other reason. The retail inventory method, which is a method that is used to estimate the cost of ending inventory by applying a cost and retail price ratio at the end of inventory. The retail inventory method produces solid inventory control record, which is an advantage to the method. The method ties in the direct products to the sales and provides an ending count without adding much work. The method deals with the direct items rather than groups or lots of items.

4. Given the following information, calculate the inventory turnover for a company. Evaluate the trend results.  2014: Cost of goods sold— $1,043,000; Beginning inventory— $283,000; Ending inventory— $264,000.  2013: Cost of goods sold— $820,000; Beginning inventory— $311,000; Ending inventory— $283,000. In 2014, the inventory turnover ratio was 3.81 and 2.76 in 2013. The increase from 2013 to 2014 is a signal that the company is becoming more efficient in managing and selling current inventory and increasing profitability. 5. Identify which methods could be used to determine whether there has been shrinkage or shortage in the physical inventory. The gross margin method and retail inventory method could be used to identify a shortage in physical inventory. With the gross margin method, they would have to estimate gross margin base on the net sales and using the same gross margin rate in previous accounting periods. Then they would have to determine the estimated cost of goods sold by subtracting the gross margin from the net sales. Finally, they would have to determine estimated ending inventory by subtracting estimated cost of goods sold from the cost of goods that are available for sale. The retail inventory method can be used to allow the business to estimate inventory cost based on retail prices. The business would have to total the beginning inventory and the amount of goods that were purchased during this period both at cost and retail price. Then they would have to divide the cost of goods available for sale by the retail price of goods available. Once they do that, the business will find the cost/retail price ratio. Then they are going to deduct the retail sales from the retail price of the goods so that they can determine ending inventory at retail. Finally, they will multiple the ratio from cost/retail or percentage by the ending inventory at retail prices to reduce it to the ending inventory at cost.

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