Chapter 5, Problem 3AA

To determine

Inventory:

Inventory refers to the stock or goods which will be sold in the near future and thus is an asset for the company. It comprises of the raw materials which are yet to be processed, the stock which is still going through the process of production and it also includes completed products that are ready for sale. Thus inventory is the biggest and the important source of income and profit for the business.

First In First Out:

In case of First in, first out method, also known as FIFO method, the inventory which was bought first will also be the first one to be taken out or to be sold.

Last In First Out:

In case of Last in, first out method, also known as LIFO method, the inventory which was bought in the last will be taken out first or to be sold first.

Net Profit Margin:

The revenue or income earned after eliminating costs and charges results to profit margin.

Current Ratio:

Current ratio depicts the efficiency of the company to offset its short period legal responsibilities through assets.

Full Disclosure Principle:

Full disclosure principle is one of the accounting principles which states that the company should reveal or unfold all the relevant facts and figures especially regarding the accounting policies followed by the entity in preparing financial statements which apparently affects the decisions of the reader’s. Disclosure can be made either through notes or schedules.

Consistency Principle:

Consistency principle states that a company should adhere to the once adopted policies, principles, methods and rules uniformly or consistently in the subsequent accounting periods until and unless the required change in the policy has a justified reason.

1.

To identify: The way FIFO improves net profit margin and current ratio.

2.

To determine

To identify: Change in the method being ethical or not.