Chapter 7 Financial Accounting Reporting and Interpreting Cost of Goods Sold and Inventory Solution

As focusing on each of the five management assertions for the inventory account, we discovered that there are some risky areas that indicate the need for further attention during the audit. First of all, for existence or occurrence, all items in the inventory account must physically exist and be available for sale. Thus, the auditors should physically count finished goods, copper rod, and plastic inventories, and determine actual increase of inventories at year end. Also, they should select items from the inventory ledger and locate them and reconcile the quantity. Second, for completeness, the auditors should make sure that all existing inventories have been recorded completely , go around the warehouse and ensure all the inventories are recorded in the inventory ledger. Third, for valuation or allocation, the auditors should make sure that Laramie Wire manufacturing sticks with one valuation method(For inventory items, valuation is based on the lower of cost or market value, with several alternative methods for calculating cost), find out if there is any scrap inventory that needs to be recorded and written off ,and ask about obsolescence items. Fourth, for rights and obligations, the auditor should ask them if there is any consigned inventory at their warehouse. If there is, those inventories should not be recorded in the company's inventory ledger. Finally, for presentation and disclosure, the auditors should review the company's financial

3. Mike Johnson determined that the value of the ending inventories under FIFO would have been higher than under LIFO, as follows:

The process requires Peyton Approved to discover how much inventory is sold and what the cost of goods will result in. The process requires the business to review three forms of merchandise inventory to determine which summary benefits the business’s operational behavior. One will discover when assuming that first inventory purchased by the store is the first to be sold, it is determined that the FIFO method displays the best financial outcome for the business. During the process of updating journal entries, one must enter the information proved appropriately into the T-accounts to add the balance under each record. Once the T-accounts for transactions and adjusted transactions are balanced, the next step is to enter the information provided on the balance sheet. The balance sheet will list Peyton Approved assets, liabilities and stockholders equity after added during the T-account process (Nobles, 2014). Once the balance sheet is completed the income statement, statement of retained earnings, and closing entries can be filled with the information proved. This will give the business a full review from journal entry to closing entries of the business for the six month accounting

LIFO was the hardest for me to grasp because of the logic and that it could provide a tax break for the company. I had trouble understanding the concept of the LIFO because I kept thinking of the concept backwards. I also had a hard time understanding the tax break because I didn’t understand why it happened. After reading the material again I noticed that where costs of inventory become high over time the LIFO method created a condition in which the less expensive inventory was recorded. This showed that the more expensive items were recently purchased creating a lower profit and a smaller income that could be taxed.

LIFO liquidation may be due to company not purchasing any more inventory (the prices are too high), and depleting its cheap inventory. When inventory costs are increasing, this results in higher net income. Either involuntary (disruptions in supply) or voluntary (earnings management).

LIFO results in the matching of current costs with current revenues and produces higher quality earnings than either FIFO or average cost. Inventory accounting system used is described in the note that details accounting policies or the note that discusses inventory.

Since LIFO believes the last items to come in are sold first, the Ending inventory contains the 25 remaining units from the May 1st purchase including the 50 units in the beginning

9)The second step, when using dollar-value LIFO retail method for inventory, is to determine the estimated:

The predecessor literature about it is Accounting Research Bulletins (ARB) No.43 Chapter 4, paragraph 4 (Issued June, 1953) and Statement of Financial Accounting Standard (FAS) NO.151 Inventory cost- an amendment of ARB No.43, Chapter 4 (Issued November, 2004).

Due to the new proposal, it will eliminate the company to perform variety of assessment of market and allow them to just use net realizable value as the primary driver of comparing the value of cost. In addition, companies will greatly benefit from this simplification from cost reduction and lower complexity in measuring the inventory. However, there is one issue that the Board still needs to address regarding the update. The Board needs to reconsider the effect of this new guidance in respect to different industries. An example would be the retail industry. The retail industry would be affected by this new guidance by creating more complexities when accounting the inventories. These complexities arise due to the change of the accounting method and when retailer using LIFO method in a declining price inventories. Retailers like Wal-Mart and Target are concerned when they are using LIFO retail inventory method, RIM, because they would record LIFO debit reserves into income. This would affect the company’s earnings to decline and it would not have a good representation in their inventory, which then would affect the accuracy of financial statement and mislead to its users. In my opinion, this is a great proposal of the Simplification Measure of Inventory. Although this would reduce the complexity and cost when measuring inventory, I still think they need to address the

Inventories are in essence what organisations hold with an intention to sell, however directly or indirectly. For most businesses, this is how their profits are made, and it is reasonable to assume that these items account for much of an organisation’s activities. Such a big influence on indicators of financial performance and position warrants an equally large need for regulation to ensure that users of the financial statements are given a clear picture of the state the organisation is in. The Australian Accounting Standards Board (AASB) is responsible for developing the standards that govern the way reporting entities disclose their accounting figures. Despite much

To obtain only this year’s production of inventories, we need to subtract the total amount of inventories this year from that of the previous year. Second, inventories should be considered a type of investment good, since they are produced with the understanding that they will yield a revenue over time, just as plants and equipment do. The time frame over which they do this is usually very short. Finally, inventory changes should be considered part of national income because they are current production and are not sold to other firms. The final sale in this case is to the firm itself.

Based on the information provided in the above indicated inventory analysis the financial controller and all interested parties within management will be better able to become informed regarding all indicated irregularities, material misstatements or inventory shrinkage . Furthermore, this will assist the management team in understanding and more effectively managing

Jones over forecasts his inventory and has a low inventory turnover ratio. This drastically increases his accounts payable, as he isn’t able to pay due to low cash inflow. His account’s payable increased by nearly 9 percent in 2006. Nearly half of his current assets are in inventory. Also Jones isn’t able to take advantage of the cash discounts offered by his suppliers due to his slow cash collection process. In order to perform well, the company must improve its inventory system and its cash collection policies.

Inventory management has two very different, but effective methods: Vendor managed inventory, and consignment inventory. A company may choose to utilize either of these two methods to manage inventory. If a company is able to manage inventory, they will be better able to work the company's capital to the fullest extent. The following paper will identify the differences between the two as well as identify what type of company is best suited for each method.