Accounting Question Assume you are opening a Bed, Bath and Beyond store. To fina
ID: 2379164 • Letter: A
Question
Accounting Question
Assume you are opening a Bed, Bath and Beyond store. To finance the business, you need a $500,000 loan, and your banker requires a set of forecasted financial statements. Assume you are preparing the statements and must make some decisions about how to do the accounting for the business. Answer the following questions:
1) Which type of inventory system will you use? Give a reason.
2) Show how to compute net purchases and net sales. How will you treat the cost of transportation in?
3) How often do you plan to do a physical count of inventory on hand? What will the physical count accomplish?
4) Inventory costs are rising. Which invnetory costing method will you use in order to:
a) Maximize net income?
b) Pay the least amount of income tax?
Explanation / Answer
I want to use LIFO(Last In First Out) inventory system.
Because this inventory system generally shows lower profits and inventory values, while the FIFO method typically shows higher profits and inventory values. If the economy is in a period of inflation, LIFO is preferred because it lowers the amount of taxes the company must pay. We are in starting point of business thats why we don't estimate high profits.
2)
Calculation of Net Purchases:
Example:
Gross Purchases $10000
Less: Purchanse returns $1000
Less: Purchase discounts $100 $1100
Net Purchases $8900
Calculation of Net Sales:
Example:
Total Sales $10000
Less: Returns $100
Less:Damages/ losses $100
Less:Discount on sale $50 $250
Net Sale $9750
3)
Generally we have to verify inventory, and fixed Assets. We have to count inventory on daily basis, other assets(Fixed) on weekly basis, this period is not mandatory. We can count as per our convenience, but it should be in perfect manner.
4)
Example:
Our stock as market price
60000
As per cost price
50000
Market Price Model
Sales
100000
Less: cost of goods sold
Opening stock
10000
Add:Purchases
80000
Less: Closing stock
60000
Cost of goods sold
30000
30000
Gross Profit
70000
Cost Price Model
Sales
100000
Less: cost of goods sold
Opening stock
10000
Add:Purchases
80000
Less: Closing stock
50000
Cost of goods sold
40000
40000
Gross Profit
60000
a) To maximize net income:
We have to valuate our stock as per market price or cost price which ever is higher, in this problem market price is going high so we can considered as market price is more than cost price price. So we have to prefer market price for showing more incoe.
b) To pay least amount of income tax:
Income tax will calculate on percentage of Net income. If our net income is high our tax liability also high, if net income is low our tax liability will be low. For showing low net income, we have to take cost price or market price which ever is lower. in this problem we have considered cost price is lower so we have to valuate our stock as per cost price.
Thank you......
Comments
Example:
Our stock as market price
60000
As per cost price
50000
Market Price Model
Sales
100000
Less: cost of goods sold
Opening stock
10000
Add:Purchases
80000
Less: Closing stock
60000
Cost of goods sold
30000
30000
Gross Profit
70000
Cost Price Model
Sales
100000
Less: cost of goods sold
Opening stock
10000
Add:Purchases
80000
Less: Closing stock
50000
Cost of goods sold
40000
40000
Gross Profit
60000