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Accounting principles chapter 1
Inventory management theories
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Introduction
To start a new business and remain in business profitably, many critical decisions must be made when the foundation of a new business is formed. These decisions affect the company in the long run and often make or break an organization. Methods of inventory control and capitalization policies are among these critical decisions that will affect any business bottom line.
Our team has investigated these policies and will present our recommendation for the method of inventory and capitalization policy for the XYZ Mattress Store in the remainder of this paper.
Inventory Policy
Selecting the valuation method for reporting and valuing is based on key issues relating to the relevance and reliability of the method of accounting for that item. According to finetuning.com (2005) "how you identify items in inventory and determine which have been sold will depend on the nature of the products, the volume of the products, how they are tracked, and inventory rotation." Key factors to consider under the inventory policy are: location of storage facilities, temperature, security, rotation of stock, cost, training, periodic inventories, and control.
caycon.com (2005) wrote: "Valuing a startup is intrinsically different from valuing established companies. Because of the high level of risk and often little or no revenues, traditional quantitative valuation methods like (P/E) per-share earnings comparables or discounting free cash flows are of little use. Startup valuations are largely determined based on qualitative attributes." To select an inventory valuation method, the options are FIFO, LIFO and Weighted Average.
The valuation method for (FIFO) First-in, first out: Answers.com (2005) defines this as a "common method for recording the value of inventory. It is appropriate where there are many different batches of similar products." This method describes the first item coming in will be the first item going out of the inventory. Retailinventories.com (2005) wrote "cost flow assumption assumes that the oldest inventory is sold first. The ending balance of inventory is valued at the most recent purchase price. FIFO produces a more relevant balance sheet since the ending balance in inventory reflects its current value." An example of this would be: Ending balance in inventory would be 30 units of the most recent purchases. 30 x 300=9,000 E/B = 9,000.
In order for Jim Turin & Sons, Inc to have used this method of accounting it would have had to match the cost of the merchandise with the revenue earned from the sale. Using the matching of revenue and cost the company would have had to have kept an actual inventory and maintained records of the costs associated with said inventory. Since the costs are not immediately deducted under the accrual method they are deferred to the year when the merchandise is
As a retailer and a supplier, Sobeys has an extremely large balance in their inventory account. During 2015, the inventories are more than 50% of the total current assets, and 13% of the total assets. We will compare the inventory accounts of 100 randomly chosen locations out of the 258 locations, as well as the 3 Cash & Carry stores. The company’s main portion of the total inventories would be food related, and they have certain shelf lives. If the unsold inventories are sitting in the warehouse for too long, then the inventory will be unable to sell, and this brings risk to future revenues. So the company should monitor the entire food related inventory, and strictly follow the FIFO rule. We need to compare the average inventory on hand ratio to other competitors in the same industry to find out if the inventory control has serious issues. Also, inquire inventory evaluation at the warehouses and possibly observe a test count done by
2) Knowing the selling price of the item. And from the first two pieces of data Bean is then able to calculate the profit margin generated from each individual item. Thus, profit margin = selling price – cost of item also relates to the costs of under stocking. 3) Knowing the liquidation cost of an item to calculate the costs of overstocking. With these calculations, Bean can use these methods mentioned in Q1 to decide what the final amount of items to stock are. Furthermore, Bean will need to compare the costs associated with under stocking relative to the sum of under stocking plus overstocking inventory. However, the costs of under stocking should not only include short terms losses, i.e. loss of sale for that item at that time, but also the loss of future business due to customer dissatisfaction. Bean must also consider that if a particular item is not in stock that entire purchase order may be cancelled. Costs of overstocking should include costs to hold inventory and consider that these might change if the salvage value of a product leftover is depended upon the number of units remaining at the end of the season. If there is a lot of product leftover, then the liquidation value might decrease and items will be transferred to next
The inventory items are classified in to tree categories based on the annual usage and the cost of each unit. More specifically, the hospital gathers data of the average annual usage and unit cost of each item. The usage and the cost is called stock keeping unit (SKU). The dollar usage is calculated for every SKU by multiplying the average annual usage with the cost of each unit. The SKUs are arrayed from highest to lowest converted per...
Which calculation method will you apply to get the best valuation of your business goodwill?
The purpose of a physical inventory is to determine the condition and quantity of items by physical inspection and count. An important part of the inventory process is the location survey. All containers, pallets, bulk shipments and individual items must be identified and marked to ensure redundant data entry is eliminated.
The purpose of this paper is to give a clear understanding of discounted cash flow valuation. The paper will explain what a discounted cash flow valuation is and its importance in financial business decisions regarding investment strategies. This paper will give a detailed discussion about discounted valuations for both present and future multiple cash flows with respect to even and uneven schedules using clear step-by-step examples. Also included will be some advantages and disadvantages in using the discounted cash flow valuation method for corporate business. Finally, the paper will give a summary of important highlights discussed in the body of the paper.
In the second year of business at Golf Challenge Corporation the company is struggling. The cost of their inventory is rising, and they are in grave danger of losing their bank loan (their prime source of financing) due to not meeting the required financial ratios agreed and set forth by the bank at the time the loan was given. The owner comes up with a solution, and figures that instead of using Last in-First out (LIFO) the company can use First in-First Out inventory cost system (FIFO) and meet their required financial ratios set forth by the bank. Ultimately, Golf Challenge Corporation should not submit documents to the bank using FIFO as opposed to their previous system LIFO in order to meet the bank requirements
Startup valuation essentially points out the worth of your business – its idea, the product or service and so on. For established business, knowing the valuation is rather straightforward. They can calculate the market value of the business using tangible metrics and assets, such as revenue, profits and customers.
Janice Corporation use large number of assets and depending on the types of financial assets the fair value is required. However, if the market is not active for trading the asset, it will be difficult to determine the fair value for an asset. Especially, when market can be so erratic, the methods can be used to determine fair value. The fair value measures require applying market price and referring to prices of similar securities; if there is no alternative, the companies employ models to determine fair value (Nally, 2008). In addition, the recommendations for Janice is that they must identify or include all the assets in valuation, base their business valuation on realistic cash flow forecast and business risk assessment, and recasting historic financial reports for valuation (Valuadder, 2007). In unstable market, the fair value measurement provides guidance on estimating the fair value of an asset when the volume for the asset is decreased, assessing a debt security, and improving disclosures. Financial assets are subject of the accounting and vary in degrees. Fair value can be used ongoing basis, and the changes in fair value go through earnings but only for trading securities and derivatives. The company should report the changes in the fair value of available for sale securities in the
Thesis: Businesses deem financing necessary when they are just beginning, expanding, or recovering; Debt financing and equity financning have many advantages and disadvantages but also change the entire accounting method that is to be considered while running the business.
A investment that considers to be passive in securities that permits an investor to multiply his/her beginning capital investment on many securities all while earning profits.it consist of having power over securities by an investor along with active management by an investor over a certain period of time. The reason for the investment will be expected to be primarily for financial gain. During the course of this paper there will discussion trying to analyze a common portfolio including a beginning capital input of $10,000 given that the allocation to the portfolio. Also it will include certain investments started under the portfolio including their possible profit. This paper will consist of a table of their investment that has been offered for reference.
Inventory management is a method through, which a business handles tangible resources and materials to ensure availability of resources for use. It is a collection of interdisciplinary processes including a full circle from the demand forecasting, supply chain management, inventory control and reverse logistics. Inventory management is the optimization of inventories of manufactured goods, work in progress, and raw materials. According to Doucette (2001) inventory management can be challenging at times; however, the need for effective inventory management is largely seeing more as a necessity than a mere trend when customer satisfaction and service have become a prime reason for a business to stand apart from its competition. For example, Wal-Mart’s inventory management is one of the biggest contributors to the success of the company;
Inventory Optimization is a critical concept in order to keep the costs under control within the supply chain. For getting the best result from management efforts, it focuses on items that cost the most. ABC approach states that a company should rate its items from A to C:
This method is based on the fact that some stock items have a much higher annual usage value than others. This after doing a cost analysis, stock items are separated into three classes with the following characteristics.