Assume you are opening a Bed, Bath and Beyond store. To finance the business, yo

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

Cost Price Model

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

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