At Lakeside Manufacturing, budgets are the responsibility of everyone. Each depa

Question

At Lakeside Manufacturing, budgets are the responsibility of everyone. Each department collaborates in determining its expected needs, and sales personnel determine the likely sales volume. Al Talbott, one of the production managers, believes in building plenty of slack into everything, including his estimates of ending inventory of work in process. As the accounting manager, write a memo to Mr. Talbott, explaining why the ending inventory figure should be extremely accurate, with as little slack as possible.

Explanation / Answer

Dear Mr. Talbott,

Inventory valuation is very important from the point of view of acounting. Accurate valuation is necessary as the amount of inventory affects calculation of cost of goods sold, gross profit and net income in income statement. It also affects the amount of current assets, working capital, total assets and owner's equity reported in balance sheet. The ending inventory becomes the opening inventory next accounting period.

Hence you are requested to calculate accurate inventory so that financial statements reflect correct picture of the organisation.

thanking you,

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