BUS FPX 2061 Assessment 5 Inventory Management

BUS FPX 2061 Assessment 5 Inventory Management

Student Name

Capella University

BUS-FPX2061 Accounting Fundamentals

Prof. Name

Date

Assessment 5: Inventory Management

Respond to the following five questions using grammatically correct language.

1. To place the proper valuation on inventory, a business must determine which costs should be included in inventory cost. Getting goods ready to sell should include what items?

Getting goods ready to sell should involve calculations concerning both quantity and price. To determine quantity, a company must perform an inventory count, which can be done either through a physical inventory (manually counting every piece) or by maintaining perpetual inventory records (updated continuously through software or transaction entries).

The price represents the amount paid by the company to purchase the goods. The cost of ending inventory is then determined by multiplying the quantity of inventory by its unit cost, ensuring that all direct costs incurred to prepare the goods for sale are properly reflected in the valuation.

2. If inventory is being valued at cost and the price level is steadily rising, which of the three methods of costing—FIFO (First In, First Out), LIFO (Last In, First Out), or weighted average cost—will yield the lowest annual after-tax net income? Which method will yield the highest after-tax net income in a scenario where the price level is steadily declining?

During periods of rising prices (inflation), the LIFO (Last In, First Out) method produces the lowest after-tax net income. This occurs because LIFO records the most recent and typically higher costs as the cost of goods sold (COGS), reducing reported income and, consequently, tax liability.

Conversely, during periods of declining prices (deflation), the FIFO (First In, First Out) method results in the highest after-tax net income. This is because FIFO assigns older, higher-cost inventory to COGS, while newer, lower-cost inventory remains on hand. The result is a higher profit margin since sales are compared to higher-cost inventory from earlier purchases.

3. Some circumstances justify departures from the historical cost approaches of FIFO, LIFO, and weighted average cost. Several additional inventory methods may be used when circumstances warrant. Identify each of these alternative methods. Describe each alternative method. Include an example of when each method may be applied.

When conditions make traditional historical cost methods unsuitable, businesses may use alternative inventory valuation methods. These include:

Alternative Method	Description	Example of Application
Lower-of-Cost-or-Market (LCM)	Inventory is valued at the lower of its historical cost or current market value. This prevents overstating assets when market value declines.	Used when the market value of inventory falls below its purchase cost, such as obsolete electronics.
Gross Margin Method	Estimates ending inventory by subtracting the estimated cost of goods sold (COGS) from the cost of goods available for sale. It assumes a stable gross profit ratio.	Used when physical inventory is impractical, for instance, after a warehouse fire.
Retail Inventory Method	Estimates ending inventory cost by applying a cost-to-retail price ratio to inventory recorded at retail prices.	Used to estimate ending inventory for interim financial statements without conducting a physical count.

Each method serves specific business situations that require estimation or market adjustment to provide more accurate financial representation.

4. Given the following information, calculate the inventory turnover for a company. Evaluate the trend results.

• 2020: Cost of goods sold (COGS) — $2,168,000; Beginning inventory — $408,000; Ending inventory — $489,000.

• 2021: Cost of goods sold (COGS) — $945,000; Beginning inventory — $436,000; Ending inventory — $408,000.

To calculate inventory turnover, the formula used is:

[
text{Inventory Turnover} = frac{text{Cost of Goods Sold}}{text{Average Inventory}}
]

Year	COGS ($)	Beginning Inventory ($)	Ending Inventory ($)	Average Inventory ($)	Inventory Turnover
2020	2,168,000	408,000	489,000	(408,000 + 489,000) ÷ 2 = 448,500	4.83
2021	945,000	436,000	408,000	(436,000 + 408,000) ÷ 2 = 422,000	2.24

A higher inventory turnover ratio indicates efficient inventory management and stronger sales performance. In 2020, the company demonstrated a ratio of 4.83, suggesting strong movement of goods. However, in 2021, the turnover decreased to 2.24, implying reduced sales efficiency or potential overstocking. The decline in the ratio suggests that inventory did not move as effectively, possibly due to slower demand or suboptimal purchasing decisions.

5. Identify which methods could be used to determine whether there has been shrinkage or shortage in the physical inventory.

The retail inventory method is commonly used to detect inventory shrinkage or shortage. By comparing the expected inventory value (as estimated through the retail inventory method) to the actual physical count, discrepancies can be identified.

For example, if the physical count shows $62,000 worth of goods on hand, but the retail inventory method estimates $66,000, the business can conclude there is a shortage of $4,000, which should be recorded as a loss. This approach helps identify theft, damage, or recording errors that contribute to inventory shrinkage.

References

Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2022). Financial accounting: Tools for business decision making (10th ed.). Wiley.

BUS FPX 2061 Assessment 5 Inventory Management

Wild, J. J., Shaw, K. W., & Chiappetta, B. (2021). Fundamental accounting principles (26th ed.). McGraw-Hill Education.