Effect of Financial Statement

¶ … inventory valuation?

Measuring inventory effectively is paramount in keeping financial statements of a company up-to-date. Inventories represent a large proportion -in most companies- of short-term assets on the balance sheet. If valuation method is not prudent the assets and shareholder's equity will be over or underrepresented on the balance sheet. This will give an inaccurate picture of financial statements on which an investor based his financial decisions on.

Why does the Canada Customs and Revenue Agency not allow companies to use LIFO when calculating Net Income for Income tax purposes?

In economies with high inflation and industries with rising prices using LIFO inventory system, new sales will be matched against higher production costs, therefore net income will be lowered. The cost of goods sold will be higher and inventory value is consequently lower on the books. Organizations can manipulate the inventory method to lower tax liability.

What would happen to the income statement if the amount of ending inventory were incorrectly counted?

Incorrect ending inventory will distort the calculation of cost of goods sold and invariably have give an inaccurate gross profit on the income statements.

4. The above examples were all under the assumption that the cost of inventory is rising. What are the implications of decreasing cost?

Decreasing costs will have an opposite effect, LIFO method will reflect a higher net income due to cost of goods sold will be lowered and inventory value will be higher on the books.

2. Visit the Business

a) How do you keep track of inventory? (Be sure to ask about the technology involved.)

"First of all we determine how much space we need for our inventory. We make sure the space is clean, well lit and organized. When we are setting up our space, similar items are grouped together. Inventory tracking system are in place on computers which tie the cash register right into our inventory system. As items are sold and taken off the shelves it will be removed from the inventory. We find greater utility for Portable computer scanners which update the inventory records in real time. . These devices allow us to scan a bar code and delete or add product to our inventory.

Removable stickers are used for tracking inventory. Stickers have a code or title written on them. These stickers are kept in a daily or a weekly file. Then a clerk manually enters each item in computer program. This type of inventory tracking requires diligence to maintain accurate counts."

b) Do you find the technology or method easy to work with, convenient, etc.

Computerized inventory tracking system helps us to identify how much inventory we have in stock. It also reminds us about reordering the inventory before the inventory reaches at minimum. This inventory tracking software package is very plain and simple. Setting them up takes the greatest amount of time, but after that, it is fairly easy to maintain.

c) Do you do a periodic physical inventory? How often?

Yes, we do on monthly basis. Our inventory team under the supervision of Production Manager undertakes a physical count of inventory at the end of each month to ensure that the physical inventory is matched as per our records.

d) Are there any problems with this inventory method?

This inventory system is very feasible for us and we are reaching our targets by following this. Its saves our time and improve our efficiency level. Therefore, we are not facing any problem with this inventory control.

e) What accounting method does the business use? (FIFO, LIFO, Average)

The business is using average inventory method for valuing its inventory.

f) What kinds of internal control and security measures do they implement? How is cash controlled? Is there a division of responsibility for security reasons?

The internal control system of the business is working very effectively. The inventory department issues receipts which is handled and verified by 2 persons. One to input the receipt into the system and another to secure the goods and both will sign the receipt. Head of inventory department inspect receipts to ensure they are accurate and not damaged.