Reference no: EM133150807
1. An executive in a merchandising company receives an annual bonus equal to 5% of net income. Historically, the company has calculated the cost of goods sold and ending inventory using LIFO and has maintained 30,000 units in inventory for the last 10 years. The executive is recommending the company reduce the number of units in year-end inventory to 1,000. Over the 10-year period, the cost per unit of inventory has increased from $60 per unit to $110 per unit.
- In what ways would a reduction in inventory help the company?
- In what ways would the change from LIFO to FIFO help the executive personally?
- Would you approve the proposal to move from LIFO to FIFO? Why or why not?
2. You oversee the $250 petty cash for your company. When an employee needs a special item that is not in inventory, you take money from petty cash to purchase that item. One day, you are short on cash for lunch. You decide to borrow $10 each day for the next 3 days until payday for a total of $30 from petty cash. After payday, you do not have enough to repay petty cash, so you decide to record a cash short/over expense of $30.
- Since this is the first time you have ever done this, is this a problem?
- If so, what steps should be taken to fix this problem? If not, why not?
3. Historically, your company has calculated bad debts using an aging of accounts receivable. Near the end of the fiscal year, the company is in a cash crunch and needs to borrow money from the bank, using accounts receivable as collateral. The owner of the company knows that many of the accounts receivable are more than 90 days past due, resulting in net receivables equal to only 80% of total receivables.
- The owner asks you to change the method of estimating bad debts to a flat 3% of receivables. What should you do?
4. Your company has always depreciated assets using the straight-line method. Your tax accountant has explained that a switch to the double-declining balance method would minimize taxes in the current year, but you are concerned about the impact this change would have on the value of long-term assets on the balance sheet and future tax liabilities.
- Assuming your projected sales (and, therefore, tax bracket) are predicted to increase dramatically over the next 5 years, what should you do?