Inventory Methods

Scenario A retail friendship begins operations late in 2000 by purchasing $600,000 of merchandise. There atomic number 18 no sales in 2000. During 2001 additional merchandise of $3,000,000 is purchased. direct expenses (excluding management subsidyes) are $400,000, and sales are $6,000,000. The management remuneration agreement provides for incentive allowancees totaling 1% of after-tax income (before bonuses). Taxes are 25%, and story a taxable income go out be the same. The company is undecided about the selection of the last in first-year out or FIFO inventory methods. For the year finish 2001, mop up inventory would be $700,000 and $1,000,000 respectively under last in first out and FIFO. Required: * How are accounting poem utilise to monitor this agency read betwixt owns and managers? * Evaluate managements incentives to cull FIFO. * Evaluate managements incentives to choose LIFO. * assuming an efficient capital market, what nucleus should the alternate(a) policies bemuse on security prices and shareholder wealth? * why is the management compensation agreement potentially counter-productive as an agency-monitoring appliance? * Devise an alternative bonus system to avoid the chore in the brisk plan. Before we get into the more hypothetic parts of this assignment we get out use the numbers in our example to purpose and expose the difference between the LIFO and FIFO inventory method.

We forget have to calculate our after-tax income twice: once without bonuses to establish the radix for the bonuses, and once we careful bonuses we have to determine the actual lettuce income after taxes including bonus! es. First have to determine cost of sales which equals beginning inventory electronegative ending inventory. This would issue in the following: Exhibit 1 Based on these results we can determine the basis for our bonus calculation Exhibit 2 Bonuses are to be metrical at 1% of after-tax income (before bonuses) which would result in $20,250 and $22,500 under LIFO and... If you want to get a full essay, order it on our website: OrderCustomPaper.com

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