Inventory Methods

Scenario A retail come with 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. operating(a) expenses (excluding management subsidyes) are $400,000, and sales are $6,000,000. The management allowance agreement provides for incentive supportes totaling 1% of after-tax income (before bonuses). Taxes are 25%, and method of accounting a taxable income go out be the same. The company is undecided about the selection of the last in runner out or FIFO inventory methods. For the year end 2001, mop up inventory would be $700,000 and $1,000,000 respectively below last in first out and FIFO. Required: * How are accounting meter utilize to monitor this agency read mingled with owns and managers? * Evaluate managements incentives to prefer FIFO. * Evaluate managements incentives to choose LIFO. * assuming an efficient capital market, what launch should the alternate(a) policies entertain on security prices and shareholder wealth? * wherefore is the management compensation agreement potentially counter-productive as an agency-monitoring implement? * Devise an alternative bonus system to avoid the paradox in the brisk plan. Before we get into the more suppositional parts of this assignment we get out use the numbers in our example to elaborate 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 reason bonuses we have to determine the actual lettuce incom! e after taxes including bonuses. 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 careful 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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