Chapter 3 Communication Case 3 - 3 Response 1
Chapter 3 Communication Case 3 - 3 Response
Christie M. N Fejeran
Liberty University
Chapter 3 Communication Case 3 - 3 Response 2
Chapter 3 Communication Case 3 - 3 Response
I enjoyed your paper on this topic and found myself spending some time pondering the
scenario. There are a few factors to consider. First, we can look at the operating cycle. Our
textbook indicates that the operating cycle of a typical company includes the following steps: 1)
Use cash to acquire inventory 2) Prepare inventory for sale to customers 3) Deliver inventory to
customer 4) Collect cash from customer. (Spiceland, Nelson, & Thomas, 2018 p. 113) In general,
the operating cycle is the typical period of time a business requires to make an initial outlay of
cash to produce goods, sell the goods, and receive cash from customers in exchange for the
goods. In this case, while the operating cycle of the flock may be two years, the company’s
operating cycle is significantly less. The operating cycle is the amount of time it takes the
company to purchase the egg-producing flock, produce eggs, and sell the eggs to the customers
in exchange for cash. As stated in the textbook, the estimated life of a laying hen is
approximately two years, and after that, Red Hen company sells the hens to soup companies. The
key factor here for me is that while the company does sell hens, this is not the core of the
business. The core of the business is production of eggs.
Another factor to consider is what FASB has to say on the matter. In reading FASB
codification, I noted that it states, “Animals with short productive lives, such as poultry, may be
classified as inventory. Due to the short productive life of poultry, the cost of flocks may be
classified as inventory. The accounting principles for poultry operations are much the same as
those for other production animals, although the operating cycles are much shorter.” (FASB, 905-
360-25-3) While I understand that many would lean toward classifying the flock as current assets
based on this, I would argue that fixed assets would be the more appropriate, more accurate, and
possibly more beneficial classification. Further, FASB specifically states “may be classified as
Chapter 3 Communication Case 3 - 3 Response 3
inventory”. This treatment is neither mandated nor recommended. I also again bring your
attention to the section that states “The accounting principles for poultry operations are much the
same as those for other production animals, although the operating cycles are much shorter”. I
interpret this to suggest that if you do not choose to classify your flocks as inventory, the
accounting principles default to the accounting principles applied to other production animals.
According to FASB 905-360-25-4, production animals are to be classified as fixed assets.
As our textbook explains, “Current assets include cash and other assets that are
reasonably expected to be converted to cash or consumed within the coming year, or within the
normal operating cycle of the business if that’s longer than one year.” (Spiceland et. al., 2018, p.
113). It goes on to indicate that for some businesses, the operating cycle extends beyond one year
and gives the example of a shipbuilding company. It takes two years to build an oil-carrying
supertanker. In this case, the company will classify as current those assets that will be converted
to cash or consumed within two years. However, I believe this does not apply to an egg
producing company. As mentioned, the company’s egg production operating cycle is quite short,
significantly shorter than the flocks’ operating cycle of two years. As a result, it would follow
that the eggs are classified as inventory while the flocks’ appropriate classification would be
property, plant and equipment. Additionally, I believe that including the flocks in inventory will
inflate the inventory account, and subsequently, it will not accurately depict the company’s true
financial picture as an egg production company as opposed to a hen selling company.
As mentioned, I not only believe fixed asset classification would be more appropriate and
accurate, but I believe it would be more beneficial to the company, depending on its size. Fixed
assets can be depreciated whereas inventory will remain in current assets until sold,
approximately two years later, and cannot be depreciated. Further, the Red Hen Company could
--y
-yrer
Chapter 3 Communication Case 3 - 3 Response 4
take the one-time section 179 deduction as opposed to depreciating the flocks over their useful
lives.
Chapter 3 Communication Case 3 - 3 Response 5
References
Spiceland, J. D., Nelson, M. W., & Thomas, W. B. (2018). Intermediate Accounting (9th ed.).
New York, NY: McGraw-Hill Education.
FASB (Financial Accounting Standards Board). (n.d.). ASC 905-360-25-3. Retrieved November
17, 2017, from FASB Accounting Standards Codification database.
FASB (Financial Accounting Standards Board). (n.d.). ASC 905-360-25-4. Retrieved November
17, 2017, from FASB Accounting Standards Codification database.
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