accounting for merchandising businesses

Comprehensive Problem 2: Merchandising

This problem has a value of 10% of the final grade.

TsIzzWe (Ts) is a company that purchases T shirts from the manufacturer, Frootyluums (Frooty) and sells them to college students through the college bookstore, Rskoolstore (RSkool). Ts has hired you to be the accountant for the company.

PART 1: 10% of grade

Ts is concerned about paying taxes and has asked you to explain which inventory flow system would be the best one to use to minimize the taxes that are paid on the profits.

Based upon this request, which one would you recommend? Support your position by explaining the differences of the inventory flow systems.

I would recommend using the FIFO (First in First Out) inventory system for your company. This system will allow you to get what you have ordered first out first, in which, you will be able reduce items to clear them out of your stock to start selling the newer items. This way you will be able to get out your older inventory and not have any left over when the newer items become available.

LIFO (Last in First Out) would not work well here because the college students you sell the shirts to will get the same merchandise over and over again. They will be paying the same amount for the items no matter how old the items are. I do not see the students being happy with this and it can result in the school dropping you from their bookstore.

AVG Cost Method would work for your company because everything will cost the same. All your items will be evenly distributed in price. The only con I see here would be that the items would not be new all the time. Meaning you will have an inventory overflow every year and it will keep accumulating because you are not getting your older items out in time. Eventually, the students will still be paying the same price for shirts that they bought a year or more ago.

PART 2: 80% of grade

Ts has decided to follow your advice and use the inventory flow method that you recommended with its perpetual inventory system. Using the data provided for transactions that occurred during August, determine the Gross Profit at the end of the period.

PART 3: 10% of grade

Ts had used the periodic inventory system prior to switching to the perpetual inventory system. Using the data provided for transactions that occurred during that time, determine the Gross Profit for that period using the Average Cost Inventory Flow Method.

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