Case 6-4 Joan Holtz

Topics: Revenue, Inventory, Generally Accepted Accounting Principles Pages: 3 (698 words) Published: October 27, 2008
Case 6-4
1.All three methods do affect the net income
- Deducted Purchased Goods: Will affect the cost of the good by decreasing it, which will affect the net income in the period the product is sold. - Other Income: Net Income would be higher than the other methods. - Not taken discount as expense: Cost of goods sold will be lower as discount will be counted, however it will decrease net income while being an expense.

Overall, the cost of goods sold will be affected, therefore gross margin and net income will as well.

2.Shrinkage should be
Dr. Operating Expense
Cr. Inventory
However, there are some industries that perform a Debit to Cost of Goods sold even though these items were never sold. I would suggest Operating Expense is a better approach.

3.An example of an industry that uses LIFO is the mining industries. Assuming they have a pit, they are filling it up with coal they dig up. The first coal they sell will be from the top (last coal put in the pit), and last one sold will be the ones in the bottom (first coal put in the pit), therefore LIFO. There are many other industries with a similar setting where the last one put in would be the first one sold.

4.The automobile dealer would not be wrong to use LIFO, however the automobile dealer should consider FIFO for tax benefits over LIFO. The hardware dealer is reflecting prices as if it was using the LIFO method, therefore you cannot consider this as FIFO.

5.a. Valid
b. Valid
c. Valid on certain conditions. The amount of inventory cannot increase/decrease and taxes needs to be unchanged. A bit of finance, you may want to consider the present value. Perhaps earning more money on the first year is valued more than earning more in the second year.

6.Justification for applying would be evidence of physical deterioration, obsolescence, drops in price level, or other causes. With these evidences, the inventory can be written down.

7.On the contrary belief of profits...
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