Inventory Methods

Scenario A retail high society 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. in operation(p) expenses (excluding management subsidyes) are $400,000, and sales are $6,000,000. The management fee agreement provides for incentive allowancees 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 get-go out or FIFO inventory methods. For the year terminate 2001, mop up inventory would be $700,000 and $1,000,000 respectively chthonic last in first out and FIFO. Required: * How are accounting come employ to monitor this agency read amidst owns and managers? * Evaluate managements incentives to select FIFO. * Evaluate managements incentives to choose LIFO. * assuming an efficient capital market, what personnel sho uld the alternate(a) policies come on security prices and shareholder wealth? * wherefore is the management compensation agreement potentially counter-productive as an agency-monitoring apparatus? * Devise an alternative bonus system to avoid the business in the brisk plan. Before we get into the more hypothetical parts of this assignment we get out use the numbers in our example to consider 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 figure bonuses we have to determine the actual lettuce income after taxes including bonuses. First have to determine cost of sales which equals beginning inventory negative 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 metric at 1% of after-tax income (before b onuses) which would result in $20,250 and $2! 2,500 under LIFO and... If you want to get a full essay, order it on our website: OrderCustomPaper.com

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