Inventory Methods

Scenario A retail familiarity 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. run expenses (excluding management subsidyes) are $400,000, and sales are $6,000,000. The management honorarium agreement provides for incentive subventiones totaling 1% of after-tax income (before bonuses). Taxes are 25%, and business relationship a taxable income go out be the same. The company is undecided about the selection of the last in first-year out or FIFO inventory methods. For the year end 2001, mop up inventory would be $700,000 and $1,000,000 respectively nether last in first out and FIFO. Required: * How are accounting total utilise to monitor this agency read among owns and managers? * Evaluate managements incentives to adopt FIFO. * Evaluate managements incentives to choose LIFO. * assuming an efficient capital market, what achievement should the alternate(a) policies create on security prices and shareholder wealth? * why is the management compensation agreement potentially counter-productive as an agency-monitoring implement? * Devise an alternative bonus system to avoid the enigma in the brisk plan. Before we get into the more speculative parts of this assignment we get out use the numbers in our example to get 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 measured bonuses we have to determin e the actual lettuce income after taxes inc! luding bonuses. First have to determine cost of sales which equals beginning inventory disconfirming 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 cipher 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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