To better account for the older merchandise inventory, the president of Widget Tek wonders whether the merchandise inventory should be valued using a different method. Do you agree, and why or why not? Yes, because valuation at lower of cost or market will provide the highest gross profit. 2. Will a change in inventory method increase a company's net income on its financial statements? 3. When is merchandise inventory not valued at cost?

Question

Jakob Holland

Business

12 July, 12:18

To better account for the older merchandise inventory, the president of Widget Tek wonders whether the merchandise inventory should be valued using a different method. Do you agree, and why or why not? Yes, because valuation at lower of cost or market will provide the highest gross profit. 2. Will a change in inventory method increase a company's net income on its financial statements? 3. When is merchandise inventory not valued at cost?

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Answers (1)

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Chace Maxwell · Answer 1

Answer: (1) Yes because valuation at lower of cost or market will provide the highest of profit (2) A change in inventory method increase a company's net income on its financial statements (3) When the current prices for these goods have fallen considerably at the time of stock taking.

Explanation:

(1) The valuation at lower of cost or market will provide the highest gross profit, it may happened when the company make use of FIFO method of stock valuation, in the sense that, under FIFO method the first item in stock is the cheapest. While under LIFO, the stock valuation will give the lowest profit because the the older item in stock are not always sold the buyers do prefer to buy the newer items in stock as a result of these such older items may lose their value.

(2) A company must stick to a particular method of stock valuation according to Financial Accounting Standard Board (FASB). The method in use for stock valuation must show the state of affairs for the business for that financial year. It must give a true state of affairs about their net income. Therefore, a change in the method of inventory may increase a net income on their financial statement which may not be a true record of the net income realized from the business for that particular period.

(3) As a rule, The stock should be valued at the cost price at which they were obtained but it may so happen that the current prices for these goods have fallen considerably at the time of stock taking. If this happen, then the stock must be valued at the current market price because this is the price the stock would cost at that time.