Accounting Case

The main purpose for this memo is to give an advice pertaining referent to the current business situation. Ms. Gonzalez, I am aware that you have expressed concern regarding the ability of the business to meet income tax obligation, because due to weather condition, the cost of acquiring produce to resell has escalated. It is causing increase in the cost of inventory and tense cash position. Additional, the business's merchandise is perishable goods and the business sales are good. Your business will have the opportunity to grow and accomplish tax obligations, although rise of cost. I am certain of that the inventory method that is operating at the moment (FIFO) would be the correct, considering the situation of your company and the aspects that concerned, among which are the type of inventory you have.

Inventory of merchandise that your company possesses and tries to sell are perishable products. It has a short life, worsen their quality and lose their value over time. Also it needs that special or technical conditions are met. For that reason they need to be sold as quickly as possible. Due to relation between physical flow of goods and the type of merchandise stored it is necessary to take into account when selecting the type of inventory right for your business.

Management of inventory involves three more commonly method to give costs to inventory. The less used type of inventory is Weighted Average or Average Cost with 20% of usage. LIFO (Last-In, First-Out) is another inventory method with 27 %, and FIFO (First-In, First-Out) it is the most frequently used with 50% incidence (Wild, Shaw, & Chiappetta, 2011, p.230). In Weighted averages method you obtain the cost per unit dividing the cost of goods available by the total units that the company has available for sale (See the chart in Table 1). In taxation this method is not acceptable by regulation (Bloom, 2010, p. 3). This method takes as cost of goods sold as the average cost of the inventory available at that time and tends to adjust abnormal changes in costs; for that it is not propose.

The LIFO inventory system flow in the opposite order as good as been received (See Table 2). This method will require you to hold on to your products for more time and causing damage. Additionally, this type of inventory may cause problems with merchandise accuracy. Also the store inventory value reflected in the balance sheet is undervalued. In many countries of European is not permitted LIFO, for example UK and France (Hutching Unabridged Encyclopedia, 2005). International Financial Reporting Standards (IFRS) and International Accounting Standards Board's (IASB) neither consent it. Many U.S. companies use LIFO because ponder it advantageous about revenues and tax purpose. The reason is that when increase costs, merchandise inventory acquired costs of goods sold more recently. Lower the gross profit as well as the income, which gives a temporary advantage with respect