1. Assuming Anson decided to charge barrel costs (but not warehousing and aging costs) to inventory, what 2012 income statement and balance sheet items would change, and what would the new amounts be? (Assume no change in work-in-process inventory.)
2. If Anson's suggestion of including all warehousing and aging costs in inventory were accepted, how would the 2012 financial statements be affected? (Assume no change in work-in-process inventory.)
3. In your opinion, what costs should be included in Anson's inventory when preparing financial statements to be submitted to Valley National Bank?
In early August 2012, Craig Anson, president and chief operating officer (COO) of Justin Anson Distillery, Inc., of Oakwoods, Tennessee, sat in his office pondering the results of the previous day's meeting of the board of directors and wondering whether he should submit the 2012 financial statements (Justin Anson Distillery Exhibits 1 and 2) to the Valley National Bank of Nashville, Tennessee in support of a recent loan request for $3.3 million, or whether he should wait until after next month's board meeting to clarify some of the preceding day's discussion. A great deal of controversy had arisen over the 2012 reported loss of $895,000 and how this result should be reported to the bank. The controversy revolved principally around the accounting treatment of various expenses reported in the "other costs" section of the operating statement. Mr. Anson knew that a decision had to be reached on these matters quickly, because the company had reached a point where additional working capital was needed immediately if it was to remain solvent.
Company History
Justin Anson began distilling whiskey in 1935. Justin had come to Oakwoods, Tennessee from Scotland the preceding year and had decided to carry on in the family tradition of beverage manufacture. He purchased a tract of land on a high knoll adjacent to a small stream fed by a limestone spring and began to distill bourbon whiskey in an old barn behind his home. His business grew from a trickling in 1935 to a million-dollar firm by 1960. He attributed this growth to the high-quality, distinctive bourbon whiskey that he produced. The quality of "Old Trailridge," Anson's only brand of whiskey, was claimed to be the result of the unusual iron-free spring water used in the distillation process and the specially prepared fire-charred white oak barrels used in the aging process.
In 1997, Craig Anson, great-grandson of Justin, took over as COO of the company and nearly doubled sales revenue during the next 10 years. In 2011, the company produced just over 2% of the whiskey distilled in the United States. Since the mid-2000s, the company's production had been stable; the financial statements for 2011 (Justin Anson Distillery Exhibits 1 and 2) were typical of the results of the preceding several years. After a surge in demand in the 1990s, no special effort had been made to gain a larger share of the market, but at a board meeting in December 2010, a decision had been made to expand production to try to capture a larger than proportionate share of the increase in whiskey consumption that Mr. Anson had forecasted, based on an industry research report. This report showed that the consumption of straight bourbon whiskey was increasing as the members of Generation Y matured. Based on this report and other industry forecasts, Mr. Anson had forecasted a doubling of straight whiskey consumption from 2011 to 2019. In view of this assumption, and because bourbon whiskey had to be aged for at least four years, the board had decided to increase the production of whiskey in 2012 by 50% of the 2011 volume (see Justin Anson Distillery Exhibit 2) in order to meet the anticipated increase in consumer demand for straight bourbon whiskey from 2014 through 2019.
Justin Anson Distillery Exhibit 1
Justin Anson Distillery, Inc., Balance Sheet as of June 30, 2011 and 2012 ($ thousands)

In June 2012, payment was made for work that had been performed during the year in adding to and improving the warehousing space in the building owned by Justin Anson Distillery.
Justin Anson
Distillery Exhibit 2
Justin Anson Distillery, Inc., Statement of Income for the Years Ended June 30, 2011 and 2012 ($ thousands)

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2011 2012 Current Assets $ 2,892 $ 792 Cash Accounts receivable-trade 3,139 4,028 Inventories: Bulk whiskey in barrels at average production cost (no excise tax induded) 11,067 9,914 Bottled and cased whiskey, 175,000 gallons in each year at an average cost of $24.75 per gallon (including excise tax) 4,331 4,331 Inventory in process 222 222 Raw materials and supplies 880 519 Prepaid expenses 970 854 Total current assets 22,348 21,813 Accumulated Fixed Assets Depreciation Cost Net 2012 2011 2011 2012 2011 2012 $ 66 $ 66 $ 66 $ 66 Land Building $1,877 2,442 2,765 4,202 4,642 $1,760 Factory equipment 158 158 57 83 101 75 Warehouse equipment 77 141 53 75 24 66 2,633 2,972 Total assets $24,981 $24,785 Current Liabilities Short-term notes payable to banks $ 2,420 $ 3,300 Current maturities of long-term debt 506 1,062 Accounts payable 2,330 1,175 Federal excise taxes payable 902 Total current liabilities 6,158 5,537 Noncurrent Liabilities Notes payable (9 1/2%) secured by deed of trust on warehouse property 7,700 9,020 Stockholders' Equity Common stock held principally by mem- bers of the Anson family 3,960 3,960 Earnings retained in the business 7,163 6,268 Total liabilities and capital $24,981 $24,785