Home Décor Company sells a variety of home decorating merchandise, including pictures, small furniture items, dishes, candles, and area rugs. The company uses a periodic inventory system and counts inventory once a year. Most customers use the option to purchase on account and many take more than a month to pay. The owner of Home Décor, Rebecca Sherstabetoff , has decided that the company needs a bank loan because the accounts payable need to be paid long before the accounts receivable are collected. The bank manager is willing to give Home Décor a loan but wants monthly financial statements.
Rebecca has also noticed that, while some of her merchandise sells very quickly, other items do not. Sometimes she wonders just how long she has had some of those older items. She has also noticed that she regularly seems to run out of some merchandise. And she is wondering how she is going to find time to count the inventory every month so she can prepare the monthly financial statements for the bank. She has come to you for help.
Instructions
(a) Explain to Rebecca what an operating cycle is and why she is having problems paying her bills.
(b) Explain to Rebecca how her inventory system is contributing to her problems.
Taking It Further
Make a recommendation about what inventory system she should use and why.