Nikki Obomsawin graduated from the Nova Scotia College of Art and Design (NSCAD) with a Master of Fine Arts in craft. While she was completing her degree, Nikki sold her jewellery designs at the Halifax Seaport Farmers Market on Saturdays. Nikki’s designs are in great demand. Several of her customers suggested she open a combination retail store and design studio on the popular shopping street, Spring Garden Road, in Halifax so she would be more accessible to her customers and potential customers during the week. Nikki located suitable space and hopes to open Nikki’s Gems in two weeks. Her friends have told her she needs to set up an inventory system to track the raw materials and finished pieces of jewellery. Someone suggested that she needs to count her inventory but Nikki thinks it is a waste of time.

Required:

Based on the information provided by Nikki, prepare a draft report that addresses the following questions:

a. Should Nikki’s Gems use a periodic or perpetual inventory system? Consider the advantages and disadvantages of each one.

b. What inventory cost formula should Nikki use? Consider the nature of the inventory.

c. Explain the concept of net realizable value and how it applies to Nikki’s business.

d. Discuss the importance of internal controls and provide suggestions for implementing appropriate controls in Nikki’s new store and studio.

e. Explain why counting inventory is not a waste of time.