Susan Smith is confused about why the company she works for sets up scrap inventory as an asset. She believes the present system is strictly a waste of time and accounting effort because the value of scrap is not large. Smith’s employer has a continuing agreement with a quilt-making specialty company that purchases all scrap fabrics.

Required:

a. Give as many reasons as you can for the company’s policy.

b. Determine the result if the scrap inventory were ignored in this company.