1. Epsilon Manufacturing

Scenario: Cash Accounting Basis for Inventory

Data: Epsilon Manufacturing uses cash accounting for inventory valuation. During the year, the following transactions occurred:

• Cash receipts from sales: $300,000
• Cash payments for inventory purchases: $150,000
• Ending inventory: $50,000

Requirements:

1. Calculate Epsilon Manufacturing's cost of goods sold (COGS) using the cash accounting method.
2. Determine Epsilon Manufacturing's gross profit for the year based on cash receipts and payments.
3. Discuss the challenges of using cash accounting for inventory valuation.
4. Analyze how cash accounting affects the timing of recognizing inventory costs and sales revenue.
5. Evaluate the impact of inventory fluctuations on Epsilon Manufacturing's cash flow and profitability.
6. Recommend whether Epsilon Manufacturing should switch to accrual basis accounting for better inventory management.