"Make Believe" is a newly setup small scale business. It is a electronic devices business. It doesn't have specialized automated software yet.

As a new business owner, we should choose 'Periodic Inventory System' for tracking our purchase and sales.

Periodic inventory management allows a company to track its beginning inventory and ending inventory within an accounting period, but it does not track the inventory on a daily or per-sale basis. Business will track their inventory by having employees take a physical inventory count.

Under this system, companies record all purchases to a purchases account. Once the physical inventory on hand has been counted, the balance in the purchases account is shifted into the inventory account, which in turn is adjusted to match the cost of the ending inventory.

Business can calculate inventory costs, or cost of goods sold, under the periodic inventory system as follows:

Beginning inventory + Purchases = Total cost of inventory (goods) Total cost of inventory Ending inventory = Total cost of goods sold.

As a new business , "Make Believe" will prefer FOB Shipping Point. FOB is a shipping term that stands for free on board. If a shipment is designated FOB (the seller's location), then as soon as the shipment of goods leaves the seller's warehouse, the seller records the sale as complete. The buyer owns the products en route to its warehouse and must pay any delivery charges.

'Make believe' is selling electronic goods. By shipment goods to different places and countries, business can increase its sale to a larger extent.

Competitive advantage of FOB shipping :

For customers FOB is a good solution for bulk transporting goods from a supplier, as you have full cost control and the supplier is responsible for clearing the goods and export duties. This helps working capital and cash flow management, reduces times to wait for end payment, and when things go wrong (which isnt uncommon), the risk is minimised as best possible.

Therefore, Customers will prefer this method of shipping. Hence, it will result in a competitive advantage for the business as compared to the other businesses which are using FOB Destination Point for shipment.

Referring to your make believe business that were used to answer the previous chapter discussions, which collection method would you adopt for your business and why?

How do you determine what amount of receivable would be uncollectible? How often would that amount be adjusted? Who should make that decision?