This case delves into the realm of cost accounting by following the inventory system from raw materials to works in process to finished goods. Additional topics covered in the case were obsolescence and unmarketable inventory, cost of sales, inventory turnover, and inventory holding. The case allowed the opportunity to explore a more analytical approach to cost accounting. In addition to just recording the inventory transactions and understanding the accounting behind them, the case involved analyzing the attributes associated with the company's inventory system in order to gain perspective on the company as a potential investor. 1. Inventory a. In raw materials inventory, the costs incurred will be related to direct materials and indirect materials. b. For work-in-process inventory, direct labor and factory overhead will be the primary costs. C. Finished Goods Inventory will include carrying costs, direct materials, direct labor, and factory overhead. 2. Here, inventories are recorded net of allowance for obsolete or unmarketable inventory. 3. Related to Note 2: Allowance for Obsolete and Unmarketable Inventory a. This account will appear in the current assets section on the company's balance sheet. It will be listed under inventory as a contra inventory account to give net inventory. This is much like the presentation of allowance for doubtful accounts with accounts receivable to yield net inventory. b. The gross amount of inventory at the end of 2011 is $243,870. The gross amount of inventory at the end of 2012 is $224,254. c. The portion of the reserves for obsolete inventory is most attributable to finished goods inventory. It is semi attributable to work-in-process inventory, and it is least attributable to raw materials inventory. 4. To set up Cost of Sales account: Cost of Sales allowance for obsolete or unmarketable inventory 13,348 13,348 To write off inventory: allowance for obsolete or unmarketable inventory 11,628 11,628 Finished Goods Inventory 5. Inventory Accounts, Accounts Payable, and Cost of Sales Work-in-Process Inventory 1,286 568,735 Finished Goods Inventory 184,808 13,348 568,735 572,549 RM Inventory 46,976 442,068 438,561 126,000 43,469 442,068 619 167,646 Cost of Sales Accounts Payable 0 432,197 39,012 572,549 438,561 13,348 585,897 45,376 a. Cost of Goods Sold: $572,549 b. Cost of Goods Manufactured: $568,735 c. Cost of RM transferred to WIP: $442,068 d. Cost of Raw Materials Purchased: $438,561 e. Cash Disbursed for Raw Material Purchases: $20,216 33 34 6. Inventory Turnover Ratio = Inventory Turnover Ratio = Cost of Sales $585,897 Average inventories,net $222,402 Cost of Sales $575.226 Average inventories,net $250,830 = 2.63 FY 2012 = 2.29 FY 2011 7. Inventory Holding Period = 365 Inventory Turnover Ratio 365 2.63 = 138.8 FY 2012 Inventory Holding Period = 365 Inventory Turnover Ratio 365 2.29 = 159.4 FY 2011 8. Percent of Inventory, Obsolete = $13,348 = 7.4% Obsolete Inventory Finished Goods Inventory $180,812 In addition to the information given, as a potential investor, I would like to have a better grasp of the company's liquidity and efficiency, solvency, and financial flexibility. Knowing the liquidity and efficiency allows for better understanding of the amount of time the company takes to convert an asset into cash and how easily an asset is converted into cash. Ratios like current ratio, days' sales in inventory, and total asset turnover lend achieve this goal. Defining the company's solvency helps in gauging the company's ability to pay debts as they come due. Calculating the debt ratio, equity ratio, debt to equity ratio, and times interest earned ratio allows me to know the debt position of the company. Outlining the company's financial flexibility plays an important role in determining the ability of a company to weather unexpected financial crisis and take advantage of unexpected investment opportunities. Reviewing the financials through this lens will provide for a complete look into the prospects of investing into this company.