Assume you are opening a Bed Bath & Beyond store. To finance the business, you need a $500,000 loan,...

Question

Assume you are opening a Bed Bath & Beyond store. To finance the business, you need a $500,000 loan, and your banker requires a set of forecasted financial statements. Assume you are preparing the statements and must make some decisions about how to do the accounting for the business.
Requirements
Answer the following questions (refer to Chapter 5 if necessary):
1. Which type of inventory system will you use? Perpetual or Periodic? Give your reason.
2. Show how to compute net purchases (see the vocabulary list in Chapter 5 for the definition of ?onet purchases??) and net sales. How will you treat the cost of freight in?
3. How often do you plan to do a physical count of inventory on hand? What will the physical count accomplish?
4. Inventory costs are rising. Which inventory costing method would have the effect of
a. maximizing net income?
b. paying the least amount of income tax?

David · Accepted Answer

Decision Case 
Assume you are opening a Bed Bath & Beyond store. To finance the business, you need a 
$500,000 loan and your banker require a set of forecasted financial statements. Assume you 
Are preparing the statements and must make some decisions about how to do the accounting 
for the business  
Requirements 
Answer the following questions:
R1. Which type of inventory system will you use? Give your reason 
There are two main inventory systems, perpetual and periodic. Since I am opening a Bed Bath 
& Beyond store which deals in expensive retail and since its inventory cannot be controlled 
by visual inspection I will use Perpetual system. Perpetual means continuous; is a system 
where a business keeps continuous record of the number, value and type of inventories it 
has. 
This system keeps a “running record of inventory and cost of goods sold” (Horngren & 
Harrison, 2007)
R2. Show how to compute net purchases and net sales. How will you treat the cost of? 
Transportation-in?
Computation of net purchases:- 
Total Purchases during the year                                                      
Less: Purchase discounts                                        
         Purchase returns and allowances 
= Net Purchases
Computation of Net sales:- 
Total Sales during the year           
Less: Sales discounts 
      :

Assume you are opening a Bed Bath & Beyond store. To finance the business, you need a $500,000 loan, and your banker requires a set of forecasted financial statements. Assume you are preparing the...

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