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1.

Retail imethod iis ia itechnique iused ito iestimate ithe ivalue iof iending iinventory iusing ithe icost ito
i retail iprice iratio. iRetail imethod iinvolves ithe ifollowing isteps:

1. Determine ithe iretail ivalue iof igoods iavailable ifor isale iduring ithe iperiod iby iadding ithe
i retail ivalue iof ibeginning iinventory iand iretail ivalue iof igoods ipurchased.
2. Subtract itotal isales iduring ithe iperiod ifrom ithe iretail ivalue iof igoods iavailable ifor isale.
3. Calculate ithe icost ito iretail iprice iratio i(formula igiven ibelow).
4. Multiply ithe idifference iobtained iin i2nd istep iand ithe icost ito iretail iratio ito iobtain
i estimated icost iof iending iinventory.

Cost ito iretail iratio iis icalculated iusing ithe ifollowing iformula:

Cost iof ibeginning iinventory i+ iCost iof iinventory ipurchased


Cost ito iRetail iRatio
Retail ivalue iof ibeginning iinventory i+ iRetail ivalue iof igoods ipurchased iduring ithe
i =
i period

The iformula igiven iabove iimplies ithat irecords iof ia ibusiness iusing ithe iretail imethod imust ishow
i the ibeginning iinventory iboth iat icost iand iat iretail iprice. iSince isuch iinformation iis ireadily
i available ito iretail imerchandising ibusinesses, iretailers icommonly iopt ito iuse iretail imethod ito
i estimate ithe ivalue iof iending iinventory.

One idisadvantage iof ithe ispecific iidentification imethod iis ithat iit ipermits ithe imanipulation iof
i income. iFor iexample, iassume ithat ia icompany ibought ithree iidentical iunits iof ia igiven iproduct
i at idifferent iprices. iOne iunit icost i$ i2,000, ithe isecond icost i$ i2,100, iand ithe ithird icost i$ i2,200.
i The icompany isold ione iunit ifor i$ i2,800. iThe iunits iare ialike, iso ithe icustomer idoes inot icare
i which iof ithe iidentical iunits ithe icompany iships. iHowever, ithe igross imargin ion ithe isale icould
i be ieither i$800, i$ i700, ior i$ i600, idepending ion iwhich iunit ithe icompany iships.

Generally, icompanies iuse ithe iinventory imethod ithat ibest ifits itheir iindividual icircumstances.
i However, ithis ifreedom iof ichoice idoes inot iinclude ichanging iinventory imethods ievery iyear ior
i so, iespecially iif ithe igoal iis ito ireport ihigher iincome. iContinuous iswitching iof imethods iviolates
i the iaccounting iprinciple iof iconsistency, iwhich irequires iusing ithe isame iaccounting imethods
i from iperiod ito iperiod iin ipreparing ifinancial istatements. iConsistency iof imethods iin ipreparing
i financial istatements ienables ifinancial istatement iusers ito icompare istatements iof ia icompany
i from iperiod ito iperiod iand idetermine itrends. i iIf iwe iswitch iinventory imethods, iwe imust irestate
i all iyears ipresented ion ifinancial istatements iusing ithe isame iinventory imethod.

2.
The ibusiness ienvironment irefers ito iall ithe iaspects iof ia ibusiness ithat iaffects ithe iactivities idone
i in ian iorganization. iThe ibusiness ienvironment iincludes iboth iinternal iand iexternal ifactors isuch
i as iemployees, icustomers, istakeholders, igovernment, iand iso ion.
Here, ithe ifinancial ivice ipresident, imade iunethical iactivities iduring ithe itransaction. iHe
i collected i$10,000,000 ifrom ithe iseller ibut ishowed ionly i$8,600,000 iin ithe iaccounts is ithe
i market ivalue iof ithe itimber idecreases, iand ihe ikept ithat iadditional i$1,400,000 iwith ihimself. iAs
i a imatter iof ifact iit imay ijust ian iill idealing ito iget ithe iextra icash ifrom ithe icompany iusing ithe
i seller ias ia iproxy.
Another iunethical iissue iis ithe ifact ithat ithere imay ibe ia iconflict iof iinterest ibetween ithe ifinancial
i vice ipresident iand ithe iseller. iDue ito ithe ifact ithat ithe itwo iparties iare irelated, ithe ifinancial ivice
i president imay ihave ito ifavor ithe iseller iin ithe idealing.
The ivice ipresident’s ifinancial idecision iaffects ithe ishareholders i(investors) iof ithe icompany.
i This iis ibecause, iby iincreasing ithe iamount iof iexpenses, ithe ivice ipresident iis ireducing ithe
i profitability iof ithe icompany. iLow iprofitability imeans ilow iretained iearnings. iThe ishareholders
i will ibe iaffected iin iterms iof ireduced idividend iearned idue ito ithe ireduced iretained iearnings.
The icontroller ishould imake ia itransparency iof ithe itransaction iso ithat ithe ivice ipresident iwill ibe
i unable ito imake iany ifraud iduring ithe ideals, ihe ishould iensure ithat ithe ifinancial ipresident ishould
i be iaware iof ithe imarket ivalue iand istop iproviding i$10,000,000 ifor ithe itimber.

3. i
Depreciation iis idefined ias ithe iexpensing iof ian iasset iinvolved iin iproducing irevenues
i throughout iits iuseful ilife. iDepreciation ifor iaccounting ipurposes irefers ithe iallocation iof ithe
i cost iof iassets ito iperiods iin iwhich ithe iassets iare iused i(depreciation iwith ithe imatching iof
i revenues ito iexpenses iprinciple). iDepreciation iexpense iaffects ithe ivalues iof ibusinesses iand
i entities ibecause ithe iaccumulated idepreciation idisclosed ifor ieach iasset iwill ireduce iits ibook
i value ion ithe ibalance isheet. iDepreciation iexpense ialso iaffects inet iincome. iGenerally ithe icost iis
i allocated ias idepreciation iexpense iamong ithe iperiods iin iwhich ithe iasset iis iexpected ito ibe iused.
i Such iexpense iis irecognized iby ibusinesses ifor ifinancial ireporting iand itax ipurposes.
Depreciation iExpense iof iYear i1 iCalculation: i
Straight iLine iMethod: i
Cost iof ithe i Asset−Salvage i Value
Year i1 iDepreciation iexpense i= i i
Useful i Life
350,000−30,000
iiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiii =i i
10
iiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiii = i32,000 i

Double iDeclining iMethod: i


Year i1 iDepreciation iexpense i= i2 ix iStraight iLine iDepreciation iRate ix iBook ivalue iof ithe iyear i
= i2 ix i10% ix i350,000 i
= i70,000 i i
Under ithe igenerally iaccepted iaccounting iprinciples ifor ipublic icompanies, iexpenses iare
i recorded iin ithe isame iperiod ias ithe irevenue ithat iis iearned ias ia iresult iof ithose iexpenses. iThus,
i when ia icompany ipurchases ian iexpensive iasset ithat iwill ibe iused ifor imany iyears, iit idoes inot
i deduct ithe ientire ipurchase iprice ias ia ibusiness iexpense iin ithe iyear iof ipurchase ibut iinstead
i deducts ithe iprice iover iseveral iyears.
Because ithe idouble ideclining ibalance imethod iresults iin ilarger idepreciation iexpenses inear ithe
i beginning iof ian iasset’s ilife iand ismaller idepreciation iexpenses ilater ion iit imakes isense ito iuse
i this imethod iwith iassets ithat ilose ivalue iquickly.
Depreciation iis ithe imeans iby iwhich ian iasset's ibook ivalue iis i"used iup" ias iit ihelps ito igenerate
i revenue. iIn ithe icase iof iour isemi-trailer, isuch iuses icould ibe idelivering igoods ito icustomers ior
i transporting igoods ibetween iwarehouses iand ithe imanufacturing ifacility ior iretail ioutlets. iAll iof
i these iuses icontribute ito ithe irevenue ithose igoods igenerate iwhen ithey iare isold, iso iit imakes
i sense ithat ithe itrailer's ivalue ibe icharged ia ibit iat ia itime iagainst ithat irevenue.
However, ione ican isee ithat ihow imuch iexpense ito icharge iis ia ifunction iof ithe iassumptions imade
i about iboth iits ilifetime iand iwhat iit imight ibe iworth iat ithe iend iof ithat ilifetime. iThose
i assumptions iaffect iboth ithe inet iincome iand ibook ivalue iof ithe iasset. iFurther, ithey ihave ian
i impact ion iearnings iif ithe iasset iis iever isold, ieither ifor ia igain ior ia iloss iwhen icompared ito iits
i book ivalue.
So, ithe idepreciation iexpense icould ibe imore iinitially ifor idouble ideclining imethod, ibut iit iwill ibe
i lesser iafter ipassing itime. iBut iin ithe istraight iline imethod ievery iyear ihas isame idepreciation
i expense. iBut iwhatever imethod iyou iuse, ithe itotal idepreciation iexpense iwill ibe isame. i