RETAIL ACCOUNTING

Retail accounting

The managers ' compensation is variable and is directly contingent on the performance capacity of the organizational activity . Managers are motivated to generate greater profit , meaning that they are trying to find the optimal combination of realizable sales within a given timeframe and minimum expenses at different sales volumes . Therefore managers are interested in yielding the highest profit margins , as they will guarantee better commissions for the contributed effort

The comparison of the two inventory systems shows that they provide different profits with the same operating activity . The difference is

br caused by the different schemes of calculating ending inventory and the cost of goods sold . Under the LIFO inventory method , the ending inventory is composed of the latest product purchases and the products that were purchased the oldest are accounted for as sold . This approach suggests that the LIFO method will generate less profit in the marking of escalating material prices , because it provides lesser ending inventory and higher cost of goods sold

Under the LIFO inventory method , the ending inventory is composed of the oldest product purchases and accounting for the latest inventory as sold . In the market of escalating prices the FIFO method demonstrates higher profits , as it allocates products with the highest prices in the ending inventory and products that were cheaper to purchase are accounted for as cost of goods sold

The choice of either method is advocated by the objectives that an organization is trying to achieve . If the organizational structure is similar to partnership , proprietorship or limited liability company (not always , the company is more likely to disclose less profit (the actual turnover is the same under both methods , as it yields less taxes Therefore , the company would choose LIFO . If the company is interested in outside investment and wants to show a more favorable picture of EPS to the potential investors , it will certainly choose FIFO , as it provides greater profit , and , consequently , greater retained earnings (and greater EPS

The managers would certainly prefer FIFO method of inventory calculation as it provide greater profit , and greater compensation , as it is demonstrated in the calculations below LIFO FIFO

Sales 6 ,000 ,000 6 ,000 ,000

COGS 2 ,900 ,000 2 ,600 ,000

Net Profit 3 ,100 ,000 3 ,400 ,000

Operating Expenses 400 ,000 400 ,000

Pretax Income 2 ,700 ,000 3 ,000 ,000

Tax 675 ,000 750 ,000

Net Income 2 ,025 ,000 2 ,250 ,000

Incentives 20 ,250 22 ,500 LIFO FIFO

Sales 6 ,000 ,000 6 ,000 ,000

COGS 2 ,900 ,000 2 ,600 ,000

Net Profit 3 ,100 ,000 3 ,400 ,000

Operating Expenses 400 ,000 400 ,000

Incentives 20 ,250 22 ,500

Pretax Income 2 ,679 ,750 2 ,977 ,500

Tax 669 ,938 744 ,375

Net Income 2 ,009 ,813 2 ,233 ,125 The calculations show that they receive 22 ,500 under FIFO method compared to 20 ,500 under LIFO

Such activity may be considered as counter-productive , because the increase in net profit provided by FIFO method is...