Question

You have decided to open your own business and inventory is a major component of your endeavor. Please describe the business you decided to open and which inventory flow assumption (FIFO, LIFO, or Average Cost) you decided to use. Please provide the reasons for your decision to the rest of the class and what you hope to obtain by using the assumptions you did. Please think about and describe all aspects discussed in the lecture and the text including lending, ownership, and tax

Answer 1

I have decided to open a retail store that sells smaller quantities of products to the general public. I will buy goods directly from manufacturers or wholesale suppliers at a volume discount and will then mark them up in price for sale to end consumers. Inventory would be a major component of my endeavor.

I will value my inventory on the basis of FIFO method. Any retail business would like to clear their old stock first before selling the new products received. This can help prevent obsolescence. Thus, the closing inventory of retailers would generally consist of the products which have been received recently. Following this practical aspect in my accounting approach, using a FIFO method for my inventory valuation would be an appropriate measure. Thus, this would help me obtain the correct and appropriate value of my closing inventory, and determine my actual profit margins, which would help me in planning future actions.

Lending vs Ownership: It will depend on the following consideration:-

1. If my business is just starting, investing as the owner allows the business to use my money without the obligation to have to pay me back right away.

2. If I believe my business is established and has good cash flow and a good credit rating, making a loan arrangement may be better.

Tax: Considering this is a new business, there is a possibility that the business might run under loss in the starting years due to high investments and less revenue. In such a case, I would gather a knowledge of various tax benefits available for setting off of losses against profits made in the future year.