Inventory Policy

Inventory Policy

All toy merchandise inventories for Tom Thumb Toys are stated at the lower of LIFO (last-in, first-out) cost or market value as determined by the retail inventory method. ÐŽ§Under LIFO, the most recent costs incurred for merchandise purchased or manufactured are transferred to the income statement (as Cost of Goods Sold) when items are sold, and the inventory on hand at the balance sheet date is costed at the oldest costs, including those used to value the beginning inventory.ЎЁ (Marshall, 2003, p. 152).

The retail sales method relies on the relationship between the cost and the selling price to estimate the companyÐŽ¦s ending inventory and cost of goods sold. Price fluctuations are adjusted by applying various price indexes such as the CPI (Consumer Price Index) to the total dollar value of each inventory category.

The company feels using this method combination provides the following advantages. (Davison, S. & Weil, R., 1983, pp. 16-23).

„X It is ideal because the company sells many different items at low unit prices.

„X Cost flow methods can be incorporated into the estimation technique

„X It is not necessary to physically count inventory to estimate ending inventory and cost of goods sold.

„X The estimates are more accurate because it is based on the current cost-to-retail percentage.

„X This method can be used for financial reporting and income tax purposes.

„X The company keeps records of purchases and inventory at the current selling prices.

The company also sells items such as candy, gum etc. at the checkout line. The company utilizes the FIFO method (first-in, first out) to account for the small percentage of these perishable items.

References

Marshall, D. (2003). Accounting: What the Numbers Mean, Sixth Addition. The McGraw Hill Companies.

Weil, R. & Davison S. (1983). Handbook of Modern Accounting, Third Addition. New Jersey: Prentice-Hall, Inc.