Intermediate Accounting Essay Example | Topics and Well Written Essays - 2000 words

Intermediate Accounting - Essay Example MHS inventory system indicates a retail method but it does not explain the entire process of the retail method. This method associates with purchases and sales or any other returns or disbursement accounts. In its application, this method requires that the company should keep all records associate with these accounts for internal purposes and control. For example, sales revenue, beginning inventory valued at both cost and retail, purchases during the period, which is also valued at cost, and retail, adjustment for markups and markdown, cancellation or discounts, and data related to damaged goods, returns, transfer, breakage, or because of other reasons. The objective of using the retail inventory method is â€Å"to find the ending inventory value at cost† (Ibid). For MHS to use bar code with the products are recorded and classified by the cost value makes the physical count time consuming and difficult. This type of unit cost inventory method is unsatisfactory. Goods on stock or inventory are related to accounts payable and affect sales. If they are not properly recorded, they can cause ending inventory to be overestimated and pretax income to be overestimated by the same amount. Similarly, ending inventory can be underestimated and pretax income be underestimated by the same amount. This method also makes it difficult for the company management to evaluate which items cause problem in stock out or over stock.