When making a decision managers need to take a lot of things into consideration. Accounting has a big impact on the manager’s decisions. In this article we will talk about inventory and capitalization policies

Inventory Policy

In business keeping inventory can be very complicated. Every company ought to do inventory on their products to assure that everything is in place and to keep track of their products to have a well-managed and functioning business. Inventory is tangible property held for sale, or materials used in a production process to make a product. There are two types of inventory systems perpetual inventory systems that keep continuous records of the cost and amount of inventory on hand and what has been sold at the time of sale on a day-to-day basis. The periodic inventory system is the amount of inventory or cost of goods sold that cannot be found on a continuous basis. The inventory must be counted, and the cost of goods sold must be computed. The SKERR medical supply companies use the perpetual system because in the medical supply field one must constantly know how supplies are being used and the cost of production and inventory.

The cost of inventory is the price of the inventory at the time of purchase. If the cost method is used to determine price, the market will have no bearing on the decision. Lower of cost or market can be used; then a decline in price of inventory falls below the original costs. Market price is then used to value inventory instead of cost. If market price goes back higher than cost, cost will be used to determine inventory and a company also must agree on what type of inventory flow one must use. When it comes to inventory flow the SKERR medical supply company use a specific invoice, this method requires that each unit of inventory be tagged so the cost of each one can be determined at the time of inventory count. There's also the weighted average, this method of inventory flow takes the number of units purchased and the total costs of all purchases, first-in and first-out (FIFO) which is the ending inventory assigned to costs as a result of the most recent purchases. FIFO refers to the items sold, not to the items of inventory. Last -in and first -out, is ending inventory assigned costs as a result of the beginning inventory and earliest purchases. LIFO refers to the item sold, not to the items in inventory. In general, when the purchase price of inventory is going down, one must choose FIFO. When the price of inventory is going up choose LIFO, and when inventory goes up and down one must choose weighted average.

Capitalization Policy

The policy for capitalizing the assets of Skerr Company should be based on the accounting standards of GAAP (General Accepted Accounting Principles). The sole purpose is to record the expenditures and inventory of company assets. The capital assets of Skerr would include: supplies, equipment, furniture, vehicles, machinery, buildings, and land associated the daily functions of the company. Company assets should be capitalized and recorded when:

* Assets are tangible

* Asset is used in the daily operations of the company

* Asset had value and use at the point of purchase

The company assets must be listed at their historical or estimated costs. The purchase price of land or any construction costs will be posted at fair market value. If there are any incidental costs (interest, insurance, title search and registration, new installations, etc.,) these will also be included.

The accounting department should also account for the depreciation of assets. This effort will be recorded within the financial statements as reduction in economic benefit during annual reporting. The straight-line depreciation method (it is done by calculating the cost of the asset over time) can be used as an effective means of asset management.

Justification for Policies

The Skeer Medical Supply Company makes notable use of the perpetual inventory system to record every purchase and sale on a continuum basis. The justification for usage of this system lies in two schools of thought. First, the advent of inventory software and bar code readers makes this process highly efficient. The software is capable of being modified to set order points, create an accounts payable transfer interface, and prompts for both the placement and sale of a particular order. Bar coding adds the element of feasibility to accurately scan what is coming in and going out. Secondly, the variance in the offerings of supplies that Skeer Medical Supply offers its customers requires us to get a real gauge of what is selling and what is remaining in inventory. Throw in the fact that the company is a start-up with huge initial costs, and one can see why the tightest inventory system is in place to cut down on potential inventory errors.

The rational for the usage of the straight-line depreciation method for capitalizing the assets of the Skerr Medical Supply Co., is that it provides the best alternative to lower discounted tax payments. When a company is not permitted to carry forward losses for tax purposes, a straight-line depreciation method is apt to be preferable when the discount factor for future tax payments or the mean of future cash flows are high. By using this method, comparable sales data used to derive a depreciation rate leaves little chance for opinions or second-guessing.

Alternative methods of valuation that were proposed for the Skeer Medical Supply Co., were the capitalization of earnings method and the asset value method. The capitalization of earnings method takes the current annual income of the small business being valued and divides it by the required percentage rate of return on the investment in the business, minus the growth rate of the firm. Its strong suit is that it takes into consideration both the required return and the growth potential of the business. The downfall using the earnings method is that it assumes that the growth rate will continue at the same level…forever. There are too many fluctuations in the market to apply that method.

The asset value method contends that a business success is reflected in its ability to accumulate assets. The argument against using this method is found in the numerous broad interpretations used to calculate market value based on the assets that are used to generate income. A company with earnings and low asset value is worth more than a business with low earnings and a high asset value. There were just too many interpretations between both methods that gauge the net book value of a firm.

Mary Anne Winslow is a member of Essay Writing Service counselling department team and a dissertation writing consultant. Contact her to get free counselling on custom essay writing.