Week 1 DQ5
When I was an Internal Auditor with John Deere & Company years ago an associate of mine was assigned to go to John Deere's branch in Johannesburg, South Africa to help the Controller there try to estimate the ending inventories after a fire. The text mentions two methods to estimate Ending Inventories in Appendix 6B that can possibly be used.
Please select one of the methods that you would recommend to the Controller to use and give your reasons why you are recommending it. You also may give any assumptions that you feel you should such as what information would be required for the method that you have selected. You may also give any limitations on the method that you have selected.
I would recommend the Gross Profit method. The company would be able to use its "estimated" current profit margin to estimate it’s lost. The text used the example of using its profit rate from the previous year. Well, what if they are doing better than last year around the same time the company if figuring ending inventory? What if the company is doing worse than last year around the same time the company is figuring ending inventory? Computations can be done to determine the percentage over or under their profit margin from the previous year. The company can then use that percentage to determine its ending inventory by assuming the year would continue as it is going. This seems like the most logical way of estimating ending inventory due to a loss.
Week 1 DQ5