Asset Valuation Paper
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Abstract
Tom Thumb Toys, Inc. is a company that will cater to children of all ages. The company structure is a retailer of toys, childrens apparel, and baby products for children ranging in age from newborn to 80. Product groups consist of baby toys, strollers, educational assistance toys, computers, bicycles, motorized childrenÐŽ¦s vehicles, and cribs. Each store will also contain a section that will consist of all types of candy, baby foods and formulas.
Prior to the opening of the first store, it is necessary to evaluate and begin policy implementation for inventory and capital expenditures. The Accounting team recommends that the following policies be published for the Tom Thumb Toys, Inc.
Introduction
Tom Thumb Toys, Inc. is located in Orlando Beach, Florida. A projected grand opening is scheduled for the first store on January 1, 2005. In order for the store to be successful, many accounting issues have to be resolved. First is the inventory policy for all products being that are sold in each store. The Accounting team has determined that utilizing the weighted average method and FIFO (first-in, first-out) methods best suit the companyÐŽ¦s products.
The second major decision to be made was the capitalization policy for the computer systems, buildings and other equipment. Capital expenditures usually represent; (a) large dollar expenditures; (b) are fixed commitments that usually cannot be canceled without serious penalties; (c) have large impacts on the operating budget and (d) have costs and benefits that may be difficult to measure accurately because their useful life may extend several years into the future.
Inventory Policy
All toy inventories for Tom Thumb Toys utilize the weighted average method for inventory valuation. The weighted average method relies on the relationship between the cost and the amount of purchases made from suppliers throughout the year to estimate the companyÐŽ¦s ending inventory and cost of goods sold (Marshall, 2003). 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 Accounting team feels using this method provides the following advantages. (Davison, S. & Weil, R., 1983, pp. 16-23).
It is ideal because the company sells many different items at low unit prices.
Cost flow methods can be incorporated into the estimation technique
It is not necessary to physically count inventory to estimate ending inventory and cost of goods sold.
The estimates are more accurate because it is based on the current cost-to-retail percentage.
This method can be used for financial reporting and income tax purposes.
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. The FIFO method was chosen because this method will be most successful for the food and candy products. When gum, candies, and other food products are purchased, the oldest purchases should be placed in front so that the products will be purchased prior to their expiration dates. By utilizing this method, the product can actually move in and out of inventory in a first-in, first-out sequence. The most recently purchased products are the ones still in ending inventory that are to be delivered in the future. The inventory assets that are reported on the balance sheet reflect the most recent purchase cost (Marshall, 2003). If the products that are purchased have a slight increase, the FIFO method will reflect that increase. When the supplier passes a cost increase to the company, prices can be adjusted to reflect the increase. There may be an overlap of the old product cost and the new product cost but with the types of product being inventoried by using FIFO, the turnaround is quick and therefore the risk is minimal. While FIFO is applied within a department to compile the cost of goods transferred out, the goods transferred in during a given period usually bear a single average unit cost as a matter of convenience.
Capitalization Policy
A capital expenditure is the acquisition of an asset that has a useful life of more than one year and is therefore titled a non-current asset. The costs incurred to get equipment or non-current assets ready for use in the business can be capitalized (Marshall, 2003). In setting up Thom Thumb Toys, Inc., the following criteria was utilized in defining a capital asset; (a) expenditures of $1,000 or more, or any group related assets purchased with a total cost of $3,000; (b) assets that will last more than one accounting cycle; (c) assets that are of a relatively permanent nature, and; (d) are used in the operation of the company. For example, the companyÐŽ¦s computer mainframe system for the store, security system, and anything that cost over $1,000 will be capitalized. These items entail large dollar amounts and have a long life span.
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