Audit Committee
After reviewing all information, I would like to present my recommendations to the Audit Committee on the proposed year-end adjustments of the companys inventory for the fiscal year 1988. It is in the best interest of the company to provide its shareholders with a flawless picture of the results of the companys operations and its financial position. Thus, it is vital that our independent auditors can attest to the accuracy of our financial statements and provide an opinion without reservations. I am in agreement with your team that writing-down our inventory valuation to the Lower of Cost or Market, particularly on our inventory for microwave ovens and its spare parts, will allow us to receive such opinion as it is also in accordance with the Generally Accepted Accounting Principles. My reservations lie mostly on the 2nd proposed adjustment, which are for the spare parts for the rest of the appliances that we produce.
In reviewing the proposal on the 1st adjustment, I placed heavy consideration on the fact that there is a potential buyer of the microwave ovens who is willing to pay 40% of the cost. This provides sufficient evidence that the company will certainly incur a loss on the microwaves and the amount is estimable. With regards to the tax law, the 40% of cost or $220,000 that the potential buyer is willing to pay for the microwaves is also the best evidence to present as the market price or the “bid price”. As the valuation for microwave ovens will also be written down, there is also a necessity to write down the value of the spare parts of the microwaves and the 95% write-off is acceptable since it is based on historical figures.
As for the 2nd adjustment proposal, although we have built a strong reputation in customer service through our service and repairs, it may be easy to say to just write off the inventory of slow moving spare parts since it is not really the core of the business. Keeping slow moving inventory has also cost implications like storage and handling costs. However, given