Justin Anson Distillery, Inc. is a company that produces quality whiskey and distributes their product throughout America. The company has recently has been trying to expand and increase their production. In order to increase their production they need to obtain more barrels in which they can age their whiskey for the necessary 4 years. This is going to incur the company many more costs in their production and also increase their inventory levels. It is now the firm’s dilemma how to report these new costs so their financial statements are accurate but also reflect the growth they are attempting. It is also important that the companies financial statements reflect will upon the company so they can obtain new loans from the bank to fund their growth. Question Analysis
Assuming Anson decided to charge barrel costs (but not warehousing and aging costs) to inventory, what 2012 income statement and balance sheet items would change, and what would the new amounts be? (Assume no change in work-in-process inventory)
Charging barrel costs to inventory would increase the operating income on the income statement and increase the amount of assets on the balance sheet. Both of these values would increase or decrease by the amount of the cost of the barrels, which in 2012 was $4,366. This would increase current assets from $21,813 to $26,179, and the operating income would increase to $6,883.
If Anson’s suggestion of including all warehousing and aging costs in inventory were accepted, how would the 2012 financial statements be affected? (Assume no change in work-in-process inventory.)
The 2012 financial statements would look drastically different if this were the case. Originally the costs charged to cost of goods sold was much greater in 2012 because the extra barrel costs were charged to this account. If they were charged to inventory instead of the cost of goods sold, the company will show a much greater profit. It will also lead to a build of inventory though and the assets of the company will increase dramatically and that will show up in the financials on the balance sheet.
In your opinion, what costs should be included in Anson’s inventory when preparing financial statements to be submitted to Valley National Bank? The first thing that the company should do is checking the ethics of any accounting changes they are planning on making. If it is found that charging these costs to inventory could cause their statements to not meet standards then the changes cannot even be considered. However, if it is acceptable, it would be in the company’s best interest to charge only barrel costs to inventory.
This would allow them to still control their inventory levels by allowing them to control how many barrels they want to purchase. Also, the financial statements will still show operating profits because the cost of barrels not being used as a part of sales wont show up in the costs of goods sold section of the income statement. By including this cost in inventory the company can still report favorable numbers and control their inventory in order to minimize the negative effects of inventory build-up that could hurt their financials in the future.