1. At a recent company meeting, an employee remarks: "We were working so hard to get the income for our bonus this year. Then they got that entire raw material inventory in and even paid for it. We don't need it yet. Why didn't they wait until January?"Will the raw material inventory affect this year's income? Does it matter whether it was paid for this year or in January? Explain. Give examples to support the answer.
2. Your friend comments, "I just ignore the income statement when I'm making an investment decision. All I care about is the cash, so that the company can pay me dividends. The balance sheet tells me about the cash the company's got; the cash flow statement tells me about its changes in cash. Who cares about the income statement? It's just a bunch of inaccurate stuff loaded with estimates". Do you agree with your friend's remarks about the income statement and its lack of importance? Explain why or why not.
Do you agree with this statement? Explain.
4. A few years ago, the Chariot Manufacturing Company installed automated robots worth billions of dollars in its auto assembly lines, believing that the robots would improve profitability and increase the efficiency of the manufacturing process. However, Chariot lost many billions of dollars more despite the fact that it was able to make automobiles faster using the robots. Why would this happen? What could have caused this situation? Explain.
No, raw material inventory will not affect this year's net income nor does it matter that it was paid for this year or in January as regards the computation of bonus this year. In the computation of cost of goods sold which directly affects net income, purchases are added to arrive at the goods available, but then since the items purchased are still in the ending inventory, then they are not included in COGS since they are ...
The solution determines the income statement value, effect of inventory purchases and management accounting.