Because a perpetual inventory system maintains

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Because a perpetual inventory system maintains accounting records against which the physical count can be compared, it provides better control over inventory and possible loss due to damage or theft (inventory shrinkage). Requirement 4 a. If inventory costs are rising, the FIFO inventory costing method maximizes net income. b. If inventory costs are rising, the LIFO inventory costing method results in paying the least amount of income tax. Horngren’s Accounting   10/e    Solutions Manual 6-113
Decision Case 6-2 Strategies for doubling net income include the following: Analyze the mix and level of operating expenses to identify opportunities to increase efficiencies (via cost control) and effectiveness (via sales in excess of costs). This would include reducing costs by eliminating non-value-added activities (e.g., some general and administrative activities) and focusing on activities with the greatest likelihood of increasing sales and yielding returns in excess of the cost of resources invested (e.g., advertising, marketing, and promotion activities). Consider offering specialty high-quality products that yield higher profit margins (products that the nearby discount applicant store might not offer). Train employees in effective customer relationship skills to increase first-time sales, repeat business, and new business created by favorable word-of-mouth. Offer superior post-sales customer support using resources already available (no additional investment or new employees required). Ethical Issue 6-1 Requirement 1 Changing accounting methods year-to-year may compromise a company’s credibility, which can create difficulties with external stakeholders. For example it might be more difficult for the company to borrow or raise money from outside investors at a reasonable cost. It might also raise the question: “What does the company have to hide?” Requirement 2 Changing accounting methods every year violates the consistency principle. Requirement 3 The company and its various stakeholders could be harmed when the company changes accounting methods too often. External decision makers often find it challenging to track and interpret a company’s operating results and financial position over time. It becomes difficult to ascertain what aspects of the company’s financial results are “real” and what aspects are simply due to changes in accounting methods. Ultimately the company suffers if it is unable to raise capital required to survive and grow. Potential creditors may not extend loans at reasonable interest rates and potential investors will be less likely to invest in the company. Horngren’s Accounting   10/e    Solutions Manual 6-114
Fraud Case 6-1 Requirement 1 Parties that could have been hurt by the actions of Carl Montague include creditors who weren’t paid (principal and/or interest), providers of equity who lost their investment, and employees who lost their jobs.

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