The “Critical Thinking Questions”

Critical Thinking Questions 1

Review Figure 3.4. Suppose the government decided that, since gasoline is a necessity, its price should be legally capped at $1.30 per gallon. What do you anticipate would be the outcome in the gasoline market?

The Answer:

In the Figure3.4, the supply curve shows the quantity that firms are willing to supply at each price, and the demand curve traces consumers’ willingness to pay for different quantities. For instance, point E in Figure 3.4 illustrates that, at $1.4 per gallon, firms are willing to supply 600 million gallons of gasoline. And also, point E in Figure 3.4 illustrates that, at $1.4 per gallon, consumers are willing and able to purchase 600 million gallons of gasoline. It's an equilibrium. 

Now, the government decided to put a price ceiling below the equilibrium price at $1.3 per gallon. After the price ceiling is imposed, at $1.3 per gallon, firms would still have been willing to supply a quantity of somewhere between 500 and 600 million gallons. But the demand curve shows that, at $1.3 per gallon, the consumers are demand more than they did at $1.4. In this case, because the government imposes the price ceiling, the price control is blocking some suppliers and demanders from transactions they would both be willing to make. This demonstrates the economic inefficiency of the market equilibrium because it is cut down the deals and transactions, which benefit both demanders and suppliers. Moreover, the reduction in supply means fewer jobs, less investment, and lower quality. For the consumers, it transfers the producer surplus to the consumer surplus which implies the consumers often favor them. But as I mentioned before, the economic inefficiency of the market equilibrium may end up with fewer jobs, less investment, and lower quality, it's should be considered carefully.

Critical Thinking Questions 2

Other than the demand for labor, what would be another example of a “derived demand?”

The Answer:

As I learned from the textbook, shifts in the demand curve for labor occur for a reason such as the demand for more new Mac consumers demand, the greater the number of engineers and programmers will need to hire, the demand for engineers and programmers is called the “derived demand.”

Nowadays, more and more business operating very dependent on modern information technology, even households supply more labors with computing capabilities and shopping online. As a result, the demand for computers and wireless gadgets rises. Components required to produce the computers rises as well. The demand chain shows the derived demand for computers, as well as the materials used to produce them.

Reference

(n.d.). Retrieved from https://cnx.org/contents/aWGdK2jw@11.330:g7yTQfC4@11/Price-Ceilings-and-Price-Floors

What Is Elasticity?

What Is Elasticity? 

Elasticity is a measure of a variable's sensitivity to a change in another variable. It is predominantly used to assess the change in consumer demand as a result of a change in a good or service's price such as hamburgers, coffee drinks, or accommodations. For instance, if Starbucks rises its Tall Blonde Caffe' Americano from $2.45 to $3. Will you stop drinking coffee? How much total quantity of coffee consume will reduce? Likewise, in order to make maximum profits, business owners need to know the degree to which consumers change their demand in response to price changes. 

An Inelastic Good

Necessities and medical treatments tend to be relatively inelastic because they are needed for survival. Due to the COV-19(Coronavirus), medical masks have seemed as necessities recently. In Taiwan, the quantity demand of medical mask has increased dramatically even if the price of a medical mask has been doubled in the very first period. Normally, medical masks are necessities for those in medical services careers, but not for all people. It's an event that changes the demand for specific goods, in this case, medical masks.

An Elastic Good

Typically, elastic goods are either unnecessary goods or services or those with many available substitutes. Normally, airline services are elastic because there are so many substitutes such as so many other airline companies for consumers to choose. If one airline decides to increase the price of its price for an economy class, consumers can use another airline, and the airline that increased its fares will see a decrease in the demand for its services. Again, due to the COV-19(Coronavirus), the airlines for travel and business has dropped down drastically. For now, no matter how attractive the discounts are, it hardly increases the demand for airline travel.

What Makes Those Goods Elastic or Inelastic?

Typically, Elastic goods are often mean unnecessary goods, unnecessary services, or those with many substitutes are available. 

In the case of the medical mask, the unpredicted event(COV-19) affects the demand for medical masks. As a result, It's has become a necessity for the public around the world even if it is fairly not necessary before.

In the example of airline services, so many substitutes causing the airline services to be fairly elastic. Another reason for this is that airline services are not a necessary service for normal people. For managers or business owners, it's might be necessary to do a business journey, but not for everyone. 

How Might Other Households Respond Differently?

It is common to see many different responses for many events due to the difference in income, tastes, personal experiences, or even educations. Other households may have different preferences on travel, so they may like some specific airline services such as in-flight meals or brand royalty. Some households may hear some bad news from their household members who work in a hospital, so they tend to buy more medical masks to stock. 

Reference

OpenStax College. (2016). Principles of economics. http://cnx.org/contents/69619d2b-68f0-44b0-b074-a9b2bf90b2c6@11.330

Federal Reserve Bank of St. Louis. (n.d.). Elasticity of demand - The Economic Lowdown Podcast Series, episode 16. 

Hayes, A. (2020, January 30). Learn About Elasticity. Retrieved from https://www.investopedia.com/terms/e/elasticity.asp

CRITICAL THINKING QUESTIONS

CRITICAL THINKING QUESTIONS 1

Transatlantic air travel in business class has an estimated elasticity of demand of 0.40 less than transatlantic air travel in economy class, with an estimated price elasticity of 0.62. Why do you think this is the case?

The Answer :

As we know that elasticity is a measure of a variable's sensitivity to a change in another variable, most commonly this sensitivity is the change in price relative to changes in other factors. For business travelers, it is relatively more necessary than other people. Also, businessmen take their business travel in business class more often. As a result, businessmen are more inelastic.

Income is one of the key factors that cause the different results. Assume the fare of a transatlantic air journey in business class is $2,000 and in economy class, It's $800. Suppose a businessman's income is $30,000 per year and the average wage is $4,000 per year. For most people, a 10% change in the price is a very different feeling. For instance, a 10% change in the price of air journey in business class is $200 and a 10% change in the price of air journey in economy class is $80. As you can see, the $200 is only 0.6% compared to the $30,000 per year income, but the $80 is 2% compared to the average wage. If you compare the result with the time they have to work for it, the result will be much more clear. Suppose they all have to work 8 hours a day and 20 days a week. While the businessman has to work about only one extra hour for the extra fare charge, the people who only get average pay have to work extra 3.2 hours, It's 3.2 times more.

The total assets value is also one of the key factors. For example, if your total asset is $3,000,000, you probably just ignore the extra $200 and decide within one second. Conversely, if your total asset is $90,000, you may cancel the deal also in one second.

CRITICAL THINKING QUESTIONS 2

Suppose you could buy shoes one at a time, rather than in pairs. What do you predict the cross-price elasticity for left shoes and right shoes would be?

The Answer :

If the two goods are complements, like toast and peanut butter, then a drop in the price of one good will lead to an increase in the quantity demanded of the other good. In this case, left shoes and right shoes are complements which means the price for left shoes drop, will lead to an increase in the quantity demanded of right shoes. 

Reference

OpenStax College. (2016). Principles of economics. http://cnx.org/contents/69619d2b-68f0-44b0-b074-a9b2bf90b2c6@11.330

Hayes, A. (2020, January 30). Learn About Elasticity. Retrieved from https://www.investopedia.com/terms/e/elasticity.asp

When a demand curve moves

When a demand curve moves

The demand curve traces consumers’ willingness to pay for different quantities, the amounts that individuals are willing and able to pay. The curve is dynamic and very changing over time. 

For instance, if the price of a new iPhone rises, consumers will have an incentive to buy less and substitute it for other brands of phones. As a result, the quantity of the new iPhone that consumers are willing and able to buy will decrease which means the demand for the new iPhone will fall. Figure A shows the graphical representation of the relationship between the price of a new iPhone and the quantity demanded for a given period of time.

Image by Julie Bang © Investopedia 2019

The movement along the demand curve

As the Figure A shows, suppose that at $799 per new iPhone, 200 million iPhones will be demanded which means 200 million deals are willing to be made at the price of $799. As the price goes down, the new iPhone now become more affordable and more attractive compare to other smartphones. As a result, the quantity demand for the new iPhone rises to 500 million, the price which more consumers are willing to purchase. The dynamic and changing balance is our daily life, from supermarket to the bank you choose to deposit your money. The higher interest rate induces you to deposit more money in their bank to gain more profit from the interest income. Notice that the movement along the demand curve focuses on the quantities of the new iPhone demands by consumers that influenced by the different prices they have been offering, not events like increase in income or the preference such as how much they love the brand of iPhone.

Provide examples from your personal or professional life where you believe a demand curve shifted. 

The first thing we need to know that, a shift in demand is not the same as the movement along the demand curve. A movement along the demand curve represents the possible deals and transactions that both buyers and sellers are willing to accept. A shift in demand, on the other hand, represents those possible deals and transactions that are willing to increase or decrease at "each price". In short, It does not focus on the price changes that influence the quantity demand. Instead, it represents how a certain event influences the whole curve to move on the graph.

As the COVID-19 spread worldwide, the COVID-19 outbreak hasn’t slowed Amazon down. Quite the opposite, as other businesses are affected by the COVID-19, Amazon's business is on the remarkably well-placed to benefit from the new circumstances. As lockdown orders have trapped people indoors, those huge expenditures are turning to home deliveries via Amazon. In order to keep up with the increasing demand, Amazon even plans to hire 100,000 new workers. Now, Amazon looks like a public utility during the period of lockdown orders. Moreover, It has even partnered with the Canadian government to distribute medical equipment, and with the UK government to deliver at-home testing kits. Obviously, Amazon is benefiting from the shift in demand with its well-placed business since the demand for home deliveries is increased at each price. 

Reference

OpenStax College. (2016). Principles of economics. http://cnx.org/contents/69619d2b-68f0-44b0-b074 a9b2bf90b2c6@11.330

Kenton, W. (2020, January 29). Demand Curve. Retrieved from https://www.investopedia.com/terms/d/demand-curve.asp

Liu, W. (2020, April 17). Coronavirus has made Amazon a public utility – so we should treat it like one | Wendy Liu. Retrieved April 18, 2020, from https://www.theguardian.com/commentisfree/2020/apr/17/amazon-coronavirus-public-utility-workers

Micro? Macroeconomics? What're The Differences?

Micro? Macroeconomics? What're The Differences?

Microeconomics is a subject that study, research, and analyze primary in the choices of individuals, households, business owners. 

For instance, business owners are more likely to hire more workers and purchase new equipment to increase their production if they think they can gain much more income by expanding their business. For individuals, they are more likely to choose the high-income jobs as possible as they can and pay for their living as low as they can. For households, they have to communicate with family members to make choices on many expenses or travel plans. Overall, microeconomics assumes that every individual, business owner chooses to do their best interest. If their choices are not in this assumption, the choices could become far harder to study. Despite analysis under the assumption is not 100% accurate, it's still the major part of human nature.

Macroeconomics, on the other hand, is a subject that study, research, and analyze primary in the choices of countries and the economy as a whole.

For instance, a country involves many different entrepreneurs, households, and individuals. Also, the government is consists of members from many different households and individuals. 

The whole economy is more likely to grow when most business owners hire more workers and purchase new equipment to increase their production. For business owners, they are more likely to supply more products in which customers are willing to buy more. Nowadays, smartphones are supplied and demanded in every city. In the 1800s, it almost impossible to make immediate communications if the distances are too far away. The technology development changes the demand as a whole and changes the choices of every business owner. It's an example of how micro and macroeconomics interact with each other. Even more, for households, they made their travel plans based on their budgets, the budgets mostly depend on their income, and the income depends on the salaries that offer by business owners. The most important part is that not everyone and every business owners are all successful, which means some individuals and business owners may fail and lose. Normally, it's happening everyday. Instead of analyzing each reason why they fail, macroeconomics focus on the whole growth. After all, the planet does not stop its rotation while each business stops. And again, despite analysis under the assumption is not 100% accurate, it's still the major part of human nature.

Briefly summarize, macroeconomics and microeconomics are not two separate subjects, or rather they are two complementary perspectives on the overall subject of the economy.

Micro and Macro: The Economic Divide (From https://www.imf.org/external/pubs/ft/fandd/basics/bigsmall.htm)

The author G. Chris Rodrigo is a visiting scholar in the IMF’s Research Department. He wrote that "Economics is split between analysis of how the overall economy works and how single markets function"(Rodrigo, 2020). As I priorly mentioned, macroeconomics and microeconomics are not two separate subjects, or rather they are two complementary perspectives on the overall subject of the economy. This author starts with the physical world to explain the concept of micro and macroeconomics. He said that "Physicists look at the big world of planets, stars, galaxies, and gravity. But they also study the minute world of atoms and the tiny particles that comprise those atoms." To give the readers another way to think and to understand the differences. And the most important part of this article is that he gives an explanation of why they divide and how they differ. About why the divide, he said that "It was not always this way. Back in the late 18th century until the Great Depression, economics was the study of how human societies organize production." There was no separation into microeconomics and macroeconomics during the period of the official economic theory developed from Smith’s The Wealth of Nations and the Great Depression. "In the early 20th century, macroeconomics as a distinct discipline began with Keynes’s masterpiece whereas early economics concentrated on equilibrium in individual markets, Keynes introduced the simultaneous consideration of equilibrium in three interrelated sets of markets for goods, labor, and finance. His approach was taken up by other leading economists and developed rapidly into what is now known as macroeconomics."(Rodrigo, 2020)

How they differ？It's has always been controversial. The microeconomic theory evolved how prices are determined. Macroeconomics, on the other hand, is rooted in empirical observations that existing theory could not explain. But those methods and concepts are all great tools for us to better analyze economics activities. "Microeconomics and macroeconomics are not the only distinct subfields in economics. Econometrics, which seeks to apply statistical and mathematical methods to economic analysis, is widely considered the third core area of economics. Without the major advances in econometrics made over the past century or so, much of the sophisticated analysis achieved in microeconomics and macroeconomics would not have been possible."(Rodrigo, 2020)

Sunk Cost

As the word "sunk", it's a cost that you already pay in the past. The cost could be the time, the money, or any other forms of cost. When we mention the sunk cost, we always facing some choices. For instance, while you are traveling, you book accommodations for your stay near the places you visit. Assume you prepaid the cost, but when you check-in and open the door of your room, you find it not as clean as the pictures you saw online where you booked. What would you do? Do you stay for your sunk cost? Or do you just ignore the cost and getting out to find another one? It's an example of the sunk cost because you make the choices after a big nonrefundable payment. However, if the cost is refundable then it is not sunk and you are not making the choice in the condition of sunk cost.

Marginal Cost

In the previous accommodation case, we focus on how the nonrefundable payment affects the choices we made. Now we look at the margin of the payment. Assume that you ignore the sunk cost and to find another hotel for your stay, the key point here is that you are more likely to choose the other cheaper, clear, or even more expensive accommodation not to choose between sleep in the street or sleep in a hotel. 

How does the sunk cost differ from a marginal cost? 

As we know that in the accommodation case, we normally made the choice between ignoring the cost and getting out to find another one, not between sleeping in the street or sleeping in a hotel. In this case, the first choice is a yes or no choice, ignore the sunk cost or not. The second choice is a numeral question, how many or how much should I pay for the extra payments of my travel plan? To make it clear, the first choice is made under the condition of the sinking cost, to continue or not. Although it is a conceptual difference between marginal cost and sunk cost, there is a basic core value is the same, the opportunity cost. Both marginal and sunk cost is based on the concept of opportunity cost and scarcity, which means we all have to make the choice and tradeoff. Furthermore, both of them have to forgo some alternative use of time or money.

Marginal Cost Are Our Daily Life

Under the law of diminishing marginal utility, we rarely make all-or-nothing choices, just like the previous case. I remember the first time I stay in a 5-star hotel, I did some homework before I booked. I drew the curve of the comparative advantages and all of the three hotels are under the budget of US$600.

The hotel A(Point A) has the best facilities(gym, swimming pool, car parking, 24-hour security, sea view), hotel C offers the best food dishes in their roof restaurant, the facilities and the food of hotel B are somewhere between hotel A and hotel B. Now I have to choose on the scarcity of my time and money since I only have a two-day trip, one-night accommodation, and the limitation of my budget. But the truth is, I don't have the energy and time to use all those facilities. I also can not just eat all the time during the time I stay in the hotel, it's unhealthy and ridiculous. So I prefer to choose somewhere in between not the extreme options which are a little more or a little less on food or hotel facilities. 

Reference

(n.d.). Retrieved from https://cnx.org/contents/aWGdK2jw@11.330:6RH0nLs4@8/What-Is-Economics-and-Why-Is-It-Important

Rodrigo, G. C. (2020, February 24). Finance & Development. Retrieved from https://www.imf.org/external/pubs/ft/fandd/basics/bigsmall.htm

Introduction

In this chapter, we learn inventory in greater detail. Obviously, inventory is a significant asset on the balance sheet. Therefore, it must be a standard principle for assigning value to it. In reality, not all firms operating exactly the same way, thus the methods are also different.

Recall My Favorite Local Merchants from Units 5 and 6. 

There's a bookstore chain called "Eslite Bookstore (https://www.eslitecorp.com/eslite/index.jsp)" who sells books and stationery in where I live. 

What inventory valuation method would you advise them to use? 

To do this suggestion, we must understand what inventory they are dealing with and digging some history of this industry. In this case, the store purchases multiple books for inventory to sell, and the merchandise that the bookstore stocks are books. Although there are so many electronic gadgets and apps such as Kindle Fire(Amazon), iPad, or other forms of e-books that tend to replace traditional books, they do not work as easily as they thought before. Traditional book sales still stand out in these modern days, regardless the prices are normally way more expensive than the electronic version(Pdf or word). We can not definitely predict the future, we only predict it probably. I suppose that if the resources for printing physical books are all on an increasing trend, and either the cost of owning a physical bookstore, then the prices of physical books are also on an increasing trend. Therefore, I advise them to use the LIFO (Last In, First Out) method to produce lower income on the financial reports and creating an increasing trend of the income statement.

Why?

Before we actually choose a mothod, we can do some comparison. Assume their business activities as the samples below:

Sample :

Day 1. Beginning Inventory = 200,000 books ($8 per book) = $1,600,000

Day 2. Net purchase 200,000 books ($10 per book) on Jan 31, 2020

Day 3. Net sales = 300,000 books at $30 each = $9,000,000

Day 4. Net purchase another 200,000 books ($12 per book)

Day 5. Net sales = 100,000 books at $30 each = $3,000,000

Based on the given information, we can do the calculate the cost of goods sold as below:

LIFO (Last In, First Out):

On the day 3, the cost of goods sold was $2,800,000 ( = 200,000 X $10 + 100,000 X $8 )

On the day 5, the cost of goods sold was $1,200,000 ( = 100,000 X $12 ) 

The total cost of goods sold = $2,800,000 + $1,200,000 = $4,000,000

The total net sales = $9,000,000 + $3,000,000 = $12,000,000

The gross profit = The Total Net Sales - Cost of goods sold = $12,000,000 - $4,000,000 = $8,000,000

FIFO (First In, First Out):

On the day 3, the cost of goods sold was $2,600,000 ( = 200,000 X $8 + 100,000 X $10 )

On the day 5, the cost of goods sold was $1,000,000 ( = 100,000 X $10 ) 

The total cost of goods sold = $2,600,000 + $1,000,000 = $3,600,000

The total net sales = $9,000,000 + $3,000,000 = $12,000,000

The gross profit = The Total Net Sales - Cost of goods sold = $12,000,000 - $3,600,000 = $8,400,000

Weighted Average:

The average cost on day 3 was = $9 ((200,000 x $8 + 200,000 x $10)/400,000)

On the day 3, the cost of goods sold was $2,700,000 ( = 300,000 X $9 )

The average cost on day 5 was = $11.33 ((100,000 x $10 + 200,000 x $12)/300,000)

On the day 5, the cost of goods sold was $1,133,000 ( = 100,000 X $11.33 ) 

The total cost of goods sold = $2,700,000 + $1,133,000 = $3,830,000

The total net sales = $9,000,000 + $3,000,000 = $12,000,000

The gross profit = The Total Net Sales - Cost of goods sold = $12,000,000 - $3,830,000 = $8,170,000

As a result, the LIFO (Last In, First Out) method produces the lowest profit while the cost of books is on an increasing trend. If we do the opposite of calculations, the amounts of FIFO and LIFO will be quite the opposite. The weighted average will be somewhere in between. Although the LIFO (Last In, First Out) method produces the lowest profit, it reflects the most recently incurred costs with the recently generated revenues. Lower profit also reduces the cost of the tax payments while the cost of books is on an increasing trend. 

Assume the tax rate is 20% times the Gross profit. The tax bills will be $1,600,000(LIFO), $1,680,000(FIFO), and $1,634,000(Weighted Average) as we sold exactly the same amounts of books. 

Specific Identification Method

As we learned during this chapter, another method is the specific identification method, which requires the bookstore to identify each book with its cost and retain that identification until the inventory is sold. Once the specific book(or inventory) is sold, the cost of the specific book is assigned to cost of goods sold. It's pretty similar to your phone number. You are on the records each time you send messages, calling someone, or even doing purchases on your phone. With advanced information technology, computers and programs generate a barcode for each book, to identify each specific book. It's not impossible, but the problem is that does it is necessary and greater than the other methods we just described? If so, for instance, every coffee you order in Starbucks will have its own name, not the name on the menu, a real name. It needs tons of storage space and cloud computing. All of these cost money and make no sense to be an improvement in the financial report and management. Therefore, specific identification is suggested only used for uniquely identifiable goods that have a fairly high per-unit cost (Luxury cars, fine jewelry, or houses ).

The Perpetual or The Periodic System?

Whether the approach is perpetual or periodic, the financial statement results are the same. This is anticipated because the beginning inventory and early purchases are being allocated and charged to cost of goods sold in the same order. The difference is the calculations are done as soon as you click the button (perpetual) or at the time you prepare to report (periodic). Similar to the cloud sync function, it automatically syncs the data you just edit on your devices.

With tons of books to manage, I would advise them to use the perpetual system. Because it's an efficient one for managing such a huge bookstore who has so many books in stock.

The Lower of Cost or Market Technique

Before we decide to adjust the value and apply any method, we need to know the reason why we do this first. Start with the net realizable value (NRV), it helps us to know how worthy is the inventory when we convert it to cash. Assume that you are trying to sell your iPhone XR, and you post it on Amazon.com. Two weeks later, the iPhone XR sold and you get paid from the buyer. You convert your iPhone XR to the cash you get. 

We all want to keep the value forever after we purchase expensive goods. Unfortunately, obsolescence, oversupply, defects, and major price declines all cause the prices to decline. As this happens, your inventory is carried on the accounting records at greater than its net realizable value (NRV). To truly reflect the value, some adjustments are necessary. For instance, if you have 1,000 phonebooks in stock and you want to convert it to cash. The NRV would be very different when you value it in 1950 and 2020.

Overall, books are consist of knowledge, papers, and inks. Knowledge can be replaced by the electronic version but papers and inks are the special physical appearance of traditional books. The electronic version of books might be way cheaper than physical books, but in the real world, people prefer physical books, even though they have to pay more money. 

To apply the lower of cost or market rule means a business must record the cost of inventory at whichever cost is lower – the original cost or its current market price. Assume that Eslite Bookstore Imports resells five listed books. At the end of its reporting year, Eslite calculates the lower of its cost or net realizable value as the following table:

Merchandise	Quantity on Hand	Unit Cost	Inventory at Cost	Market per Unit	Lower of Cost or Market
Herry Porter	1,000	$19	$19,000	$23	$19,000
Don Quixote	750	$14	$10,500	$17	$10,500
The Little Prince	200	$14	$2,800	$12	$2,400
Rich dad, Poor dad	1,200	$28	$33,600	$16	$19,200
A Tale of Two Cities	800	$20	$16,000	$22	$16,000

Based on the table, the market value is lower than the cost on The Little Prince and Rich dad, Poor dad. Therefore, Eslite Bookstore recognizes a loss on The Little Prince of $400 ($2,800 - $2,400), as well as a loss of $14,400 ($33,600 - $19,200) on the Rich dad, Poor dad.

Reference

Chapter 8: Inventory. (n.d.). Retrieved from https://www.principlesofaccounting.com/chapter-8/

Specific Identification Method

Specific Identification Method Overview

As I learned during this chapter, the specific identification method requires the business to identify each unit of their inventory with its cost and retain that identification until the inventory is sold. Once the specific unit is sold, the cost of the specific unit is assigned to the cost of goods sold. Assume that Apple gives every iPhone a specific serial number, and records these numbers in an inventory management system. While Apple sold an iPhone, the system matches each serial number to its record to recognize its cost. 

Specific Identification Method Requirements

Be able to track each inventory item individually, such as paper labels, serial numbers, or unique numbers to identify each product.

Tracking the cost of each unit which means clearly identify the cost of each purchased item, and associate it with a unique identification.

Advantages and Disadvantages

These days, we have advanced information technology, computers and programs generate a barcode for each unit in inventory. In other words, It's not impossible. But the problem is, does it is necessary and greater than the other methods? It needs tons of storage space and cloud computing, and all of these cost money to maintain, another operating expense to pay. If it makes no sense to be an improvement in the financial report and management, it becomes a waste. For instance, assume that a cloud services company offering such services, but they charge the purchaser $100 per TB(1,000GB) and $3,000 monthly management fee. If your bookstore needs 1,000 TB to storage and operating with their algorithm, you will be charged $103,000 ($3,000 + $100 x 1,000) per month. Suppose your profits are around $10 per unit, the service expense has already offset your 10,300 units on the amounts of sales. On the other hand, if you are selling a Lamborghini Urus(A SUV) at $399,000, and the profit is $150,000 per car. The service expense just costs you 1 unit of your sales and It's 10,300 times less than the bookstore's space used to store that information. It is also very time-consuming to track inventory on an individual unit basis. Therefore, specific identification is suggested only used for uniquely identifiable goods that have a fairly high per-unit cost (Luxury cars, fine jewelry, or houses ).

The specific identification method provides a high degree of accuracy to the cost of inventory since the exact cost at which something was purchased can be identified, and connecting to the cost of goods sold when the related item is sold.

Example

In Taiwan, a big construction company called Huaku which holds a lot of building inventory. Each building, house, or other real estate, has its own specific name. They track each case individually by those specific names, and identify the cost of each built item, and associate it with the unique names. For instance, they built an apartment named “Huaku Sky Garden” and "Huaku Sky Lake" for sale. The Huaku Sky Garden and Huaku Sky Lake are two very different buildings and houses. Just like you can not sell the house in Alaska and then value its cost with the house in California or New York City. In the Huaku Sky Garden and Huaku Sky Lake cases, the cost of inventory is only valued by each apartment itself.

Retail Inventory Method

To estimate their ending inventory balances, the method is based on the relationship between the cost of the merchandise and its retail price. But be careful that the method is not entirely accurate, and periodically adjusted by physical inventory count is needed. As such, this method is normally for retailers to deal with their sales of small items since a hard count is often impractical. Retailers can attempt to estimate inventory levels and the cost of inventory based on the total cost and retail value of goods available for sale and the total sales over a certain period.

To calculate the cost of ending inventory using the retail inventory method:

1.The cost-to-retail percentage = Cost / Retail price.

2.The cost of goods available for sale = Cost of beginning inventory + Cost of purchases

3.The cost of goods sold = Sales × cost-to-retail percentage

4.The ending inventory = Cost of goods available for sale - Cost of sales during the period

For instance, Eslite bookstore sells Harry Potter for an average of $20, and it costs $14. This is a cost-to-retail percentage of 70%. Suppose Eslite bookstore’s beginning inventory has a cost of $100,000 it paid $180,000 for purchases during the month, and it had sales of $240,000. The ending inventory is $112,000 :

$100,000(Beginning inventory) + $180,000(Purchases) - $168,000(Sales of $240,000 x 70%) = $112,000(Ending inventory)

Retail Method? The Advantages and Disadvantages

The retail inventory method is a quick and easy way to determine an approximate ending inventory balance. However, It's only an estimate, not a physical inventory count. It only works if the business has a consistent mark-up across all products sold. If the mark-up was different, the results of the calculation will be incorrect.

What a receivable turnover calculation is?

What a receivable turnover calculation is?

Start with the formulation. 

Accounts Receivable Turnover Ratio = Net Annual Credit Sales / ((Beginning Accounts Receivable + Ending Accounts Receivable) / 2)

Sales on credit - Sales returns - Sales allowances = Net credit sales

Accounts Receivable Turnover Ratio = (Sales on credit - Sales returns - Sales allowances)/Average Net Accounts Receivable

Sample of The Calculation (Case 1)

In this case, I set the average number to a lower level to reflect a healthy financial situation.

Assume I am running a construction company called Starbruce had an annual net credit sales of $1,000,000 during 2019. The beginning accounts receivable (net of uncollectible) is $60,000, and ending accounts receivable (net of uncollectible) is $40,000. The average net accounts receivable = $50,000 (($60,000 + $40,000)/2)

The turnover ratio is “20” = $1,000,000 / $50,000

Thus, Starbruce's accounts receivable turned over 10 times during the past year, which means that the average account receivable was collected approximately in 19(18.25) days.

Sample of The Calculation (Case 2)

In this case, I set the average number to a higher level to reflect an unhealthier financial situation.

Assume that Starbruce had an annual net credit sales of $1,000,000 during 2019. The beginning accounts receivable (net of uncollectible) is $950,000, and ending accounts receivable (net of uncollectible) is $850,000. The average net accounts receivable = $900,000 (($950,000 + $850,000)/2)

The turnover ratio is approximately “1”(1.111) = $1,000,000 / $900,000

Thus, Starbruce's accounts receivable turned over 1 time during the past year, which means that the average account receivable was collected approximately in 365 days.

Review the case 1 and case 2, we can see a tremendous difference between the expectation of how many days does the company take to collect its account receivable. Moreover, it also means the Starbuce has to forego the alternative use of the money, or even cut down the reinvestment on the growth of its business, and the interest income is also way different between the two. The 346(365-19) days difference can be a significant loss on interest income if you deposit huge amounts of money in a bank. 

Let's see other different cases which have the same average net accounts receivables, but a different beginning and ending amounts of accounts receivables.

Sample of The Calculation (Case 3)

In this case, I set very high and low amounts of account receivables to reflect the tricky of the average number.

Assume Starbruce had an annual net credit sales of $1,000,000 during 2019. The beginning accounts receivable (net of uncollectible) is $850,000, and ending accounts receivable (net of uncollectible) is $50,000. The average net accounts receivable = $450,000 (($850,000 + $50,000)/2)

The turnover ratio is “2”(2.2222) = $1,000,000 / $450,000

Thus, Starbruce's accounts receivable turned over 10 times during the past year, which means that the average account receivable was collected approximately in 182.5 days.

Sample of The Calculation (Case 4)

Assume that Starbruce had an annual net credit sales of $1,000,000 during 2019. The beginning accounts receivable (net of uncollectible) is $500,000, and ending accounts receivable (net of uncollectible) is $400,000. The average net accounts receivable = $450,000 (($500,000 + $400,000)/2)

The turnover ratio is “2”(2.2222) = $1,000,000 / $450,000

Thus, Starbruce's accounts receivable turned over 10 times during the past year, which means that the average account receivable was collected approximately in 182.5 days.

As you can see, the average net accounts receivables are the same. But the beginning and ending amounts are very different. It may cause by choosing a specific period, or similar to the very last day of a credit card bill. If a note receivable is in a 2-year promise, the accounting result would be very different between choosing 1 and 2 years. 

What does it mean?

Accounts Receivable Turnover Ratio reveals how many times a firm’s receivables are converted to cash during the year. A high turnover ratio may indicate a conservative credit policy or several high-quality customers. For instance, American Express qualifies its clients by charging them a higher annual fee relative to other credit card companies. 

On the other hand, a low turnover ratio represents a loose credit policy, an inadequate collections function, or a large proportion of customers having financial difficulties. 

How it is used?

The ratio is used to evaluate the ability of a company to efficiently issue credits to its customers and collect funds from them promptly. It also indicates an excessive amount of bad debt. It is used to track the collection activities, and drawing a trend line to see its efficiency. But just be careful the tricky cases like I introduced priorly.

Notice that the net credit sales are revenues generated by a firm that it allows to customers on credit. Therefore, net credit sales do not include any sales for which payment is made immediately in cash. 

Enhancing Cash Flows

A company that operates where I live

There's a branded coffee company Nespresso (https://www.nespresso.com/tw/en/) who selling espresso machines and coffee capsules in Taiwan. 

How does the company enhance its cash flows? 

To enhance cash flows, the company has inflow and outflow solutions. And there are also internal and external solutions.

Internal Solutions

Inflow Solution/Crowded

They open their stores at crowded places to enhance the sales since crowded streets relative to higher possibilities of product views. Higher sales mean higher inflows of cash.

Inflow Solution/Accelerate Cash Collections

No matter how excellent your products are, you still need a great checkout system to ensure your customers can easily pay for your products. Mobile payments such as Apple Pay, LINE Pay, or credit cards, debit cards, are increasing recently. If their stores only accept cash, their sales will drop down for sure. Prices of their espresso machines are not that cheap and It's not the amounts of money for everyone would like to carry. Credit cards also induce people to purchase more since it's not an immediate outflow from their pockets. Once the customers feel less pain on their purchases, they would like to buy more than expected.

Inflow Solution/Discounts

Are you experienced a buy one, get one free promotion? Or the second one is 40% off? These kinds of promotions induce your heart to think it's cheaper if you purchase more, and the company gets higher inflows of cash from sales. Festivals such as New Year, Christmas, or Thanksgiving, and Valentine's Day, are all opportunities to announce some activities or discounts. 

Outflow Solution/Controls

The future agreement is the solution for possible price changes in coffee supply, to reduce the fluctuations of their cash outflows, and a long-term supply contract might also get better prices. Moreover, their expenses are outflow "on time", the electronic system is scheduled to pay for checks. In order to take better control of there cash flows internally, there are sensors and cameras around their store, also a passcard is needed for accessing the register. From the beginning, they even have to detect the counterfeit money by using a detector of counterfeit money. 

Does it contact outside parties to obtain investment funds by issuing stock, bonds, or borrowing in another way?

Nespresso Coffee Stores is a brand of the Nestlé Group. The Nestlé Group issues billions of shares of stock to obtain more operating funds from investors around the globe. Although this solution dilutes the ownership of original owners, it still a necessary step for such a big international company. Your shares can be much worthy if they use the funds effectively.

Instead of issuing stock, Nestlé sold some departments of their company. For instance, their famous brands like Haagen-Daze, Dreyer's and Drumstick are sold to Froneri company for cash. 

Reference

Chapter 6: Cash and Highly-Liquid Investments. (n.d.). Retrieved from 

https://www.principlesofaccounting.com/chapter-6/

Nestlé. (2020, March 1). Retrieved from https://en.wikipedia.org/wiki/Nestlé

The Accounting Cycle

Now we begin to look at the "accounting cycle", culminates in closing the books and producing financial statements. While expanding the picture to take in the full accounting cycle and culminates in closing the books and producing financial statements, balances of some accounts are carried forward from period to period, some were not. To understand why, we need to know the differences between these two types of account, which are "nominal" and "real" accounts. 

The Nominal Accounts

The nominal accounts are revenue, expense, and dividend accounts, these accounts must be reset to begin the next accounting period. 

The Real Accounts

The real accounts are asset, liabilities, and equity accounts, these accounts must be carried forward from period to period. 

What Are The Differences?

1.Reset or not

The balance of the real accounts, asset, liabilities, and equity accounts, be carried forward from period to period. In contrast, the nominal accounts are revenue, expense, and dividend accounts, these accounts must be reset to begin the next accounting period. For instance, It's just like your bank accounts, the balance of the account(Real account) is carried forward while you deposit or withdraw. The nominal accounts, on the other hand, reflect the amounts of your deposit and withdraw.

2.The Results or Happening

The amounts of revenues, expenses, and dividend accounts during a particular period, depending on how much you earned or paid. In short, it's the happening events of the period. In contrast, the amounts of assets, liabilities, and equity depend on the results of the prior, it's the achievements that you have already done before measuring the revenues, expenses, and dividends. Recall the example of your bank account, your balance reflects the result of your deposits and withdraw. Your deposits and withdraw are printed on the record of transactions, they are events and activities of your account, reflect the happening nominal events.

Why are they so-called?

The reason why they are so-called "nominal" and "real" accounts, is actually achieved or not. As we know that the net income equals revenues minus expenses, so we have the actual increase or decrease on the balance sheet after the result of the net income. If you have $1,000,000 in revenue, but you also have $1,000,000 in expense, you will end up with zero increase in the assets. Moreover, if the expense is $2,000,000 , you will end up with $1,000,000 in liabilities. The result will finanlly accumulate to the real accounts, the balance sheet, assets, liabilities, and equity.

What type of information is contained in nominal accounts?

Since the nominal accounts are the revenues, expenses, and dividend accounts, so they contain the information to record revenues, expenses, and dividend accounts. The information contained in nominal accounts is usually income statement accounts such as revenue data, expense data, and gain or lose data.

What types in real accounts? 

The real accounts are also known as capital accounts, which contain balance sheet accounts, asset data, liability data, and equity data. 

Which financial statement contains the information from nominal accounts?

Obviously, the income statement contains the information from nominal accounts, since it has the amounts of revenues and expenses.

Which contains the information from real accounts?

Clearly, the balance sheet involved assets, liabilities, and equity, which contains the information for real accounts.

References

Walther, L. M. (2012). Principles of accounting. Logan, UT: Utah State University. Retrieved from https://www.principlesofaccounting.com/chapter-4/