a merchandising company wants to include the cost of operating its warehouse in the cost of inventory. The company’s controller argues that the cost of the warehouse is a reasonable and necessary cost of getting the inventory ready for sale and, therefore, should be included in the cost of the inventory. what impact will this descision have on the firm's income stement and balance sheet? Do you think the controller is justified in his actions? WHY

The decision to include the cost of operating the warehouse in the cost of inventory will have an impact on both the firm's income statement and balance sheet.

On the income statement, including the warehouse costs in the inventory value would result in higher expenses. This is because the operating costs of the warehouse, such as rent, utilities, labor, and depreciation, would now be allocated to the cost of inventory instead of being recognized as separate expense items. As a result, the cost of goods sold (COGS) would increase, leading to a reduction in gross profit and ultimately affecting the net income. This will have a direct impact on the company's profitability.

On the balance sheet, including the warehouse costs in the inventory value will increase the carrying value of the inventory. This means that the inventory figure reported on the balance sheet will be higher, reflecting the additional costs. As a result, the company's assets and total equity will increase, while the net income reported on the income statement will be reduced due to the higher expenses.

As for whether the controller is justified in their actions, it depends on the context and the accounting principles being followed. Generally, under the Generally Accepted Accounting Principles (GAAP), the cost of getting inventory ready for sale includes the direct costs directly attributable to the production process, such as raw materials, direct labor, and certain overhead costs. However, it is not common to include the operating costs of a warehouse in the cost of inventory.

While the controller may have reasoning behind their argument, including warehouse costs in inventory may not align with standard accounting principles. The justification would depend on factors such as industry practices, company policies, and the specific nature of the warehouse operations. It would be advisable for the company to consult with their auditors or accounting experts to ensure compliance with applicable accounting standards and to assess the potential impact on financial reporting.