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

Question

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

Answer 1

Including the cost of operating the warehouse in the cost of inventory will have a significant impact on both the firm's income statement and balance sheet.

Income Statement:
- Including the cost of operating the warehouse in the cost of inventory will increase the cost of goods sold (COGS) on the income statement. This means that the company's expenses will be higher, resulting in a lower gross profit and potentially lower net income.

Balance Sheet:
- Including the cost of operating the warehouse in the cost of inventory will increase the value of inventory on the balance sheet. This means that the company's assets will be higher, but it will also increase the liabilities (if the company financed the inventory), resulting in a higher working capital and potentially affecting the financial ratios.

Whether the controller is justified in his actions depends on the applicable accounting principles and guidelines. According to Generally Accepted Accounting Principles (GAAP), the cost of inventory should include all costs incurred to bring the inventory to its present condition and location. If the warehouse costs such as rent, utilities, and labor directly relate to the storage and handling of inventory, then including them in the cost of inventory can be justified.

However, it is important to note that different accounting standards and rules may have different requirements. It is recommended to consult with accounting professionals or refer to the specific accounting standards applicable to the company's jurisdiction to determine the appropriate treatment of warehouse costs in inventory valuation.