i) We are following FIFO system for the purpose of issues.

Case Study

         

          Ramesh developed original specification of a product and founded Ramesh Manufacturing Ltd. In 2007 the firm manufactured 980 nos at an average price of Rs.900/- each. In 2008 due to continuous price rise of the inputs, he raised his prices at an average of 12%, since he knew he could sell plant’s full capacity of 980 nos per year. In spite of price rise for the product, which sold for over Rs.1000/- for the first time. Ramesh was surprised to learn in late 2008 (as may be seen from the financial statements) that Ramesh Manufacturing Ltd show a decline in earnings and still worse, decline in cash flow.

          His accountant has bought the following:

i)                   We are following FIFO system for the purpose of issues.

ii)                 Costs are going up faster than 12% and they will go up further in 2009.

iii)               We are not setting aside enough to replace the machinery; we need to set aside Rs.1,65,000/- not Rs.1,50,000/- so as to be able to buy new machinery.

iv)               It is still not late to switch to LIFO for 2008. This will reduce closing inventory to Rs.3,30,000/- and raise cost of goods sold