FIN621 Financial Statement Analysis GDB Solution Fall 2012

Financial Statement Analysis (FIN621)
Topic/Area for Discussion:  “Inventory Valuation Methods”

Muhammad Bazil Hassan is a renowned artist and famous for his spiritual and mystical paintings. He has been working as an artist for the past ten years. He has organized many successful exhibitions locally and globally. Recently, one of his paintings titled “The real glory” earned much fame in the Global Paintings Competition held in a country which is known globally for her enriched culture among the region’s neighboring countries.  

To do his work professionally, Bazil has set up Painting Art Gallery to manage his paintings’ business. Here, he has a good collection of paintings. At present, this art gallery has an inventory of more than 100 paintings – No two are alike. The least expensive item is priced at Rs. 110,000 and the higher- priced item carry price of Rs. 1,275,000. This high cost is primarily due to the usage of high quality imported painting materials.

To manage its financial matters, Bazil has recently appointed a business graduate in his Gallery as Senior Account’s Manager. The account’s manager is thinking about the method of inventory valuation being the most appropriate one for this particular art business, as the paintings are of unique nature.

 

Requirement: Recommend the Manger the method that could serve his purpose. Support your answer with logical reasons.

A method of keeping track of all items in an inventory. Specific identification inventory valuation is often used for larger items such as furniture or vehicles, but it is used to identify specific securities as well. This method of identification allows investors to reduce or offset capital gains by picking a specific lot of securities to be used as basis for a sale.

For example, suppose that Jane owns 1,000 shares of ABC company, a volatile small cap manufacturer. She bought 400 shares at $40 per share, 300 shares at $60 per share and the remaining 300 shares at $20 per share. Jane then sells 300 shares at $70 per share. Using the method described above, Jane can match the shares she sold with the 300 shares she purchased at $60 per share, because the cost of specific securities is easy to identify.


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