Inventory Valuation without Records
The Ma & Pa Grocery Store has never kept many records. The proceeds from sales are used to pay suppliers for goods delivered. When the owners, Donald and Alicia Wride, need some cash, they withDr.aw it from the till without any record of it. The Wrides realize that eventually tax returns must be filed, but for three years, “they just haven’t got around to it.” Finally, the IRS catches up with the Wrides, and an audit of the company records is conducted. The auditor requests the general ledger, special journals, inventory counts, and supporting documentation—very little of which is available. Records of expenditures are extremely sketchy because most expenses are paid in cash. If you were the IRS auditor, what might you do to make a reasonable estimate of income for the company?