Should investors be informed of raw materials price increases?
The price of raw materials is of paramount importance in any production process. Investors who indulge in manufacturing ought to know the current and future prices of the raw materials they intend to use in their course of business. The cost of raw materials and its probable increase should be of great concern to them because the cost of raw materials is useful when making various decisions in business. For instance, when the investor is deciding the selling price of the end product, the cost of production of this product is considered apart from labor and other production costs. The investor calculates all the costs incurred in production and adds a small percentage of the profit when pricing the goods1.
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The cost of raw materials and its likelihood to increase or decrease is also important when deciding on the line of production to engage in. An investor who enters the manufacturing business usually has a wide variety of choices. They have to make informed decisions on the products to manufacture. For the investors to make these decisions, they should be well versed with the necessary costs of production and any other costs to be incurred, and the cost of raw materials happens to be one of these costs. If the cost of raw materials of a given product is high or is likely to increase shortly then the investor should avoid that product1.
The fact that Uniroyal Technology Corporation was able to deal with the increase in prices of raw materials affects the answer above. This company had followed a production path whose prices of raw materials increased suddenly. The management team of the company had to ensure that the company still made profits and maintained its large profit margins. They decided to exploit one of the many alternatives that were available at their disposal.
Thus, the team decided to increase the prices of the final product. In a way, these provided a measure of the increasing cost of raw materials. It also provoked the managers to think of other ways of dealing with the problem. Some of the other alternatives that could have been exploited are mentioned in the answer above. Still, managers can reduce the volume of the goods produced from raw materials whose prices were bound to rise. This will reduce the extra costs incurred by the business entities, in turn increasing their profits and profit margins.
How should this information be presented in the financial statements of UTC?
Business entities usually have more than one source of finance, which are both internal and external sources of funding. Internal funds are reported as capital, while external funding is reported as either long-term liabilities or current liabilities. Loans that are to be serviced for more than one year are reported as non-current liabilities. Assuming that the amount borrowed is to be repaid in more than one year, then the outstanding amount at the end of the year should be reported as a long-term liability. Hence, the four million dollars should appear under this account on the balance sheet.
Epstein, BJ & EK Jermakowicz, Interpretation and Application of International Financial Reporting Standards, John Wiley & Sons, London, 2007.
Mortimer, D, Corporation Financial Statements, Arno Press, New York, 2010.
Sullivan, A, & SM Sheffhrin, Economics: Principles in action, Pearson Prentice Hall, New Jersey, 2003.
Williams, JR, SF Haka, MS Bettner & JV Carcello, Financial & Managerial Accounting, McGraw-Hill, Pennsylvania, 2008.
- BJ, Epstein & EK Jermakowicz, Interpretation and Application of International Financial Reporting Standards, John Wiley & Sons, London, 2007.