Final answer:
The student's inquiry pertains to the best method to test the net realizable value of inventory, which is best evidenced by investigating sales prices after year-end. The degree of imperfect information varies by purchase scenario, with a high degree for buying a used laptop at a garage sale. A firm's accounting profit is the total revenue minus total expenses.
Step-by-step explanation:
The student's question revolves around determining the net realizable value of inventory, which is a key concept in accounting and business. To evaluate the net realizable value of inventory, one should assess the expected selling price in the ordinary course of business minus the estimated costs necessary to make the sale, as well as an applicable reduction for any possible damaged or obsolete items.
For testing the net realizable value of inventory, investigating sales prices on the sale of inventory made after year-end (option 1) would generally provide the best evidence. This is because it reflects the actual market conditions and selling prices after the inventory date, which can be compared with the recorded inventory value to determine if any write-downs are necessary due to market declines or obsolescence.
The degree of imperfect information is higher for purchases such as a used laptop computer at a garage sale (high) than for buying apples at a roadside stand (low). Imperfect information can be mitigated by sellers through providing warranties, having clear return policies, and offering detailed product descriptions or demonstrations.
Accounting profit is calculated by subtracting total expenses from total revenues. In the scenario provided, the firm's accounting profit would be calculated as follows: $1,000,000 (sales revenue) - ($600,000 (labor) + $150,000 (capital) + $200,000 (materials)) = $50,000.