DATE: November 1, 2015TO: The Red Hen CompanyFROM: Alejandro Ruiz

Section 11SUBJECT: Presentation of egg-laying flock under FASB Accounting Standards Codification

Complying with state and federal law, providing accurate information to investors as well

increasing our accuracy in the assignment of costs to products is key to the success of any

company. The purpose of this memo is to present information provided by the Financial

Accounting Standards Board and use it as a guide to determine the proper classification for the

egg-laying flock owned by The Red Hen Company as well as the cost associated with it.

The FASB Accounting Standards Codification defines Inventory in the agriculture sector as

including “growing crops, developing animals to be held for sale, harvested crops, livestock held

for sale, and secondary products, such as calves from dairy herds and wool from sheep” [905-

330-05]. At the same time, Property, Plant, and equipment include “ cattle, sheep, hogs, horses,

poultry, and other small animals. The development of animals requires care and maintenance of

the breeding stock and their progeny until their transfer from the brood herd. Animals purchased

before maturity also require care and maintenance to ready them for productive use or sale. The

animals are ultimately identified for transfer to breeding herds, dairy herds, or other productive

functions, are selected for sale, or are transferred to a feeding or other marketing operation”

[905-330-05]. In addition to this, FASB defines current assets as “used to designate cash and

other assets or resources commonly identified as those that are reasonably expected to be

realized in cash or sold or consumed during the normal operating cycle of the business”

[glossary]. Although it’s possible to classify the hens as being part of property, plant and

equipment, it is more practical to classify the hens as inventory. Based on this information we

can say that the hens and the eggs can be classified as current assets because they both fit the

description for inventory and both are also sold within the business operating cycle of two years.

Whether the egg-producing flock is raised or bought by the company, we can account for the

inventory costs by using the costs of raising the hens or the cost of buying them from a vendor.

Once the hens begging producing eggs, we can assign the cost of keeping the hens alive to the

eggs produced as inventory costs.

Based on the information above, I recommend the Red Hen Company to assign the costs of the

hens and the production of eggs to inventory on the current asset section of the balance sheet

rather than on the non-current asset section as part of property, plan and equipment.

Although it is possible to assign the hens to property, plant and equipment, we would also have

to account for the cost of producing eggs as inventory. Therefore, it would be much more simple

to account for these two item as inventory only. In addition to this, we would be able to price our

products better due to the increased accuracy in the assignation of costs.