Three retailing giants, Best Buy Co., Amazon, and Target Corporation each use a different inventory costing method. Best Buy uses weighted-average cost, Amazon uses FIFO, and Target uses LIFO. Here is a hypothetical example that highlights the potential differences in income statements and balance sheets that could arise simply because of the use of a different inventory costing method. Basic facts Assume that all three retailers sell a popular shirt that retails for $32. To compare the impact of inventory costing method, we will also assume that all three retailers have the following inventory and sales data for the same period. To keep the calculations simple, a “unit" represents one million shirts. Beginning inventory: 3 units @ $10.00 • Purchases: 2 units @ $15.00 Ending inventory: 1 unit Questions 1. Calculate the number of units sold. 2. Calculate cost of goods sold, cost of ending inventory, and gross margin for Best Buy using the weighted-average inventory costing method. 3. Calculate cost of goods sold, cost of ending inventory, and gross margin for Amazon using the FIFO inventory costing method. 4. Calculate cost of goods sold, cost of ending inventory, and gross margin for Target using the LIFO inventory costing method. 5. If prices are decreasing, would FIFO or LIFO produce the highest income? Explain.
Three retailing giants, Best Buy Co., Amazon, and Target Corporation each use a different inventory costing method. Best Buy uses weighted-average cost, Amazon uses FIFO, and Target uses LIFO. Here is a hypothetical example that highlights the potential differences in income statements and balance sheets that could arise simply because of the use of a different inventory costing method. Basic facts Assume that all three retailers sell a popular shirt that retails for $32. To compare the impact of inventory costing method, we will also assume that all three retailers have the following inventory and sales data for the same period. To keep the calculations simple, a “unit" represents one million shirts. Beginning inventory: 3 units @ $10.00 • Purchases: 2 units @ $15.00 Ending inventory: 1 unit Questions 1. Calculate the number of units sold. 2. Calculate cost of goods sold, cost of ending inventory, and gross margin for Best Buy using the weighted-average inventory costing method. 3. Calculate cost of goods sold, cost of ending inventory, and gross margin for Amazon using the FIFO inventory costing method. 4. Calculate cost of goods sold, cost of ending inventory, and gross margin for Target using the LIFO inventory costing method. 5. If prices are decreasing, would FIFO or LIFO produce the highest income? Explain.
Chapter1: Financial Statements And Business Decisions
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Transcribed Image Text:Three retailing giants, Best Buy Co., Amazon, and Target Corporation each use a
different inventory costing method. Best Buy uses weighted-average cost, Amazon uses
FIFO, and Target uses LIFO.
Here is a hypothetical example that highlights the potential differences in income
statements and balance sheets that could arise simply because of the use of a different
inventory costing method.
Basic facts
Assume that all three retailers sell a popular shirt that retails for $32. To compare the
impact of inventory costing method, we will also assume that all three retailers have
the following inventory and sales data for the same period. To keep the calculations
simple, a “unit" represents one million shirts.
• Beginning inventory: 3 units @ $10.00
• Purchases: 2 units @ $15.00
• Ending inventory: 1 unit
Questions
1. Calculate the number of units sold.
2. Calculate cost of goods sold, cost of ending inventory, and gross margin for Best Buy
using the weighted-average inventory costing method.
3. Calculate cost of goods sold, cost of ending inventory, and gross margin for Amazon
using the FIFO inventory costing method.
4. Calculate cost of goods sold, cost of ending inventory, and gross margin for Target
using the LIFO inventory costing method.
5. If prices are decreasing, would FIFO or LIFO produce the highest income? Explain.
5
6. Would FIFO or LIFO produce the highest inventory cost on the balance sheet if
prices are rising? Explain.
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