Chapter 7, Problem 1CC

Accounting for Changing Inventory Costs

In October, Nicole eliminated all existing inventory of cosmetic items. The trouble of ordering and tracking each product line had exceeded the profits earned. In December, a supplier asked her to sell a prepackaged spa kit. Feeling she could manage a single product line, Nicole agreed. Nicole’s Getaway Spa (NGS) would make monthly purchases from the supplier at a cost that included production costs and a transportation charge. NGS would keep track of its new inventory using a perpetual inventory system.

On December 31, NGS purchased 10 units at a total cost of $6 per unit. Nicole purchased 25 more units at $8 in February, in March, Nicole purchased 15 units at $10 per unit. In May, 50 units were purchased at $9.80 per unit. In June, NGS sold 50 units at a selling price of $12 per unit and 35 units at $10 per unit.

Required:

1. 1. Explain whether the transportation cost included in each purchase should be recorded as a cost of the inventory or immediately expensed.
2. 2. Compute the Cost of Goods Available for Sale, Cost of Goods Sold, and Cost of Ending Inventory using the first-in, first-out (FIFO) method.
3. 3. Calculate the inventory turnover ratio (round to one decimal place), using the inventory purchased on December 31 as the beginning inventory. The supplier reported that the typical inventory turnover ratio was 6.0. How does NGS’s ratio compare?
4. 4. Would a different inventory cost flow assumption allow Nicole’s Getaway Spa to better minimize its income tax?