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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.

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.

Cornerstones of Financial Accounting
Cornerstones of Financial Accounting
4th Edition
ISBN:9781337690881
Author:Jay Rich, Jeff Jones
Publisher:Jay Rich, Jeff Jones
Chapter6: Cost Of Goods Sold And Inventory
Section: Chapter Questions
Problem 57E: Lower of Cost or Market Shaw Systems sells a limited line of specially made products, using...
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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.
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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