Textbook Problem

Various Inventory Issues

Diane Company, a retailer and wholesaler of national brand-name household lighting fixtures, purchases its inventories from various suppliers. Diane uses the LIFO inventory method.

Required:

1.

1. a. What criteria are used to determine which of Diane’s costs are inventoriable?
2. b. Are Diane’s administrative costs inventoriable? Defend your answer.

2.

1. a. Diane uses the lower of cost or market rule for its wholesale inventories. Explain the theoretical arguments for that rule.
2. b. The replacement cost of the inventories is below the net realizable value less a normal profit margin, which, in turn, is below the original cost. Explain the amount that is used to value the inventories.

3. Diane calculates the estimated cost of its ending inventories held for sale at retail using the conventional (lower of average cost or market) retail inventory method. Explain how Diane would treat the beginning inventories and net markdowns in calculating the cost ratio used to determine its ending inventories. could sell us enough of their products to last us three months. They have offered us a great price—lower than we have paid in a couple of years. Then I remembered that you use that funny LIFO retail inventory method where you play with such confusing numbers. Will the purchase reduce our retail ratio, or whatever you call it, so that our inventory is lower and cost of goods sold higher, because that would only make us look worse? Alternatively, I thought that we could delay this purchase until after January 1, and we might be able to have one of those LIFO liquid profits and make ourselves look good for the year’s results. Give these issues some thought and let’s have a drink after work today to discuss them.”

Required:

From financial reporting and ethical perspectives, how would you reply to Kelly?