The level of inventory a company maintains has important economic consequences, and it involves conflicting goals. The ability to control inventory levels is a critical skill in managing a business. Three retailing giants, Best Buy Co., Inc. (NYSE: BBY), Amazon.com, Inc., (NASDAQ: AMZN), and Target Corporation (NYSE: TGT) each use a different inventory costing method. Best Buy uses weighted-average cost, Amazon uses FIFO, and Target uses LIFO. Below 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. 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 Instructions: Initial Post: In a post to the Discussion Board, discuss the following questions: What is the impact for each company on the Income Statement and Balance Sheet? What specific accounts are affected in each statement? Think Cost of Goods Sold, Net Income, Inventory costs, ending inventory balances. What affect do rising or falling prices have on the Financial Statements? Which company will produce the higher net income in an environment of rising prices? Why? You may need to calculate the following in order to generate you answers. Number of units sold Number of units remaining in ending merchandise inventory Cost of good sold, cost of ending inventory, and gross margin

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 75.1C

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The level of inventory a company maintains has important economic consequences, and it involves conflicting goals. The ability to control inventory levels is a critical skill in managing a business.

Three retailing giants, Best Buy Co., Inc. (NYSE: BBY), Amazon.com, Inc., (NASDAQ: AMZN), and Target Corporation (NYSE: TGT) each use a different inventory costing method. Best Buy uses weighted-average cost, Amazon uses FIFO, and Target uses LIFO.

Below 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.

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

Instructions:

Initial Post:

In a post to the Discussion Board, discuss the following questions:

What is the impact for each company on the Income Statement and Balance Sheet?
1. What specific accounts are affected in each statement?
2. Think Cost of Goods Sold, Net Income, Inventory costs, ending inventory balances.
What affect do rising or falling prices have on the Financial Statements?
Which company will produce the higher net income in an environment of rising prices? Why?
You may need to calculate the following in order to generate you answers.
1. Number of units sold
2. Number of units remaining in ending merchandise inventory
3. Cost of good sold, cost of ending inventory, and gross margin

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