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Accounting for Inventory: Cost Methods

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A new textbook is published in the spring of 2011. Your campus bookstore buys 400 copies
at $70 each in June, an additional 1,000 copies in August at $72 each, and 600 copies in December at $75 each. At the end of December 2011, the bookstore has sold 1,900 copies of the text.
Find the cost of goods sold and the cost of ending inventory:
a) under the weighted average cost method.
b) under the FIFO method.
c) under the LIFO method.
Using your calculations as a guide, explain how different inventory costing methods affect the numerator and denominator of the inventory turnover ratio when unit costs are increasing.
Conclude your explanation by identifying the method that produces the highest (and lowest) inventory turnover ratio.

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Solution Summary

Calculated the cost of goods sold and the cost of ending inventory: under the weighted average cost method, under the FIFO method and under the LIFO method.
Explained how different inventory costing methods affect the numerator and denominator of the inventory turnover ratio

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Inventory valuation methods: GAAP

1. Are there any other inventory valuation methods acceptable under GAAP besides LIFO, FIFO, average cost and specific identification? If so, when is it appropriate to use the other method(s)? (Provide the Codification reference for your answer)

2. What does the Codification say about consistency regarding the application of the chosen inventory valuation method? (Provide the Codification reference for your answer)

3. If the company were to choose one inventory valuation method in the current year, and then decide in the following year to change inventory valuation methods to a method that better approximates the company's actual costs: (Provide the Codification references for your answers)

a. Would this be accounted for as a change in accounting estimate or a change in accounting principle?

b. Where is the Example provided in the Codification that illustrates the guidance for the retrospective application of a change from LIFO to FIFO (assuming it is practicable to determine the cumulative effect of the change for all prior years)?

4. As New Beginnings is a start-up company, it is still determining how much inventory to manufacture and through the budgeting process it has been determined that over- or under-producing inventory relative to demand will have a significant negative impact on the company's net income. As such, New Beginnings has entered into an agreement with Mature Corporation whereby each manufacturer will buy and sell inventory from the other on an as-needed basis at market prices. The agreement is not predicated on the understanding that the companies will purchase certain quantities from one another (i.e., there is no requirement that Mature Corporation will purchase from New Beginnings at all, or vice versa). All transactions that do occur will be gross-cash settled at market prices. (Provide the Codification references for your answers)

a. Based on this information, how would New Beginnings account for these purchases and sales of inventory with the same counterparty: As a single exchange between counterparties or as separate monetary transactions?

b. Where is an Example of this type of transaction provided in the Codification?

5. Based on the criteria in the Codification (include references), explain why each of the following items would or would not be included in Inventory Cost.

a. Expenses incurred for marketing to sell New Beginnings' inventory

b. General & administrative expenses incurred by New Beginnings that are not clearly related to production

c. Freight charges paid by New Beginnings to its suppliers for inventory items purchased

d. Shipping & handling costs incurred on the sale of inventory from New Beginnings to a customer

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