Exercise 5-16B: Inventory Turnover and Average Days to Sell
The following accounting information pertains to two retail stores that specialize in selling winter ski gear. Aspen Sports operates only a few locations and has a market strategy of selling only high-end ski gear. Discount Ski has many locations but sells lower-quality products than Aspen Sports.
| Discount Ski | Aspen Sports | |
|---|---|---|
| Sales | $800,000 | ? |
| Cost of Goods Sold | ? | $200,000 |
| Gross Margin | ? | $300,000 |
| Gross Margin Percentage | 20% | ? |
Discount Ski has an average inventory balance of $60,000, while Aspen Sports’ average inventory balance is $55,000.
Required
a. Complete the table above by filling in the missing amounts.
b. Which retail store is using a higher cost/lower volume strategy regarding sales?
c. Calculate the inventory turnover and the average days to sell inventory for each retail store. Based on your calculations, which retail store will need to reorder inventory more frequently?
Exercise 5-17B: Explaining Multiple Inventory Methods at One Real-World Company
The following note related to accounting for inventory was taken from the 2016 annual report of Wal-Mart Stores, Inc.:
Inventories
The Company values inventories at the lower of cost or market as determined primarily by the retail inventory method of accounting, using the last-in, first-out (“LIFO”) method for substantially all of the Walmart U.S. segment’s inventories. The inventory at the Walmart International segment is valued primarily by the retail inventory method of accounting, using the first-in, first-out (“FIFO”) method. The retail inventory method of accounting results in inventory being valued at the lower of cost or market since permanent markdowns are immediately recorded as a reduction of the retail value of inventory. The inventory at the Sam’s Club segment is valued based on the weighted-average cost using the LIFO method. At January 31, 2016 and January 31, 2015, the Company’s inventories valued at LIFO approximated those inventories as if they were valued at FIFO.
Required
Write a brief report explaining the reason (reasons) that best explains (explain) why Walmart uses the LIFO cost flow method for its operations in the United States, but the FIFO method for its non-U.S. operations.
Exercise 5-18B: GAAP versus IFRS
Po River Winery Inc. has inventory that cost $500,000. The aging process for the inventory requires several years. At the company’s closing date (December 31, Year 1), the inventory had a market value of $400,000. During Year 2, the market value recovered to an estimated $480,000.
Required
a. Assuming Po River uses GAAP, determine the book value and the amount of any gain or loss recognized on the Year 1 and Year 2 financial statements.
b. Assuming Po River uses IFRS, determine the book value and the amount of any gain or loss recognized on the Year 1 and Year 2 financial statements.
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