Exercise 5-16A Inventory turnover and average days to sell
The following accounting information pertains to two grocery store chains. One grocery store chain has a market strategy of selling only high-end organic food products while the other grocery store sells less expensive foods that are traditionally grown with the use of pesticides, synthetic fertilizers, and/or genetically modified organisms.
| Traditional | Organic | |
|---|---|---|
| Sales | $600,000 | ? |
| Cost of Goods Sold | ? | $300,000 |
| Gross Margin | ? | $200,000 |
| Gross Margin Percentage | 35% | ? |
The company selling traditional produced foods has an average inventory balance of $45,000, while the company selling organic foods has an average inventory balance of $40,000.
Required
a. Complete the table by filling in the missing amounts.
b. Which grocery store chain is taking a lower cost/higher volume strategy as it relates to sales?
c. Calculate the inventory turnover and average days to sell inventory for each grocery store chain. Based on your calculations, which grocery chain will be required to reorder inventory more frequently?
Exercise 5-17A Explaining multiple inventory methods at one real-world company
The following information related to accounting for inventory was taken from the 2016 annual report of Costco Wholesale Corporation:
Merchandise inventories consist of the following at the end of 2016 and 2015:
| 2016 | 2015 | |
|---|---|---|
| United States | $6,422 | $6,427 |
| Foreign | $2,547 | $2,481 |
| Merchandise inventories | $8,969 | $8,908 |
Merchandise inventories are valued at the lower of cost or market, as determined primarily by the retail inventory method, and are stated using the last-in, first-out (LIFO) method for substantially all U.S. merchandise inventories. Merchandise inventories for all foreign operations are primarily valued by the retail inventory method and are stated using the first-in, first-out (FIFO) method.
Required
Write a brief report explaining the reason (reasons) that best explains (explain) why Costco uses the LIFO cost flow method for its inventories in the United States, but the FIFO cost method for its other inventories.
Exercise 5-18A GAAP versus IFRS
Generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS) treat the LIFO inventory cost flow method differently.
Required
a. Briefly describe the position GAAP takes with respect to LIFO.
b. Briefly describe the position IFRS takes with respect to LIFO.
c. Explain the primary force that motivates the different positions.
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