Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 6 Inventories 299

inventory to retailers, such as Best Buy. The following financial statement information is pro-

vided for Dell and HP for fiscal year 2004 (in millions):

Dell HP

Inventory, end of period $ 459 $ 7,071

Inventory, beginning of period 327 6,065

Cost of goods sold 40,190 60,150

The two approaches can be seen in the difference between the inventory turnover and number

of days’ sales in inventory ratio for the two companies.

a. Determine the inventory turnover ratio and number of days’ sales in inventory ratio for

each company. Round to one decimal place.

b. Interpret the difference between the ratios for the two companies.

Feedbag Company began operations in 2005 by selling a single product. Data on purchases and

sales for the year were as follows:

Purchases:

Date Units Purchased Unit Cost Total Cost

April 3 7,750 $24.40 $ 189,100

May 15 8,250 26.00 214,500

June 6 10,000 26.40 264,000

July 10 10,000 28.00 280,000

August 3 6,800 28.50 193,800

October 5 3,200 29.00 92,800

November 1 2,000 29.90 59,800

December 10 2,000 32.00 64,000

50,000 $1,358,000

Sales:

April 4,000 Units

May 4,000

June 5,000

July 6,000

August 7,000

September 7,000

October 4,500

November 2,500

December 2,000

Total units 42,000

Total sales $1,300,000

On January 3, 2006, the president of the company, Heather Ola, asked for your advice on

costing the 8,000-unit physical inventory that was taken on December 31, 2005. Moreover, since

the firm plans to expand its product line, she asked for your advice on the use of a perpetual in-

ventory system in the future.

1. Determine the cost of the December 31, 2005, inventory under the periodic system,
   using the (a) first-in, first-out method, (b) last-in, first-out method, and (c) average cost
   method.


2. Determine the gross profit for the year under each of the three methods in (1).

Case 6-6

Costing inventory

(continued)