Financial Accounting: An Integrated Statements Approach, 2nd Edition

300 Chapter 6 Inventories

Activity 6-1

Ethics and professional

conduct in business

BUSINESS ACTIVITIES AND RESPONSIBILITY ISSUES

Follicle Co. is experiencing a decrease in sales and operating income for the fiscal year ending

December 31, 2006. Preston Shipley, controller of Follicle Co., has suggested that all orders re-

ceived before the end of the fiscal year be shipped by midnight, December 31, 2006, even if the

shipping department must work overtime. Since Follicle Co. ships all merchandise FOB ship-

ping point, it would record all such shipments as sales for the year ending December 31, 2006,

thereby offsetting some of the decreases in sales and operating income.

Discuss whether Preston Shipley is behaving in a professional manner.

3. a. Explain varying viewpoints why each of the three inventory costing methods may best
   reflect the results of operations for 2005.
   b. Which of the three inventory costing methods may best reflect the replacement cost of
   the inventory on the balance sheet as of December 31, 2005?
   c. Which inventory costing method would you choose to use for income tax purposes?
   Why?
   d. Discuss the advantages and disadvantages of using a perpetual inventory system. From
   the data presented in this case, is there any indication of the adequacy of inventory lev-
   els during the year?

The general merchandise retail industry has a number of segments represented by the follow-

ing companies:

Company Name Merchandise Concept

Costco Wholesale Corporation Membership warehouse

Wal-Mart Discount general merchandise

JCPenney Department store

For a recent year, the following cost of merchandise sold and beginning and ending inventories

have been provided from corporate annual reports for these three companies:

Costco Wal-Mart JCPenney

Cost of merchandise sold $42,092 $219,793 $11,285

Merchandise inventory, beginning 3,339 26,612 3,156

Merchandise inventory, ending 3,644 29,447 3,169

a. Determine the inventory turnover ratio for all three companies.

b. Determine the number of day’s sales in inventory for all three companies.

c. Interpret these results based upon each company’s merchandise concept.

Case 6-7