Financial Accounting: An Integrated Statements Approach, 2nd Edition

As you can see, selecting an inventory costing method can have a significant im-

pact on the financial statements. For this reason, the selection has important implica-

tions for managers and others in analyzing and interpreting the financial statements.

The chart in Exhibit 4 shows the frequency with which fifo, lifo, and the average

methods are used in practice for firms exceeding $1 billion in sales.

270 Chapter 6 Inventories

Exhibit 3

Effect of Inventory

Costing Methods on

Financial Statements

Fifo Method

Income Statement

Sales $20

Cost of merchandise sold 9

Gross profit $11

Lifo Method

Income Statement

Sales $20

Cost of merchandise sold 14

Gross profit $ 6

Balance Sheet

Merchandise inventory $27

Balance Sheet

Merchandise inventory $22

Average Cost Method

Income Statement

Sales $20

Cost of merchandise sold 12

Gross profit $ 8

Balance Sheet

Merchandise inventory $24

Facilitating Others

Best Buyis focusing on growing from within (based upon the

strength of its employees) and building a strength-based com-

pany. Brad Anderson, chief executive officer and vice chair-

man of Best Buy, stated:

... being a leader is not so much what you do, but what you
facilitate from others....[Best Buy is committed to]... show

respect, humility and integrity; learn from challenge and

change; have fun while being best and unleash the power of

our people.

Source:Laura Heller, “Best Buy Chief Learns Valuable Lessons in First

Year in Office,” Discount Store News, Monday, July 7, 2003.

INTEGRITY, OBJECTIVITY, AND ETHICS IN BUSINESS