Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 6 Inventories 301

Activity 6-2

Lifo and inventory flow

Activity 6-3

Observe controls over
inventory

Activity 6-4

Compare inventory cost flow
assumptions

The following is an excerpt from a conversation between Jaime Noll, the warehouse manager

for Baltic Wholesale Co., and its accountant, Tara Stroud. Baltic Wholesale operates a large re-

gional warehouse that supplies produce and other grocery products to grocery stores in smaller

communities.

Jaime:Tara, can you explain what’s going on here with these monthly statements?

Tara:Sure, Jaime. How can I help you?

Jaime:I don’t understand this last-in, first-out inventory procedure. It just doesn’t make sense.

Tara:Well, what it means is that we assume that the last goods we receive are the first ones

sold. So the inventory is made up of the items we purchased first.

Jaime:Yes, but that’s my problem. It doesn’t work that way! We always distribute the oldest

produce first. Some of that produce is perishable! We can’t keep any of it very long or it’ll

spoil.

Tara:Jaime, you don’t understand. We only assumethat the products we distribute are the last

ones received. We don’t actually have to distribute the goods in this way.

Jaime:I always thought that accounting was supposed to show what really happened. It all

sounds like “make believe” to me! Why not report what really happens?

Respond to Jaime’s concerns.

Select a business in your community and observe its controls over inventory. In groups of three

or four, identify and discuss the similarities and differences in each business’s inventory con-

trols. Prepare a written summary of your findings.

In groups of three or four, examine the financial statements of a well-known retailing business.

You may obtain the financial statements you need from one of the following sources:

1. Your school or local library.


2. The investor relations department of the company.


3. The company’s Web site on the Internet.


4. EDGAR (Electronic Data Gathering, Analysis, and Retrieval), the electronic archives of fi-
   nancial statements filed with the Securities and Exchange Commission. SEC documents can
   be retrieved using the EdgarScan service from PricewaterhouseCoopersathttp://edgarscan.
   pwcglobal.com. To obtain annual report information, type in a company name in the ap-
   propriate space. EdgarScan will list the reports available to you for the company you’ve se-
   lected. Select the most recent annual report filing, identified as a 10-K or 10-K405. EdgarScan
   provides an outline of the report, including the separate financial statements. You can
   double-click the income statement and balance sheet for the selected company into an Excel
   spreadsheet for further analysis.

Determine the cost flow assumption(s) that the company is using for its inventory, and de-

termine whether the company is using the lower-of-cost-or-market rule. Prepare a written sum-

mary of your findings.