In October 2014, Nicole of Nicole's Getaway Spa (NGS) eliminated all existing inventory of cosmetic items. The trouble of ordering and tracking each product line had exceeded the profits earned. In December, a supplier asked her to sell a prepackaged spa kit. Feeling she could manage a single product line, Nicole agreed. NGS would make monthly purchases from the supplier at a cost that included production costs and a transportation charge. The spa would use a perpetual inventory system to keep track of its new inventory.
On December 30, 2014, NGS purchased 10 units at a total cost of $6 per unit. NGS purchased 30 more units at $8 in February 2015, but returned 5 defective units to the supplier. In March, NGS purchased 15 units at $10 per unit. In May, 50 units were purchased at $10 per unit; however, NGS took advantage of a 2/10, n/30 discount from the supplier. In June, NGS sold 50 units at a selling price of $12 per unit and 35 units at $10 per unit.
Required:
1. Explain whether the transportation cost included in each purchase should be recorded as a cost of the inventory or immediately expensed.
2. Compute the Cost of Goods Available for Sale, Cost of Goods Sold, and Cost of Ending Inventory using the first-in, first-out (FIFO) method.
3. Calculate the inventory turnover ratio (round to one decimal place), using the inventory on hand at December 31, 2014, as the beginning inventory. The supplier reported that the typical inventory turnover ratio was 7.9. How does NGS's ratio compare?