Coca-Cola disclosed the following in its 1997 annual report:

Inventories: Inventories consist primarily of raw materials and supplies and are valued at the lower of cost or market. In general, cost is determined on the basis of average cost or first-in, first-out methods.

www.pepsico.com PepsiCo disclosed the following in its 1997 annual report (in millions):

Inventories: Inventories are valued at the lower of cost (computed on the average, first-in, first-out or last-in, first-out method) or net realizable value.

Year-end 1997 1996 Raw materials and supplies $400 $484 Finished goods 332 369

$732 $853 The cost of 43% of 1997 inventories and 39% of 1996 inventories was computed using the last-in, first-out method.

Required: (1) Why do you think that Coca-Cola and PepsiCo use different cost flow as- sumptions? Why do you think that PepsiCo uses all three cost flow assump- tions? Is there anything you find surprising about PepsiCo’s disclosures? (2) Explain why a user might want to convert PepsiCo’s inventory and cost of goods sold to non-LIFO amounts.