Assume that in September you purchased a Sony HDTV from Best Buy (BBY). At the same time, you purchased a Denon surround sound system for $599.99. You liked your surround sound so well that in November you purchased an identical Denon system on sale for $549.99 for your bedroom TV. Over the holidays, you moved to a new apartment and in the process of unpacking discovered that one of the Denon surround sound systems was missing. Luckily, your renters or homeowners insurance policy will cover the theft; but the insurance company needs to know the cost of the system that was stolen.

The Denon systems were identical. However, to respond to the insurance company, you will need to identify which system was stolen. Was it the first system, which cost $599.99, or was it the second system, which cost $549.99? Whichever assumption you make may determine the amount that you receive from the insurance company.

Businesses such as Best Buy make similar assumptions when identical merchandise is purchased at different costs. For example, Best Buy may have purchased thousands of Denon surround sound systems over the past year at different costs. At the end of a period, some of the Denon systems will still be in inventory, and some will have been sold. But which costs relate to the sold systems, and which costs relate to the Denon systems still in inventory? Best Buy’s assumption about inventory costs can involve large dollar amounts and, thus, can have a significant impact on the financial statements. For example, Best Buy reported $5,051 million of inventory and net income of $897 million for a recent year.

This chapter discusses such issues as how to determine the cost of merchandise in inventory and the cost of goods sold. However, this chapter begins by discussing the importance of control over inventory.

 

Comprehensive Problem 1 Name: Section: Score: 0% Key Code: 2 Instructions Answers are entered in the cells with gray backgrounds. |Cells with non-gray backgrounds are protected and cannot be edited. An asterisk (*) will appear to the right of an incorrect entry. In the general ledger accounts, only normal balance columns will be graded. For correct grading in the trial balances, work sheet, and ledger balance columns, enter a zero in cells you would otherwise leave blank. 1. and 2. JOURNAL Page 5 Post. Date Description Ref. Debit Credit 2018 May 3 13 15 16 17