Discussion #3

David is the CEO of AquaGear Enterprises, a seven-year-old manufacturer of boats. After many long months of debate with the companys board of directors, David obtained the boards approval to expand into water ski sales. David firmly believed that AquaGear could generate significant profits in this market, despite recent increases in the cost of skis. A board meeting will be held later in the month for David to present the financial results for the first quarter of ski sales. As AquaGears corporate controller, you reported to David that the results werent great. Although sales were better than expected at $165,000 (3,000 units at $55 per unit), the cost of goods sold was $147,500. This left a gross profit $17,500. David knew this amount would not please the board. Desperate to save the ski division, Davis asks you to take another look at the cost calculations to see if there is any way to reduce the cost of goods sold. I know you accountants have different methods for figuring things out, so maybe you can do your magic now when I need it most. You dig out your summary of inventory purchases for the quarter to recheck your calculations, using the LIFO method that has always been used for the companys inventory of boats. Date Units Unit Cost Total Beginning inventory of water skis January 1 0 - -- Purchases January 15 1,500 $30 $45,000 Purchases February 18 2,000 45 90,000 Purchases March 29 2,500 50 125,000 Required: Calculate Cost of Goods Sold using the LIFO method. Does this confirm the statement you made to David about the Gross Profit earned on the water ski sales in the first quarter? Without doing any calculations, is it likely that any alternative inventory costing method will produce a lower Cost of Goods Sold? Explain. Calculate Cost of Goods Sold using the FIFO method. Would use of this method solve Davids current dilemma? Is it acceptable within GAAP to report the water skis using one inventory costing method and the boats using a different method? Do you see any problems with using the FIFO numbers for purposes of Davids meeting with the board?