This is the second in a series of exercises designed to assist you in building and applying your accounting knowledge. Inventory valuation is a critical management decision that will affect net income, the cost of goods sold, and potential tax liabilities. The following exercise will walk you through several inventory scenarios and consider various costing methods.

Assignment

Sheridan Supply performed the following transactions during the month of April 2018. Assume that Sheridan Supply uses a perpetual inventory.

Sheridan Supply

Inventory Transactions

April 2018

Date	Transaction	Units	Each unit
4/1	Beginning inventory	600	$ 5.00
4/10	Sold units	400	$ 12.00
4/11	Purchased units	1,600	$ 6.00
4/15	Sold units	1,000	$ 12.50
4/20	Purchased units	1,000	$ 6.50
4/27	Sold units	600	$ 13.50

Calculate the cost of goods sold, ending inventory, and gross profit for each of the following:

Using the First-in, First-out (FIFO) costing method

Using the Last-in, First-out (LIFO) costing method

Using the weighted-average costing method

Discuss the financial statement impact of the inventory costing method chosen.

Write a couple of paragraphs on what inventory costing method you would choose if you were the controller of Sheridan Supply and why. Be sure to explain your reasoning.

How do public companies handle inventory in the financial statements?

Look at the 2017 annual report for The GAP, Inc. (posted in Canvas) and answer the following:

The GAP discusses the importance of managing inventory (see page 6 of the annual report). What risks does the company say it might face if it does not manage inventory effectively?

What inventory costing method does the company primarily use (see page 29)?

How much inventory did The GAP have on its balance sheet at the end of fiscal year 2017?