(Lower of cost and market, LO 3, 7) Wolverine Corp. (Wolverine) reports its inventory at the lower of cost and market, where market is defined as replacement cost.

Wolverine has five inventory categories. You are provided with the following cost and replacement cost information about each category:

Required:

a. What amount should Wolverine report on its balance sheet for inventory if it determines the lower of cost and market for the inventory as a whole? What is the amount of write-down that is required?

b. What amount should Wolverine report on its balance sheet for inventory if it determines the lower of cost and market item by item? What is the amount of write-down that is required?

c. What is the effect on Wolverine’s cash flow of determining the lower of cost and market for the inventory as a whole versus on an item-by-item basis?

d. What are the implications of the two methods on the inventory turnover ratio and the gross margin percentage? Explain.

e. Should Wolverine use the inventory-as-a-whole approach or the item-by-item approach to determine the lower of cost and market of its inventory? Explain your answer.

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Inventory category Cost Replacement cost Category 1 $112,000 $125,000 Category 2 231,000 215,000 Category 3 74,500 75,200 Category 4 98,100 78,500 Category 5 147,000 152,000