The purchase and sale of inventory by Yearly Inc. (Yearly) during the year ended December 31, 2017 is summarized below. Assume that purchases are made on the first day of each quarter and sales on the last day of each quarter. Yearly pays for all its inventory in cash when it's delivered.

a. Determine cost of sales for the year ended December 31, 2017 and ending inventory on December 30, 2017 using FIFO and average cost, assuming that Yearly uses a periodic inventory control system.
b. How much cash was spent on inventory during 2017 under each cost formula? Is the amount of cash spent on inventory under each cost formula the same or different? Explain.
c. Which cost formula would you recommend if Yearly's objective was to minimize taxes? Explain.
d. Which cost formula would you use if you were Yearly's CEO and your bonus were based on net income? Explain.
e. Which cost formula would you recommend if the amount of Yearly's bank loan was a percentage of inventory? Explain.
f. Yearly uses the lower of cost and net realizable value to value its inventory. Suppose that on December 31, 2017, the NRV of Yearly's inventory plummeted to $6.25 per unit. What would you do under each cost formula?
g. Does it matter which cost formula Yearly uses? Explainfully.

  • CreatedFebruary 26, 2015
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