Comfort Solutions sells a wide range of mattresses to consumers. For the most recent year, Comfort Solutions provides you with the following data:
Beginning inventory............................ $2,450,000
Purchases....................................... $23,125,000
Ending inventory............................... $2,225,000
Transportation in ..................................$511,500
Comfort Solutions informs you that it has traditionally treated transportation in as a period expense. However, the firm has a new auditor this year. The auditor believes that the cost of "transportation in" should be treated as a product cost and, as such, should flow through the firm's inventory account.
Required:
a. What is Comfort's cost of goods sold under its current (traditional) system?
b. Assume the auditor asks Comfort to allocate the cost of transportation in between cost of goods sold (as computed in part (a)) and Ending inventory. Using this approach, what is Comfort's cost of goods sold?
c. Which approach, (a) or (b), do you believe is compliant with GAAP?