In a discussion of dramatic increases in coffee bean prices, a Wall Street Journal article noted the following fact about Starbucks.
Before this year’s bean-price hike, Starbucks added several defenses that analysts say could help it maintain earnings and revenue. The company last year began accounting for its coffee-bean purchases by taking the average price of all beans in inventory.
Source: Aaron Lucchetti, “Crowded Coffee Market May Keep a Lid on Starbucks After Price Rise Hurt Stock,” Wall Street Journal (June 4, 1997), p. C1. Prior to this change the company was using FIFO.
Instructions
Your client, the CEO of Supreme Coffee, Inc., read this article and sent you an e-mail message requesting that you explain why Starbucks might have taken this action. Your response should explain what impact this change in accounting method has on earnings, why the company might want to do this, and any possible disadvantages of such a change.