a) Explain the risks and benefits associated with holding inventory.
There are various reasons for holding inventory. Inventory acts as a buffer between supply and demand fluctuations and irons out supply chain system failures. The smoother your supply chain operates and the better you are able to forecast the less inventory you have to hold, unless you gain some economies of scale in purchasing, transportation and or manufacturing. Especially for supermarket, holding inventory can lead to customer satisfaction and increase their loyalty. Customers tend to stop by most often at supermarket where they surely know the item is available.
On the contrary, inventory is a poor investment alternative for cash, but imperative to achieve required service levels. Maintaining the appropriate levels and types of inventory is essential to providing quality, timely service and products to your customers. Preventing stock-outs without overstocking products requires a disciplined process and information system that can dynamically manage this balance. Two of the keys to optimizing inventories are to improve reliability and reduce variability in the supply chain to meet your customer's demand while being cost effective. To order just in time and just enough.
b) In general, why must companies use cost flow assumptions to cost their inventories? What cost flow assumption does Whole Foods Market use to cost its inventories?
Cost flow assumption was developed for tax purposes. However, because of tax law requirements, if a company uses this assumption for tax purposes it must also use it for its financial statements. Whole Foods Market uses LIFO (Last-in, First-out) method to determine cost. It does not coincide with the actual movement of goods. LIFO is used during inflation to defer income tax payments. Under LIFO the goods in inventory at the beginning of the period are assumed to remain in the ending inventory (perhaps for decades).
c) Assume that food prices are generally increasing over time. Explain in general terms, how the Whole Foods Market balance sheet would have been different had the company used the first-in, first-out (FIFO) method of inventory costing instead of the last-in, first-out (LIFO) method. How would the income statement have differed? The statement of cash flows? What about if food prices are generally decreasing over time?
If the Whole Foods Market uses FIFO during a trend of rising prices, it will results in lower reported COGS and thus higher income and higher retained earnings. Also, by using FIFO, there will be higher reported assets and equity, higher taxes which lower net income. Lower net income leads to lower statement of cash flow. In general, the business will appear better off than with LIFO.
On the other hand, in a trend of falling prices, using LIFO results in lower reported COGS and thus higher income, higher statement of cash flow, higher retained earnings, higher taxes which lower net income, higher reported assets and equity.
d) Set up a T-account for the Whole Foods Market inventory account. Enter the 2000 and 2001 ending balances in the T-account. Use information from the financial statements to recreate the activity that took place in the account during fiscal 2001 and answer the following questions. Note that the income statement line item cost of goods and occupancy costs' portion was $57,300 (which according to footnote 5 to the financial statements is the rental expense for operating leases in fiscal 2001; the corresponding figure is $47,100 in fiscal 2000)
* number in thousands
i. How much inventory did Whole Foods Market purchase in fiscal 2001? Assume that new inventory was acquired in a single purchase. Provide the journal entry Whole Foods Market made to record...