University Bookstore Case By Shiyun Lu

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DEPARTMENT OF ACCOUNTANCY
UNIVERSITY OF ILLINOIS
MEMORANDUM
TO: Emilio Velasquez
FROM: Shiyun (Sharon) Lu
DATE: February 8, 2015
SUBJECT: University bookstore textbook travails case

Reasons for use of the retail method
Retailers use the retail method to record the value of inventory because this method is easy to use and acceptable for financial reporting purpose under GAAP. Under retail method, inventory is recorded at a predetermined percentage of the original cost. Thus, ending balance of inventory can be easily estimated. Stores can keep track of the total cost, purchase cost, cost of goods available for sale, and sale volume during the period easily. College bookstores hire plenty of student employees who are less sophisticated in recording and analyzing accurate inventory pricing level. In addition, turnover rate is high for the college bookstore as student employees tend to leave when they graduate from colleges. As a result, easy inventory valuation method such as the retail method is more appropriate for retailers like college bookstores.
Major causes of the store's inventory obsolescence problem
First, students are constantly seeking other ways to purchase textbooks since the cost of textbooks gradually becomes unaffordable for most students. They may purchase textbooks from other retailers who provide lower prices. Some students even copy used textbooks from previous semesters or download illegal e-text from the Internet. The sales of textbooks for the college bookstore decrease tremendously since fewer students are willing to purchase textbooks from the college bookstore now. Second, more textbooks are purchased than sold since the university is facing declining enrollment problem recently. Third, many classes are requiring students to use the updated version of textbooks. However, the bookstore spends money in buying back used textbooks that are useless for most students. Fourth, the turnover rate for return managers who in charge of

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