Question

Assume that my stote has six cans of Hearty Soup in inventory; four cans were purchased at $2.00 per can, while two cans were purchaded at a cost of $2.25 per can. All six cans are available for sale to customers at $3.00 per can.

A customer walks in, purchases a can of soup, and leaves. I ask the cashier "Was that a $2.00 can of soup?" The cashier replies "I dont know - they're exactly the same. Besides, why do you care?"

please explain why the store owner cares which can of soup was sold.

Answer 1

The store owner cares which can of soup was sold because it helps in determining cost of goods sold for income statement and inventory valuation for income statement and Balance sheet. There are 2 lots of inventory purchased during the period. There are different methods of inventory valuation like First in First out (FIFO), Last in First out (LIFO), weighted average method and specific cost identification method. In FIFO method the first purchased lots are issued to cost of goods sold and latest lot of purchase is part of closing inventory. In LIFO method the latest purchase of lots is part of cost of goods and the earlier lot purchase is part of closing inventory. In weighted average method the average price is computed based on inventory available. In specific identification method the lots are issued based on specific identification. Inventory valuation method is important since it impacts the cost of goods sold and closing inventory. For example : when prices are rising , FIFO method gives the highest profit since closing inventory is valued at higher prices and cost of goods sold will be lower. When prices are falling, LIFO method gives the highest profit since closing inventory will be valued higher and cost of goods sold will be lower

Hence based on above reasoning Store owner is interested in knowing which can of soup was sold since it impacts materially the financial statement of the store owner.