Case #2 - Why does Kroger keep old milk?
Students often struggle to understand that inventory cost flow (i.e. FIFO / LIFO) is an accounting treatment and has nothing to do with the actual flow of goods. This simple case is a great way to clear up this misconception. I use this case to introduce inventory cost flow (Chapter 5). As soon as students read the case, they will realize that something isn't right; Kroger wouldn't keep the old milk. Even if they can't answer the discussion question, pondering the question gets them in the right frame of mind to learn inventory cost flow. No longer will they confuse the LIFO or FIFO accounting treatment with the actual flow of goods.
Learning Objectives: IFAB 1e Ch. 5 LO 1, FFAC 10e Ch. 5 LO 1, Survey 5e Ch 5 LO 6
Implementation Ideas: 1) Students work the case in groups of 3-4 and then we have a class discussion (class time: 10-15 minutes) , 2) Assign case out-of-class and then discuss in class (class time: 5-10 minutes)
Handouts and Solution for Case #2 available on Resources Page
Why does Kroger keep old milk?
The Kroger Company is one of the world’s largest retail chains, operating about 2,778 stores. As of January 30, 2016, the company reported approximately $6.2 billion of inventory on its balance sheet. In the notes to its financial statements, Kroger reported that it uses an inventory method that assumes its newest goods are sold first and its oldest goods are kept in inventory.
Can you think of any reason why a company selling perishable goods, such as milk and vegetables, would use an inventory method that assumes older goods are kept, while newer goods are sold?