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 illustrate the problem of accounting for inventory and have students come up with their own unique solutions. The student solutions may or may not follow GAAP. I use this case to introduce inventory cost flow in Chapter 5.
Learning Objectives: IFAB 1e Ch. 5 LO 1, FFAC 10e Ch. 5 LO 1, Survey 5e Ch 5 LO 6
Implementation: Distribute copies of the case to the class before providing any explanation of alternate inventory costing methods. Ask students to read the case and individually develop answers. After allowing students time to develop their individual answers, put them into groups to reach consensus on an answer. Also, ask each group to select a spokesperson. Allow groups time to develop answers, then call on some of the spokespersons to share their solutions. As you respond to the student solutions, explain the basic concepts of inventory cost flow assumptions. Emphasize the concept of gross margin.
Handouts and Solution for Case #8 available on Resources Page
How much does my inventory cost?
John Smith purchased two toy cars to resell. The cars were identical in every respect except that John purchased them at different times for different costs. The first car purchased cost $25. The second one purchased cost $31. John sold one of the cars for $40. John’s other operating expenses were $5.
Discussion Question: Based on this information alone, what was John’s net income? It's okay to come up with more than one answer.