How could the different inventory costing methods used by CVS, Walmart, and Walgreens impact their respective income statements and balance sheets?

Three pharmacy giants, CVS Health, Walmart, and Walgreens Boots Alliance each use a different inventory costing method. CVS uses weighted-average cost, Walmart uses FIFO, and Walgreens uses LIFO.

Here is a hypothetical example that highlights the potential differences in income statements and balance sheets that could arise simply because of the use of a different inventory costing method.

Basic facts

Assume that all three pharmacies sell a popular allergy medicine that retails for $50. To compare the impact of inventory costing method, we will also assume that all three retailers have the following inventory and sales data for the same period. To keep the calculations simple, a “unit” represents one million bottles.

  • Beginning inventory: 3 units @ $20.00
  • Purchases: 2 units @ $25.00
  • Ending inventory: 1 unit

View these quick tutorial videos about inventory methods and then answer the following questions.

  • Basic inventory principles (link)
  • Inventory basic unit calculations (link)
  • Inventory: Specific identification method (link)
  • Inventory: Average-cost method (link)
  • Inventory: FIFO method (link)
  • Inventory: LIFO method (link)

Note to instructors: This post is assignable in Pearson’s MyLab and has questions that are auto-graded.

Questions

1. Calculate the number of units sold.

2. Calculate cost of goods sold, cost of ending inventory, and gross margin for CVS using the weighted-average inventory costing method.

3. Calculate cost of goods sold, cost of ending inventory, and gross margin for Walmart using the FIFO inventory costing method.

4. Calculate cost of goods sold, cost of ending inventory, and gross margin for Walgreens using the LIFO inventory costing method.

5. If prices are decreasing, would FIFO or LIFO produce the highest income? Explain.

6. Would FIFO or LIFO produce the highest inventory cost on the balance sheet if prices are rising? Explain.

Copyright 2022 Wendy M. Tietz, LLC


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About Dr. Wendy Tietz, CPA, CMA, CSCA, CGMA

Dr. Wendy Tietz is a professor of accounting at Kent State University in Kent, Ohio, USA. She is also a textbook author with Pearson Education.

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