Decision Case: Read and interpret Gap Inc.'s inventory note
The 2008 annual report for Gap Inc. includes the following information in the note that summarizes the accounting policies.
Merchandise Inventory:
Effective January 29, 2006 (the beginning of fiscal 2006) we changed our inventory flow assumption from the first in first out method to the weighted average cost method. The change in the inventory accounting method did not have material impact on the fiscal 2006 consolidated financial statements.
We review our inventory levels in order to identify slow moving merchandise and broken assortments (items no longer in stock in a sufficient range of size) and use markdowns the clear merchandise, we value inventory at the lower of cost or market and record a reserve when future estimated selling price is less than cost. In addition, we estimate and accrue shortage for the period between the last physical count and the balance sheet date.
Required:
Question 1: What inventory costing method did Gap Inc. use prior to the 2006 fiscal year?
Question 2. What inventory costing method did Gap Inc. change to beginning with the 2006 fiscal year? Why would a company decide to change its inventory method?
Question 3. Gap Inc. values its inventory at the lower cost of market. How does the company define market? What factors does it take into accounting in deciding whether to write down its inventory?