Question

Top Notch Tires is a wholesaling and retailing company that deals in automotive tires for foreign cars. During the year-end audit, heated discussion occurs between management and the independent auditors. Management’s accounting policy for valuing inventory of imported tires reads as follows:

Inventory is valued at actual cost plus any freight-in. At year-end, the warehousing costs related to the tires are prorated to cost of goods sold and inventory on hand.

The auditors for Top Notch Tires believe that any warehousing costs should not be considered as inventory, but should be expensed as period costs. Management disagrees by stating that the warehousing costs would not have been incurred if the tires did not exist and therefore should be part of the value of the inventory on hand. The CFO of the company has requested the auditors to justify their conclusion by providing specific authoritative support for their decision. Utilize the Codification to provide a recommendation to the auditors to support their decision. Provide specific Codification reference (s).

Answer 1