The 2006 annual report for Home Depot includes the following information in the note that summarizes
its accounting policies:
Merchandise Inventories. The majority of the Company’s Merchandise Inventories are
stated at the lower of cost (first-in, first-out) or market, as determined by the retail inventory
A friend knows that you are studying accounting and asks you what this note means.
1. Home Depot uses the first-in, first-out method. Does this mean that it always sells its oldest
merchandise first? Explain your answer.
2. Does Home Depot report inventories on its balance sheet at their retail value? Explain your