Solved The management of National Inc asks your help in determining the 1 Answer

So, which inventory figure a company starts with when valuing its inventory really does matter. And companies are required by law to state which accounting method they used in their published financials. Determine the cost of goods sold during the period under a periodic inventory system

using (a) the FIFO method, (b) the LIFO method, and (c) the average-cost method. Under a periodic inventory system, which we are using here, all goods purchased during

the period are assumed to be available for the first sale, regardless of the date of

purchase. There is no accounting requirement that the cost flow assumption be consistent with the

physical movement of the goods.

(c)

Calculate the current ratio after adjusting for the LIFO reserve. (b)

On March 28, Wholesale Inc. shipped goods to Sun FOB shipping point. The receiving report indicates that the goods were received by Sun on April 2. If a user or application submits more than 10 requests per second, further requests from the IP address(es) may be limited for a brief period. Once the rate of requests has dropped below the threshold for 10 minutes, the user may resume accessing content on SEC.gov. This SEC practice is designed to limit excessive automated searches on SEC.gov and is not intended or expected to impact individuals browsing the SEC.gov website.

LIFO and FIFO: Impact of Inflation

Houghton Limited is trying to determine the value of its ending inventory as of February 28, 109, the company’s year-end. The following transactions occurred and the accountant asked your help… Amanda Bellucco-Chatham is an editor, writer, and fact-checker with years of experience researching personal finance topics. Specialties include general financial planning, career development, lending, retirement, tax preparation, and credit. Explain the statement presentation and analysis of inventory. The accounting records of Shumway Ag Implements show the following data.

Therefore, when prices are rising (which is usually the case), companies tend to

prefer FIFO because it results in higher net income. Houston Electronics calculates cost of goods sold by subtracting the cost of the units not

sold (ending inventory) from the cost of all goods available for sale. Cost of goods sold will differ depending on which two TVs the company sold.

The management ofNational Inc. asks your help in determining the comparative effects of the FIFO and…

A company’s taxable income, net income, and balance sheet balances will all vary based on the inventory method selected. Illustration 6.17 presents the inventory turnovers and days in inventory for Wal-Mart and

Target, using data from the financial statements of those corporations for 2016 and 2015. High inventory turnover (low days in inventory) indicates the company has minimal funds

tied up in inventory—that it has a minimal amount of inventory on hand at any one time. Although minimizing the funds tied up in inventory is efficient, too high an inventory

turnover may indicate that the company is losing sales opportunities because of inventory

shortages. For example, investment analysts at one time suggested that Office Depot had

gone too far in reducing its inventory—they said they were seeing too many empty shelves.

Compare specific identification, FIFO, and LIFO under periodic method; use cost flow assumption to influence earnings. Calculate ending inventory, cost of goods sold, gross profit, and gross profit rate under periodic method; compare results. Limex uses the periodic method of accounting for its inventory transactions. Limex carries only one brand of hand-crafted jeweled watches—all are identical. Each batch of watches purchased is carefully coded and marked with its purchase cost. The preceding illustrations were based on the periodic inventory system.

Inventory, January 1 (12,000 units) Cost of 118,000 units purchased Selling price of 95,000 units sold Operating expenses

Cameras100 units at a cost per unit of $65 Blu-ray players150 units at a… Rayre Books uses the retail inventory method to estimate its monthly ending inventories. The following information is available for two of its departments of October 31, 2019.

• Illustration 6.18 presents an excerpt from the notes to Caterpillar’s 2016 financial

  statements that discloses and discusses Caterpillar’s LIFO reserve.

• LIFO has the highest net cash provided by operating activities because it results in the

  lowest tax payments.

• Inflation is a measure of the rate of price increases in an economy.
• The modifications introduced by Opinion No. 28 [AC section I73], however, do not lessen the comparability of the financial information of an interim period with that of a preceding annual period.

For

example, it might be $1,450 ($700 + $750), or $1,500 ($700 + $800), or $1,550 ($750 +

$800). In this section, we discuss alternative costing methods available to Crivitz. For example, assume that Crivitz TV Company purchases three identical 50-inch TVs on

different dates at costs of $700, $750, and $800. Calculate cost of goods sold, ending inventory, and gross profit under LIFO, FIFO, and moving-average https://turbo-tax.org/depreciation-2020/ under the perpetual system; compare results. Thus the modifications introduced by Opinion No. 28 [AC section I73] are not of the type that would require an explanatory paragraph (following the opinion paragraph) in the auditor’s report. Independent auditors should, of course, add an explanatory paragraph if changes of the type that lessen comparability are introduced in the interim financial information.

Perpetual FIFO

Fortunately, companies using LIFO are required to report the

difference between inventory reported using LIFO and inventory using FIFO. Reporting the LIFO reserve enables analysts to make

adjustments to compare companies that use different cost flow methods (see Decision

Tools). Specific Identification

If Crivitz can positively identify which particular units it sold and which are still in ending

inventory, it can use the specific identification method of inventory costing. For example,

if Crivitz sold the TVs it purchased on February 3 and May 22, then its cost of goods sold

is $1,500 ($700 + $800), and its ending inventory is $750 (see Illustration 6.4). Using this

method, companies can accurately determine ending inventory and cost of goods sold.

When sales are recorded using the FIFO method, the oldest inventory–that was acquired first–is used up first. FIFO leaves the newer, more expensive inventory in a rising-price environment, on the balance sheet. As a result, FIFO can increase net income because inventory that might be several years old–which was acquired for a lower cost–is used to value COGS. However, the higher net income means the company would have a higher tax liability. Recall that the quality of earnings

ratio is net cash provided by operating activities divided by net income.