Accounting Chapter 8 ECT Co Would Report Its Yearend Balance

169) The following information comes from the 2013 Occidental Petroleum Corporation annual

report to shareholders:

NOTE 4 INVENTORIES

Net carrying values of inventories valued under the LIFO method were approximately $205

million and $185 million at December 31, 2013 and 2012, respectively. Inventories consisted of

the following: ($ in millions)

2013

2012

Raw materials

$ 74

$ 70

Materials and supplies

628

612

Finished goods

589

763

1,291

1,445

LIFO reserve

(91)

(101)

Total

$1,200

$1,344

The LIFO reserve indicates that inventories would have been $91 million and 101 million higher

at the end of 2013 and 2012, respectively, if Occidental Petroleum had used FIFO to value its

entire inventory.

Required:

If Occidental Petroleum had used FIFO to value its entire inventory how would its 2013 pre-tax

income be affected?

Use the following to answer the question(s) below:

The inventories disclosure note in the 2014 financial statements for SUPERVALU Inc., one of

the largest grocery chains in the United States, included the following:

“During fiscal 2014, 2013 and 2012, inventory quantities in certain LIFO layers were reduced.

These reductions resulted in a liquidation of LIFO inventory quantities carried at lower costs

prevailing in prior years as compared with the cost of fiscal 2014, 2013 and 2012 purchases. As a

result, Cost of sales decreased by $14, $6 and $9 in fiscal 2014, 2013 and 2012, respectively. All

inventories are stated at the lower of cost or current market values. Cost for inventories at the

majority of our operations is determined on a last-in, first-out (“LIFO”) basis.”

Required:

170) The disclosure note indicates an inventory liquidation during 2014, 2013, and 2012. By

how much did net income in 2014 increase due to the liquidation? Assume an income tax of

40%.

171) What additional income tax payments did the 2014 liquidation cost SUPERVALU?

172) Spando Apparel uses the LIFO inventory method for external reporting and for income tax

purposes but maintains its internal records using FIFO. The following disclosure note was

included in a recent annual report:

Inventories ($ in millions):

2018 2017

Total inventories $625 $604

LIFO reserve (83) (51)

$542 $ 553

The company’s income statement reported cost of goods sold of $3,120 million for the fiscal year

ended December 31, 2018.

Required:

1. Spando adjusts the LIFO reserve at the end of its fiscal year. Prepare the December 31, 2018,

adjusting entry to record the cost of goods sold adjustment.

2. If Spando had used FIFO to value its inventories, what would cost of goods sold have been

for the 2018 fiscal year?

173) The table below contains selected financial information from recent financial statements of

KBI Toys and Little Tikes Adventure Toys, Inc., two toy manufacturing companies ($ in

thousands):

KBI Toys Little Tikes

12/31/2018 12/31/2017 12/31/2018 12/31/2017

Net sales $80,622 $72,120 $63,480 $68,900

Cost of goods sold 58,900 53,800 40,786 46,325

Year-end inventory 7,400 6,900 5,800 6,300

Required:

Calculate the 2018 gross profit ratio, inventory turnover ratio, and the average days in inventory

for the two companies (rounded).

174) On January 1, 2018, the National Furniture Company adopted the dollar-value LIFO

method of computing inventory. An internal cost index is used to convert ending inventory to

base year. Inventory on January 1 was $200,000. Year-end inventories at year-end costs and cost

indexes for its one inventory pool were as follows:

Inventory at Cost Index

Year Ended Year-end (Relative to

December 31 Costs Base Year)

2018 $259,200 1.08

2019 296,800 1.12

2020 299,000 1.15

Required:

Compute inventory amounts at the end of each year.

175) Appleton Inc. adopted dollar-value LIFO on January 1, 2018, when the inventory value was

$1,200,000. The December 31, 2018, ending inventory at year-end costs was $1,430,000 and the

cost index for the year is 1.1.

Required:

Compute the dollar-value LIFO inventory valuation for the December 31, 2018, inventory.

176) Chavez Inc. adopted dollar-value LIFO on January 1, 2018, when the inventory value was

$850,000. The December 31, 2018, ending inventory at year-end cost was $950,000 and the cost

index for the year is 1.08.

Required:

Compute the dollar-value LIFO inventory valuation (rounded) for the December 31, 2018,

inventory.

177) Liquidated Corporation had a dollar-value LIFO (DVL) inventory of $800,000 at the

beginning of the current year when it adopted DVL. Its year-end inventory at year-end prices

was $850,000. The index for the current year was 1.08.

Required:

Compute the DVL inventory (rounded) to be reported at the end of the year.

178) On January 1, 2017, ECT Co. adopted the dollar-value LIFO method for its one inventory

pool. The pool’s value on this date was $600 million. The 2017 and 2018 ending inventory

valued at year-end costs were $702 million and $840 million, respectively. The appropriate cost

indexes are 1.08 for 2017 and 1.20 for 2018.

Required:

Calculate the inventory balance that ECT Co. would report on its year-end balance sheets for

2017 and 2018, using the dollar-value LIFO method.

179) On January 1, 2017, RAY Co. adopted the dollar-value LIFO method for its one inventory

pool. The pool’s value on this date was $300 million. The 12/31/2017 inventory valued at year-

end costs was $385 million. The 12/31/2017 inventory, using dollar-value LIFO was $355

million.

Required:

Calculate 2017 cost index for RAY’s inventory.

180) The Genworth Company adopted the dollar-value LIFO method on January 1, 2018 when

the inventory value of its one inventory pool was $450,000. The company decided to use an

external index, the Consumer Price Index (CPI), to adjust for changes in the cost level. On

January 1, 2018, the CPI was 280. On December 31, 2018, inventory valued at year-end cost was

$504,000 and the CPI was 294.

Required:

Calculate the inventory value at the end of 2018 using the dollar-value LIFO method.

181) Briefly describe why companies that use perpetual inventory systems must still perform

physical inventories.

182) It is the end of the accounting period, and your boss asks you to help determine the

inventory balance to place in the company’s balance sheet. Explain which physical quantities of

inventory that you will include and which you will exclude.

183) Briefly explain when there would be a tax benefit from electing LIFO rather than FIFO.

184) Briefly explain how companies that use LIFO can both increase and decrease reported

earnings by “managing” ending inventories.

185) Costs and prices regularly fall every year in the microcomputer industry. Briefly indicate

your recommendation and rationale for an inventory method for a firm about to enter this

industry.

186) Carmen Inc., producer of high-tech boating equipment, disclosed the following information

in its 2018 annual report to shareholders:

Inventories are valued at the lower of cost or net realizable value with cost determined by the

last-in, first-out (LIFO) method for inventories.

Inventories at May 31 were as follows:

(Dollars in thousands)

2018

2017

Raw materials and work in process

$ 70,458

$ 66,175

Finished goods

207,231

168,135

Total inventories

$277,689

$234,310

If the inventory had been valued using the first-in, first-out

(FIFO) method, inventories would have been higher by

$22,200 and $24,400 ($ in thousands) at the end of 2018

and 2017, respectively.

How does the supplemental LIFO information indicating what the value of ending inventory

would have been if measured using FIFO improve the quality of financial reporting by Carmen?

187) Briefly explain the advantages of dollar-value LIFO (DVL).