Chapter 8 Inventories: Measurement
121. Bettencourt Clothing Corporation uses a periodic inventory system and the LIFO cost method.
The company began 2016 with the following inventory layers (listed in chronological order of
acquisition):
5,000 units @ $10 $50,000
8,000 units @ $12 96,000
Beginning inventory $146,000
During 2016, 20,000 units were purchased for $15 per unit. Sales for the year totaled 30,000
units at various prices, leaving 3,000 units in ending inventory.
Required:
1. Calculate cost of goods sold for 2016.
2. Determine the amount of LIFO liquidation profit that the company must report in a
disclosure note to its 2016 financial statements, assuming the amount is material. Assume
an income tax rate of 40%.
Answer:
122. The Foxworthy Corporation uses a periodic inventory system and the LIFO inventory cost
method for its one product. Beginning inventory of 40,000 units consisted of the following,
listed in chronological order of acquisition:
24,000 units at a cost of $6.00 per unit = $144,000
16,000 units at a cost of $7.00 per unit = 112,000
During 2016, inventory quantity declined by 18,000 units. All units purchased during 2016
cost $8.00 per unit.
Required:
Calculate the before-tax LIFO liquidation profit or loss that the company would report in a
disclosure note assuming the amount determined is material.
Chapter 8 Inventories: Measurement
123. Modern Day Appliances, Inc. is a wholesaler of kitchen appliances. The company uses a
periodic inventory system and the LIFO cost method. Modern Day’s December 31, 2016,
fiscal year-end inventory of its main product, double-door stainless steel refrigerators,
consisted of the following (listed in chronological order of acquisition):
Units Unit cost
100 $750
200 800
300 850
The replacement cost of the refrigerators throughout 2017 was $900. Modern Day sold 5,000
of these refrigerators during 2017. The company’s selling price throughout 2017 was $1,200.
Required:
1. Compute the gross profit (sales minus cost of goods sold) and the gross profit ratio for
2017 assuming that Modern Day purchased 5,200 units during the year.
2. Repeat requirement 1 assuming that Modern Day purchased only 4,500 units.
3. For requirements 1 and 2, what amount of before-tax LIFO liquidation profit or loss
would Modern Day report in its 2017 disclosure notes, if any, assuming any calculated
amount is material?
Chapter 8 Inventories: Measurement
124. Selected financial statement data from Western Colorado Stores is shown below.
2016
2015
Net sales
$625,000
$690,000
Cost of goods sold
500,000
490,000
Operating expenses
105,000
85,000
Inventory
90,000
70,000
Required:
1. Compute the gross profit ratio for 2016.
2. Compute the inventory turnover ratio for 2016.
Answer:
Net sales
Cost of goods sold
Gross profit
125. The inventories disclosure note in the 2014 financial statements for SUPERVALU Inc., one of
the largest grocery chains in the United States, included the following ($ in millions):
“Inventories are valued at the lower of cost or market. Substantially all of the Company’s
inventory consists of finished goods. As of February 22, 2014 and February 23, 2013,
approximately 57 percent and 60 percent, respectively, of the Company’s inventories were
valued under the LIFO method. If the FIFO method had been used to determine cost of
inventories for which the LIFO method is used, the Company’s inventories would have been
higher by approximately $202 and $211 as of February 22, 2014 and February 23, 2013,
respectively.”
Cost of goods sold for the fiscal year ended February 22, 2014 was $14,623 million.
Chapter 8 Inventories: Measurement
Required:
If SUPERVALU had used FIFO for all of its LIFO inventories, what would its cost of goods
sold have been for 2014?
126. 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?
Chapter 8 Inventories: Measurement
Use the following to answer questions 127 and 128:
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 $9 in fiscal 2014, 2013 and 2012, respectively. All inventories are
stated at the lower of cost or current market values. Cost for inventories at the majority of our
operations is determined on a last-in, first-out (“LIFO”) basis.”
Required:
127. The disclosure note indicates an inventory liquidation during 2014, 2013, and 2012. By how
much did net income in 2014 increase due to the liquidation? Assume an income tax of 40%.
128. What additional income tax payments did the 2014 liquidation cost SUPERVALU?
129. Spando Apparel uses the LIFO inventory method for external reporting and for income
tax purposes but maintains its internal records using FIFO. The following disclosure
note was included in a recent annual report:
Chapter 8 Inventories: Measurement
Inventories ($ in millions):
2016 2015
Total inventories $625 $604
LIFO reserve (83) (51)
$542 $ 553
The company’s income statement reported cost of goods sold of $3,120 million for the
fiscal year ended December 31, 2016.
Required:
1. Spando adjusts the LIFO reserve at the end of its fiscal year. Prepare the
December 31, 2016, adjusting entry to record the cost of goods sold adjustment.
2. If Spando had used FIFO to value its inventories, what would cost of goods sold
have been for the 2016 fiscal year?
130. The table below contains selected financial information from recent financial statements of
KBI Toys and Little Tikes Adventure Toys, Inc., two toy manufacturing companies ($ in
thousands):
KBI Toys Little Tikes
12/31/16 12/31/15 12/31/16 12/31/15
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 2016 gross profit ratio, inventory turnover ratio, and the average days in
inventory for the two companies (rounded).
Chapter 8 Inventories: Measurement
131. On January 1, 2016, 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)
2016 $259,200 1.08
2017 296,800 1.12
2018 299,000 1.15
Required:
Compute inventory amounts at the end of each year.
Answer:
Chapter 8 Inventories: Measurement
132. Appleton Inc. adopted dollar-value LIFO on January 1, 2016, when the inventory value was
$1,200,000. The December 31, 2016, 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, 2016, inventory.
133. Chavez Inc. adopted dollar-value LIFO on January 1, 2016, when the inventory value was
$850,000. The December 31, 2016, 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, 2016,
inventory.
134. 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.
135. On January 1, 2015, ECT Co. adopted the dollar-value LIFO method for its one inventory
pool. The pool’s value on this date was $600 million. The 2015 and 2016 ending inventory
valued at year-end costs were $702 million and $840 million, respectively. The appropriate
cost indexes are 1.08 for 2015 and 1.20 for 2016.
Required:
Calculate the inventory balance that ECT Co. would report on its year-end balance sheets for
2015 and 2016, using the dollar-value LIFO method.
Chapter 8 Inventories: Measurement
136. On January 1, 2015, RAY Co. adopted the dollar-value LIFO method for its one inventory
pool. The pool’s value on this date was $300 million. The 12/31/15 inventory valued at year-
end costs was $385 million. The 12/31/15 inventory, using dollar-value LIFO was $355
million.
Required:
Calculate 2015 cost index for RAY’s inventory.
Chapter 8 Inventories: Measurement
137. The Genworth Company adopted the dollar-value LIFO method on January 1, 2016 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, 2016, the CPI was 280. On December 31, 2016, inventory valued at year-end cost
was $504,000 and the CPI was 294.
Required:
Calculate the inventory value at the end of 2016 using the dollar-value LIFO method.
Answer:
Chapter 8 Inventories: Measurement
Chapter 8 Inventories: Measurement
Essay
Instructions:
The following answers point out the key phrases that should appear in students’ answers. They are not
intended to be examples of complete student responses. It might be helpful to provide detailed
instructions to students on how brief or in-depth you want their answers to be.
138. Briefly describe why companies that use perpetual inventory systems must still perform
physical inventories.
139. 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.
140. Briefly explain when there would be a tax benefit from electing LIFO rather than FIFO.
Chapter 8 Inventories: Measurement
141. Briefly explain how companies that use LIFO can both increase and decrease reported
earnings by “managing” ending inventories.
142. 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.
Chapter 8 Inventories: Measurement
Chapter 8 Inventories: Measurement
143. Carmen Inc., producer of high-tech boating equipment, disclosed the following information in
its 2016 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)
2016
2015
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 2016 and
2015, 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?
144. Briefly explain the advantages of dollar-value LIFO (DVL).
Chapter 8 Inventories: Measurement