978-1259722660 Chapter 9 Solution Manual Part 10

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Real World Case 9–8

Requirement 1

Inventories are valued using the retail first-in, first-out method for goods in

Requirement 2

The company uses the Producer Price Index in applying the dollar-value LIFO

Requirement 3

The disclosure note states that the current cost of inventories exceeded the

LIFO cost for pharmacy department inventories by approximately $47.5 million at

Therefore, cost of goods sold for the year ended January 30, 2016, would have

Requirement 4

($ in thousands)

Case 9–8 (concluded)

Requirement 5

For changes not involving LIFO or changes from the LIFO method to another,

the event is accounted for as a normal change in accounting principle. In general,

we report voluntary changes in accounting principles retrospectively. This means

revising all previous periods’ financial statements as if the new method were used

Communication Case 9–9

Requirement 1

Change in Inventory Method

During 2018, the Company changed the method of valuing its inventories from

the first-in, first-out (FIFO) method, to the last-in, first-out (LIFO) method,

determined by the retail method. To estimate the effects of changing retail

prices on inventories, the Company utilizes internally developed price indexes.

The Company believes that the change to the LIFO method provides a

Note: Because cost of goods sold would have been $22 million lower if the

change had not been made, income before tax would have been $22

million higher, and net income would have been $13.2 million higher ($22

million multiplied by 60% [1 – .40]).

Requirement 2

It usually is impracticable to calculate the cumulative effect of a change to

LIFO. To do so would require assumptions as to when specific LIFO inventory

Judgment Case 9–10

Despite the self-correcting feature of certain inventory errors, the errors cause

the financial statements of the year of the error as well as the financial statements

If a material inventory error is discovered in an accounting period subsequent

to the period in which the error is made, previous years’ financial statements that

were incorrect as a result of the error are retrospectively restated to reflect the

Ethics Case 9–11

Requirement 1

Bonuses will be negatively affected because if the error is corrected, a lower

Requirement 2

It will be reported as a prior period adjustment to the beginning retained

earnings balance for the year beginning July 1, 2018. Financial statements for the

Requirement 3

Ethical Dilemma:

Should John recognize his obligation to disclose the inventory error to

Analysis Case 9–12

Purchases are recorded at market price when market price is lower than the

agreed upon contract price, and a loss is recognized for the difference between

In this case, the contract price of $0.80 per gallon is compared to the market

price at December 31. If market is less than $0.80, an estimated loss is recognized

As the heating oil is purchased in 2019, if an estimated loss is recorded at

Target Case

Requirement 1

Requirement 2

The use of RIM will result in inventory being valued at the lower of cost or

Requirement 3

Activity under this program is included in sales and cost of sales in the

Air France-KLM Case

No. Both U.S. GAAP and IFRS require inventory to be valued at the lower of

cost and net realizable value.