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CT 6-5 REAL-WORLD FOCUS
Answers will vary depending on the company chosen.
LO 2, 3 BT: S Difficulty: Medium TOT: 30 min. AACSB: Analytic and Technology AICPA FC: Measurement
and Reporting
CTP 6-6 REAL WORLD FOCUS
(a) Companies with slow moving inventory, such as industrial
manufacturers, benefit most from the use of LIFO, because the extended
time that they hold their inventory make them more susceptible to price
changes.
(d) Proponents of LIFO argue that without LIFO, there is mismatch between
the price that was paid for the inventory many months earlier, and the
price that would now have to be paid to replenish the inventory at the
current, higher, price. They argue that this mismatch makes it appear
that their profits are higher than they really are, because it is including
an inflation component that is not really profit.
CT 6-7 DECISION MAKING ACROSS THE ORGANIZATION
(a)
2017
2016
2015
Current ratio
$1,800
$600
= 3.00 :1
$1,423
$590
= 2.41 : 1
$1,183
$525
= 2.25 :1
(b) The company’s current ratio has increased steadily over this period.
While this might be interpreted as a positive, since it would normally
represent improved liquidity, the company started this period with a
current ratio in excess of 2, thus it already had good liquidity. With its
current ratio now 3 it would appear that the company has too many
funds tied up in current assets. In particular, it would appear that the
company has a surplus of unsold inventory. This is supported by the fact
that inventory as a percent of total assets has increased significantly.
CT 6-7 (Continued)
(c) The evaluation above suggests that many of the company’s problems
stem from poor inventory management. As the company has grown,
its ability to manage its inventory has declined. This has caused a
(d) The marketing and sales department may well be concerned that a just-
in-time inventory system will result in more stock-outs. The company
already is having stock-out problems, even though it has a lot of
CT 6-8 COMMUNICATION ACTIVITY
In a period of changing prices, the cost flow assumption can have a signifi-
cant impact on income and on evaluations based on income. Under the
FIFO method, the costs of the earliest goods purchased are the first to be
recognized as cost of goods sold. Under the average-cost method, the
calculation of cost of goods sold is made on the basis of the weighted-
average unit cost incurred. In a period of rising prices, FIFO will produce a
lower cost of goods sold and a higher net income.
*CT 6-9 COMMUNICATION ACTIVITY
MEMO
To: H.K. Logan, President
From: Student
Subject: 2016 ending inventory error
As you know, 2016 ending inventory was overstated by $1 million. Of course,
this error will cause 2016 net income to be incorrect because the ending
inventory is used to compute 2016 cost of goods sold. Since the ending
inventory is subtracted in the computation of cost of goods sold, an
CT 6-10 ETHICS CASE
(a) The higher cost of the items ordered, received, and on hand at year-
end will be charged to cost of goods sold, thereby lowering current
year’s income and income taxes. Next year’s income will be increased
because the inventory carried at lower costs from the earlier year will
(b) No. The president would not have given the same directive because
the purchase under FIFO would have had no effect on net income of
the current year.
CT 6-11 ALL ABOUT YOU
Students responses to this question will vary depending on the inventory
fraud they choose to investigate. Here are responses for the two examples
given in the activity.
The fraud at Leslie Fay involved a number of illegal actions, all of which
increased net income. The company intentionally overstated ending inventory,
which has the effect of understating cost of goods sold. It also understated
or completely omitted discounts and allowances that it gave to retailers. In
CT 6-12 FASB CODIFICATION ACTIVITY
(a) The primary basis of accounting for inventories is cost, which has
been defined generally as the price paid or consideration given to
acquire an asset. As applied to inventories, cost means in principle the
(b) The basis of stating inventories shall be consistently applied and shall
be disclosed in the financial statements; whenever a significant
change is made therein, there shall be disclosure of the nature of the
(c) A departure from the cost basis of pricing the inventory is required
when the utility of the goods is no longer as great as their cost. Where
there is evidence that the utility of goods, in their disposal in the
ordinary course of business, will be less than cost, whether due to
CT 6-13 CONSIDERING PEOPLE, PLANET, AND PROFIT
(a) The company’s goals were separated into two groups as follows:
2020 Goals for Operations
● Reduce recordable workplace Injury rate to 0.6 and lost-time case
rate due to Injury to 0.15
● Reduce energy intensity by 50% from 2006.
2020 Goals for Product Stewardship
● Provide leadership in the safety of people in, on and around our
products.
(b) The company improved its Recordable Injury Frequency rate by 89
percent from our 2003 baseline year and 9 percent from its last
reporting period. It improved its Lost-Time Case Frequency rate by 92
(c) The company measures its energy intensity by dividing its total
revenue in dollars into a measure of its total energy used. This then
IFRS CONCEPTS AND APPLICATION
IFRS6-1
Key Similarities are (1) the definitions for inventory are essentially the same,
Key differences are related to (1) the LIFO cost flow assumption—U.S.
GAAP permits the use of LIFO for inventory valuation, but IFRS prohibits
its use. FIFO and average-cost are the only two acceptable cost flow
assumptions permitted under IFRS; (2) lower-of-cost-or-market test for
IFRS6-2
Under IFRS, LaTour’s inventory turnover is computed as follows:
Cost of Goods Sold/Average Inventory
€578/€154 = 3.75 or approximately 97 days (365 ÷ 3.75).
Difficulties in comparison to a company using U.S. GAAP could arise if the
U.S. company uses the LIFO cost flow assumption, which is prohibited under
IFRS6-3 INTERNATIONAL FINANCIAL REPORTING PROBLEM
(a) Louis Vuitton’s Note 1.16 states that inventories are valued using the
weighted average or FIFO methods.
