Accounting Chapter 6 Homework Next Years Income Will Increased Because The

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.