AP7–4. (continued)
Req. 2
2016 2017 2018 2019
Gross profit ratio (gross profit ÷ sales):
Before correction:
$21,000 ÷ $60,000 = 0.35
Req. 3
The error would have the following effect on income tax expense:
2017 2018
Before correction:
CONTINUING PROBLEM
CON7-1.
Req. 1
ITEM A. First–In, First–Out (FIFO) Last–In, First–Out (LIFO)
Cost of Goods Sold
Units
Unit Cost
Total Cost
ITEM B. First–In, First–Out (FIFO) Last–In, First–Out (LIFO)
Cost of Goods Sold
Units
Unit Cost
Total Cost
Units
Unit Cost
Total Cost
Req. 2
ITEM A.
(a) Net income: You should recommend FIFO because the lower amount of cost of goods
ITEM B.
(a) Net income: You should recommend LIFO because the lower amount of cost of goods
Cost of Goods Sold
Units
Unit Cost
Total Cost
Cost of Goods Sold
COMPREHENSIVE PROBLEM (Chapters 6 and 7)
COMP7-1.
Income
Statement
CASES AND PROJECTS
ANNUAL REPORT CASES
CP7–1.
(dollars in thousands)
Req. 1
Req. 2
The company purchased $2,464,811thousand during the current year. The beginning
Inventory
Beg. Balance
358,446
sold
End. Balance
398,213
Req. 3
valued at the lower of average cost or market.
Req. 4
American Eagle Outfitters
CP7–2.
Req. 1
Since the end of the year coincides with the end of the selling season for winter clothes,
Req. 2
The company uses the lower of cost or net realizable value on a weighted-average cost
basis. This is disclosed in Note 2 under “Inventories.”
Req. 3
If the company had overstated its ending inventory by $10 million, cost of goods sold
Req. 4
Express, Inc.
CP7–3.
(dollars in thousands)
Req. 1
American Eagle
Outfitters
Express, Inc.
Inventory
=
Cost of Goods Sold
$2,425,044
=
6.41
$1,522,797
=
6.00
Turnover
Average Inventory
$378,329.5*
$253,847.5**
Req. 2
Industry
American Eagle
Express, Inc.
FINANCIAL REPORTING AND ANALYSIS CASES
CP7–4.
Req. 1 Production costs included in inventory become cost of goods sold expense on
the income statement in the period the goods are sold.
CP7–5.
(dollars in millions)
Req. 1
Caterpillar
2011
2010
2009
2011 LIFO
Inventory turnover = $43,578 = 3.6
($14,544 + $9,587) ÷ 2
2011 FIFO
CP7–5. (continued)
John Deere (as provided)
2011 LIFO 5.9
2011 FIFO 4.2
Req. 2
In all three cases, the ratio is higher under LIFO than FIFO. The LIFO beginning and
Req. 3
The FIFO inventory turnover ratio is normally thought to be a more accurate indicator
CRITICAL THINKING CASES
CP7–6.
1. The press release states that management believes LIFO is more appropriate because
2. The decrease in pre-tax income was $28,165,000. Thus, ending inventory was
decreased by $28,165,000 and cost of goods sold was increased by $28,165,000.
3. This $9,858,000 tax postponement is significant and is likely to be the main reason
that management adopted LIFO. A decrease in net income is normally a negative
CP7–7.
To: The Files
From: The New Staff Member
Re: Effect of Restatement
1. The Company understated purchases by $47.3 million. This causes cost of goods
sold to be understated and pre-tax income to be overstated by $47.3 million. Net
income is overstated by that amount times 1 – tax rate:
2. The restatement of the purchases caused the board to rescind management’s
3. If it is assumed that bonuses are a fixed portion of net income, the bonus rate can
be roughly estimated using the amounts computed in parts 1 and 2.
4. The Board likely tied management compensation to net income to align the
interests of management with that of shareholders. Typically, increases in net
FINANCIAL REPORTING AND ANALYSIS TEAM PROJECT
CP7–8.