8-20 Intermediate Accounting, 8/e
FIFO — PERPETUAL INVENTORY SYSTEM
The same ending inventory and cost of goods sold amounts
are always produced in a perpetual system as in a periodic
system when FIFO is used.
Date
Purchased
Sold
Balance
Beginning
inventory
4,000 @ $5.50 = $22,000
4,000 @ $5.50 $22,000
Jan. 10
2,000 @ $5.50 = $11,000
2,000 @ $5.50 $11,000
Jan. 17
1,000 @ $6.00 = $6,000
2,000 @ $5.50
1,000 @ $6.00 $17,000
1,000 @ $6.00 $29,750
3,000 @ $7.00
3,000 @ $7.00 $52,250
3,000 @ $7.50
Illustration 8-7F
LIFO — PERPETUAL INVENTORY SYSTEM
Date
Purchased
Sold
Balance
Beginning
inventory
4,000 @ $5.50 = $22,000
4,000 @ $5.50 $22,000
Jan. 10
2,000 @ $5.50 = $11,000
2,000 @ $5.50 $11,000
Jan. 17
1,000 @ $6.00 = $6,000
2,000 @ $5.50
1,000 @ $6.00 $17,000
1,000 @ $6.00 $38,000
3,000 @ $7.00
1,000 @ $6.00 $27,500
1,500 @ $7.00
1,500 @ $7.00
Illustration 8-7H
T8–13
8-22 Intermediate Accounting, 8/e
COMPARISON OF COST FLOW METHODS
The three cost flow methods are compared below assuming a
periodic inventory system.
AVERAGE
FIFO
LIFO
Cost of goods sold
$42,250
$38,500
$46,500
T8–14
LIFO CONFORMITY RULE
➢ If a company uses LIFO to measure its taxable income, IRS
regulations require that LIFO also be used to measure income
reported to investors and creditors.
Inventories Disclosure — Rite Aid Corporation.
Summary of Significant Accounting Policies (in part)
Inventories
Inventories are stated at the lower of cost or market. The Company uses
the Last-in, first-out (LIFO) method of accounting for substantially all of
its inventories.
Illustration 8-9
T8–15
8-24 Intermediate Accounting, 8/e
LIFO LIQUIDATION PROFIT
A decline in inventory quantity results in LIFO liquidation
profit in periods of rising costs.
National Distributors, Inc., uses the LIFO inventory method. The
company began 2016 with inventory of 10,000 units that cost $20
per unit. During 2016 30,000 units were purchased for $25 each
and 35,000 units were sold.
National’s LIFO cost of goods sold for 2016 consists of:
➢ Included in cost of goods sold are 5,000 units from beginning inventory
purchased at $20 that have now been liquidated.
➢ If the company had purchased at least 35,000 units, no liquidation would
have occurred. Then cost of goods sold would have been $875,000 (35,000
Illustration 8-11
INTERNATIONAL FINANCIAL REPORTING STANDARDS
Inventory Cost Flow Assumptions. IAS NO. 2 does not permit the use of LIFO.
Because of this restriction, many U.S. multinational companies employ the use of
LIFO only for all or most of their domestic inventories and FIFO or average cost for
their foreign subsidiaries. General Mills provides an example with a disclosure note
included in a recent annual report:
Inventories (in part)
All inventories in the United States other than grain are valued at the lower of cost,
T8–17
8-26 Intermediate Accounting, 8/e
DECISION MAKERS’ PERSPECTIVE —
SUPPLEMENTAL LIFO DISCLOSURES
Supplemental LIFO disclosures can be used to convert LIFO
inventory and cost of goods sold amounts.
Rite Aid Corporation
For the Year Ended
March 1, March 2,
($ in thousands) 2014 2013
Balance sheets:
Inventories $2,993,948 $3,154,742
➢ Rite Aid Corporation uses the LIFO method to value its inventory. We can
convert Rite Aid’s inventory and cost of goods sold to a FIFO basis before
comparing to a competitor by using the information provided in Illustration 8–
9 (Slide T8-15).
($ in thousands) 2014 2013
Inventories (as reported) $2,993,948 $3,154,742
T8–18
DECISION MAKERS’ PERSPECTIVE —
FINANCIAL ANALYSIS
➢ The gross profit ratio indicates the percentage of each sales
dollar available to cover other expenses and provide a profit.
➢ The inventory turnover ratio helps to evaluate a company’s
effectiveness in managing its investment in inventory.
Gross profit ratio = Gross profit
Net sales
Inventory turnover ratio = Cost of goods sold
Average Inventory
T8–19
8-28 Intermediate Accounting, 8/e
DOLLAR-VALUE LIFO (DVL)
➢ Many LIFO applications are based on this approach.
➢ Inventory is viewed as a quantity of value instead of a
physical quantity of goods.
➢ The DVL inventory pool is viewed as comprising layers of
dollar value from different years.
COST INDEXES
➢ Under unit LIFO we determine whether a new LIFO layer
was added by comparing the ending quantity with the
beginning quantity.
Cost in layer year
Cost index in layer year =
Cost in base year
T8–21
8-30 Intermediate Accounting, 8/e
DVL ILLUSTRATION
Hanes Company adopted the dollar-value LIFO method on January
1, 2016, when the inventory value was $400,000. The 2016 ending
inventory valued at year-end costs is $441,000, and the cost index
for the year is 105.
Step 1: Convert ending inventory valued at year-end cost to base
year cost.
Step 2: Identify the layers of ending inventory.
$420,000 Ending inventory at base year cost
Step 3: Convert each layer’s base year cost to layer year cost
using the cost index for the year it was acquired.
Ending Inventory Cost Ending Inventory
Date at Base Year Cost x Index = at DVL Cost
T8–22
Suggestions for Class Activities
1. Research Activity
Costco Wholesale Corporation (formerly Price/Costco) operates membership warehouses in the
United States, Puerto Rico, Canada, the United Kingdom, Mexico, Korea, Japan, Australia and
Taiwan. It offers very low prices on a limited selection of nationally branded and selected private
label products in a wide range of merchandise categories in no-frills, self-service warehouse
facilities. Wal-Mart Stores, Inc., the largest retailer in the U.S., is engaged in the operation of mass
merchandising stores located in all 50 states and a number of other countries. Have students,
individually or in groups:
A. Access Walmart’s most recent annual report using Edgar which can be located at www.sec.gov.
1. Determine the company’s primary products and activities.
2. Using the data provided in the income statement and balance sheet,
determine what the company’ cost of goods sold (cost of sales) for the
most recent year would have been if the company had used FIFO instead of
LIFO to value its inventories.
B. Access Costco’s most recent annual report using Edgar.
1. Determine the company’s primary products and activities.
2. Predict which company, Walmart or Costco, has the higher gross profit
ratio and the higher inventory turnover ratio.
3. Using the data provided in the income statements and balance sheets for the
most recent fiscal year, confirm their predictions in 2 above.
Points to note:
Students should predict a higher gross profit ratio and lower turnover ratio for Walmart. For the
year ended January 31, 2014 for Walmart and September 1, 2013 for Costco:
Walmart Costco
8-32 Intermediate Accounting, 8/e
2. Real World Activity
Deere & Company provides products and services primarily for agriculture and forestry. The
following disclosure note appeared in the company’s financial statements for the nine months ended
July 31, 2014:
(12) Inventories:
Most inventories owned by Deere & Company and its U.S. equipment subsidiaries are valued at
cost, on the “last-in, first-out” (LIFO) basis. If all inventories had been valued on a “first-in, first-
out” (FIFO) basis, estimated inventories by major classification in millions of dollars would have
been as follows ($ in millions):
July 31, October 31,
2014 2013
Raw materials and supplies $ 1,848 $ 1,954
Work-in-process 792 753
Finished materials and supplies 4,361 3,757
Total FIFO value 7,001 6,464
Less adjustment to LIFO value 1,562 1,529
Inventories $ 5,439 $ 4,935
The company reported cost of goods sold of $18,679 million in its income statement for the nine
months ended July 31, 2014.
Suggestions:
Have the class answer the following questions:
1. What would cost of goods sold for the nine months ended July 31, 2014 have been if Deere
had used FIFO to value its entire inventory?
2. Using the reported numbers, what was Deere’s average days in inventory for the nine months
ended July 31, 2014?
3. Professional Skills Development Activities
The following are suggested assignments from the end–of-chapter material that will help your
students develop their communication, research, analysis and judgment skills.
Communication Skills. In addition to Communication Case 8-4, Communication Case 8-5 can be
adapted to ask students to write a memo to the “intern,” and Communication Case 8-10 can be
Research Skills. In their careers, our graduates will be required to locate and extract relevant
information from available resource material to determine the correct accounting practice,
perhaps identifying the appropriate authoritative literature to support a decision. Research
Case 8-11 and Exercises 8-12 and 8-21 provide excellent opportunities to help students
develop this skill. In addition, Real World Case 8-8 can be adapted to require students to
research the authoritative literature on the presentation of supplemental LIFO disclosures.
Analysis Skills. The “Broaden Your Perspective” section includes Analysis Cases that direct
students to gather, assemble, organize, process, or interpret data to provide options for making
Judgment Skills. The “Broaden Your Perspective” section includes Judgment Cases that require
students to critically analyze issues to apply concepts learned to business situations in order to
evaluate options for decision-making and provide an appropriate conclusion. In addition to
Judgment Cases 8-1, 8-3, and 8-6, Ethics Case 8-7 also requires students to exercise judgment.
CPA Simulation. Students can test their knowledge of the concepts discussed in this chapter and
at the same time practice critical professional skills necessary for career success and
8-34 Intermediate Accounting, 8/e
Assignment Chart
Learning Est. time
Questions Objective(s) Topic (min.)
8-1
3
Types of inventory for a manufacturer
5
8-2
1
Perpetual versus period inventory systems
5
8-3
1
Perpetual versus period inventory systems
5
8-4
2
F.O.B. shipping point versus F.O.B. destination
5
8-5
2
Consignment arrangement
5
8-6
3
Purchase discounts; gross versus net methods
5
8-7
1,3
Periodic inventory system
5
8-8
4
Inventory costing methods
5
8-9
4,5
LIFO versus FIFO
5
8-10
5
LIFO
5
8-11
6
IRS conformity rule
5
8-12
7
Ratios used to monitor investment in receivables
5
8-13
8
LIFO inventory pool
5
8-14
8
Dollar-value LIFO compared with unit LIFO
5
8-15
8
Dollar-value LIFO
5
8-16
9
IFRS; inventory valuation methods
5
Brief Learning Est. time
Exercises Objective(s) Topic (min.)
8-1
1
Determining ending inventory; periodic system
5
8-2
1
Perpetual system; journal entries
5
8-3
2
Goods in transit
10
8-4
3
Purchase discounts; gross method
10
8-5
3
Purchase discounts; net method
10
8-6
4
Inventory cost flow methods; periodic system
15
8-7
4
Inventory cost flow methods; perpetual system
15
8-8
4
LIFO method
10
8-9
4
LIFO method
10
8-10
6
LIFO liquidation
10
8-11
6
Supplemental LIFO disclosures; Walgreen
10
8-12
7
Ratio analysis
10
8-13
8
Dollar-value LIFO
10
Learning Est. time
Exercises Objective(s) Topic (min.)
8-1
1
Perpetual inventory system; journal entries
10
8-2
1
Periodic inventory system; journal entries
10
8-3
1
Determining cost of goods sold; periodic
inventory system
15
8-4
1
Perpetual and periodic inventory systems
compared
15
8-5
1
Periodic inventory system; missing data
25
8-6
2
Goods in transit
10
8-7
2
Goods in transit; consignment
10
8-8
2
Physical quantities and costs included in
inventory
10
8-9
3
Purchase discounts; the gross method
15
8-10
3
Purchase discounts; the net method
15
8-11
3
Trade and purchase discounts; the gross method
and the net method compared
20
8-12
2,3
FASB codification research
20
8-13
1,4
Inventory cost flow methods; periodic system
20
8-14
1,4
Inventory cost flow methods; perpetual system
25
8-15
1,4
Comparison of FIFO and LIFO; periodic system
20
8-16
1,4
Average cost method; periodic and perpetual
systems
20
8-17
1,4
FIFO, LIFO, and average cost methods
20
8-18
6
Supplemental LIFO disclosures; LIFO reserve;
AEP Industries
15
8-19
1,4,6
LIFO liquidation
10
8-20
4,6
LIFO liquidation
10
8-21
6
FASB codification research
20
8-22
7
Ratio analysis; The Home Depot and Lowe’s
15
8-23
8
Dollar-value LIFO
20
8-24
8
Dollar-value LIFO
25
8-25
8
Dollar-value LIFO
10
8-26
1,2,3,4,5
Concepts; terminology
15
8-36 Intermediate Accounting, 8/e
CPA/CMA Learning Est. time
Exam Questions Objective(s) Topic (min.)
CPA-1
2
Goods in transit
3
CPA-2
3
Purchase discounts; the net method
3
CPA-3
4
Inventory cost flow methods; periodic system
3
CPA-4
4
Inventory cost flow methods; periodic system
3
CPA-5
4
Inventory cost flow methods; periodic system
3
CPA-6
4,5
FIFO vs. LIFO
3
CPA-7
8
Dollar-value LIFO
3
CPA-8
9
IFRS
3
CMA-1
1,4
FIFO; perpetual
3
CMA-2
1,4
LIFO; periodic
3
CMA-3
1,4
LIFO; perpetual
3
Learning Est. time
Problems Objective(s) Topic (min.)
8-1
1,2,3
Various inventory transactions; journal entries
45
8-2
2
Items to be included in inventory
20
8-3
2,3
Costs included in inventory
25
8-4
1,2,3,4
Various inventory transactions; determining
inventory and cost of goods sold
25
8-5
1,4
Various inventory costing methods
50
8-6
1,4,7
Various inventory costing methods; gross profit
ratio
40
8-7
1,4
Various inventory costing methods
40
8-8
4,6
Supplemental LIFO disclosures, Caterpillar
20
8-9
4,6
LIFO liquidation
20
8-10
4,6
LIFO liquidation
25
8-11
4,6,7
Inventory cost flow methods; LIFO liquidation;
ratios
30
8-12
4,6,7
Inventories and accounts receivable; Chapters 7
and 8
25
8-13
8
Dollar-value LIFO
25
8-14
8
Dollar-value LIFO
25
8-15
8
Dollar-value LIFO
25
8-16
8
Dollar-value LIFO; solving for unknowns
25
Star Problems
Learning Est. time
Cases Objective(s) Topic (min.)
Judgment Case 8-1
7
Riding the Merry-Go-Round
25
Real World Case 8-2
2
Physical quantities and cost included in
inventory; Sport Chalet
35
Judgment Case 8-3
3,4
The specific identification inventory method;
inventoriable costs
30
Communication Case 8-4
4,5
LIFO versus FIFO
45
Communication Case 8-5
4,5
LIFO versus FIFO
15
Judgment Case 8-6
2
Goods in transit
15
Ethics Case 8-7
4
Profit manipulation
30
Real World Case 8-8
4,6
Effects of inventory valuation methods: LIFO
and FIFO; The Kroger Company
25
Real World Case 8-9
4,5,7
Effects of inventory valuation methods; Whole
Foods Market
45
Communication Case 8-10
8
Dollar-value LIFO method
20
Research Case 8-11
2,3
FASB codification research; product financing
arrangement
40
Analysis Case 8-12
7
Compare inventory management using ratios;
Kohl’s and Dillards
60
Analysis Case 8-13
3,4,7
Costs included in inventory; inventory cost flow
methods; ratio analysis; PetSmart
20
Air France-KLM Case
9
IFRS; inventory valuation methods; Air France-
KLM
15
CPA Simulation 8-1 Physical quantities and costs included in inventory