Chapter 24: 18Q (page 1445)

Dierdorf Inc., a closely held corporation, has decided to go public. The controller, Ed Floyd, is concerned with presenting interim data when a LIFO inventory valuation is used. What problems are encountered with LIFO inventories when quarterly data are presented?

Short Answer

Expert verified

LIFO basis can be used quarterly but not throughout the year.

Step by step solution

Meaning of LIFO

LIFO stands for "Last-In, First-Out.” This method is utilized for recording the cost flow of inventory in the business. The LIFO strategy expects that themost important method that comprises a company's stock is sold first.

Explaining the problems that are encountered with LIFO inventories when quarterly data are presented.

When the LIFO basis is used for quarterly reporting, there is concern that the LIFO basis may be reduced in any quarter but not for the entire year. If the stock basis closes at the end of the most recent year, a purchase savings (equation account) should be established at that time to better reflect transaction costs and obtain a more practical interim statement for net income.

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GILMOUR COMPANY COMPARATIVE BALANCE SHEET AS OF DECEMBER 31, 2018 AND 2017
December 31
	2018	2017
Assets
Cash	\( 180,000	\) 275,000
Accounts receivable (net)	220,000	155,000
Short-term investments	270,000	150,000
Inventories	1,060,000	980,000
Prepaid expenses	25,000	25,000
Plant & equipment	2,585,000	1,950,000
Accumulated depreciation	(1,000,000)	(750,000)
	\(3,340,000	(2,785,000)

Liabilities and Stockholders’ Equity
Accounts payable	\) 50,000	\( 75,000
Accrued expenses	170,000	200,000
Bonds payable	450,000	190,000
Common stock	2,100,000	1,770,000
Retained earnings	570,000	550,000
	\)3,340,000	(2,785,000)

BRADBURN CORPORATION BALANCE SHEET MARCH 31
Assets	2018	2017
Cash	\) 18,200	\( 12,500
Notes receivable	148,000	132,000
Accounts receivable (net)	131,800	125,500
Inventories (at cost)	105,000	50,000
Plant & Equipment (net of depreciation)	1,449,000	1,420,500
Total assets	\)1,852,000	\(1,740,500

Liabilities and Stockholders’ Equity
Accounts payable	\) 79,000	\( 91,000
Notes payable	76,000	61,500
Accrued liabilities	9,000	6,000
Common stock (130,000 shares, \)10 par)	1,300,000	1,300,000
Retained earnings*	388,000	282,000
Total liabilities and stockholders’ equity	\(1,852,000	\)1,740,500

(\(000 omitted)
	2018	2017	2016	2015	2014
Sales revenue	\)20,000	\(16,000	\)14,000	\(6,000	\)4,000
Net income	2,400	14,000	800	700	250
Average total assets	22,000	19,000	11,500	4,200	3,000
Current assets	8,000	6,000	3,000	1,200	1,000
Working capital	3,600	3,200	1,200	500	400
Common shares: Number of shares Outstanding (000) Average market price	2,000 \(9	2,000 \)6	2,000 $4	20 -	20 -

Dierdorf Inc., a closely held corporation, has decided to go public. The controller, Ed Floyd, is concerned with presenting interim data when a LIFO inventory valuation is used. What problems are encountered with LIFO inventories when quarterly data are presented?

Short Answer

Step by step solution

Meaning of LIFO

Explaining the problems that are encountered with LIFO inventories when quarterly data are presented.

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