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Chapter 8: 17Q (page 421)
Explain the following terms.
(a) LIFO layer.
(b) LIFO reserve.
(c) LIFO effect.
LIFO method tackles the different issues. These issues are related to the LIFO layer, LIFO reserve, and LIFO effect.
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Question:In your audit of Jose Oliva Company, you find that a physical inventory on December 31, 2017, showed merchandise with a cost of \(441,000 was on hand at that date. You also discover the followingitems were all excluded from the \)441,000.
1. Merchandise of \(61,000 which is held by Oliva on consignment. The consignor is the Max Suzuki Company.
2. Merchandise costing \)38,000 which was shipped by Oliva f.o.b. destination to a customer on December 31, 2017. The customerwas expected to receive the merchandise on January 6, 2018.
3. Merchandise costing \(46,000 which was shipped by Oliva f.o.b. shipping point to a customer on December 29, 2017. Thecustomer was scheduled to receive the merchandise on January 2, 2018.
4. Merchandise costing \)83,000 shipped by a vendor f.o.b. destination on December 30, 2017, and received by Oliva on January4, 2018.
5. Merchandise costing $51,000 shipped by a vendor f.o.b. shipping point on December 31, 2017, and received by Oliva onJanuary 5, 2018.
Instructions
Based on the above information, calculate the amount that should appear on Oliva’s balance sheet at December 31, 2017, for inventory.
Case 3: The Kroger Company
The Kroger Company reported the following data in its annual report (in millions).
January 31, February 1, February 2,
2015 2014 2013
Net sales \(108,465 \)98,375 $96,619
Cost of sales (using LIFO) 85,512 78,138 76,726
Year-end inventories using FIFO 6,933 6,801 6,244
Year-end inventories using LIFO 5,688 5,651 5,146
Instructions
(a) Compute Kroger’s inventory turnovers for fiscal years ending January 31, 2015, and February 1, 2014, using:
(1) Cost of sales and LIFO inventory.
(2) Cost of sales and FIFO inventory.
(b) Some firms calculate inventory turnover using sales rather than cost of goods sold in the numerator. Calculate Kroger’s fiscal years ending January 31, 2015, and February 1, 2014, turnover, using:
(1) Sales and LIFO inventory.
(2) Sales and FIFO inventory.
(c) State which method you would choose to evaluate Kroger’s performance. Justify your choice.
Richardson Company cans a variety of vegetable-type soups. Recently, the company decided to value its inventories using dollar-value LIFO pools. The clerk who accounts for inventories does not understand how to valuethe inventory pools using this new method, so, as a private consultant, you have been asked to teach him how this new method works.
He has provided you with the following information about purchases made over a 6-year period.
Ending Inventory
Date (End-of-Year Prices) Price Index
Dec. 31, 2013 $ 80,000 100
Dec. 31, 2014 111,300 105
Dec. 31, 2015 108,000 120
Dec. 31, 2016 128,700 130
Dec. 31, 2017 147,000 140
Dec. 31, 2018 174,000 145
You have already explained to him how this inventory method is maintained, but he would feel better about it if you were to leavehim detailed instructions explaining how these calculations are done and why he needs to put all inventories at a base-year value.
Instructions
(a) Compute the ending inventory for Richardson Company for 2013 through 2018 using dollar-value LIFO.
(b) Using your computation schedules as your illustration, write a step-by-step set of instructions explaining how the calculationsare done. Begin your explanation by briefly explaining the theory behind this inventory method, includingthe purpose of putting all amounts into base-year price levels.
Presented below is information related to Blowfish radios for the Hootie Company for the month of July.
Units Unit Total Units Selling Total
InCostSoldPrice
Date Transaction
July 1 Balance 100 \(4.10 \) 410
6 Purchase 800 4.20 3,360
7 Sale 300\(7.00 \) 2,100
10 Sale 300 7.30 2,190
12 Purchase 400 4.50 1,800
15 Sale 200 7.40 1,480
18 Purchase 300 4.60 1,380
22 Sale 400 7.40 2,960
25 Purchase 500 4.58 2,290
30 Sale 200 7.50 1,500
Totals 2,100\(9,240 1,400\)10,230
Instructions
(a) Assuming that the periodic inventory method is used, compute the inventory cost at July 31 under each of the following cost flow assumptions.
(1) FIFO.
(2) LIFO.
(3) Weighted-average.
(b) Answer the following questions.
(1) Which of the methods used above will yield the lowest figure for gross profit for the income statement? Explain why.
(2) Which of the methods used above will yield the lowest figure for ending inventory for the balance sheet? Explain why.
Some of the information found on a detail inventory card for Slatkin Inc. for the first month of operations is as follows.
Received
Issued, Balance,
Date No. of Units Unit Cost No. of Units No. of Units
January 2 1,200 $3.00 1,200
7 700 500
10 600 3.20 1,100
13 500 600
18 1,000 3.30 300 1,300
20 1,100 200
23 1,300 3.40 1,500
26 800 700
28 1,600 3.50 2,300
31 1,300 1,000
Instructions
(a) From these data compute the ending inventory on each of the following bases. Assume that perpetual inventory records are kept in units only. (Carry unit costs to the nearest cent and ending inventory to the nearest dollar.)
(1) First-in, first-out (FIFO).
(2) Last-in, first-out (LIFO).
(3) Average cost.
(b) If the perpetual inventory record is kept in dollars, and costs are computed at the time of each withdrawal, would the amounts shown as ending inventory in (1), (2), and (3) above be the same? Explain and compute. (Round average unit costs to four decimal places.)
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