Case 3: The Kroger Company
The Kroger Company reported the following data in its annual report (in millions).
January 31, 2015
February 1, 2014
February 2, 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.
Jan 31, 2015 – 108465/((5688+5651)/2) = 19.13
Feb 1, 2014 – 98375/((5651+5146)/2) = 18.22
(2)Sales and FIFO inventory.
Jan 31, 2015 – 108465/((6933+6801)/2) = 15.80
Feb 1, 2014 – 98375/((6801+6244)/2) = 15.08
(c)”””State which method you would choose to evaluate Kroger’s performance. Justify your choice.
If the company wants to report a higher net profit, they should use FIFO. If they want to pay lower tax, LIFO would be better. As this particular company used the LIFO method to measure the cost of goods sold, they should also use the LIFO method to measure the turnover/inventory.
#2
CA8-10 WRITING (FIFO and LIFO) Harrisburg Company is considering changing its inventory valuation method from FIFO to LIFO because of the potential tax savings. However, management wishes to consider all of the effects on the company, including its reported performance, before making the final decision.
The inventory account, currently valued on the FIFO basis, consists of 1,000,000 units at $8 per unit on January 1, 2017. There are 1,000,000 shares of common stock outstanding as of January 1, 2017, and the cash balance is $400,000.
The company has made the following forecasts for the period 2017-2019.
2017
2018
2019
Unit sales (in millions of units)
1.1
1.0
1.3
Sales price per unit
$10
$12
$12
Unit purchases (in millions of units)
1.0
1.1
1.2
Purchase price per unit
$8
$9
$10
Annual depreciation (in thousands of dollars)
$300
$300
$300
Cash dividends per share
$0.15
$0.15
$0.15
Cash payments for additions to and replacement of plant and equipment (in thousands of dollars)
$350
$350
$350
Income tax rate
40%
40%
40%
Operating expenses (exclusive of depreciation) as a percent of sales
15%
15%
15%
Common shares outstanding (in millions)
1
1
1
Instructions
(a)”””Prepare a schedule that illustrates and compares the following data for Harrisburg Company under the FIFO and the LIFO inventory method for 2017-2019. Assume the company would begin LIFO at the beginning of 2017.
(1)Year-end inventory balances.
FIFO
LIFO
2017
2018
2019
2017
2018
2019
Beginning Inv. Bal.
Purchase
COGS
Year End Inv. Bal
(2)Annual net income after taxes.
FIFO
LIFO
2017
2018
2019
2017
2018
2019
Sales
COGS
OE
Annual Dep.
Income (Before tax)
Income Tax
Net Income
(3)Earnings per share.
FIFO
LIFO
2017
2018
2019
2017
2018
2019
Net Income
Common Share Outstanding
Earning Per Share
(4)Cash balance
FIFO
LIFO
2017
2018
2019
2017
2018
2019
Net Income
Annual Depreciation
Cash Flow
Capital Expenditure
Cash Balance
.
Assume all sales are collected in the year of sale and all purchases, operating expenses, and taxes are paid during the year incurred.
(b)”””Using the data above, your answer to (a), and any additional issues you believe need to be considered, prepare a report that recommends whether or not Harrisburg Company should change to the LIFO inventory method. Support your conclusions with appropriate arguments.
#3
P9-3 (LO1) (LCNRVCost-of-Goods-Sold and Loss) Malone Company determined its ending inventory at cost and at LCNRV at December 31, 2017, December 31, 2018, and December 31, 2019, as shown below.
Cost
NRV
12/31/17
$650,000
$650,000
12/31/18
780,000
712,000
12/31/19
905,000
830,000
Instructions
(a)”Prepare the journal entries required at December 31, 2018, and at December 31, 2019, assuming that a perpetual inventory system and the cost-of-goods-sold method of adjusting to LCNRV is used.
Dec 31, 2018
Dec 31, 2019
(b)”Prepare the journal entries required at December 31, 2018, and at December 31, 2019, assuming that a perpetual inventory is recorded at cost and reduced to LCNRV using the loss method.
Dec 31, 2018
Dec 31, 2019
#4
P9-13 (LO7) GROUPWORK (Retail, LIFO Retail, and Inventory Shortage) Late in 2014, Joan Seceda and four other investors took the chain of Becker Department Stores private, and the company has just completed its third year of operations under the ownership of the investment group. Andrea Selig, controller of Becker Department Stores, is in the process of preparing the year-end financial statements. Based on the preliminary financial statements, Seceda has expressed concern over inventory shortages, and she has asked Selig to determine whether an abnormal amount of theft and breakage has occurred. The accounting records of Becker Department Stores contain the following amounts on November 30, 2017, the end of the fiscal year.
Cost
Retail
Beginning inventory
$ 68,000
$100,000
Purchases
255,000
400,000
Net markups
50,000
Net markdowns
110,000
Sales revenue
320,000
According to the November 30, 2017, physical inventory, the actual inventory at retail is $115,000.
Instructions
(a)”Describe the circumstances under which the retail inventory method would be applied and the advantages of using the retail inventory method.
(b)”Assuming that prices have been stable, calculate the value, at cost, of Becker Department Stores’ ending inventory using the last-in, first-out (LIFO) retail method. Be sure to furnish supporting calculations.
Cost
Retail
Beginning Inventory
Purchases
Net Markups
Net Markdowns
Net Purchases
Goods Available
Sales
Estimated Ending Inventory (at retail)
Cost-to Retail percentage: (255,000/340,000)*100 = 75%
Beginning Inventory Layer
Incremental Increase
At retail
At cost (10,000*75%)
Estimated Ending Inventory (LIFO)
(c)”Estimate the amount of shortage, at retail, that has occurred at Becker Department Stores during the year ended November 30, 2017.
Estimated Ending Inventory at Retail
Actual Ending Inventory at Retail
Estimated Inventory Shortage
(d)”Complications in the retail method can be caused by such items as (1) freight-in costs, (2) purchase returns and allowances, (3) sales returns and allowances, and (4) employee discounts. Explain how each of these four special items is handled in the retail inventory method.
