CHAPTER 6 INVENTORIES

S-A E 227

FIFO and LIFO are the two most common cost flow assumptions made in costing inventories. The amounts assigned to the same inventory items on hand may be different under each cost flow assumption. If a company has no beginning inventory, explain the difference in ending inventory values under the FIFO and LIFO cost bases when the price of inventory items purchased during the period have been (1) increasing, (2) decreasing, and (3) remained constant.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economic

S-A E 228

In a period of rising prices, the inventory reported in Crawford Company's balance sheet is close to the current cost of the inventory. Breland Company's inventory is considerably below its current cost. Identify the inventory cost flow method being used by each company. Which company has probably been reporting the higher gross profit?

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economic

S-A E 229

Errors occasionally occur when physically counting inventory items on hand. Identify the financial statement effects of an overstatement of the ending inventory in the current period. If the error is not corrected, how does it affect the financial statements for the following year?

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economic

S-A E 230

A survey of major U.S. companies revealed that 77% of those companies used either LIFO or FIFO cost flow methods, while 19% used average cost, and only 4% used other methods.

Required:

Provide brief, yet concise responses to the following questions.

a. Why are LIFO and FIFO so popular?

b. Since computers and inventory management software are readily available, why aren’t more companies using specific identification?

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economic

S-A E 231

Your former college roommate is opening a new retail store and asks you “Which inventory costing method should I use?”

What is your response? Include a comparison of the tax effect, balance sheet effect, and income statement effect for FIFO versus LIFO.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economic

S-A E 232

Robert Tingle is studying for the next accounting mid-term examination. What should Robert know about (a) departing from the cost basis of accounting for inventories and (b) the meaning of "market" in the lower-of-cost-or-market method?

Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economic

S-A E 233 (Ethics)

Glenda Good and Danny Rock are department managers in the house wares and shoe departments, respectively, for Litwins, a large department store. Danny has observed Glenda taking inventory from her own department home, apparently without paying for it. He hesitates confronting Glenda because he is due to be promoted, and needs Glanda's recommendation. He also does not want to notify the company management directly, because he doesn't want an ethics investigation on his record, believing that it will give him a “goody-goody” image. This week, Glenda tried on several pairs of expensive running shoes in his department before finding a pair that suited her. She did not, however, buy them. That very pair was missing this morning.

Litwins recently replaced its old periodic inventory system with a perpetual inventory system using scanners and bar codes. In addition, the annual inventory is to be replaced by a monthly inventory conducted by an independent firm. On hearing the news of the changes, Danny relaxes. "The system will catch Glenda now," he says to himself.

Required:

1. Is Danny's attitude justified? Why or why not?

2. What, if any, action should Danny take now?

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC: Professional Demeanor, IMA: Internal Controls

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S-A E 234 (Communication)

Frank Jeffries, a new employee of Stine Company, recorded $1,000 in consigned goods received as part of the firm's inventory. The goods were received one day after the end of the fiscal period, but Frank reasoned that the goods should be included in inventory sooner because Stine paid the freight. The mistake was brought to his attention by the purchasing department who said the goods should not have been recorded as Stine inventory at all. Frank told Sara Janik, the purchasing supervisor, that nobody needed to worry, because the mistake would cancel itself out the following month. In Frank opinion, there was no reason to get everyone excited over nothing, especially since it was monthly, and not annual, financial statements that were affected. Sara Janik has reported the problem to the accounting department.

Required:

You are Frank's supervisor. Write a memo to Frank explaining why the error should have been corrected.

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: FSA