Concept explainers
(a)
International Financial Reporting Standards (IFRS):
IFRS are a set of international accounting standards which are framed, approved, and published by International Accounting Standards Board (IASB) for the preparation and disclosure of international financial reports.
Generally Accepted Accounting Principles (GAAP):
These are the guidelines necessary to create accounting principles for the implementation of financial information reporting in the Country U.
First-in-First-Out (FIFO):
In this method, items purchased initially are sold first. So, the value of the ending inventory consists the recent cost for the remaining unsold items.
Last-in-First-Out (LIFO):
In this method, items purchased recently are sold first. So, the value of the ending inventory consists the initial cost for the remaining unsold items.
To draft: A table with the columns given in the problem
(a)
Explanation of Solution
Table is prepared as follows (amounts in millions of dollars):
FIFO less LIFO | IFRS Net Income | |||
Company E | ||||
Company K | ||||
Company F |
Table (1)
(b)
To complete: The table prepared in Part (a)
(b)
Explanation of Solution
Complete the table as follows (amounts in millions of dollars):
FIFO less LIFO | IFRS Net Income | |||
Company E | $21,348 | $30,143 | ||
Company K | 827 | 1,173 | ||
Company F | 865 | 4,686 |
Table (2)
Working Notes:
Compute FIFO less LIFO (amounts in millions of dollars).
FIFO | LIFO | FIFO less LIFO | |
Company E | $31,200 | $9,852 | $21,348 |
Company K | 5,793 | 4,966 | 827 |
Company F | 6,782 | 5,917 | 865 |
Table (3)
Description:
Deduct the LIFO value from FIFO value to get FIFO less LIFO.
Compute IFRS net income (amounts in millions of dollars).
Net Income as Reported | Impact on Net Income From Using LIFO Rather Than FIFO | IFRS Net Income | |
Company E | $30,460 | $317 | $30,143 |
Company K | 1,116 | (57) | 1,173 |
Company F | 4,690 | 4 | 4,686 |
Table (4)
Description:
Deduct the impact on net income value from net income reported value to get IFRS net income.
Compute FIFO less LIFO divided by total current assets (amounts in millions of dollars).
FIFO less LIFO | Total Current Assets | ||
Company E | $21,348 | $58,984 | 36% |
Company K | 827 | 7,621 | 11% |
Company F | 865 | 34,368 | 3% |
Table (5)
Description:
Divide FIFO less LIFO value by total current assets value to get the value in last column. Refer to Table (3) for value and computation of FIFO less LIFO value.
Compute IFRS net come divided by reported net income (amounts in millions of dollars).
IFRS Net Income | Net Income as Reported | ||
Company E | $30,143 | $30,460 | 99% |
Company K | 1,173 | 1,116 | 105% |
Company F | 4,686 | 4,690 | 100% |
Table (6)
Description:
Divide IFRS net income value by reported net income value to get the value in last column. Refer to Table (4) for value and computation of IFRS net income value.
(c)
To indicate: the Company which would have the highest impact on total current assets due to change in
(c)
Explanation of Solution
If the inventory valuation method is changed to reflect the use of IFRS, Company E would have greatest impact on total current assets.
Description:
Refer to Table (5) for value and computation of impact of change in inventory valuation method on total current assets.
(d)
To indicate: the Company which would have the highest impact on net income due to change in inventory valuation method, if the company uses IFRS instead of GAAP
(d)
Explanation of Solution
If the inventory valuation method is changed to reflect the use of IFRS, Company K would have greatest impact on net income.
Description:
Refer to Table (6) for value and computation of impact of change in inventory valuation method on net income.
(e)
To discuss: The reasons for negative impact on net income if LIFO is used rather than FIFO
(e)
Explanation of Solution
During inflation, the inventory purchased last will have higher price than the inventory purchased first. Thus, under LIFO method, the inventory purchased last with higher price will be sold first, thereby increasing the cost of goods sold. Increase in cost of goods sold decreases the net income
Want to see more full solutions like this?
Chapter 13MJ Solutions
Bundle: Financial & Managerial Accounting, Loose-Leaf Version, 13th + CengageNOWv2, 2 terms (12 months) Printed Access Card + Hydro Paddle Boards ... 2 terms (12 months) Printed Access Card
- Under U.S. GAAP, LIFO is an acceptable inventory method. Financial statement information for three companies that use LIFO follows. All table numbers are in millions of dollars. Assume these companies adopted IFRS, and thus were required to use FIFO, rather than LIFO. a. Prepare a table with the following columns: (1) Difference between FIFO and LIFO inventory valuation. (2) Revised IFRS net income using FIFO. (3) Difference between FIFO and LIFO inventory valuation as a percent of total current assets. (4) Revised IFRS net income as a percent of the reported net income. b. Complete the table for the three companies. c. For which company would a change to IFRS for inventory valuation have the largest percentage impact on total current assets (Col. 3)? d. For which company would a change to IFRS for inventory valuation have the largest percentage impact on net income (Col. 4)? e. Why might Kroger have a negative impact on net income from using LIFO, while the other two companies have a positive impact on net income from using LIFO?arrow_forwardLIFO and Inventory Pools On January 1, 2016, Grover Company changed its inventory cost flow method to the LIFO cost method from the FIFO cost method for its raw materials inventory. It made the change for both financial statement and income tax reporting purposes. Grover uses the multiple-pools approach under which it groups substantially identical raw materials into LIFO inventory pools. It uses weighted average costs in valuing annual incremental layers. The composition of the December 31, 2018, inventory for the Class F inventory pool is as follows: Inventory transactions for the Class F inventory pool during 2019 were as follows: On March 2, 2019, 4,800 units were purchased at a unit cost of 13.50 for 64,800. On September 1, 2019, 7,200 units were purchased at a unit cost of 14.00 for 100,800. A total of 15,000 units were used for production during 2019. The following transactions for the Class F inventory pool took place during 2020: On January 11, 2020, 7,500 units were purchased at a unit cost of 14.50 for 108,750. On May 14, 2020, 5,500 units were purchased at a unit cost of 15.50 for 85,250. On December 29, 2020, 7,000 units were purchased at a unit cost of 16.00 for 112,000. A total of 16,000 units were used for production during 2020. Required: 1. Prepare a schedule to compute the inventory (units and dollar amounts) of the Class F inventory pool at December 31, 2019. Show supporting computations in good form. 2. Prepare a schedule to compute the cost of Class F raw materials used in production for the year ended December 31, 2019. 3. Prepare a schedule to compute the inventory (units and dollar amounts) of the Class F inventory pool at December 31, 2020. Show supporting computations in good form.arrow_forwardLower of Cost or Market Garcia Company uses FIFO, and its inventory at the end of the year was recorded in the accounting records at $17,800. Due to technological changes in the market, Garcia would be able to replace its inventory for $16,500. Required: 1. Using the lower of cost or market method, what amount should Garcia report for inventory on its balance sheet at the end of the year? 2. Prepare the journal entry required to value the inventory at the lower of cost or market.arrow_forward
- Inventory analysis Costco Wholesale Corporation (COST) and Wal-Mart Stores Inc. (WMT) compete against each other in general merchandise retailing, gas stations, pharmacies, and optical centers. Below is selected financial information for both companies from a recent year's financial statements (in millions): a. Determine for bom companies (1) the inventory turnover and (2) the days' sales in inventory. Round to one decimal place. b. Compare and interpret the inventory metrics computed in (a).arrow_forwardKulsrud Company would like to estimate the current inventory level. Using the gross profit method and the following information, estimate the current inventory level for Kulsrud Company. Goods available for sale 100,000 Net sales 150,000 Normal gross profit as a percent of sales 40%arrow_forwardRefer to the information provided in RE8-4. If Paul Corporations inventory at January 1, 2019, had a cost and net realizable value of 300,000, prepare the journal entry to record the reductions to NRV for Paul Corporation assuming that Paul uses a periodic inventory system and the direct method. Paul Corporation uses FIFO and reports the following inventory information: Assuming Paul uses a perpetual inventory system and the direct method, prepare the journal entry to record the write-down of inventory.arrow_forward
- Inventory Write-Down Stiles Corporation uses the FIFO cost flow assumption and is in the process of applying the LCNRV rule for each of two products in its ending inventory. A profit margin of 30% on the selling price is considered normal for each product. Specific data for each product are as follows: Inventory Write-Down Use the information in E8-1. Assume that Stiles uses the LIFO cost flow assumption and is applying the LCM rule. Required: 1. What is the correct inventory value for each product? 2. Next Level With regard to requirement 1, what effect does the imposition of the constraints on market value have on the inventory valuations?arrow_forwardIf Barcelona Companys ending inventory was actually $122,000, but the cost of consigned goods, with a cost value of $20,000 were accidentally included with the company assets, when making the year-end inventory adjustment, what would be the impact on the presentation of the balance sheet and income statement for the year that the error occurred, if any?arrow_forwardThe following are independent errors made by a company that uses the periodic inventory system: a. Goods in transit, purchased on credit and shipped FOB destination, 10,000, were included in purchases but not in the physical count of ending inventory. b. Purchase of a machine for 2,000 was expensed. The machine has a 4-year life, no residual value, and straight-line depreciation is used. c. Wages payable of 2,000 were not accrued. d. Payment of next years rent, 4,000, was recorded as rent expense. e. Allowance for doubtful accounts of 5,000 was not recorded. The company normally uses the aging method. f. Equipment with a book value of 70,000 and a fair value of 100,000 was sold at the beginning of the year. A 2-year, non-interest-bearing note for 129,960 was received and recorded at its face value, and a gain of 59,960 was recognized. No interest revenue was recorded and 14% is a fair rate of interest. Required: 1. Next Level Indicate the effect of each of the preceding errors on the companys assets, liabilities, shareholders equity, and net income in the year in which the error occurs. State whether the error causes an overstatement (+), an understatement (), or no effect (NE). 2. Prepare the correcting journal entry or entries required at the beginning of the year for each of the preceding errors, assuming the company discovers the error in the year after it was made. Ignore income taxes.arrow_forward
- Refer to the information for Morgan Inc. above. If Morgan uses a perpetual inventory system, what is the cost of ending inventory under FIFO at April 30? a. $32,500 b. $38,400 c. $63,600 d. $69,500arrow_forwardBlack Corporation uses the LIFO cost flow assumption. Each unit of its inventory has a net realizable value of 300, a normal profit margin of 35, and a current replacement cost of 250. Determine the amount per unit that should be used as the market value to apply the lower of cost or market rule to determine Blacks ending inventory.arrow_forwardLower-of-cost-or market inventory Data on the physical inventory of Moyer Company as of December 31, 20Y9, are presented below. Quantity and cost data from the last purchases invoice of the year and the next-to-the-last purchases invoice are summarized as follows: Instructions Determine the inventory at cost and at the lower of cost or market, using the first-in, first-out method. Record the appropriate unit costs on an inventory sheet and complete the pricing of the inventory. When there are two different unit costs applicable to an item, proceed as follows: 1. Draw a line through the quantity, and insert the quantity and unit cost of the last purchase. 2. On the following line, insert the quantity and unit cost of the next-to-the-last purchase. 3. Total the cost and market columns and insert the lower of the two totals in the LCM column. The first item on the inventory sheet has been completed below as an example.arrow_forward
- Financial & Managerial AccountingAccountingISBN:9781285866307Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage LearningAccounting (Text Only)AccountingISBN:9781285743615Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage LearningCorporate Financial AccountingAccountingISBN:9781305653535Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage Learning
- Financial AccountingAccountingISBN:9781337272124Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage LearningFinancial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage Learning