Concept explainers
(a)
Draft a table with the columns given in the problem.
(a)
Explanation of Solution
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.
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)
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)
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)
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)
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)
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)
Indicate the company which would have the highest impact on total current assets due to change in
(c)
Answer to Problem 3IFRS
If the inventory valuation method is changed to reflect the use of IFRS, Company E would have greatest impact on total current assets.
Explanation of Solution
Refer to Table (5) for value and computation of impact of change in inventory valuation method on total current assets.
(d)
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)
Answer to Problem 3IFRS
If the inventory valuation method is changed to reflect the use of IFRS, Company K would have greatest impact on net income.
Explanation of Solution
Refer to Table (6) for value and computation of impact of change in inventory valuation method on net income.
(e)
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 15 Solutions
Financial Accounting (Loose Leaf)
- 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_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_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_forward
- The 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_forwardInventory 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_forwardEffects of Inventory Costing Methods Refer to the information for Tyler Company above. Required: 1. Which inventory costing method produces the highest amount for net income? 2. Which inventory costing method produces the lowest amount for taxes? 3. Which inventory costing method produces the highest amount for ending inventory? 4. How would your answers to Requirements 1-3 change if inventory prices declined during the period?arrow_forward
- Inventory Errors McLelland Inc. reported net income of $175,000 for 2019 and $210,000 for 2020. Early in 2020, McLelland discovers that the December 31, 2019 ending inventory was overstated by $20,000. For simplicity, ignore taxes. Required: 1. What is the correct net income for 2019? For 2020? 2. Assuming the error was not corrected, what is the effect on the balance sheet at December 31, 2019? At December 31, 2020?arrow_forward( Appendix 6B) Refer to the information for Morgan Inc. above. If Morgan uses a periodic inventory system, what is the cost of ending inventory under LIFO at April 30? a. $32,800 b. $38,400 c. $63,600 d. $69,200arrow_forwardInventory Write-Down The following information is taken from Aden Companys records: Required: 1. What is the correct inventory value if the company applies the LCNRV rule to each of the following? a. individual items b. groups of items c. the inventory as a whole 2. Next Level Are there any conditions under which a company may ignore the decline in the value of inventory below its cost?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_forward( Appendix 6B) Refer to the information for Morgan Inc. above. If Morgan uses a periodic inventory system, what is the cost of goods sold under FIFO at April 30? a. $32,800 b. $38,400 c. $63,600 d. $69,200arrow_forwardInventory Valuation Specific identification method Weighted average cost method FIFO method LIFO method LIFO liquidation LIFO conformity rule LIFO reserve Replacement cost Inventory profit Lower-of-cost-or-market (LCM) rule Inventory turnover ratio Number of days sales in inventory Moving average (Appendix) The name given to an average cost method when a weighted average cost assumption is used with a perpetual inventory system. An inventory costing method that assigns the same unit cost to all units available for sale during the period. A conservative inventory valuation approach that is an attempt to anticipate declines in the value of inventory before its actual sale. An inventory costing method that assigns the most recent costs to ending inventory. The current cost of a unit of inventory. An inventory costing method that assigns the most recent costs to cost of goods sold. A measure of how long it takes to sell inventory. The IRS requirement that when LIFO is used on a tax return, it must also be used in reporting income to stockholders. An inventory costing method that relies on matching unit costs with the actual units sold. The portion of the gross profit that results from holding inventory during a period of rising prices. The result of selling more units than are purchased during the period, which can have negative tax consequences if a company is using LIFO. The excess of the value of a companys inventory stated at FIFO over the value stated at LIFO. A measure of the number of times inventory is sold during the period.arrow_forward
- Financial AccountingAccountingISBN:9781337272124Author: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 & Managerial AccountingAccountingISBN:9781285866307Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage LearningFinancial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage LearningIntermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning