ACCTG 101 Lecture Notes - Lecture 9: Financial Statement, Balance Sheet, Income Statement

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brownherring985

23 Oct 2020

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Inventory book value is written down to current market value (replacement cost), reducing inventory and total assets. Inventory write down is reflected as an expenses (part of cost of goods sold) on the income statement, reducing current period gross profit, income, and equity. When a company used lifo, they include in the footnotes of its financial statements that using fifo, their inventories would have been higher; the difference is referred to as the lifo reserve. But using lifo will save on taxes, causing higher cash flow. Lifo companies must report their lifo reserve, so their fifo equivalent is identifiable for comparison purposes. Balance sheet adjustments for a lifo reserve. Increase tax liabilities by the tax rate applied to the lifo reserve. Income statement adjustments for a lifo reserve. To compare financial statements of lifo companies, we must adjust cogs from lifo to fifo by subtracting (or adding) the change in the lifo reserve from the lifo cogs.

Related Questions

Analyzing Inventory Disclosure Comparing LIFO and FIFO

The current asset section of the 2014 and 2013 fiscal year endbalance sheets of The Kroger Co. are presented in the accompanyingtable:

$ millions	January 31, 2015	February 1, 2014
Current assets
Cash and temporary cash investments	$188	$825
Deposits in-transit	786	666
Receivables	949	845
FIFO inventory	6,297	5,793
LIFO credit	(1,083)	(827)
Prepaid and other current assets	288	319
Total current assets	$7,425	$7,621

In addition, Kroger provides the following footnote describingits inventory accounting policy (assume the following is theircomplete disclosure):

Inventories are stated at the lower of cost (principally on a LIFObasis) or market. In total, approximately 95% of inventories in2014 and 2013 were valued using the LIFO method. Cost for thebalance of the inventories, including substantially all fuelinventories, was determined using the FIFO method. Replacement costwas higher than the carrying amount by $1,043 million at January31, 2015 and $827 million at February 1, 2014. We follow theLink-Chain, Dollar-Value LIFO method for purposes of calculatingour LIFO charge or credit.

Required:
a. At what dollar amount does Kroger report its inventory in itsJanuary 31, 2015, balance sheet?
$Answer million

b. What is the cumulative effect (through January 31, 2015) of theuse of LIFO on Kroger's pretax earnings? (Show an increase as apositive number and a decrease as a negative number.)
$Answer million

c. Assuming a 35% tax rate, what is the cumulative (through January31, 2015) tax effect of the use of LIFO to determine inventorycosts?
(Show an increase as a positive number and a decrease as a negativenumber.)
(Round your answers to one decimal place.)
$Answer million

d. Kroger reported net earnings of $602 million in its fiscal year2014 income statement. Assuming a 35% tax rate, what amount of netearnings would Kroger report if the company used the FIFO inventorycosting method?
(Round your answers to one decimal place.)
$Answer million

e. Kroger reported merchandise costs (cost of goods sold) of$71,494 million in fiscal year 2014. Compute its inventory turnoverfor the year.
(Round your answers to one decimal place.)
Answer

f. Calculate the inventory turnover ratio if the FIFO costingmethod had been used.
(Round your answers to one decimal place.)
Answer

jadecicada303

Produce a balance sheet for a company that distinguishes betweencurrent and non- current assets and liabilities.

Create a balance sheet from a trial balance.

Create a comparison of net income based on different methods ofinventory accounting.

Analyze a statement of cash flows and show where each line itemcan be found or

calculated from the other financial statements.

Prepare a full analysis of key financial ratios for a companyand state conclusions about

the financial strength of the company compared to industryratios.

PROJECT SUBMISSION PLAN

Project Part

Description/Requirements of Project Part

Evaluation Criteria

Title: Creating a Balance Sheet and Evaluating Inventory
You will be provided with financial information about a fictionalcompany. You will have to determine what information is relevantfor Project Parts 1 and 2.

Task 1: Create a balance sheet from a trial balance for a givenscenario. Make sure you classify the accounts appropriately ascurrent or non-current. Click here to download the trialbalance.

Page 1

AC1420: Project

Project Part

Description/Requirements of Project Part

Evaluation Criteria

Task 2: Perform inventory valuations using LIFO, FIFO, andweighted average methods based on the following information.Explain the impact of each method on the cost of goods sold andending inventory.

The company imports microwaves from a supplier in China for theUS market. At the end of the first quarter, 100 microwaves are instock. The company purchased a total of 400 microwaves during thequarter at various prices: January: 100 units @ $75

February: 250 units @ $83
March: 50 units @ $87
The company had no inventory at the beginning of the quarter.
Task 3: If the companyâs goal is to maximize net income, whichevaluation method will you use and why?

Project Part 1 -Task 2:

Value of Ending Inventory of100 Units

Weighted AVG

LIFO

FIFO

Cost of Goods Sold (300 UnitsSold)

Weighted AVG

LIFO

FIFO

Create a BalanceSheet from the trial balance:
		Debits	Credits	Classification

	Cash	300,000.00		Current asset

	Sales		(10,000,000.00)	Income statement

	Cost of Goods Sold	7,000,000.00		Income statement

	Selling Expenses	500,000.00		Income statement

	Other income		(50,000.00)	Income statement

	Administrative expenses	350,000.00		Income statement

	Interest Expenses	12,500.00		Income statement

	Land	300,000.00		non-current asset

	Building	2,000,000.00		non-current asset

	Long Term bond payable		(550,000.00)	non-current liability

	Accrued Liabilities		(50,000.00)	current- liability

	Accumulated Depreciation Buildings		(250,000.00)	non-current asset

	Equipment	750,000.00		non-current asset

	Receivables	100,000.00		current asset

	Allowance for doubtful accounts		(7,500.00)	current asset

	Accumulated depreciation equipment		(125,000.00)	non-current asset

	Common Stock		(200,000.00)	equity

	Payables		(115,000.00)	current Liability

	Inventories	200,000.00		current asset

	Prepaid Expenses	50,000.00		current asset

	Retained Earnings		(215,000.00)	equity



		11,562,500.00	(11,562,500.00)

Assets		Equity and Liabilities

Current Assets		Current Liabilities





Total Current Assets	-	Total Current Liabilities	-




		Total long term Liabilities	-

Total property plant andequipment	-






		Total Equity	-


Total Assets	-	Total Equity and liabilities	-

pearlouse123

Produce a balance sheet for a company that distinguishes betweencurrent and non- current assets and liabilities.

Create a balance sheet from a trial balance.

Create a comparison of net income based on different methods ofinventory accounting.

Analyze a statement of cash flows and show where each line itemcan be found or

calculated from the other financial statements.

Prepare a full analysis of key financial ratios for a companyand state conclusions about

the financial strength of the company compared to industryratios.

PROJECT SUBMISSION PLAN

Project Part

Description/Requirements of Project Part

Evaluation Criteria

Task 1: Create a balance sheet from a trial balance for a givenscenario. Make sure you classify the accounts appropriately ascurrent or non-current. Click here to download the trialbalance.

Page 1

AC1420: Project

Project Part

Description/Requirements of Project Part

Evaluation Criteria

Task 2: Perform inventory valuations using LIFO, FIFO, andweighted average methods based on the following information.Explain the impact of each method on the cost of goods sold andending inventory.

support your answer with facts.

blackfish217

ACCTG 101 Lecture Notes - Lecture 9: Financial Statement, Balance Sheet, Income Statement

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