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Case 3: The Kroger Company
The Kroger Company reported the following data in its annual report (in millions).
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January 31, 2015 |
February 1, 2014 |
February 2, 2013 |
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Net sales |
$108,465 |
$98,375 |
$96,619 |
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Cost of sales (using LIFO) |
  85,512 |
 78,138 |
 76,726 |
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Year-end inventories using FIFO |
   6,933 |
  6,801 |
  6,244 |
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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.
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2017 |
2018 |
2019 |
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Unit sales (in millions of units) |
1.1 |
1.0 |
1.3 |
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Sales price per unit |
$10 |
$12 |
$12 |
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Unit purchases (in millions of units) |
1.0 |
1.1 |
1.2 |
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Purchase price per unit |
$8 |
$9 |
$10 |
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Annual depreciation (in thousands of dollars) |
$300 |
$300 |
$300 |
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Cash dividends per share |
$0.15 |
$0.15 |
$0.15 |
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Cash payments for additions to and replacement of plant and equipment (in thousands of dollars) |
$350 |
$350 |
$350 |
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Income tax rate |
40% |
40% |
40% |
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Operating expenses (exclusive of depreciation) as a percent of sales |
15% |
15% |
15% |
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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.
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FIFO |
LIFO |
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2017 |
2018 |
2019 |
2017 |
2018 |
2019 |
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Beginning Inv. Bal. |
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Purchase |
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COGS |
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Year End Inv. Bal |
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(2)Annual net income after taxes.
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FIFO |
LIFO |
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2017 |
2018 |
2019 |
2017 |
2018 |
2019 |
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Sales |
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COGS |
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OE |
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Annual Dep. |
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Income (Before tax) |
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Income Tax |
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Net Income |
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(3)Earnings per share.
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FIFO |
LIFO |
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2017 |
2018 |
2019 |
2017 |
2018 |
2019 |
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Net Income |
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Common Share Outstanding |
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Earning Per Share |
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(4)Cash balance
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FIFO |
LIFO |
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2017 |
2018 |
2019 |
2017 |
2018 |
2019 |
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Net Income |
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Annual Depreciation |
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Cash Flow |
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Capital Expenditure |
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Cash Balance |
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.
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) (LCNRV—Cost-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.
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Cost |
NRV |
|
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12/31/17 |
$650,000 |
$650,000 |
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12/31/18 |
780,000 |
712,000 |
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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.
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Dec 31, 2018 |
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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.
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Dec 31, 2018 |
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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.
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Cost |
Retail |
|
|
Beginning inventory |
$ 68,000 |
$100,000 |
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Purchases |
255,000 |
400,000 |
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Net markups |
50,000 |
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Net markdowns |
110,000 |
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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.
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Cost |
Retail |
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Beginning Inventory |
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Purchases |
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Net Markups |
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Net Markdowns |
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Net Purchases |
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Goods Available |
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Sales |
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Estimated Ending Inventory (at retail) |
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Cost-to Retail percentage: (255,000/340,000)*100 = 75%
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Beginning Inventory Layer |
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Incremental Increase |
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At retail |
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At cost (10,000*75%) |
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Estimated Ending Inventory (LIFO) |
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(c) Estimate the amount of shortage, at retail, that has occurred at Becker Department Stores during the year ended November 30, 2017.
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Estimated Ending Inventory at Retail |
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Actual Ending Inventory at Retail |
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Estimated Inventory Shortage |
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(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.
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