Starfish Company (a company using GAAP and the LIFO inventory method) is considering changing to IFRS and the FIFO inventory method. How would a comparison of these methods affect Starfish’s financials? (a) During a period of inflation, working capital would decrease when IFRS and the FIFO inventory method are used as compared to GAAP and LIFO. (b) During a period of inflation, the taxes will decrease when IFRS and the FIFO inventory method are used as compared to GAAP and LIFO. During a period of inflation, net income would be greater if IFRS and the FIFO inventory method are used as compared to GAAP and LIFO. (d) During a period of inflation, the current ratio would decrease when IFRS and the FIFO inventory method are used as compared to GAAP and LIFO.
The correct option is “c.”
(c) Under the FIFO method, inventories thatare purchased first or early are sold first as compared to the recent inventories purchased. In the event of a price increase in the market or in case of inflation, the cost of goods sold will include inventories purchased at a lower price. Hence, the cost of goods sold will be lower, increasing the net income.
(a) The working capital will increase, as current assets will include inventories purchased at a higher price.
(b) The taxes will increase, as in this case cost of goods sold will decrease, and net income will increase, which will increase the overall tax liability.
(d) Current ratio will increase, as current assets will include inventories purchased at a higher price.
Thus, the correct option is the third.
Eastman Company lost most of its inventory in a fire in December just before the year-end physical inventory was taken. Corporate records disclose the followingInventory (beginning) $ 80,000 Sales revenue $415,000 Purchases 290,000 Sales returns 21,000 Purchase returns 28,000 Gross profi t % based on net selling price 35%Merchandise with a selling price of $30,000 remained undamaged after the fire, and damaged merchandise has a net realizable value of $8,150. The company does not carry fire insurance on its inventory. Instructions Prepare a formal labeled schedule computing the fire loss incurred. (Do not use the retail inventory method.)
Kumar Inc. uses a perpetual inventory system. At January 1, 2017, inventory was $214,000,000 at both cost and net realizable value. At December 31, 2017, the inventory was $286,000,000 at cost and $265,000,000 at net realizable value. Prepare the entry under (a) the cost-of-goods-sold method and (b) the loss method.
The financial statements of ConAgra Foods, Inc.’s 2014 annual report disclose the following information. (in millions) 2014 2013 2012 Year-end inventories $2,201 $2,077 $2,341 Fiscal Year 2014 2013 Net sales $17,703 $15,427 Cost of goods sold 13,980 11,864 Net income 315 786Instructions Compute ConAgra’s (a) inventory turnover and (b) the average days to sell inventory for 2014 and 2013.
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