Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter Inventories: Measurement AACSB assurance of learning standards in accounting and business education require documentation of outcomes assessment Although schools, departments, and faculty may approach assessment and its documentation differently, one approach is to provide specific questions on exams that become the basis for assessment To aid faculty in this endeavor, we have labeled each question, exercise, and problem in Intermediate Accounting, 7e, with the following AACSB learning skills: Questions AACSB Tags Exercises (cont.) AACSB Tags 8–1 8–2 8–3 8–4 8–5 8–6 8–7 8–8 8–9 8–10 8–11 8–12 8–13 8–14 8–15 8–16 Reflective thinking Reflective thinking Reflective thinking Reflective thinking Reflective thinking Reflective thinking Reflective thinking Reflective thinking Reflective thinking Reflective thinking Reflective thinking Reflective thinking Reflective thinking Reflective thinking Reflective thinking Reflective thinking 8–5 8–6 8–7 8–8 8–9 8–10 8–11 8–12 8–13 8–14 8–15 8–16 8–17 8–18 8–19 8–20 8–21 8–22 8–23 8–24 Analytic Analytic Analytic Analytic Analytic Analytic Analytic Communications Analytic Analytic Analytic Analytic Analytic Analytic Analytic Communications Analytic Analytic Analytic Reflective thinking Brief Exercises 8–1 8–2 8–3 8–4 8–5 8–6 8–7 8–8 8–9 8–10 8–11 8–12 8–13 Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Exercises 8–1 8–2 8–3 8–4 Solutions Manual, Vol.1, Chapter Analytic Analytic Analytic Analytic CPA/CMA Analytic Analytic Analytic Analytic Analytic Analytic Analytic Reflective thinking Analytic Analytic Analytic Problems 8–1 8–2 Analytic Analytic © The McGraw-Hill Companies, Inc., 2013 8–1 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Problems cont AACSB Tags 8–3 8–4 8–5 8–6 8–7 8–8 8–9 8–10 8–11 8–12 8–13 8–14 8–15 8–16 Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic © The McGraw-Hill Companies, Inc., 2013 8–2 Intermediate Accounting, 7/e Find more slides, ebooks, solution manual and testbank on www.downloadslide.com QUESTIONS FOR REVIEW OF KEY TOPICS Question 8–1 Inventory for a manufacturing company consists of (1) raw materials, (2) work in process, and (3) finished goods Raw materials represent the cost, primarily purchase price plus freight charges, of goods purchased from other manufacturers, that will become part of the finished product Workin-process inventory represents the products that are not yet complete The cost of work in process includes the cost of raw materials used in production, the cost of labor that can be directly traced to the goods in process, and an allocated portion of other manufacturing costs, called manufacturing overhead When the manufacturing process is completed, these costs that have been accumulated in work in process are transferred to finished goods Question 8–2 Beginning inventory plus net purchases for the period equals cost of goods available for sale The main difference between a perpetual and a periodic system is that the periodic system allocates cost of goods available for sale to ending inventory and cost of goods sold only at the end of the period The perpetual system accomplishes this allocation by decreasing inventory and increasing cost of goods sold each time goods are sold Question 8–3 Perpetual System Periodic System (1) Purchase of merchandise debit inventory debit purchases (2) Sale of merchandise debit cost of goods sold; credit inventory no entry (3) Return of merchandise credit inventory credit purchase returns (4) Payment of freight debit inventory debit freight-in Question 8–4 Inventory shipped f.o.b shipping point is included in the inventory of the purchaser when the merchandise reaches the common carrier Laetner Corporation records the purchase in 2013 and includes the shipment in its ending inventory Bockner Company records the sale in 2013 Inventory shipped f.o.b destination is included in the inventory of the seller until it reaches the purchaser’s location Bockner would include the merchandise in its 2013 ending inventory and the sale/purchase would be recorded in 2014 Solutions Manual, Vol.1, Chapter © The McGraw-Hill Companies, Inc., 2013 8–3 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Answers to Questions (continued) Question 8–5 A consignment is an arrangement under which goods are physically transferred to another company (the consignee), but the transferor (consignor) retains legal title If the consignee can’t find a buyer, the goods are returned to the consignor Goods held on consignment are included in the inventory of the consignor until sold by the consignee Question 8–6 By the gross method, purchase discounts not taken are viewed as part of inventory cost By the net method, purchase discounts not taken are considered interest expense because they are viewed as compensation to the seller for providing financing to the buyer Question 8–7 Beginning inventory Purchases Ending inventory Purchase returns Freight-in — — — — — increase increase decrease decrease increase Question 8–8 Four methods of assigning cost to ending inventory and cost of goods sold are (1) specific identification, (2) first-in, first-out (FIFO), (3) last-in, first-out (LIFO), and (4) average cost The specific identification method requires each unit sold during the period or each unit on hand at the end of the period to be traced through the system and matched with its actual cost First-in, first-out (FIFO) assumes that units sold are the first units acquired The last-in, first-out (LIFO) method assumes that the units sold are the most recent units purchased The average cost method assumes that cost of goods sold and ending inventory consist of a mixture of all the goods available for sale The average unit cost applied to goods sold or ending inventory is an average unit cost weighted by the number of units acquired at the various unit prices Question 8–9 When costs are declining, LIFO will result in a lower cost of goods sold and higher income than FIFO This is because LIFO will include in cost of goods sold the most recently purchased lower-cost merchandise LIFO also will provide a higher ending inventory in the balance sheet © The McGraw-Hill Companies, Inc., 2013 8–4 Intermediate Accounting, 7/e Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Answers to Questions (continued) Question 8–10 Proponents of LIFO argue that it provides a better match of revenues and expenses because cost of goods sold includes the costs of the most recent purchases These are matched with sales that reflect a current selling price On the other hand, inventory costs in the balance sheet generally are out of date because they are derived from old purchase transactions It is conceivable that a company’s LIFO inventory balance could be based on unit costs actually incurred several years earlier When inventory quantity declines during a period, then these out-of-date inventory layers will be liquidated and cost of goods sold will match noncurrent costs with current selling prices Question 8–11 Many companies choose the LIFO inventory method to reduce income taxes in periods when prices are rising In periods of rising prices, LIFO results in a higher cost of goods sold and therefore a lower net income than the other methods The companies’ income tax returns will report lower taxable incomes using LIFO and lower taxes will be paid currently If a company uses LIFO to measure its taxable income, IRS regulations require that LIFO also be used to measure income reported to investors and creditors Question 8–12 The gross profit, inventory turnover, and average days in inventory ratios are designed to monitor inventories The gross profit ratio is calculated by dividing gross profit (net sales minus cost of goods sold) by net sales Inventory turnover is calculated by dividing cost of goods sold by average inventory, and we compute average days in inventory by dividing the number of days in the period by the inventory turnover ratio Question 8–13 A LIFO inventory pool groups inventory units into pools based on physical similarities of the individual units The average cost for all of a pool’s beginning inventory and for all of a pool’s purchases during the period is used instead of individual unit costs If the quantity of ending inventory for the pool increases, then ending inventory will consist of the beginning inventory plus a layer added during the period at the average acquisition cost for the pool Question 8–14 The dollar-value LIFO method has important advantages First, it simplifies the recordkeeping procedures compared to unit LIFO because no information is needed about unit flows Second, it minimizes the probability of the liquidation of LIFO inventory layers, even more so than the use of pools alone, through the aggregation of many types of inventory into larger pools In addition, firms that not replace units sold with new units of the same kind can use the method Solutions Manual, Vol.1, Chapter © The McGraw-Hill Companies, Inc., 2013 8–5 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Answers to Questions (concluded) Question 8–15 After determining ending inventory at year-end cost, the following steps remain: Convert ending inventory valued at year-end cost to base year cost Identify the layers in ending inventory with the years they were created Convert each layer’s base year cost measurement to layer year cost measurement using the layer year’s cost index and then sum the layers Question 8–16 The primary difference between U.S GAAP and IFRS in the methods allowed to value inventory is that IFRS does not allow the use of the LIFO method © The McGraw-Hill Companies, Inc., 2013 8–6 Intermediate Accounting, 7/e Find more slides, ebooks, solution manual and testbank on www.downloadslide.com BRIEF EXERCISES Brief Exercise 8–1 Beginning inventory Plus: Purchases Less: Cost of goods sold Ending inventory $186,000 945,000 (982,000) $149,000 Brief Exercise 8–2 To record the purchase of inventory on account Inventory 845,000 Accounts payable 845,000 To record sales on account and cost of goods sold Accounts receivable 1,420,000 Sales revenue 1,420,000 Cost of goods sold 902,000 Inventory 902,000 Solutions Manual, Vol.1, Chapter © The McGraw-Hill Companies, Inc., 2013 8–7 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Brief Exercise 8–3 Both shipments should be included in inventory The goods shipped to a customer f.o.b destination did not arrive at the customer’s location until after the fiscal year-end They belong to Kelly until they arrive at the customer’s location Title to the goods shipped from a supplier to Kelly on December 30, f.o.b shipping point, changed hands on December 30 Brief Exercise 8–4 Purchase price = 10 units x $25,000 = $250,000 December 28, 2013 Inventory 250,000 Accounts payable 250,000 January 6, 2014 Accounts payable 250,000 Cash (99% x $250,000) 247,500 Inventory (1% x $250,000) 2,500 © The McGraw-Hill Companies, Inc., 2013 8–8 Intermediate Accounting, 7/e Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Brief Exercise 8–5 December 28, 2013 Inventory (99% x $250,000) 247,500 Accounts payable 247,500 January 6, 2014 Accounts payable 247,500 Cash 247,500 Solutions Manual, Vol.1, Chapter © The McGraw-Hill Companies, Inc., 2013 8–9 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Brief Exercise 8–6 Cost of goods available for sale: Beginning inventory (200 x $25) Purchases: 100 x $28 200 x $30 Cost of goods available (500 units) $5,000 $2,800 6,000 8,800 $13,800 First-in, first-out (FIFO) Cost of goods available for sale (500 units) Less: Ending inventory (determined below) Cost of goods sold $13,800 (8,100) $5,700 Cost of ending inventory: Date of purchase January January 19 Total Units 75 200 Unit cost $28 30 Total cost $2,100 6,000 $8,100 Average cost Cost of goods available for sale (500 units) Less: Ending inventory (determined below) Cost of goods sold $13,800 (7,590) $6,210 * Cost of ending inventory: $13,800 Weighted-average unit cost = = $27.60 500 units 275 units x $27.60 = $7,590 * Alternatively, could be determined by multiplying the units sold by the average cost: 225 units x $27.60 = $6,210 © The McGraw-Hill Companies, Inc., 2013 8–10 Intermediate Accounting, 7/e Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Problem 8–15 Date Ending Inventory at Base Year Cost 1/1/13 $260,000 Inventory Layers at Base Year Cost Inventory Layers Converted to Cost Ending Inventory DVL Cost = $260,000 $260,000 (base) $260,000 x 1.00 = $260,000 $260,000 = $333,333 $260,000 (base) 73,333 (2013) $260,000 x 1.00 = 73,333 x 1.02 = $260,000 74,800 334,800 $260,000 (base) 70,189 (2013) $260,000 x 1.00 = 70,189 x 1.02 = $260,000 71,593 331,593 $260,000 (base) 70,189 (2013) 43,643 (2015) $260,000 x 1.00 = 70,189 x 1.02 = 43,643 x 1.07 = $260,000 71,593 46,698 378,291 $260,000 (base) 70,189 (2013) 43,643 (2015) 17,077 (2016) $260,000 70,189 43,643 17,077 $260,000 71,593 46,698 18,785 397,076 1.00 12/31/13 $340,000 1.02 12/31/14 $350,000 = $330,189 1.06 12/31/15 $400,000 = $373,832 1.07 12/31/16 $430,000 = $390,909 1.10 Solutions Manual, Vol.1, Chapter x 1.00 x 1.02 x 1.07 x 1.10 = = = = © The McGraw-Hill Companies, Inc., 2013 8–65 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Problem 8–16 Date Ending Inventory at Base Year Cost 1/1/13 $84,000 Inventory Layers at Base Year Cost Ending Inventory DVL Cost Inventory Layers Converted to Cost = $84,000 $84,000 (base) $84,000 x 1.00 = $84,000 $84,000 = $96,000 $84,000 (base) 12,000 (2013) $84,000 12,000 x 1.00 = x 1.05 = $84,000 12,600 96,600 $84,000 (base) 12,000 (2013) 24,000 (2014) $84,000 12,000 24,000 x 1.00 = x 1.05 = x 1.14 = 84,000 12,600 27,360 123,960 $84,000 (base) 12,000 (2013) 24,000 (2014) 5,000 (2015) $84,000 12,000 24,000 5,000 x 1.00 x 1.05 x 1.14 x 1.20 = = = = $84,000 12,600 27,360 6,000 129,960 $84,000 (base) 12,000 (2013) 24,000 (2014) 5,000 (2015) 3,000 (2016) $84,000 12,000 24,000 5,000 3,000(3) x 1.00 x 1.05 x 1.14 x 1.20 x 1.25 = = = = = 1.00 12/31/13 $100,800 1.05 12/31/14 $136,800 = $120,000 1.14 12/31/15 $150,000 = $125,000 1.20 (1) 12/31/16 (1) (2) (3) (4) (5) $160,000(5) = $128,000(4) 1.25 84,000 12,600 27,360 6,000 3,750(2) 133,710 $150,000 y $125,000 = 1.20 (2015 cost index) $133,710 – 129,960 = $3,750 $3,750 y 1.25 = $3,000 $125,000 + 3,000 = $128,000 (2016 inventory at base-year cost) $128,000 x 1.25 = $160,000 (2016 inventory at year-end costs) © The McGraw-Hill Companies, Inc., 2013 8–66 Intermediate Accounting, 7/e Find more slides, ebooks, solution manual and testbank on www.downloadslide.com CASES Judgment Case 8–1 Advance warning of the company's impending bankruptcy existed at the date of the financial statements As a rule, inventories should rise in tandem with sales If inventories rise faster, it may be because the goods simply aren't selling This is particularly true of companies in faddish or seasonal businesses—Merry-Go-Round's world The company's report showed that inventories on January 30 were $82.2 million, up 37 percent from $60 million a year earlier That's well above the 15 percent sales growth in the same period, to $877.5 million from $761.2 million This alone should have been a major cause for concern It indicated the company's goods simply weren't selling as rapidly as it expected, causing its inventories to bulge The increase in receivables from $6,195 to over $6 million should also have been cause for concern Solutions Manual, Vol.1, Chapter © The McGraw-Hill Companies, Inc., 2013 8–67 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Real World Case 8–2 Requirement Identifying items that should be included in inventory is difficult due to goods in transit, goods on consignment, and sales returns Goods in transit Inventory shipped f.o.b shipping point is included in the purchaser’s inventory as soon as the merchandise is shipped On the other hand, inventory shipped f.o.b destination is included in the purchaser’s inventory only after it reaches the purchaser’s location Goods on consignment Goods held on consignment are included in the inventory of the consignor until sold by the consignee Sales returns When the right of return exists, a seller must be able to estimate those returns As a result, a company includes in inventory the cost of merchandise it anticipates will be returned Requirement In addition to the direct acquisition costs such as the price paid and transportation costs to obtain inventory, the costs of unloading, unpacking, and preparing inventory for sale or raw materials for use, if material in amount, also should be included in the cost of inventory Requirement Sport Chalet considers cost to include the direct cost of merchandise and inbound freight, plus internal costs associated with merchandise procurement, storage, and handling © The McGraw-Hill Companies, Inc., 2013 8–68 Intermediate Accounting, 7/e Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Judgment Case 8–3 a The specific identification method requires each unit to be clearly distinguished from similar units either by description, identification number, location, or other characteristic Costs are accumulated for specific units and expensed as the units are sold Thus, the specific identification method results in recognized cost flows being identical to actual physical flows Ideally, each unit is relatively expensive and the number of units relatively few so that recording costs is not burdensome Under the specific identification method, if similar items have different costs, cost of goods sold is influenced by the specific units sold b It is appropriate for Happlia to use the specific identification method because each appliance is expensive, and easily identified by number and description The specific identification method is feasible because Happlia already maintains records of its units held by individual retailers Management’s ability to manipulate cost of goods sold is minimized because once the inventory is in the retailer’s hands, Happlia’s management cannot influence the units selected for sale a Happlia should include in inventory carrying amounts all necessary and reasonable costs to get an appliance into a useful condition and place for sale Common (or joint) costs should be allocated to individual units Such costs exclude the excess costs incurred in transporting refrigerators to Minneapolis and their reshipment to Kansas City These unit costs should only include normal freight costs from Des Moines to Kansas City In addition, costs incurred to provide time utility to the goods, that is, ensuring that they are available when required, will also be included in inventory carrying amounts b Examples of inventoriable costs include the unit invoice price, plus an allocated proportion of the port handling fees, import duties, freight costs to Des Moines and to retailers, insurance costs, repackaging, and warehousing costs The 2013 income statement should report in cost of goods sold all inventory costs related to units sold in 2013, regardless of when cash is received from retailers Excess freight costs incurred for shipping the refrigerators from Minneapolis to Kansas City should be included in determining operating income Solutions Manual, Vol.1, Chapter © The McGraw-Hill Companies, Inc., 2013 8–69 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Communication Case 8–4 Suggested Grading Concepts and Grading Scheme: Content (70%) _ 20 Describes the differential effect on ending inventory and cost of goods sold of using FIFO versus LIFO when _ Prices are increasing _ Prices are decreasing _ 25 Discusses the various motivating factors that might influence the choice of inventory method The actual physical flow of product The better match of expenses with revenues provided by LIFO The effect on the balance sheet The effect on reported income and income taxes The cost of implementation of LIFO _ 10 Discusses briefly the methods available to simplify LIFO _ 15 Discusses the IRS conformity rule with respect to LIFO and the relaxation of the rule that allows a a company using LIFO to present supplemental non-LIFO disclosures _ 70 points Writing (30%) _ Terminology and tone appropriate to the audience of a company president _ 12 _ 12 Organization permits ease of understanding _ Introduction that states purpose _ Paragraphs that separate main points English _ Sentences grammatically clear and well organized, concise _ Word selection _ Spelling _ Grammar and punctuation _ 30 points © The McGraw-Hill Companies, Inc., 2013 8–70 Intermediate Accounting, 7/e Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Communication Case 8–5 LIFO produces a higher cost of goods sold, lower taxable income, and therefore lower income taxes currently payable than FIFO only in periods when the costs of the company’s products are rising When costs are decreasing, LIFO results in lower cost of goods sold, higher taxable income, and a higher current tax liability than FIFO In the case of the electronics client, you would explain this to the intern concluding that the costs of the client's products must be decreasing, as frequently occurs in this industry Judgment Case 8–6 At the end of a reporting period it is important to ensure that a proper inventory cutoff is made A proper cutoff involves the determination of the ownership of goods that are in transit between the company and its customers as well as the company and its suppliers If the shipment is made f.o.b shipping point, then ownership is transferred to the buyer when the goods reach the common carrier If the shipment is made f.o.b destination, then ownership is transferred to the buyer when the goods arrive at the buyer’s location In this case, John is incorrect if the goods were shipped f.o.b destination If so, even though the company is not in physical possession of the goods, they should be included in ending inventory because the shipment had not reached the buyer's location by the end of the reporting period Solutions Manual, Vol.1, Chapter © The McGraw-Hill Companies, Inc., 2013 8–71 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Ethics Case 8–7 Requirement Without purchase of the additional units: Sales (35,000 @ $60) Cost of goods sold (35,000 x $30) Gross profit $2,100,000 (1,050,000) $1,050,000 Due Jim Lester ($1,050,000 x 20%) = $210,000 With purchase of the additional units: Sales Cost of goods sold: 20,000 x $40 $800,000 15,000 x $30 450,000 Gross profit $2,100,000 (1,250,000) $ 850,000 Due Jim Lester ($850,000 x 20%) = $170,000 Requirement Discussion should include these elements Facts: If Moncrief purchases the additional units at the end of the year under a periodic LIFO inventory system, the transaction results in a reduced payment to Jim Lester, reduced profits to shareholders, and reduced income tax payments to government entities By purchasing the additional units of Zelenex, Moncrief reduces Jim Lester's payment by $40,000 ($210,000 – 170,000) and decreases gross profit by $200,000 ($1,050,000 – 850,000) The net effect on before-tax income is a decrease of $160,000 ($200,000 – 40,000) Since Moncrief does not intend to sell the units until 2014, the only logical reason for purchasing more costly inventory at year-end is profit manipulation Ethical Dilemma: Should Moncrief exercise its right to purchase inventory at will, resulting in a reduction in net income, or recognize the rights of Jim Lester to receive profit for the sale of his product, shareholders' rights to have their investment appreciate through positive earnings, and government entities' rights to collect tax on economic net income? © The McGraw-Hill Companies, Inc., 2013 8–72 Intermediate Accounting, 7/e Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Real World Case 8–8 Requirement The LIFO conformity rule permits LIFO users to present designated supplemental disclosures These disclosures allow a company using LIFO to report, in a note, the difference between inventories valued using LIFO and inventory valued as if another method had been used Kroger's note provides this supplemental information Requirement 1/29/11 Ending Beginning Inventory Inventory ($ in millions) Inventory as stated Add: Increase in LIFO inventory FIFO inventory balances $4,966 827 $5,793 $4,935 770 $5,705 Requirement Cost of goods sold for the fiscal year ended January 29, 2011, would have been $57 million lower had Kroger used FIFO for its entire inventory While beginning inventory would have been $770 million higher, ending inventory also would have been higher by $827 million An increase in beginning inventory causes an increase in cost of goods sold, but an increase in ending inventory causes a decrease in cost of goods sold Purchases for the year are the same regardless of the inventory valuation method used Solutions Manual, Vol.1, Chapter © The McGraw-Hill Companies, Inc., 2013 8–73 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Real World Case 8–9 Requirement The following is based on Whole Foods’ 2010 financial statements Answers will vary depending on the financial statement dates chosen a Whole Foods uses the last-in, first-out (LIFO) method for approximately 93.9% of its inventories at the end of 2010 and 93.6% of its inventories at the end of 2009 and FIFO for the remainder b Assuming that current cost approximates FIFO cost, the inventory disclosure note indicates that, if FIFO had been used to value LIFO inventories, inventories would have been higher than reported by $19.4 million at the end of 2010 and $27.1 million at the end of 2009 Cost of goods sold for 2010 would have been $7.7 million higher ($27.1 – 19.4) had Whole Foods used FIFO Beginning inventory would have been $27.1 million higher and ending inventory also would have been higher by $19.4 million An increase in beginning inventory causes an increase in cost of goods sold, while an increase in ending inventory causes a decrease in cost of goods sold Purchases for 2010 are the same regardless of the inventory valuation method used c Inventory turnover = cost of goods sold divided by average inventory ($ rounded to millions) Inventory turnover = $5,870 = 18.52 times $317 * *($323 + 311) ÷ © The McGraw-Hill Companies, Inc., 2013 8–74 Intermediate Accounting, 7/e Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Communication Case 8–10 The dollar-value LIFO inventory estimation technique begins with the determination of the current year’s ending inventory valued in terms of year-end costs It is not necessary for a company using DVL to track the cost of purchases during the year All that is needed is to take the physical quantities of goods on hand at the end of the year and apply year-end costs The next step is to convert the ending inventory from year-end costs to base year costs This usually is accomplished by dividing the ending inventory at year-end costs by the year’s cost index The cost index reflects the change in cost from a base year to the current year The ending inventory has been deflated for cost changes from the base year to the end of the current year The next step in the procedure is to identify the layers in ending inventory with the years they were created by comparing ending inventory at base year cost to the beginning inventory at base year cost Applying the LIFO concept, if inventory has increased, ending inventory at base year cost consists of the beginning inventory layer plus a current year layer The final step converts the layers identified to cost by multiplying the layers at base year cost by the layer’s cost index The costs are totaled to obtain ending inventory at DVL cost Solutions Manual, Vol.1, Chapter © The McGraw-Hill Companies, Inc., 2013 8–75 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Research Case 8–11 Requirement The FASB’s codification citation that provides guidance for determining whether an arrangement involving the sale of inventory is in substance a financing arrangement is FASB ASC 470–40–05–2: “Debt–Product Financing Arrangements– Overview and Background.” Requirement The FASB’s codification citation that addresses the recognition of a product financing arrangement is FASB ASC 470–40–25–1: “Debt–Product Financing Arrangements–Recognition.” Requirement The appropriate accounting treatment for this type of arrangement is for the sponsor to record a liability at the time the proceeds are received from the other entity The sponsor does not record the transaction as a sale and does not remove the product from its inventory The cost of the repurchase amount in excess of the originally recorded liability represents financing and holding costs These costs are accounted for in accordance with the sponsor’s accounting policies applicable to other financing and holding costs Notice that this is an example of “substance (a loan) over form (a sale).” Requirement Journal entry to record the “sale” (cash receipt): Cash 160,000 Liability—product financing arrangement 160,000 Journal entry to record the repurchase: Liability—product financing arrangement 160,000 Holding and financing costs* 4,000 Cash 164,000 © The McGraw-Hill Companies, Inc., 2013 8–76 Intermediate Accounting, 7/e Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Research Case 8–11 (concluded) *The treatment of these costs depends on the accounting policies of the sponsor For example, if these costs normally are expensed as period costs, then the debit in this case would be to an expense account (or accounts) Solutions Manual, Vol.1, Chapter © The McGraw-Hill Companies, Inc., 2013 8–77 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Analysis Case 8–12 Requirement ($ in millions) SAKS DILLARDS Gross profit ratio = 1,098 2,786 = 39% 2,145 6,121 = 35% Inventory turnover = 1,688 660 = 2.56 times 3,976 1,295.5 = 3.07 times Average days in inventory = = 143 days 365 3.07 = 119 days 365 2.56 The gross profit ratios for the two companies are similar, and both are higher than the industry average The inventory turnover ratios for the two companies reveal that, on average, it takes Saks 24 more days to sell its inventory than Dillards This could be a reflection of more “higher-end” merchandise sold at Saks, which would also explain the slightly higher gross profit ratio of 39% compared to 35% for Dillards Saks turns its inventory over 14 days slower than the industry average, Dillards 10 days faster Requirement The objective of this requirement is to motivate students to obtain hands-on familiarity with actual annual reports and to apply the techniques learned in the chapter You may wish to provide students with multiple copies of the same annual reports and compare responses Another approach is to divide the class into teams who evaluate reports from a group perspective © The McGraw-Hill Companies, Inc., 2013 8–78 Intermediate Accounting, 7/e Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Air France–KLM Case Per note 3.15, AF uses the weighted-average method to value its inventory Under IFRS, the FIFO (first-in, first-out) method also can be used However, the LIFO (last-in, first-out) method, which can be used under U.S GAAP in addition to the average cost method and the FIFO method, is prohibited under IFRS Solutions Manual, Vol.1, Chapter © The McGraw-Hill Companies, Inc., 2013 8–79 ... determined by multiplying the units sold by the average cost: 225 units x $27.60 = $6,210 © The McGraw-Hill Companies, Inc., 2013 8–10 Intermediate Accounting, 7/e Find more slides, ebooks, solution manual. .. Inc., 2013 8–26 34,300 700 35,000 Intermediate Accounting, 7/e Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Exercise 8–12 The FASB Accounting Standards Codification... determined by multiplying the units sold by the average cost: 15,000 units x $5.40 = $81,000 © The McGraw-Hill Companies, Inc., 2013 8–30 Intermediate Accounting, 7/e Find more slides, ebooks, solution