Intermediate Accounting: Reporting And Analysis
3rd Edition
ISBN: 9781337788281
Author: James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Question
Chapter 7, Problem 5C
1.
To determine
Enlist the arguments for the management in favor of LIFO.
2.
To determine
Identify the disadvantages of LIFO.
3.
To determine
Identify the reasons for difference in the effect on earning and inventory.
4.
To determine
Identify the changes if any to first to requirements while advocating for a change to LIFO to the Dealer F.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
The 1970s were a period of historically high inflation. The 1976 financial statements of Ford
Motor Company included the following note: Note 1 (in part): Inventory valuation.
Inventories are stated at the lower of cost or market. In 1976 the company changed its
method of accounting from first-in, first-out (FIFO) to last-in, first-out (LIFO) for most of its
U.S. inventories.
The change to LIFO reduced net income in 1976 by $81 million or $0.86 a share. There is no
effect on prior years' earnings resulting from the change to LIFO in 1976 and, accordingly,
prior years' earnings have not been restated. If the FIFO method of inventory accounting
had been used by the company, inventories on December 31, 1976, would have been $166
million higher than reported.
Required:
2. Explain the disadvantages that are likely to result from the adoption of LIFO.
Zimt AG wrote down the value of its inventory in 2007 and reversed the write-down in2008. Compared to the results the company would have reported if the write-down hadnever occurred, Zimt’s reported 2008:A. profit was overstated.B. cash flow from operations was overstated.C. year-end inventory balance was overstated.
Jane Yoakam, president of Estefan Co., recently read an article that claimed that at least 100 of the country's largest 500 companies were either adopting or considering adopting the last-in, first-out (LIFO) method for valuing inventories. The article stated that the firms were switching to LIFO to (1) neutralize the effect of inflation in their financial statements, (2) eliminate inventory profits, and (3) reduce income taxes. Ms. Yoakam wonders if the switch would benefit her company.
Estefan currently uses the first-in, first-out (FIFO) method of inventory valuation in its periodic inventory system. The company has a high inventory turnover rate, and inventories represent a significant proportion of the assets.
Ms. Yoakam has been told that the LIFO system is more costly to operate and will provide little benefit to companies with high turnover. She intends to use the inventory method that is best for the company in the long run rather than selecting a method just because it is the…
Chapter 7 Solutions
Intermediate Accounting: Reporting And Analysis
Ch. 7 - Distinguish among the types of inventory accounts...Ch. 7 - Prob. 2GICh. 7 - Describe the flow of costs for o merchandising...Ch. 7 - Describe the relationship between cost of goods...Ch. 7 - Prob. 5GICh. 7 - Does the use of a perpetual system eliminate the...Ch. 7 - What is the general rule used to determine if a...Ch. 7 - For goods in transit at the end of a period,...Ch. 7 - Prob. 9GICh. 7 - Prob. 10GI
Ch. 7 - Prob. 11GICh. 7 - Consider each of the following independent...Ch. 7 - Prob. 13GICh. 7 - Prob. 14GICh. 7 - Prob. 15GICh. 7 - Prob. 16GICh. 7 - Prob. 17GICh. 7 - Prob. 18GICh. 7 - Prob. 19GICh. 7 - Prob. 20GICh. 7 - Discuss the LIFO and FIFO cost flow assumptions...Ch. 7 - Prob. 22GICh. 7 - Prob. 23GICh. 7 - List the acceptable cost flow assumptions under...Ch. 7 - Prob. 25GICh. 7 - Explain the dollar-value LIFO method of inventory...Ch. 7 - Describe the double-extension and link-chain...Ch. 7 - Prob. 28GICh. 7 - Prob. 29GICh. 7 - What is the impact of LIFO inventory liquidation...Ch. 7 - Goods on consignment should be included in the...Ch. 7 - The following items were included in Venicio...Ch. 7 - During 2019, R Corp., a manufacturer of chocolate...Ch. 7 - Dixon Menswear Shop purchased shirts from Colt...Ch. 7 - The moving average inventory cost flow assumption...Ch. 7 - The cost of the inventory on January 31, 2019,...Ch. 7 - Questions M7-6 and M7-7 are based on the following...Ch. 7 - Assuming no beginning inventory, what can be said...Ch. 7 - On December 31, 2018, Kern Company adopted the...Ch. 7 - When the double-extension approach to the...Ch. 7 - On December 31, Pitts Manufacturing Company...Ch. 7 - On January 1, Pope Enterprises inventory was...Ch. 7 - Reid Company uses the periodic inventory system....Ch. 7 - Billings Company uses a periodic inventory system....Ch. 7 - Dani Corporation signed a binding commitment on...Ch. 7 - Stevens Company uses a perpetual inventory system....Ch. 7 - RE7-6 Stevens Company uses a perpetual inventory...Ch. 7 - Johnson Company uses a perpetual inventory system....Ch. 7 - RE7-8 Johnson Company uses a perpetual inventory...Ch. 7 - Jessie Stores uses the periodic system of...Ch. 7 - Jessie Stores uses the periodic system of...Ch. 7 - Carla Company uses the perpetual inventory system....Ch. 7 - Carla Company uses the perpetual inventory system....Ch. 7 - On January 1 of Year 1, Dorso Company adopted the...Ch. 7 - An evaluation of Bryces Bookstores inventory was...Ch. 7 - Inventory Accounts for a Manufacturing Company...Ch. 7 - Prob. 2ECh. 7 - Perpetual versus Periodic Inventory Systems Graham...Ch. 7 - Determining Net Purchases The following amounts...Ch. 7 - Perpetual versus Periodic Inventory Systems...Ch. 7 - Goods in Transit Gravais Company made two...Ch. 7 - Items Included in Inventory The following are...Ch. 7 - Prob. 8ECh. 7 - Prob. 9ECh. 7 - Discounts Nelson Company bought inventory for...Ch. 7 - Alternative Inventory Methods Nevens Company uses...Ch. 7 - Alternative Inventory Methods Park Companys...Ch. 7 - Alternative Inventory Methods Frate Company was...Ch. 7 - LIFO, Perpetual and Periodic Riedel Companys...Ch. 7 - Habicht Company was formed in 2018 to produce a...Ch. 7 - Dollar-Value LIFO A company adopted the LIFO...Ch. 7 - On January 1, 2018, Sato Company adopted the...Ch. 7 - Dollar-Value LIFO Beistock Company manufactures...Ch. 7 - Acute Company manufactures a single product. On...Ch. 7 - Inventory Pools Stone Shoe Company adopted...Ch. 7 - Grimstad Company uses FIFO for internal reporting...Ch. 7 - LIFO and Interim Financial Reports Assume prices...Ch. 7 - Applying the Cost of Goods Sold Model The...Ch. 7 - Items to Be Included in Inventory As the auditor...Ch. 7 - Valuation of Inventory The inventory on hand at...Ch. 7 - Prob. 4PCh. 7 - Cost of Goods Sold As an accountant for Lee...Ch. 7 - Alternative Inventory Methods Garrett Company has...Ch. 7 - Totman Company has the following transactions...Ch. 7 - Comprehensive The following information for 2019...Ch. 7 - LIFO Liquidation Profit Hammond Company adopted...Ch. 7 - LIFO and Inventory Pools On January 1, 2016,...Ch. 7 - Olson Company adopted the dollar-value LIFO method...Ch. 7 - Dollar-Value LIFO Kwestel Company adopted the...Ch. 7 - Webster Company adopted do liar-value LIFO on...Ch. 7 - Dollar-Value LIFOComprehensive Kelly Company...Ch. 7 - On January 1, 2019, Lucas Distributors Inc....Ch. 7 - Inventory Valuation You are engaged in an audit of...Ch. 7 - Allen Company is a wholesale distributor of...Ch. 7 - FIFO and LIFO A company may compute inventory...Ch. 7 - Prob. 2CCh. 7 - In January, Broome Inc. requested and secured...Ch. 7 - Prob. 4CCh. 7 - Prob. 5CCh. 7 - Interpretation of GAAP and Ethical Issues Robin...Ch. 7 - Selection of an Inventory Method and Ethical...Ch. 7 - Analyzing Starbuckss Inventory Disclosures Obtain...Ch. 7 - Fenimore Manufacturing Company uses the average...
Knowledge Booster
Similar questions
- Inventory levels decreased from 2008 to 2009 for all of the following reasons except:A. LIFO liquidation.B. sales volume decreased.C. fluctuations in foreign currency translation rates.arrow_forwardZimt AG wrote down the value of its inventory in 2007 and reversed the write-downin 2008. Compared to the ratios that would have been calculated if the write-down hadnever occurred, Zimt’s reported 2007:A. current ratio was too high.B. gross margin was too high.C. inventory turnover was too high.arrow_forwardHubble Space Incorporated has the following data which includes inventory conversion period or ICP of the firms against which it benchmarks. The firm's new manager is looking into the company on how he could reduce its inventory enough to reduce its ICP to the benchmarks’ average. If this were done, by how much would inventories decrease? Assume a 365-day year. Cost of goods sold =P85,000; Inventory =P20,000; Inventory conversion period (ICP) =85.88; Benchmark inventory conversion period (ICP) =38.00 *arrow_forward
- Hubble Space Incorporated has the following data which includes inventory conversion period or ICP of the firms against which it benchmarks. The firm's new manager is looking into the company on how he could reduce its inventory enough to reduce its ICP to the benchmarks’ average. If this were done, by how much would inventories decrease? Assume a 365-day year. Cost of goods sold =P85,000; Inventory =P20,000; Inventory conversion period (ICP) =85.88; Benchmark inventory conversion period (ICP) =38.00 * A. P 8,129 B. P 7,316 C. P 9,032 D. P11,151 E. P10,036arrow_forwardHubble Space Incorporated has the following data which includes inventory conversion period or ICP of the firms against which it benchmarks. The firm's new manager is looking into the company on how he could reduce its inventory enough to reduce its ICP to the benchmarks' average. If this were done, by how much would inventories decrease? Assume a 365-day year. Cost of goods sold =P85,000; Inventory =P20,000; Inventory conversion period (ICP) =85.88; Benchmark inventory conversion period (ICP) =38.00 * P 7,316 P11,151 P 9,032 P10,036 O P 8,129arrow_forwardRios Inc, uses International Financial Reporting Standards (IFRS). In 2018, Rios Inc. experienced a decline in the value of its inventory resulting in a write-down of its inventory from €240,000 to €200,000. The company used the loss method in 2018 to record the necessary adjustment and uses an allowance account to reduce inventory to NRV. In 2019, market conditions have improved dramatically and Rios, Inc.’s inventory increases to an NRV of €216,000. Which of the following will Rios, Increcord in 2019?arrow_forward
- An analyst observes a decrease in a company’s inventory turnover. Which of the following would most likely explain this trend? B . Due to problems with obsolescent inventory last year, the company wrote off a large amount of its inventory at the beginning of the period.arrow_forwardRequired: 1. Determine the amount of net income that International Paper would have reported in 2017 if it had used the FIFO method (assume a 30 percent tax rate). (Enter your answer in millions. Round your intermediate and final answer to 1 decimal place.) Net income millionarrow_forwardDuring 2010, Orca Corp. decided to change from the FIFO method of inventory valuation to the weighted-average method. Inventory balances under each method were as follows:FIFO Weighted-averageJanuary 1, 2010 71,000 77,000December 31, 2010 79,000 83,000Orca’s income tax rate is 30%. In its 2010 financial statements, what amount should Orca report as the cumulative effect of this accounting change?a.2,800b.4,000c.4,200d.6,000arrow_forward
- During a recession, a manufacturing company using a perpetual inventory system wrote down its inventory that cost $5.0 million to the net realizable value of $4.5 million. Two years later this inventory was still available for sale; however, its net realizable value had increased to $5.5 million. Using the LCNRV rule, what is the correct journal entry to record this change in value? Select answer from the options below Debit: Cost of Goods Sold, $1 million; Credit: Gain on Inventory Valuation, $1 million Debit: Inventory, $500,000; Credit: Cost of Goods Sold, $500,000 Debit: Gain on Inventory Valuation, $500,000; Credit: Cost of Goods Sold, $500,000 Debit: Inventory, $1 million; Credit: Gain on Inventory Valuation, $1 millionarrow_forwardAn annual report for International Paper Company included the following note: The last-in, first-out inventory method is used to value most of International Paper’s U.S. inventories . . . If the first-in, first-out method had been used, it would have increased total inventory balances by approximately $293 million and $290 million at December 31, 2017, and 2016, respectively. For the year 2017, International Paper Company reported net income (after taxes) of $2,144 million. At December 31, 2017, the balance of International Paper Company’s retained earnings account was $6,180 million.arrow_forwardOscar Company has been using the FIFO cost flow method during a prolonged period of inflation. During the same time period,Oscar has been paying out all of its net income as dividends. What adverse effects may result from this policy?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage LearningCornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage LearningIntermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Intermediate Accounting: Reporting And Analysis
Accounting
ISBN:9781337788281
Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher:Cengage Learning
Cornerstones of Financial Accounting
Accounting
ISBN:9781337690881
Author:Jay Rich, Jeff Jones
Publisher:Cengage Learning
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning