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Chapter 9: Q3ISTQ (page 499)

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鈥檚 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 methodare used as compared to GAAP and LIFO.

Short Answer

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The correct option is 鈥渃.鈥�

Step by step solution

01

Effect of FIFO method

(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.

02

Explanation of incorrect options

(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.

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Most popular questions from this chapter

Question:The conventional retail inventory method yields results that are essentially the same as those yielded by the lower-of-cost-or-market method. Explain. Prepare an illustration of how the retail inventory method reduces inventory to market.

Presented below is information related to Waveland Inc. Cost Retail Inventory, 12/31/17 \(250,000 \) 390,000 Purchases 914,500 1,460,000 Purchase returns 60,000 80,000 Purchase discounts 18,000 鈥� Gross sales revenue (after employee discounts) 鈥� 1,410,000 Sales returns 鈥� 97,500 Markups 鈥� 120,000 Markup cancellations 鈥� 40,000 Markdowns 鈥� 45,000 Markdown cancellations 鈥� 20,000 Freight-in 42,000 鈥� Employee discounts granted 鈥� 8,000 Loss from breakage (normal) 鈥� 4,500 486 Chapter 9 Inventories: Additional Valuation Issues Instructions Assuming that Waveland Inc. uses the conventional retail inventory method, compute the cost of its ending inventory at December 31, 2018.

The inventory of Oheto Company on December 31, 2017, consists of the following items. Part Quantity Cost per Unit Net Realizable Value 110 600 \( 95 \)100 111 1,000 60 52 112 500 80 76 113 200 170 180 120 400 205 208 121a 1,600 16 1 122 300 240 235 a Part No. 121 is obsolete and has a realizable value of $1 each as scrap. Instructions 1. Determine the inventory as of December 31, 2017, by the LCNRV method, applying this method to each item. 2. Determine the inventory by the LCNRV method, applying the method to the total of the inventory.

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.

Maddox Specialty Company, a division of Lost World Inc., manufactures three models of gear shift components for bicycles that are sold to bicycle manufacturers, retailers, and catalog outlets. Since beginning operations in 1993, Maddox has used normal absorption costing and has assumed a first-in, first-out cost flow in its perpetual inventory system. The balances of the inventory accounts at the end of Maddox鈥檚 fiscal year, November 30, 2017, are shown below. The inventories are stated at cost before any year-end adjustments. Finished goods \(647,000 Work in process 112,500 Raw materials 264,000 Factory supplies 69,000 The following information relates to Maddox鈥檚 inventory and operations. 1. The finished goods inventory consists of the items analyzed below. Cost NRV Down tube shifter Standard model \) 67,500 \( 67,000 Click adjustment model 94,500 89,000 Deluxe model 108,000 110,000 Total down tube shifters 270,000 266,000 Bar end shifter Standard model 83,000 90,050 Click adjustment model 99,000 97,550 Total bar end shifters 182,000 187,600 Head tube shifter Standard model 78,000 77,650 Click adjustment model 117,000 119,300 Total head tube shifters 195,000 196,950 Total fi nished goods \)647,000 \(650,550 2. One-half of the head tube shifter finished goods inventory is held by catalog outlets on consignment. 3. Three-quarters of the bar end shifter finished goods inventory has been pledged as collateral for a bank loan. 4. One-half of the raw materials balance represents derailleurs acquired at a contracted price 20% above the current market price. The NRV of the rest of the raw materials is \)127,400. 5. The total NRV of the work in process inventory is \(108,700. 6. Included in the cost of factory supplies are obsolete items with an historical cost of \)4,200. The market value of the remaining factory supplies is $65,900. 7. Maddox applies the LCNRV method to each of the three types of shifters in finished goods inventory. For each of the other three inventory accounts, Maddox applies the LCNRV method to the total of each inventory account. 8. Consider all amounts presented above to be material in relation to Maddox鈥檚 financial statements taken as a whole. Instructions (a) Prepare the inventory section of Maddox鈥檚 balance sheet as of November 30, 2017, including any required note(s). (b) Without prejudice to your answer to (a), assume that the NRV of Maddox鈥檚 inventories is less than cost. Explain how this decline would be presented in Maddox鈥檚 income statement for the fiscal year ended November 30, 2017. (c) Assume that Maddox has a firm purchase commitment for the same type of derailleur included in the raw materials inventory as of November 30, 2017, and that the purchase commitment is at a contracted price 15% greater than the current market price. These derailleurs are to be delivered to Maddox after November 30, 2017. Discuss the impact, if any, that this purchase commitment would have on Maddox鈥檚 financial statements prepared for the fiscal year ended November 30, 2017.
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