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Chapter 8: 17Q (page 421)
Explain the following terms.
(a) LIFO layer.
(b) LIFO reserve.
(c) LIFO effect.
LIFO method tackles the different issues. These issues are related to the LIFO layer, LIFO reserve, and LIFO effect.
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Geddes Corporation is a medium-sized manufacturing company with two divisions and three subsidiaries, all located in the United States. The Metallic Division manufactures metal castings for the automotive industry, and the Plastic Division produces small plastic items for electrical products and other uses. The three subsidiaries manufacture various products for other industrial users.
Geddes Corporation plans to change from the lower of first-in, first-out (FIFO)-cost-or market method of inventory valuation to the last-in, first-out (LIFO) method of inventory valuation to obtain tax benefits. To make the method acceptable for tax purposes, the change also will be made for its annual financial statements.
Instructions
(a) Describe the establishment of and subsequent pricing procedures for each of the following LIFO inventory methods.
(1) LIFO applied to units of product when the periodic inventory system is
used.
(2) Application of the dollar-value method to LIFO units of product.
(b) Discuss the specific advantages and disadvantages of using the dollar-value LIFO application as compared to specific goods LIFO (unit LIFO). (Ignore income tax considerations.)
(c) Discuss the general advantages and disadvantages claimed for LIFO methods.
The net income per books of Linda Patrick Company was determined without knowledge of the errors indicated.
Net Income Error in Ending
Year per Books Inventory
2012 \(50,000 Overstated \) 3,000
2013 52,000 Overstated 9,000
2014 54,000 Understated 11,000
2015 56,000 No error
2016 58,000 Understated 2,000
2017 60,000 Overstated 8,000
Instructions
Prepare a worksheet to show the adjusted net income figure for each of the 6 years after taking into account the inventoryerrors.
FIFO, average-cost, and LIFO methods are often used instead of specific identification for inventory valuation purposes. Compare these methods with the specific identification method, discussing the theoretical propriety of each method in the determination of income and asset valuation.
What is the difference between a perpetual inventory and a physical inventory? If a company maintains a perpetual inventory, should its physical inventory at any date be equal to the amount indicated by the perpetual inventory records? Why?
Accounting, Analysis, and Principles
Englehart Company sells two types of pumps. One is large and is for commercial use. The other is smaller and is used in residentialswimming pools. The following inventory data is available for the month of March.
Price per
Units Unit Total
Residential Pumps
Inventory at Feb. 28: 200 \( 400 \) 80,000
Purchases:
March 10 500 \( 450 \)225,000
March 20 400 \( 475 \)190,000
March 30 300 \( 500 \)150,000
Sales:
March 15 500 \( 540 \)270,000
March 25 400 \( 570 \)228,000
Inventory at March 31: 500
Commercial Pumps
Inventory at Feb. 28: 600 \( 800 \)480,000
Purchases:
March 3 600 \( 900 \)540,000
March 12 300 \( 950 \)285,000
March 21 500 \(1,000 \)500,000
Sales:
March 18 900 \(1,080 \)972,000
March 29 600 \(1,140 \)684,000
Inventory at March 31: 500
Accounting
(a) Assuming Englehart uses a periodic inventory system, determine the cost of inventory on hand at March 31 and thecost of goods sold for March under first-in, first-out (FIFO).
(b) Assume Englehart uses dollar-value LIFO and one pool, consisting of the combination of residential and commercialpumps. Determine the cost of inventory on hand at March 31 and the cost of goods sold for March. Assume Englehart鈥檚initial adoption of LIFO is on March 1. Use the double-extension method to determine the appropriate price indices.
(Hint:The price index for February 28/March 1 should be 1.00.) (Round the index to three decimal places.)
Analysis
(a) Assume you need to compute a current ratio for Englehart. Which inventory method (FIFO or dollar-value LIFO) doyou think would give you a more meaningful current ratio?
(b) Some of Englehart鈥檚 competitors use LIFO inventory costing and some use FIFO. How can an analyst compare theresults of companies in an industry, when some use LIFO and others use FIFO?
Principles
Can companies change from one inventory accounting method to another? If a company changes to an inventory accounting methodused by most of its competitors, what are the trade-offs in terms of the conceptual framework discussed in Chapter 2 of the textbook?
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