Exam 7: Reporting and Analyzing Inventory

As a shareholder of Wesleyan Industries, a manufacturer of DVD players, you are interested in comparing gross profits over a 3-year period. Calculate the gross profit margin for years 2016, 2015, and 2014 using the income statement items below (in thousands). Interpret your results.

Use the following information for questions below: Wonderland Company imports and sells a product produced in Canada. In the summer of 2016, a natural disaster disrupted production, affecting its supply of product. On January 1, 2016, Wonderland's inventory records were as follows: Through mid-December of 2016, purchases were limited to16,000 units, because the cost had increased to $320 per unit. Wonderland sold 18,400 units during 2016 at a price of $392 per unit, which significantly depleted its inventory. -Assume that Wonderland makes no further purchases during 2016. Wonderland uses the LIFO inventory method. Compute Wonderland's gross profit for 2016.

The following data refer to Sean Company's ending inventory: How much is ending inventory if the lower of cost or market rule is applied to the total inventory?

Mountain Gas Company, a large national company uses the LIFO inventory method for most of its inventories. Its inventory costs are heavily dependent on the price of petroleum. In 2015, when the price of oil was down, Mountain followed the lower of cost of market rule and wrote down its inventory by $880 million. In 2016, when the price of petroleum recovered, the company disclosed that the market price exceeded the LIFO carrying value by $10 billion. Explain why the lower of cost or market rule resulted in a write-down during 2015. What is inconsistent about the treatment for 2015 and 2016, in terms of conservatism in accounting? If the price of petroleum declines significantly in 2017, what is the likely consequence?

The following are excerpted from Super Drug Store's 2016 financial statements (in millions): Super Drug Store's inventory footnote follows: Inventories Inventories are valued on a lower of last-in, first-out (LIFO) cost or market basis. At August 31, 2016 and 2015, inventories would have been greater by $3,794 million and $3,174 million, respectively, if they had been valued on a lower of first-in, first-out (FIFO) cost or market basis. Inventory includes product cost, inbound freight, warehousing costs and vendor allowances that are not included as a reduction of advertising expense. A. How much is Super Drug Store's ratio of inventories to current assets for each year? Does this percentage make sense in Super Drug Store's industry? What does the change suggest about Super Drug Store? B. Calculate the ratio of inventories to current assets under the FIFO method for both years. Why does it differ from your answer to part A? C. Compute the inventory turnover ratios for 2016 and 2015 (ending inventory in 2014 is $18,445). What does this say about the company? D. Is it correct to include in-bound freight in Super Drug Store's inventory cost? Why or why not?

The cost of acquiring inventory includes adding the cost of freight associated with obtaining the inventory and subtracting the amount of cash discount allowed from timely payment.

Gross profit is calculated as net sales less the cost of goods sold. Gross profit margin (GPM = gross profit / sales) on the other hand, is considered a more useful metric for gross profit analysis. A. Why is GPM a more useful metric than gross profit in dollars? B. What factors most influence gross profit margin?

Use the following information for questions below: Wonderland Company imports and sells a product produced in Canada. In the summer of 2016, a natural disaster disrupted production, affecting its supply of product. On January 1, 2016, Wonderland's inventory records were as follows: Through mid-December of 2016, purchases were limited to16,000 units, because the cost had increased to $320 per unit. Wonderland sold 18,400 units during 2016 at a price of $392 per unit, which significantly depleted its inventory. -Assume that Wonderland purchases 22,800 more of the $320 units on December 31, 2016. Wonderland uses the FIFO inventory method. Compute Wonderland's gross profit for 2016.

FIFO inventory costing yields more accurate reporting of the inventory balance on the balance sheet.

Assuming rising prices, which method will give the highest dollar value for cost of goods sold on the income statement?

A decline in gross profit margin can be caused by selling fewer units to customers.

In periods of rising prices, companies that use FIFO inventory costing report higher gross profit as a result of inventory holding gains.

The following hammers were available for sale during the year for Felicity Tools: Felicity has 45 hammers on hand at the end of the year. What is the dollar amount of cost of goods sold for the year according to the first-in, first-out method?

Awesome Clothing had the following inventory at December 31, 2016: A. Determine ending inventory by applying the lower of cost or market rule to: 1. Each item of inventory 2. Each major category of inventory 3. Total inventory B. Which of the LCM procedures from requirement A results in the lowest net income for 2016? Explain.

Companies can easily affect gross profit with selling price increases.

At the beginning of July, Travelers' Favorite Luggage holds 15 units of its only product with a per-unit cost of $560. During July, Travelers' Favorite sells 40 units. A summary of purchases during the current period follows: Assume that Travelers' Favorite utilizes the LIFO method and instead of making the third purchase during July, the company allows its inventory level to decline by delaying the third purchase until August. A. Compute cost of goods sold for July under both scenarios: 1. If the third purchase is made during July 2. If the third purchase is delayed to August B. Discuss the effect of LIFO liquidation on profit for this company.

Munich Shoes' sales totaled $12,000,000 for 2016. Information concerning Munich's gross profit under three inventory costing methods follows: Compute the gross profit margin for each costing method. What method shows the highest gross profit? Explain the reasoning behind this.