Exam 9: Inventories

The LIFO conformity rule was promulgated by the SEC to insure that all firms in a given industry use LIFO if a majority of the firms in the industry opt to do so.

GAAP does not require the cost flow assumption to conform to the actual physical flow of the goods.

The use of the lower of cost or market method to value inventory indicates a probable loss sustained.This is an application of the accounting principle of

For ratio analysis,a distortion in the current ratio under LIFO inventory costing may be adjusted by subtracting the LIFO reserve from current assets.

Midyear LIFO liquidations receive the same accounting treatment regardless of whether they are deemed to be temporary or permanent.

The following information pertains to the Fan Company's inventory item B1008: March 1 Inventory Balance 400 units @\ 3.10 5 Purchase 1,400 units @\ 3.20 14 Purchase 280 units @\ 3.25 31 Inventory Balance 520 units -In a periodic inventory system,the FIFO cost of goods sold is

Jenkins RV Sales has been selling large recreational vehicles for 20 years.On January 1,2015,the company had $4,630,000 in inventory (based on a FIFO valuation).While the number of recreational vehicles in Jenkins' inventory remained fairly constant throughout 2015,by December 31,2015 RV prices were 6% higher than at the beginning of the year.The company reported cost of goods sold for 2015 of $19,500,000. Required: Calculate the amount of realized holding gains in 2015 income for Jenkins RV Sales.

The following information pertains to the Fan Company's inventory item B1008: March 1 Inventory Balance 400 units @\ 3.10 5 Purchase 1,400 units @\ 3.20 14 Purchase 280 units @\ 3.25 31 Inventory Balance 520 units -In a periodic inventory system,the LIFO cost of goods sold is

Managers can avoid the negative tax ramifications of LIFO liquidation by purchasing enough inventory by year-end to bring inventory up to beginning-of-year levels.

"Vendor allowances" should be used by the recipient to lower the carrying cost of inventory and thus ultimately to lower cost of goods sold.

IFRS requires the use of absorption costing.

Current cost (replacement cost)accounting is preferred by the FASB because it records holding gains on financial statements as they arise.

During periods of rising inventory costs,LIFO cost of goods sold is understated because of the inventory holding gains that have occurred during the period.

Inventory carrying cost includes storage costs.

Konan, Inc. uses the lower of cost or market method to determine inventory value. The following information pertains to the ending inventory: Item Cost Replacement Cost Selling Price Cost of Completion Normal Profit L-19 \ 40 \ 38 \ 50 \ 2 \ 11 M-23 52 40 60 4 14 N-05 20 24 30 2 6 -The maximum limit for market value of product L-19 is

Current ratio distortion under LIFO inventory costing may be adjusted by

The input cost changes that occur after the purchase of inventory items in a current cost accounting system are recognized as unrealized holding gains.

When a company uses absorption costing

Yarnco,Inc.is primarily a diversified North American producer and processor of multi-filament polyester and nylon yarns,including specialty yarns with enhanced performance characteristics.The Company manufactures partially oriented,textured,dyed,twisted and beamed polyester yarns as well as textured nylon and nylon covered spandex products.Refer to the excerpts of the 2015 Yarnco,Inc.Annual Report.All questions relate to 2015 unless stated otherwise.Assume a 35% corporate tax rate where necessary. Yarnco, Inc. Consolidated Statement of Operations $\begin{array}{lrr}&\text { Fiscal Years Ended }\\&\text { June 24, } & \text {June 25, } \\\text { (\$ in thousands) } & \underline{2015} &{\underline{2014}} \\\text { Net sales } & \$ 690,308 & \$ 738,665 \\\text { Cost of sales } & 652,743 & 696,055 \\\text { Selling, general, and administrative expenses } & 44,886 & 41,534 \\\text { Provision for bad debts } & 7,174 & 1,256\\\text { Interest expense } & 25,518 & 19,266 \\\text { Interest income } & (3,187) & (6,320) \\\text { Other (income) expense, net } & (2,576) & (1,466) \\\text { Equity in (earnings) losses of unconsolidated affiliates } & 4,292 & (825) \\\text { Restructuring recoveries } & (157) & (254) \\\text { Write down of long-lived assets } & 16,731 & 2,366 \\\text { Write down of investment in equity affiliate } & 84,742 & \\\text { Loss from earlv extinguishment of debt } & -- & 2.949\\\text { Loss from continuing operations before income taxes and }\\\text { extraordinary item } & (139,858) & (15,896) \\\text { Income tax expense (benefit) } & (22,088) & (1,170)\\\text { Loss from continuing operations before extraordinary item }&(117,770) & (14,726) \\\text { Income (loss) from discontinued operations, net of tax }& 1,465 & 360\\\text { Net Loss }&\$(116,305)&\$(14,366)\end{array}$ Inventories.The Company utilizes the last-in,first-out ("LIFO")method for valuing certain inventories representing 38.6% and 38.2% of all inventories at June 24,2015,and June 25,2014,respectively,and the first-in,first-out ("FIFO")method for all other inventories.Inventories are valued at lower of cost or market including a provision for slow moving and obsolete items.Market is considered net realizable value.Inventories valued at current or replacement cost would have been approximately $8.2 million and $7.3 million in excess of the LIFO valuation at June 24,2015,and June 25,2014,respectively.The Company did not have LIFO liquidations during fiscal year 2015 and fiscal year 2014.The Company maintains reserves for inventories valued utilizing the FIFO method and may provide for additional reserves over and above the LIFO reserve for inventories valued at LIFO.Such reserves for both FIFO and LIFO valued inventories can be specific to certain inventory or general based on judgments about the overall condition of the inventory.General reserves are established based on percentage markdowns applied to inventories aged for certain time periods.Specific reserves are established based on a determination of the obsolescence of the inventory and whether the inventory value exceeds amounts to be recovered through expected sales prices,less selling costs;and,for inventory subject to LIFO,the amount of existing LIFO reserves.The total inventory reserves on the Company's books,including LIFO reserves,at June 24,2015 and June 25,2014 were $15.7 million and $10.7 million,respectively.The following table reflects the composition of the Company's inventory as of June 24,2015 and June 25,2014: (\ in thousands) June June 25, 2014 Raw materials and supplies \ 47,201 \ 48,594 Work in process 7,573 10,144 Finished goods 69,353 57,280 \1 24,127 \1 16,018 Required: a.What amount of inventory is on the balance sheet? b.Compute Yarnco's cost of goods sold using FIFO instead of LIFO. c.Compute the amount of the cumulative tax deferral resulting from LIFO existing at the end of 2015. d.Compute how the use of LIFO affects Yarnco's book value (common stockholders' equity)at the end of 2015. e.Compute the inventory turnover ratio to approximate physical unit flow for 2015.Show your work.

Analysts must be aware that with the use of absorption costing,as inventory absorbs more fixed costs,reported net income tends to