Deck 6: Inventory, Accounts Payable, and Long-Term Assets

Question 1

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

Answer 1

False

Question 2

In general, in a period of falling prices, LIFO produces higher gross profits than FIFO.

Answer 2

True

Question 3

Companies using LIFO are required to disclose the amount at which inventory would have been reported had it used FIFO. Similarly, companies using FIFO are required to disclose what their inventory would have been if the company had used LIFO.

Answer 3

False

Question 4

Increasing inventory turnover rate will improve profitability.

Question 5

The cash conversion cycle is defined as:
Days sales outstanding - Days inventory outstanding + Days payable outstanding

Question 6

In order to estimate depreciation expense using the double-declining-balance method, managers must estimate the asset's useful life and its salvage value.

Question 7

When a firm uses an accelerated method of depreciation for tax reporting in order to minimize its tax burden, it will not really save any tax dollars in the end because depreciation method merely changes the timing of the depreciation expenses but not the total.

Question 8

Next year, Chemical Corporation plans to build a laboratory dedicated to a special project. The company will not use the laboratory after the project is finished. Under GAAP, this laboratory should be expensed.

Question 9

The gain or loss on the sale of the asset is computed by:
Gain / (Loss) on sale = Market value of asset - Net book value of asset

Question 10

Employee severance costs, as part of board-approved restructuring plans, are reported in the income statement even if the actual payment for these costs occurs in subsequent periods.

Question 11

The percent used up ratio indirectly measures the likelihood of future capital expenditures that the company will have to make.

Question 12

Other than raw materials and manufacturing overhead, what is the third component of inventories for manufacturing companies?

A) Direct labor
B) Indirect labor
C) Equipment cost
D) Processing cost
E) All of the above

Question 13

Aiello, Inc. had the following inventory in fiscal 2016. The company uses the FIFO method of accounting for inventory.
Beginning Inventory, January 1, 2016: 130 units @ $15.00
Purchase 200 units @ $18.00
Purchase 50 units @ $13.50
Purchase 110 units @ $15.75
Ending Inventory, December 31, 2016: 120 units
The company's cost of goods sold for fiscal 2016 is:

A) $6,090.00
B) $6,045.00
C) $6,157.50
D) $5,305.75
E) None of the above

Question 14

Aiello Inc. had the following inventory in fiscal 2016. The company uses the LIFO method of accounting for inventory.
Beginning Inventory, January 1, 2016: 130 units @ $15.00
Purchase 200 units @ $18.00
Purchase 50 units @ $13.50
Purchase 110 units @ $15.75
Ending Inventory, December 31, 2016: 120 units
The company's cost of goods sold for fiscal 2016 is:

A) $6,090.00
B) $1,800.00
C) $5,305.75
D) $6,157.50
E) None of the above

Question 15

In times of falling prices, choosing LIFO over FIFO as an inventory cost method would affect the financial statements as follows:

A) Cost of goods sold will be higher and ending inventory will be lower
B) Cost of goods sold will be lower and ending inventory will be lower
C) Cost of goods sold will be higher and ending inventory will be higher
D) Cost of goods sold will be lower and ending inventory will be higher
E) None of the above

Question 16

Assume that Barber Co. uses the LIFO inventory costing method for both tax and financial reporting purposes. The balance sheet reports inventories at $297 million. Then, in its footnotes, the company reports that inventories would have been $327 million had the company used the FIFO method.
The difference between these two numbers ($30 million) is referred to as:

A) LIFO reserve
B) LIFO conformity rule
C) LIFO holding gain
D) Inventory temporary difference
E) None of the above

Question 17

The January 28, 2017 (fiscal year 2016) financial statements of Caleres, Inc. reported the following information (in thousands).
If Caleres had used the FIFO method of inventory costing, 2016 inventory would have been:

A) $506,852 million
B) $590,109 million
C) $504,752 million
D) $581,419 million
E) None of the above

Question 18

The January 28, 2017 (fiscal year 2016) financial statements of Caleres, Inc. reported the following information (in thousands).
If Caleres had used the FIFO method of inventory costing, 2016 COGS would have been:

A) $1,517,648 thousand
B) $1,551,301 thousand
C) $1,553,198 thousand
D) $1,517,146 thousand
E) None of the above

Question 19

The 2016 financial statement of Willamette Valley Vineyards reported Net revenues of $19,425,412 and Cost of goods sold of $7,204,884. Note 3 to the financial statements reported that Inventories consisted of:
The inventory turnover for 2016 was:

A) 0.57
B) 0.64
C) 0.59
D) 1.71
E) None of the above

Question 20

The January 28, 2017 (fiscal year 2016) financial statements of Caleres, Inc. reported the following information (in thousands):
The 2016 average days inventory outstanding is:

A) 136.2 days
B) 133.9 days
C) 121.5 days
D) 49.6 days
E) None of the above

Question 21

The 2016 financial statements of CVS Health Corporation reported the following information (in millions):
The inventory turnover ratio for 2016 is:

A) 9.22
B) 11.48
C) 9.33
D) 10.34
E) None of the above

Question 22

CarMax Inc. reports sales of $15,875,118 thousand and cost of sales of $13,691,824 thousand for the year ended February 28, 2017.
The gross profit for the year is:

A) $2,183,294 thousand
B) $1,464,362 thousand
C) 86.2%
D) 13.8%
E) There is not enough information to determine gross profit.

Question 23

Hauser Corporation has the following metrics for 2016.
The cash conversion cycle for 2016 is:

A) 2.2 days
B) 61.3 days
C) 47.4 days
D) 70.8 days
E) None of the above

Question 24

Which of the following estimates are not always required when calculating depreciation expense? Select all that apply.

A) Depreciation rate
B) Useful life
C) Depreciation method
D) Salvage value
E) None of the above

Question 25

Central Supply purchased a new printer for $67,500. The printer is expected to operate for nine (9) years, after which it will be sold for salvage value (estimated to be $6,750).
How much is the first year's depreciation expense if the company uses the double-declining-balance method?

A) $15,000
B) $ 7,500
C) $18,000
D) $13,500
E) None of the above

Question 26

One difference between straight-line and double-declining-balance depreciation methods is that:

A) Straight-line method will fully depreciate the asset more quickly.
B) Double-declining-balance method will fully depreciate the asset more quickly.
C) Income taxes paid will be lower under the double-declining-balance method.
D) Losses on disposal will be lower under the straight-line method.
E) None of the above

Question 27

An asset is impaired when the asset's carrying value is:

A) Greater than the sum of discounted expected cash flows.
B) Less than the sum of discounted expected cash flows.
C) Less than the sum of undiscounted expected cash flows.
D) Greater than the sum of undiscounted expected cash flows.
E) None of the above

Question 28

Dow Chemical Corporation plans to build a laboratory dedicated to a special project. The company will not use the laboratory after the project is finished. Under GAAP, this laboratory should be:

A) Capitalized and depreciated.
B) Expensed in the current year.
C) Depreciated and expensed.
D) Capitalized only.
E) None of the above

Question 29

Fey Enterprises recorded a restructuring charge of $16.2 million during fiscal 2016 related entirely to the closing of its division located in Denver, Colorado. The company's financial statement footnotes indicated that expected employee separation payments amounted to $12.6 million and that fixed asset write-downs accounted for the remainder. Nickolas had never before incurred restructuring charges. At the end of the year, the company's balance sheet included a restructuring accrual of $2,700,000.
The cash flow effect of Fey Enterprises' restructuring during fiscal 2016 is:

A) $0 (there was no cash flow effect in 2016)
B) $13,200,000
C) $16,800,000
D) $ 9,900,000
E) $21,600,000

Question 30

InterTech Corporation recorded pretax restructuring charges of $1,033.5 million in 2017. The charges consisted of asset write-downs of $681 million, costs associated with exit or disposal activities of $99 million, and employee severance costs of $253.5 million. The company paid $108 million cash to settle these restructuring charges during the year (2017).
At year end, the restructuring accrual associated with these charges was:

A) $ 1,033.5 million
B) $ 326.0 million
C) $ 253.5 million
D) $ 244.5 million
E) There is not enough information to determine the amount.

Question 31

Acadia, Inc. recorded restructuring charges of $235,542 thousand during fiscal 2017 related entirely to anticipated employee separation payments. Acadia, Inc. had never before incurred restructuring charges. At the end of the year, the company's balance sheet included a restructuring accrual of $29,643 thousand.
The cash flow effect of Acadia's restructuring during fiscal 2017 was:

A) $205,899 thousand
B) $235,542 thousand
C) $265,185 thousand
D) $ 29,643 thousand
E) None of the above

Question 32

The 2016 financial statements for BNSF Railway report the following information:
The 2016 property, plant and equipment turnover is:

A) 0.39
B) 2.38
C) 0.33
D) 0.70
E) None of the above

Question 33

The 2016 financial statements for Leggett & Platt, Inc., report the following information:
Which of the following estimates the property and equipment's percent-used-up at December 31, 2016?

A) 68.8%
B) 45.4%
C) 16.9%
D) 42.3%
E) None of the above

Question 34

The 2016 financial statements of Willamette Valley Vineyards, Inc. include the following footnote:
The average useful life of Willamette's depreciable assets at the end of fiscal 2016 is:

A) 14.2 years
B) 19.6 years
C) 2.4 years
D) 21.7 years
E) None of the above

Question 35

Aiello, Inc. had the following inventory in fiscal 2016. Compute the company's cost of goods sold for fiscal 2016 assuming the company used a) FIFO and b) LIFO methods of accounting for inventory:
Beginning Inventory, January 1, 2016: 130 units @ $15.00
Purchase 200 units @ $18.00
Purchase 50 units @ $13.50
Purchase 110 units @ $15.75
Ending Inventory, December 31, 2016: 120 units

Question 36

Everett Company uses the average cost method to account for inventory and has the following activity during the month of March 2017.
During March, Everett sold 850 units.
Compute the cost of goods sold for March and the ending inventory balance at March 31, 2017.

Question 37

Leggett and Platt reported total inventory of $519.6 million on their 2016 balance sheet along with a LIFO reserve of $33.8 million.
What would the company have reported on its balance sheet for inventory if it had used the FIFO method of accounting for inventory?

Question 38

Leggett and Platt uses the LIFO method of accounting for inventory. The company reported a LIFO reserve of $22.6 million at the beginning of the 2016 fiscal year and a LIFO reserve of $33.8 million at the end of the 2016 fiscal year. Cost of goods sold reported on the 2016 income statement was $2,850.7 million.
What would the company have reported for cost of goods sold had they used FIFO to account for inventory costs?

Question 39

Note 3 to the 2016 financial statements of Willamette Valley Vineyards reports that Inventories consist of the following:
The company reported cost of goods sold of $7,204,884 in 2016 and $7,092,111 in 2015. At December 31, 2014, Total inventories were $ 9,910,570.
Compute average days inventory outstanding for both years. What does this ratio mean? Interpret the ratios.

Question 40

The January 28, 2017 (fiscal year 2016) financial statements of Caleres, Inc. reported the following information (in thousands):
The footnotes to the 2016 financial statements of Skechers U.S.A., Inc., a competitor of Caleres, Inc., reported that the company uses the FIFO method of accounting for inventories. Financial statements reported the following (in thousands):
Compare the two companies' days-inventory-outstanding ratios for 2016. To do this properly, you will need to convert the companies' cost of sales and inventories to a common inventory costing method. Which company is more efficient with its inventory?

Question 41

Abercrombie & Fitch has inventory levels of $399,795 thousand and $436,701 thousand at the end of fiscal-year ending 2016 and 2015 respectively. Cost of goods sold for 2016 is $1,298,172 thousand.
a. Calculate the inventory turnover ratio and the average days inventory outstanding for 2016.
b. Suggest three ways that Abercrombie & Fitch might improve inventory turnover.

Question 42

Central Supply purchased a new printer for $72,000. The printer is expected to operate for ten (10) years, after which it will be sold for salvage value (estimated to be $7,200).
How much is the first and second year's depreciation expense if the company uses the double-declining-balance method?

Question 43

The Rialto Theatre purchased a new projector costing $123,000 on January 1, 2017. Because of changing technologies, the projector is estimated to last four years after which it will be obsolete and have a salvage value of $6,000 as a collectors' item.
Compute the depreciation expense for 2017 using:
a. The straight-line method
b. Double-declining-balance method

Question 44

Plastix Inc. bought a molding machine for $555,000 on June 1, 2016. The company expected to use this machine to extrude plastic toys for the next eight (8) years, when the machine would be sold for $45,000. On June 1, 2018, their major customer, Wal-Mart, gave notification that they were terminating Plastix Inc. as a supplier. Plastix Inc.'s accountants estimate that the machine will generate $390,000 in future cash inflows from other customers and the fair value of the machine is $345,000. Plastix uses straight-line depreciation.
a. Is this asset impaired on June 1, 2018? Show your calculation.
b. If the equipment is impaired, what is the impairment loss on June 1, 2018?

Question 45

Aiello Industries recorded a restructuring charge of $37.8 million during fiscal 2017 related entirely to the closing of its operations based in Orlando, Florida. The company's financial statement footnotes indicated that expected employee separation payments amounted to $29.4 million and that fixed asset write-downs accounting for the remainder. Aiello had never before incurred restructuring charges. At the end of the year, the company's balance sheet included a restructuring accrual of $6,300,000.
Calculate the cash flow effect of Nickolas's restructuring during fiscal 2017.

Question 46

Dow Chemical included the following information in footnotes to its 2016 Form 10-K:
2016 Restructuring
On June 27, 2016, the Board of Directors of the Company approved a restructuring plan that incorporates actions related to the recent ownership restructure of Dow Corning Corporation ("Dow Corning"). These actions, aligned with Dow's value growth and synergy targets, will result in a global workforce reduction of approximately 2,500 positions, with most of these positions resulting from synergies related to the Dow Corning transaction. These actions are expected to be substantially completed by June 30, 2018.
As a result of these actions, the Company recorded pretax restructuring charges of $449 million in the second quarter of 2016 consisting of severance charges of $268 million, asset write-downs and write-offs of $153 million and costs associated with exit and disposal activities of $28 million.
a. Reconcile the various parts of Dow Chemical's "Restructuring charges" of $449 million.
b. How should Dow Chemical report the restructuring charges in its income statement and on its balance sheet?
c. The SEC has expressed concern about abuses surrounding restructuring charges. What is the nature of the SEC's concerns?

Question 47

The 2016 financial statements for BNSF Railway report the following information:

a. Compute the common-size amount for property and equipment, net for 2016. Does this ratio seem high or low to you? Explain.
b. Compute property, plant and equipment turnover for 2016. Interpret the ratio.

Question 48

The 2016 financial statements for Leggett & Platt, Inc. report the following information:

a. By what percentage are the assets 'used up' at the year-end 2016? What implication does this ratio have for future cash flows at Leggett & Platt?
b. Estimate the useful life on average for the Leggett & Platt depreciable assets.

Question 49

The 2016 financial statements of Willamette Valley Vineyards include the following footnote:
Note 4. Property and Equipment

a. Estimate the useful life on average for Willamette's depreciable assets at the end of fiscal 2016. What assets does a wine producer such as Willamette Valley Vineyards own that would explain the useful life you calculated?
b. Assume that on January 1, 2017 the company determined that a building with a net book value of $950,000 had a fair value of $400,000. How would this affect the company's balance sheet and income statement in 2017?

Question 50

The asset side of the 2016 balance sheet for Leggett & Platt follows. The company reported cost of sales of $2,850.7 million in 2016 and $2,994.0 million in 2015. Use this information to answer the requirements.

a. Calculate the common-size amount for inventories for both years and comment on any differences that you note. Given that the company is in the furniture manufacturing industry, does this ratio seem appropriate?
b. Compute inventory turnover for both years and interpret any change. At December 31, 2014, Total inventories, net were $481.4 million.
c. Leggett & Platt uses LIFO for at least some of its inventory method. What would the company have reported as inventory in 2016 and 2015 if the company had used the FIFO method? (LIFO reserve balances: $33.8 million in 2016; $22.6 million in 2015; and $73.0 million in 2014.)
d. Recalculate cost of goods sold (COGS) under the FIFO method.
e. Recompute the inventory turnover ratios for 2016 and 2015 under the FIFO method. What difference do you notice between the FIFO-based ratios and the LIFO-based ratios?

Question 51

The asset side of the 2016 balance sheet for Willamette Valley Vineyards is below. The company reported cost of goods sold of $7,204,884 in 2016 and $7,092,111 in 2015. Use this information to answer the requirements.
Note 3 to the financial statement reports that Inventories consist of:
Continued next page
Required:
a. Explain in layman's terms what each of the three types of inventories comprises.
b. Compute average days inventory outstanding for both years and interpret any change. At December 31, 2014, Total inventories, net, were $ 9,910,570. What does this ratio mean? Is the year-over-year change good news?
c. It is typical in the winemaking industry for wine to stay in "process" for more than a year. How is such inventory classified in Willamette's balance sheet?

Question 52

The asset side of the 2017 balance sheet for CarMax Inc. is below.
Continued next page
The footnotes to the annual report include the following:
Inventory is primarily comprised of vehicles held for sale or currently undergoing reconditioning and is stated at the lower of cost or market. Vehicle inventory cost is determined by specific identification. Parts, labor and overhead costs associated with reconditioning vehicles, as well as transportation and other incremental expenses associated with acquiring and reconditioning vehicles, are included in inventory.
Required:
a. Does CarMax use the LIFO or the FIFO method of inventory costing? Explain.
b. Calculate the common-size amount for inventories for both years and comment on any differences that you note. Given that the company is an automotive retailer, does this ratio seem appropriate?
c. At February 28, 2015, Inventory was $2,086,874 thousand. CarMax reports cost of sales of $13,691,824 thousand for the year ended February 28, 2017 and $13,130,915 thousand for the year ended February 29, 2016. Compute inventory turnover and average days inventory outstanding for both years. Do the two ratios tell the same story? Why or why not?
d. CarMax reports revenue of $15,875,118 thousand for the year ended February 28, 2017 and $15,149,675 thousand for the year ended February 29, 2016. Calculate gross profit margins for both years.
e. What is your opinion about the financial health of CarMax? Use the ratios you calculated above to support your opinion.

Question 53

The Dow Chemical Corporation announced a restructuring plan in 2016 which incorporated actions related to the recent ownership restructure of Dow Corning Corporation. The following footnote (excerpted) of the Company comes from the December 31, 2016 financial statements:
2016 Restructuring
On June 27, 2016, the Board of Directors of the Company approved a restructuring plan that incorporates actions related to the recent ownership restructure of Dow Corning Corporation ("Dow Corning"). These actions, aligned with Dow's value growth and synergy targets, will result in a global workforce reduction of approximately 2,500 positions, with most of these positions resulting from synergies related to the Dow Corning transaction. These actions are expected to be substantially completed by June 30, 2018.
As a result of these actions, the Company recorded pretax restructuring charges of $449 million in the second quarter of 2016 consisting of severance charges of $268 million, asset write-downs and write-offs of $153 million and costs associated with exit and disposal activities of $28 million. The impact of these charges is shown as "Restructuring charges (credits)"
in the consolidated statements of income and reflected in the Company's segment results in the table that follows. The table also summarizes the activities related to the Company's 2016 restructuring reserve, which is included in "Accrued and other current liabilities"
and "Other noncurrent obligations"
in the consolidated balance sheets.
The following table summarizes the activities related to the Company's restructuring reserve (liability):
Continued next page
Required:
a. Explain why Dow Chemical planned this restructuring. When did the company record the restructuring expense? When will the restructuring take place? Explain the difference.
b. What are the three types of restructuring costs for Dow Chemical for 2016?
c. Explain why no cash is involved in settling the impairment of long-lived assets portion of the restructuring reserve.
d. Dow Chemical managers estimated all of the charges above. What would be the income-statement consequences next year (in 2017) if only $100 million of additional cash payments were necessary to completely settle the employee severance costs? Assume that Dow Chemical did not intentionally overestimate these severance costs.

Question 54

The 2016 income statement and balance sheet (excerpts) for BNSF Railway are below.
Continued next page
The footnotes to the financial statements included the following:
Property and equipment, net (in millions), and the corresponding ranges of estimated useful lives were as follows:
Required:
a. What proportion of total assets, does BNSF hold as property and equipment in 2016 and 2015? Does this surprise you?
b. Compute property and equipment turnover for 2016 and 2015. Property and equipment, net for 2014 was $55,806 million. Explain this ratio.
c. By what percentage are the assets 'used up' at year-end 2016? What implication does this ratio have for future cash flows at BNSF?
d. Estimate the useful life on average for the BNSF depreciable assets at year-end 2016. Which of the assets listed in the footnote explain this estimated useful life?

Question 55

Following are selected disclosures from Cabela's Inc. (an outdoor adventure superstore):
Property and equipment consisted of the following at the years ended:
Required:
a. Compute the PPE turnover for 2016 (Total revenue in 2016 is $4,129,359 thousand). Does the level of its PPE turnover suggest that Cabela's is capital intensive? (Hint: The median PPE turnover for all publicly traded companies is approximately 1.3.)
b. Cabela's reported depreciation expense of $150,163 thousand in 2016. How much of this related to Land? How much of this expense related to Construction in progress? Explain.
c. Assuming that Cabela's uses straight-line depreciation, estimate the useful life of its depreciable PPE assets.
d. By what percentage are Cabela's assets "used up" at year-end 2016? What implication does the assets-used-up ratio have for forecasting Cabela's cash flows?

Question 56

The asset side of the 2016 balance sheet for Willamette Valley Vineyards is as follows:
Continued next page
The following footnotes are from the annual report for Willamette Valley Vineyards for 2016.
Vineyard Development Costs
Vineyard development costs consist primarily of the costs of the vines and expenditures related to labor and materials to prepare the land and construct vine trellises. The costs are capitalized until the vineyard becomes commercially productive, at which time annual amortization is recognized using the straight-line method over the estimated economic useful life of the vineyard, which is estimated to be 30 years. Accumulated amortization of vineyard development costs aggregated $1,185,823 and $1,109,406 at December 31, 2016 and 2015, respectively.
Amortization of vineyard development costs are included in capitalized crop costs that in turn are included in inventory costs and ultimately become a component of cost of goods sold. For the years ending December 31, 2016 and 2015, approximately $76,417 and $75,669, respectively, was amortized into inventory costs.
Required:
a. Explain the difference between Vineyard development costs and Land and improvements.
b. Calculate the percent used up of the Vineyard development costs.
c. Calculate the percent used up of the Property and equipment. What does this imply for future cash flows for Willamette Valley Vineyards?
d. Assume that on January 1, 2017 the company determined that the Vineyard development costs had a fair value of $4,000,000. How would this affect the company's balance sheet and income statement in 2017?

Question 57

How do companies test assets for impairment? If an asset is impaired, how do companies write them down?

Question 58

Firms typically report three categories of restructuring costs. What are they and how do they affect the balance sheet and the income statement?