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in.wbn.outs.020 Converting LIFO to FIFO, recording related entries, and identifying
their financial-statement effects (ADM)
This exercise asks you to use Archer Daniels Midland Company’s disclosures to convert
LIFO numbers reported by the company to FIFO, record related entries, and determine
their financial-statement effects. The entries should be recorded using the accounts on
page 4. Pages 5-9 report ADM’s financial statements and an excerpt from ADM’s fiscal
2012 10K.
Part I: Convert reported LIFO numbers to FIFO
Required
Write your answers in the appropriate boxes:
FIFO "Earnings Before Income Taxes" for the year ended June 30, 2012
$1,755
FIFO "Reinvested earnings" at June 30, 2012
$13,124
LIFO reserve at year end
Reported LIFO Earnings Before Income Taxes for year ended June 30, 2012
Increase (decrease) in LIFO reserve
FIFO Earnings Before Income Taxes for year ended June 30, 2013
Assumed tax rate
(LIFO reserve at June 30, 2012) * (1-tax rate)
Reported LIFO Reinvested earnings at June 30, 2112
FIFO Reinvested earnings at June 30, 2113
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(a) Assuming a tax rate of 40% for all relevant years, estimate what ADM would have
reported under FIFO for “Earnings Before Income Taxes” on the Consolidated
Statement of Earnings for the year ended June 30, 2012 and “Reinvested earnings” on the Consolidated Balance Sheet at June 30, 2012.
Record Keeping
2012
$583
$1,765
($10)
$1,755
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2011
$593
40%
$350
12,774
13,124
Part II: Record Entries
Simplifying Assumptions
■
Although ADM uses LIFO for financial and tax reporting, we will assume ADM
(like most companies): (1) uses FIFO to record day-to-day operating entries that
affect inventories such as purchasing materials and recognizing FIFO cost of products sold and (2) records an entry at the end of the reporting period to adjust FIFO
inventories to LIFO (using a LIFO reserve contra asset) and FIFO cost of products
sold to LIFO cost of products sold. (This approach allows ADM to use FIFO numbers for operating decisions and still get the tax breaks provided by LIFO).
■
Two costs are recorded to LIFO cost of products sold: (1)FIFO cost of products sold
and (2) the adjustment needed to convert FIFO cost of products sold to LIFO cost of
product sold.
■
Assume all costs recorded to LIFO cost of products sold were previously recorded in
inventory and thus there were no delivery costs or other costs recorded directly to
cost of products sold.
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2
NAVIGATING ACCOUNTING®
Required
(b) Record a journal entry that summarizes the entries ADM recorded during the
year ended June 30, 2012 (fiscal 2012) to recognize FIFO cost of products sold.
Write your entry in the space below using the accounts on page 4.
ADM's fiscal 2012 entry to recognize FIFO cost of products sold
Debit
LIFO cost of products sold
Finished goods inventories -- FIFO
Credit
$85,380
$85,380
Reported LIFO cost of sales for fiscal 2012
$85,370
Increase (decrease) in LIFO reserve for fiscal 2012
FIFO cost of products sold for fiscal 2012
($10)
$85,380
(c) Record a journal entry that summarizes the entries ADM recorded during the
year ended June 30, 2012 (fiscal 2012) to adjust FIFO cost of products sold to
LIFO cost of products sold.
Write your entry in the space below using the accounts on page 4.
ADM's fiscal 2012 entry to adjust FIFO cost of products sold to LIFO
Debit
LIFO reserve
LIFO cost of products sold
Credit
$10
$10
Reported LIFO cost of sales for fiscal 2012
$85,370
Increase (decrease) in LIFO reserve for fiscal 2012
FIFO cost of products sold for fiscal 2012
($10)
$85,380
Part III: Financial-Statement Effects of Entries
Required
For the entry you recorded in Part I, complete the related table identifying the ADM
financial statement line items that would have been directly affected (and the direction of
the effects) during the year ended June 30, 2012.
Guidance:
(1) Determine the appropriate line item(s) affected using ADM’s financial statements on pages 5-8. For example, write “cash and cash equivalents” rather than
“cash” because this is on ADM’s balance sheet.
(2) Include line item(s) directly affected, including the effect(s) of closing entries for
events affecting income. Ignore taxes.
(3) Don’t include totals or sub-totals indirectly affected by the entry. For example,
don’t report “net earnings” on the income statement. However, net earnings is
NOT a total on the statement of shareholders’ equity.
(4) Three or four lines were included below for each statement, but you may need
none or more than one line. Write “NONE” if no line item is effected on the
statement.
(5) Indicate if the effect(s) of the entries associated with the event increased or
decreased the line item. Put an X in the appropriate column if the above event
increases or decreases that line item. Be sure to mark only one box in each
statement’s row. NOTE: If a reported negative number changes from -2 to -3, it
decreases; if it changes from - 2 to - 1, it increases.
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
3
EXERCISE
(d) Fiscal 2012 FIFO cost of products sold:
ADM's fiscal 2012 entry to recognize FIFO cost of products sold
CONSOLIDATED BALANCE SHEETS
Line Items
CONSOLIDATED STATEMENTS OF EARNINGS
Increases
Decreases
Inventories
X
Reinvested earnings
X
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Line Items
Increases
Decreases
X
Net earnings
Line Items
Cost of products sold
Increases
Decreases
X
CONSOLIDATED STATEMENT OF CASH FLOWS
Line Items
Increases
X
Net earnings including noncontrolling interests
Inventories
Decreases
X
(Negatively reported number increases.)
(e) Adjusting fiscal 2012 FIFO cost of products sold to LIFO:
ADM's fiscal 2012 entry to adjust FIFO cost of products sold to LIFO
CONSOLIDATED BALANCE SHEETS
Line Items
CONSOLIDATED STATEMENTS OF EARNINGS
Increases
Inventories
X
Reinvested earnings
X
Decreases
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Line Items
Increases
Decreases
Net earnings
X
Line Items
CONSOLIDATED STATEMENT OF CASH FLOWS
Line Items
Increases
Net earnings including noncontrolling interests
Inventories
Decreases
X
Cost of products sold
(Negatively reported number decreases.)
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
Increases
Decreases
X
X
4
NAVIGATING ACCOUNTING®
Chart of Accounts
ASSETS
Current
Cash
C
Inventories (this is a title, not an account)
Materials inventories -- FIFO
Minv
Work in process -- FIFO
WIP
Finished goods inventories -- FIFO
FGI
LIFO reserve
LR
Segregated inventories: deferred revenue
SIdr
Prepaid expenses
PrEx
Short-term investments
Stin
Trade receivables, net (this is a title, not an account)
Trade receivables: gross
Trgr
Trade receivables: allowance for doubtful accounts
Trall
Noncurrent
Property, plant, and equipment (this is a title, not an account)
HcPPE PP&E historical cost
AcDep PP&E accumulated depreciation
Eqinv Equity and other investments
Goodwill
Gdw
LIABILITIES
Current
Accounts payable
AP
Accrued liabilities (this is a title, not an account)
Accrued liabilities: warranty and recalls
Alwr
Alcom Accrued liabilities: compensation and wages
Aloth Accrued liabilities: other
Dividends payable
DP
Short-term debt
STD
Noncurrent
Long-term debt
LTD
OLTL Other long-term liabilities
OWNERS' EQUITY
Permanent
AOCI
APIC
CS
RE
Accumulated other comprehensive income
Additional paid-in capital
Common stock par value
Retained earnings
Net income
Bdexp
Cops
DepEx
Ginvs
Gimp
IncS
Intinc
PPEg
PPEl
ResEx
Rev
SG&A
Bad debt expense
LIFO cost of products sold
Depreciation expense
Gain on sale of investments
Goodwill impairment
Income summary
Interest income
Gain on sale of PP&E
Loss on sale of PP&E
Restructuring charge
Net revenues
Selling, general, and administrative expense
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
5
EXERCISE
Archer- Daniels - Midland Company
Consolidated Balance Sheet
June 30
2012
Assets
Current Assets
Cash and cash equivalents
Short-term marketable securities
Segregated cash and investments
Trade receivables
Inventories
Other current assets
Total Current Assets
Investments and Other Assets
Investments in and advances to affiliates
Long-term marketable securities
Goodwill
Other assets
Total Investments and Other Assets
Property, Plant, and Equipment
Land
Buildings
Machinery and equipment
Construction in progress
Accumulated depreciation
Net Property, Plant, and Equipment
Total Assets
Liabilities and Shareholders Equity
Current Liabilities
Short-term debt
Trade payables
Accrued expenses and other payables
Current maturities of long-term debt
Total Current Liabilities
Long-Term Liabilities
Long-term debt
Deferred income taxes
Other
Total Long-Term Liabilities
Shareholders Equity
Common stock
Reinvested earnings
Accumulated other comprehensive income (loss)
Noncontrolling interests
Total Shareholders Equity
Total Liabilities and Shareholders Equity
(In millions)
2011
$1,291
176
3,263
3,439
12,192
6,593
26,954
$615
739
3,396
4,808
12,055
5,891
27,504
3,388
262
603
534
4,787
3,240
666
602
681
5,189
325
4,609
16,729
1,027
22,690
(12,878)
9,812
$41,553
305
4,413
16,245
765
21,728
(12,228)
9,500
$42,193
2,108
2,474
8,367
1,677
14,626
1,875
2,581
8,584
178
13,218
6,535
783
1,440
8,758
8,266
859
1,012
10,137
6,102
12,774
(907)
200
18,169
$41,553
6,636
11,996
176
30
18,838
$42,193
Archer - Daniels - Midland 2012 10K, page 49
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
6
NAVIGATING ACCOUNTING®
Archer- Daniels - Midland Company
Consolidated Statement of Earnings
Year Ended June 30
2012
2011
2010
(In millions, except per share amounts)
Net sales and other operating income
Cost of products sold
Gross Profit
$89,038
85,370
3,668
$80,676
76,376
4,300
$61,682
57,839
3,843
Selling, general and administrative expenses
Asset impairment, exit, and restructuring costs
Interest expense
Equity in earnings of unconsolidated affiliates
Interest income
Other (income) expense - net
Earnings Before Income Taxes
1,626
437
441
(472)
(112)
(17)
1,765
1,611
1,398
482
(542)
(136)
(130)
3,015
422
(561)
(126)
125
2,585
Income taxes
Net Earnings Including Noncontrolling Interests
523
1,242
997
2,018
666
1,919
Less: Net earnings (losses) attributable to noncontrolling
Net Earnings Attributable to Controlling Interests
19
1,223
(18)
2,036
(11)
1,930
Average number of shares outstanding basic
665
642
643
Average number of shares outstanding diluted
666
654
644
Basic earnings per common share
$1.84
$3.17
$3.00
Diluted earnings per common share
$1.84
$3.13
$3.00
Archer - Daniels - Midland 2012 10K, page 48
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
7
EXERCISE
Archer- Daniels - Midland Company
Consolidated Statements of Shareholders' Equity
Other
Common Stock
Common Stock
Shares
Amount
Balance June 30, 2009
Comprehensive income
Net earnings
Other comprehensive income
(loss)
Total comprehensive income
Cash dividends paid-$.58 per share
Treasury stock purchases
Stock compensation expense
Other
Balance June 30, 2010
Comprehensive income
Net earnings
Other comprehensive income (loss)
Total comprehensive income
Cash dividends paid-$.62 per share
Shares issued related to equity unit
conversion
Treasury stock purchases
Stock compensation expense
Acquisition of noncontrolling
interests
Other
Balance June 30, 2011
Comprehensive income
Net earnings
Other comprehensive income (loss)
Total comprehensive income
Cash dividends paid-$.685 per
share
Treasury stock purchases
Stock compensation expense
Noncontrolling interests previously
associated with mandatorily
redeemable instruments
Acquisition of noncontrolling
interests
Other
Balance June 30, 2012
$642
$5,204
Reinvested Comprehensive
Earnings
$8,778
Income (Loss)
(In millions)
($355)
1,930
Total
Noncontrolling
Interests
$26
1
639
(100)
45
2
5,151
(372)
21
10,357
2,036
(899)
1,075
7
22
2
676
1,750
(301)
47
(2)
11,996
1,223
(18)
(527)
48
176
(1,083)
(40)
(15)
$6,102
25
1
30
19
(6)
(455)
$12,774
(1)
14
18,838
153
(455)
(527)
48
10
1
$659
1,375
(372)
(100)
45
30
14,631
3,093
(395)
1,750
(301)
47
(26)
15
6,636
$13,653
(18)
(395)
44
(9)
Equity
(11)
(544)
(4)
Shareholders
174
($907)
(14)
(3)
$200
184
(54)
(18)
$18,169
Archer - Daniels - Midland 2012 10K, page 51
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
8
NAVIGATING ACCOUNTING®
Archer- Daniels - Midland Company
Consolidated Statements of Cash Flows
Year Ended June 30
2012
2011
Operating Activities
Net earnings including noncontrolling interests
Adjustments to reconcile net earnings to net cash provided
(used in) operating activities)
Depreciation and amortization
Asset impairment charges
Deferred income taxes
Gain on Golden Peanut revaluation
Equity in earnings of affiliates, net of dividends
Stock compensation expense
Pension and postretirement accruals (contributions), net
Charges from early extinguishment of debt
Deferred cash flow hedges
Other net
Changes in operating assets and liabilities
Segregated cash and investments
Trade receivables
Inventories
Other current assets
Trade payables
Accrued expenses and other payables
Total Operating Activities
Investing Activities
Purchases of property, plant, and equipment
Proceeds from sales of property, plant, and equipment
Cash divested from deconsolidation
Net assets of businesses acquired
Investments in and advances to affiliates
Purchases of marketable securities
Proceeds from sales of marketable securities
Other net
Total Investing Activities
Financing Activities
Long-term debt borrowings
Long-term debt payments
Debt repurchase premium and costs
Net borrowings under lines of credit agreements
Shares issued related to equity unit conversion
Purchases of treasury stock
Cash dividends
Other net
Total Financing Activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents beginning of year
Cash and cash equivalents
Cash paid for interest and income taxes as follows:
Interest
Income taxes
(In millions)
$1,242
848
367
45
$2,018
2010
$1,919
(243)
48
37
12
43
156
877
2
521
(71)
(397)
47
4
15
(1)
(123)
(326)
45
(110)
75
49
75
128
974
(272)
(954)
(117)
581
2,895
(1,035)
(687)
(3,412)
(2,452)
339
2,015
(2,340)
74
(540)
(404)
1,069
(75)
(118)
2,684
(1,477)
48
(130)
(241)
(31)
(1,297)
1,945
61
(1,122)
(1,247)
72
(1,607)
35
(218)
(31)
(2,379)
2,094
34
(1,675)
(62)
(146)
(1,387)
1,454
48
(1,665)
27
(552)
(71)
29
(527)
(455)
(7)
(1,097)
676
615
$1,291
1,564
(417)
(21)
1,381
1,750
(301)
(395)
23
3,584
(431)
1,046
$615
(100)
(372)
11
(1,028)
(9)
1,055
$1,046
$411
479
$418
513
$453
604
97
(358)
(44)
197
912
9
30
Archer - Daniels - Midland 2012 10K, page 50
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
9
EXERCISE
Excerpt from ADM’s Fiscal 2012 10K
■
Note 4: Inventories, Derivative Instruments, and Hedging Activities (excerpt)
The Company values certain inventories using the lower of cost, determined by either the LIFO or FIFO
method, or market. Inventories of certain merchandisable agricultural commodities, which include inventories acquired under deferred pricing contracts, are stated at market value.
2012
(In millions)
LIFO inventories
FIFO value
LIFO valuation reserve
LIFO inventories carrying value
FIFO inventories
Market inventories
$1,070
(583)
487
4,946
6,759
$12,192
2011
$1,143
(593)
550
5,590
5,915
$12,055
During fiscal year 2012, LIFO inventory quantities declined resulting in a liquidation effect on LIFO reserves
that increased after-tax earnings by $59 million ($0.09 per share).
© 1991-2013 NavAcc LLC, G. Peter & Carolyn R. Wilson
ADM 2012 10K, Note 4, page 64