McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 7
Reporting and Interpreting
Inventories and Cost of Goods Sold
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Fred Phillips, Ph.D., CA
Learning Objective 1
Describe the issues in
managing different types of
inventory.
7-3
Inventory Management Decisions
The primary goals of inventory managers are to:
1. Maintain a sufficient quantity
to meet customers’ needs
2. Ensure quality meets customers’
expectations and company standards
3. Minimize the costs of acquiring and carrying
the inventory
7-4
Types of Inventory
Merchandisers . . .
 Buy finished goods.
 Sell finished goods.
Merchandise inventory
Manufacturers . . .
 Buy raw materials.
 Produce and sell
finished goods.
Raw Materials
Work in Process
Finished goods
Completed products
awaiting sale
Materials waiting to
be processed
Partially
complete products
7-5
Learning Objective 2
Explain how to report
inventory and cost of goods
sold.
7-6
Balance Sheet and Income
Statement Reporting
7-7
Cost of Goods Sold Equation
BI + P – CGS = EI
American Eagle Outfitters’ beginning inventory was $4,800.
During the period, the company purchased inventory for
$10,200. The cost of goods sold for the period is $9,000.
Compute the ending inventory.
+
=
–
=
7-8
Cost of Goods Sold Calculation
Beginning Inventory
$ 4,800
Purchases
10,200
Cost of Goods Available for Sale
15,000
Cost of Goods sold
9,000
Ending Inventory
$ 6,000
Cost of Goods Sold Equation
Beginning
Inventory
$4,800
+
Purchases
$10,000
Goods Available
for Sale
$15,000
7-9
Ending
Inventory
$6,000
Cost of
Goods Sold
$9,000
(Balance Sheet)
(Income Statement)
Learning Objective 3
Compute costs using four
inventory costing methods.
7-10
Inventory Costing Methods
Specific
identification
First-in, first-out
(FIFO)
Last-in, first-out
(LIFO)
Weighted
average
7-11
Inventory Costing Methods
Consider the following information
May 3
May 5
May 6
May 8
Purchased 1 unit for $70
Purchased 1 more unit for $75
Purchased 1 more unit for $95
Sold 2 units for $125 each
May 6
$95 cost
May 5
$75 cost
May 3
$70 cost
Specific Identification
This method individually identifies and records the cost of
each item sold as part of cost of goods sold. If the items
sold were identified as the ones that cost $70 and $95, the
total cost of those items ($70 + 95 = $165) would be
reported as Cost of Goods Sold. The cost of the remaining
item ($75) would be reported as Inventory on the balance
sheet at the end of the period.
7-12
Inventory Costing Methods
LIFO
May 6
$95 cost
7-13
Sold
May 3
$70 cost
Still there
Sold
May 5
$75 cost
Weighted average
May 6
$95 cost
May 6
$95 cost
May 5
$75 cost
May 5
$75 cost
May 3
$70 cost
May 3
$70 cost
Income Statement
Net Sales
$ 250
Cost of Goods Sold 145
Gross Profit
$ 105
Income Statement
Net Sales
$ 250
Cost of Goods Sold 170
Gross Profit
$ 80
Balance Sheet
Inventory
$ 95
Balance Sheet
Inventory
$ 70
Still there
FIFO
$240 = $80
per unit
3
Income Statement
Net Sales
$ 250
Cost of Goods Sold 160
Gross Profit
$ 90
Sold
Balance Sheet
Inventory
$ 80
Still
there
Inventory Costing Methods
Summary
Cost of Goods sold (Income Statement)
Inventory (Balance sheet)
FIFO
Oldest cost
Newest cost
Weighted
LIFO
Average
Newest cost Average cost
Oldest cost Average cost
Let’s consider a more complex example.
Date
Oct 1
Oct 3
Oct 5
Oct 6
7-14
Description
Beginning Inventory
Purchase
Purchase
Sales
Ending Inventory
# of Units Cost per Unit
10
7
30
8
10
10
(35) To calculate
15
To calculate
Total Cost
$
70
240
100
To calculate
To calculate
Inventory Cost Flow Computations
FIFO
10 units ×
30 units ×
10 units ×
Cost of Goods Available for Sale
– Ending Inventory
= Cost of Goods Sold
Beginning Inventory
+ Purchases
$ 7 = $ 70
$ 8 =
240
$ 10 =
100
$ 410
140
$ 270
(10 units @ $10) + (5 units @ $8)
(10 units @ $7) + (25 units @ $8)
7-15
Inventory Cost Flow Computations
LIFO
10 units ×
30 units ×
10 units ×
Cost of Goods Available for Sale
– Ending Inventory
Cost of Goods Sold
Beginning Inventory
+ Purchases
$ 7 = $ 70
$ 8 =
240
$ 10 =
100
$ 410
110
$ 300
(10 units @ $7) + (5 units @ $8)
(10 units @ $10) + (25 units @ $8)
7-16
Inventory Cost Flow Computations
Weighted Average
Description
Beginning Inventory
Purchase
Purchase
Cost of Goods Available for Sale
Weighted
=
Average Cost
Weighted
=
Average Cost
7-17
# of
Units
10
30
10
50
Cost
per Unit
7
8
10
Total
Cost
$
70
240
100
$ 410
Cost of goods Available for Sale
Number of Units Available for Sale
$410
50 units
= $8.20 per unit
Inventory Cost Flow Computations
Weighted Average
10 units ×
30 units ×
10 units ×
Cost of Goods Available for Sale
– Ending Inventory
Cost of Goods Sold
Beginning Inventory
+ Purchases
$ 7 = $ 70
$ 8 =
240
$ 10 =
100
$ 410
123
$ 287
15 units @ $8.20
35 units @ $8.20
7-18
Financial Statement Effects
7-19
Effects on the Income Statement
Sales
Cost of Goods Sold
Gross Profit
Operating Expenses
Income from Operations
Other Revenue (Expenses)
Income before Income Tax Expense
Income Tax Expense (30%)
Net Income
FIFO
$
525
270
255
125
130
20
150
45
$
105
LIFO
$
525
300
225
125
100
20
120
36
$
84
Weighted
Average
$
525
287
238
125
113
20
133
40
$
93
Effects on the Balance Sheet
Inventory
$
$
$
140
110
123
Financial Statement Effects
Effects of Increasing Costs on the Financial Statements
Inventory (Balance sheet)
Cost of Goods Sold (Income Statement)
FIFO
Higher
Lower
LIFO
Lower
Higher
Effects of Decreasing Costs on the Financial Statements
Inventory (Balance sheet)
Cost of Goods Sold (Income Statement)
7-20
FIFO
Lower
Higher
LIFO
Higher
Lower
Financial Statement Effects
Advantages of Methods
Weighted
Average
First-In,
First-Out
Last-In,
First-Out
Smoothes out
price changes.
Ending inventory
approximates
current
replacement cost.
Better matches
current costs in
cost of goods sold
with revenues.
7-21
Tax Implications and Cash Flow
Effects
7-22
Effects on the Income Statement
Sales
Cost of Goods Sold
Gross Profit
Operating Expenses
Income from Operations
Other Revenue (Expenses)
Income before Income Tax Expense
Income Tax Expense (30%)
Net Income
FIFO
$
525
270
255
125
130
20
150
45
$
105
LIFO
$
525
300
225
125
100
20
120
36
$
84
Weighted
Average
$
525
287
238
125
113
20
133
40
$
93
Effects on the Balance Sheet
Inventory
$
$
$
140
110
123
Learning Objective 4
Report inventory at the
lower of cost or market.
7-23
Lower of Cost or Market
The value of inventory can fall below its
recorded cost for two reasons:
1. it’s easily replaced by identical goods at a
lower cost, or
2. it’s become outdated or damaged.
When the value of inventory falls below its
recorded cost, the amount recorded for
inventory is written down to its lower
market value. This is known as the lower of
cost or market (LCM) rule.
7-24
Lower of Cost or Market
1,000 items @ $165
Item
Leather coats
Vintage jeans
1
Cost
per
Item
$165
20
Analyze
Assets
Inventory –15,000
2
7-25
Record
Market
Value
per Item
$
150
25
LCM
Total Lower
per
of cost
Total
Item Quantity or Market
cost
Writedown
$ 150
1,000 $ 150,000 $ 165,000 $ 15,000
20
400
8,000
8,000
-
400 items @ $20
1,000 items @ $150
=
Liabilities
+
Stockholders' Equity
Cost of Goods sold (+E) –15,000
Learning Objective 5
Analyze and record inventory
purchases, transportation,
returns and allowances, and
discounts.
7-26
Recording Inventory Transactions
We will now look at the accounting for
purchases, transportation costs,
purchase returns and allowances, and
purchase discounts. We will record all
inventory-related transactions in the
Inventory account.
7-27
Inventory Purchases
American Eagle Outfitters purchases
$10,500 of vintage jeans on credit.
1 Analyze
Assets
Inventory –10,500
2 Record
7-28
=
Liabilities
+
Accounts Payable +10,500
Stockholders' Equity
Transportation Cost
American Eagle pays $400 cash to a trucker who
delivers the $10,500 of vintage jeans to one of its stores.
1 Analyze
Assets
Cash - 400
Inventory + 400
2 Record
7-29
=
Liabilities
+
Stockholders' Equity
Purchase Returns and
Allowances
American Eagle returned some of the vintage jeans to the
supplier and received a $500 reduction in the balance owed.
1
Analyze
Assets
Inventory - 500
2 Record
7-30
=
Liabilities
Accounts Payable - 500
+
Stockholders' Equity
Purchase Discounts
American Eagle’s vintage jeans purchase for $10,500 had
terms of 2/10, n/30. Recall that American Eagle returned
inventory costing $500 and received a $500 reduction in its
Accounts Payable. American Eagle paid within
the discount period.
1
Analyze
Assets
Cash - 9,800
Inventory -200
2 Record
7-31
=
Liabilities
+
Accounts Payable -10,000
Stockholders' Equity
Summary of Inventory
Transactions
7-32
Learning Objective 6
Evaluate inventory
management by computing
and interpreting the inventory
turnover ratio.
7-33
Inventory Turnover Analysis
7-34
Comparison to Benchmarks
7-35
Supplement 7A
FIFO, LIFO, and Weighted Average in
a Perpetual Inventory System
Perpetual Inventory System
This is the same information that we used earlier in the
chapter to illustrate a periodic inventory system. The only
difference is that we have assumed the sales occurred on
October 4, prior to the final inventory purchase.
Date
Oct 1
Oct 3
Oct 4
Oct 5
7-37
Description
Beginning Inventory
Purchase
Sales
Purchase
Ending Inventory
# of Units Cost per Unit
10
7
30
8
(35) To calculate
10
10
15
To calculate
Total Cost
$
70
240
To calculate
100
To calculate
FIFO (First-in, First-Out)
7-38
LIFO (Last-in, First-Out)
7-39
Weighted Average Cost
$310 ÷ 40 units
= $7.75 per unit
7-40
Financial Statement Effects
Summary of Perpetual Inventory System Cost
Flow Assumptions on Financial Statements
7-41
Supplement 7B
The Effects of Errors in Ending
Inventory
The Effects of Errors in Ending
Inventory
Cost of Goods Sold Equation
BI + P – CGS = EI
Errors in Ending
Inventory will affect
the Balance Sheet and
the Income Statement.
Assume that Ending Inventory was overstated in 2009 by
$10,000 due to an error that was not discovered until 2010.
2009
Beginning Inventory
+ Purchases
– Ending Inventory
= Cost of Goods Sold
7-43
Accurate
Accurate
Overstated $10,000
Understated $10,000
The Effects of Errors in Ending
Inventory
Now let’s examine the effects of the
2009 Ending Inventory Error on 2010.
Assume that Ending Inventory was overstated in 2009 by
$10,000 due to an error that was not discovered until 2010.
2010
Beginning Inventory
+ Purchases
– Ending Inventory
= Cost of Goods Sold
7-44
Overstated $10,000
Accurate
Accurate
Overstated $10,000
Supplement 7C
Recording Inventory Transactions in
a Periodic System
Recording Inventory Transactions
in a Periodic System
A local cell phone dealer stocks and sells one item,
the MOTORAZR phone. The following events
occurred in the past year:
Jan. 1
Apr. 14
Nov. 30
Dec. 31
Beginning inventory: 80 units at a cost of $60.
Purchased 170 additional units on account at a cost of $60.
Sold 150 units on account at a unit sales price of $80.
Counted 100 units at a unit cost of $60.
We will record these events assuming the company uses
a periodic inventory system and then compare the
periodic inventory system to a perpetual inventory system.
7-46
Recording Inventory Transactions
in a Periodic System
Periodic Inventory System
7-47
Perpetual Inventory System
Recording Inventory Transactions
in a Periodic System
Periodic Inventory System
BI + P – CGS = EI
End-of-year adjustment entries are not required using a perpetual inventory system.
7-48
Recording Inventory Transactions
in a Periodic System
Summary of the Effects on the Accounting Equation
Periodic Inventory System
7-49
Perpetual Inventory System
Chapter 7
Solved Exercises
M7-6, M7-7, E7-3, E7-5, E7-10, E7-17
M7-6 Calculating Cost of Goods Available for Sale, Ending Inventory,
Sales, Cost of Goods Sold, and Gross Profit under Periodic FIFO, LIFO,
and Weighted Average Cost
Given the following information, calculate cost of goods available for sale and
ending inventory, then sales, cost of goods sold, and gross profit, under (a)
FIFO, (b) LIFO, and (c) weighted average. Assume a periodic inventory
system is used.
7-51
M7-6 Calculating Cost of Goods Available for Sale, Ending Inventory,
Sales, Cost of Goods Sold, and Gross Profit under Periodic FIFO, LIFO,
and Weighted Average Cost
a. FIFO
Beginning Inventory
100 units × $10 = $1,000
+ Purchase
500 units × $13 = 6,500
Cost of Goods Available for Sale
7,500
– Ending Inventory (400 × $13)
= 5,200
= Cost of Goods Sold (100 × $10) + (100 × $13)
= $2,300
7-52
M7-6 Calculating Cost of Goods Available for Sale, Ending Inventory,
Sales, Cost of Goods Sold, and Gross Profit under Periodic FIFO, LIFO,
and Weighted Average Cost
b. LIFO
Beginning Inventory
100 units × $10
+ Purchase
500 units × $13
Cost of Goods Available for Sale
– Ending Inventory (100 × $10) + (300 × $13)
= Cost of Goods Sold (200 × $13)
7-53
= $1,000
= 6,500
7,500
= 4,900
= $2,600
M7-6 Calculating Cost of Goods Available for Sale, Ending Inventory,
Sales, Cost of Goods Sold, and Gross Profit under Periodic FIFO, LIFO,
and Weighted Average Cost
c. Weighted Average
Beginning Inventory
100 units × $10 = $1,000
+ Purchase
500 units × $13 = 6,500
Cost of Goods Available for Sale
7,500
= 5,000
– Ending Inventory (400 × $12.50)
= Cost of Goods Sold (200 × $12.50)
= $2,500
Weighted
Average Cost
7-54
=
$7,500
600 units
= $12.50 per unit
M7-6 Calculating Cost of Goods Available for Sale, Ending Inventory,
Sales, Cost of Goods Sold, and Gross Profit under Periodic FIFO, LIFO,
and Weighted Average Cost
Sales (200 units @ $15)
Cost of Goods Sold
Gross Profit
7-55
FIFO
$ 3,000
2,300
$ 700
Weighted
LIFO
Average
$ 3,000 $ 3,000
2,600
2,500
$
400 $
500
M7-7 Calculating Cost of Goods Available for Sale, Cost of Goods Sold
and Ending Inventory under FIFO, LIFO, and Weighted Average Cost
(Periodic Inventory)
Given the following information, calculate the cost of goods available for sale,
ending inventory, and cost of goods sold, assuming a periodic inventory
system is used in combination with (a) FIFO, (b) LIFO, and (c) Weighted
Average Cost.
7-56
M7-7 Calculating Cost of Goods Available for Sale, Cost of Goods Sold
and Ending Inventory under FIFO, LIFO, and Weighted Average Cost
(Periodic Inventory)
Goods available for sale – same for all methods
Beginning Inventory
+ Purchase (July 13)
+ Purchase (July 25)
Goods Available for Sale
7-57
Units
2,000
6,000
8,000
16,000
Unit
Total
Cost
$ 20
22
25
Cost
$ 40,000
132,000
200,000
$ 372,000
M7-7 Calculating Cost of Goods Available for Sale, Cost of Goods Sold
and Ending Inventory under FIFO, LIFO, and Weighted Average Cost
(Periodic Inventory)
a. FIFO:
Ending Inventory
7-58
(7,000 units x $25)
$175,000
Cost of Goods Sold (2,000 units x $20)
(6,000 units x $22)
(1,000 units x $25)
$197,000
M7-7 Calculating Cost of Goods Available for Sale, Cost of Goods Sold
and Ending Inventory under FIFO, LIFO, and Weighted Average Cost
(Periodic Inventory)
c. Weighted average :
Average unit cost
Ending Inventory
Cost of Goods Sold
7-59
$372,000 ÷ 16,000 = $23.25 per unit
(7,000 units × $23.25) = $162,750
(9,000 units × $23.25) = $209,250
E7-3 Inferring Missing Amounts Based on Income Statement
Relationships
Supply the missing dollar amounts for the 2010 income statement of Lewis
Retailers for each of the following independent cases.
Sales Beginning
Total
Ending
Case Revenue Inventory Purchases Available Inventory
A $ 800 $
100 $
700
? $ 500
B
900
200
700
?
?
C
?
150
?
?
250
D
800
?
600
?
250
7-60
Cost of
Income
Goods Gross Operating
from
Sold Profit Expenses Operations
?
? $
200
?
?
?
150
0
200
400
100
?
?
?
250
100
E7-3 Inferring Missing Amounts Based on Income Statement
Relationships
Supply the missing dollar amounts for the 2010 income statement of Lewis
Retailers for each of the following independent cases.
Sales Beginning
Total
Ending
Case Revenue Inventory Purchases Available Inventory
A $ 800 $
100 $
700 $ 800 $ 500
B
900
200
700
900
?
150
?
C
?
150
?
?
250
D
800
?
600
?
250
7-61
Cost of
Income
Goods Gross Operating
from
Sold Profit Expenses Operations
$ 300 $500 $
200 $
300
750
?
150
?
150
0
200
400
100
?
?
?
250
100
E7-3 Inferring Missing Amounts Based on Income Statement
Relationships
Supply the missing dollar amounts for the 2010 income statement of Lewis
Retailers for each of the following independent cases.
Sales Beginning
Total
Ending
Case Revenue Inventory Purchases Available Inventory
A $ 800 $
100 $
700 $ 800 $ 500
B
900
200
700
900
150
C
600
150
300
450
250
D
800
100
?
600
700
?
250
7-62
Cost of
Income
Goods Gross Operating
from
Sold Profit Expenses Operations
$ 300 $500 $
200 $
300
750
150
150
0
200
400
100
300
450
?
350
?
250
100
E7-5 Calculating Cost of Ending Inventory and Cost of Goods Sold
under Periodic FIFO, LIFO, and Weighted Average
Assume Oahu Kiki’s uses a periodic inventory system, which shows the
following for the month of January. Sales totaled 240 units.
Required:
1. Calculate the number and cost of goods available for sale.
Beginning Inventory
+ Purchase
+ Purchase
Goods Available for Sale
7-63
120 units x $ 8
380 units x $ 9
200 units x $11
700 units
$
960
3,420
2,200
$ 6,580
E7-5 Calculating Cost of Ending Inventory and Cost of Goods Sold
under Periodic FIFO, LIFO, and Weighted Average
Assume Oahu Kiki’s uses a periodic inventory system, which shows the
following for the month of January. Sales totaled 240 units.
Required:
2. Calculate the number of units in ending inventory.
Units in Ending Inventory = Units Available – Units Sold
Units in Ending Inventory = 700 – 240 = 460 Units
7-64
E7-5 Calculating Cost of Ending Inventory and Cost of Goods Sold
under Periodic FIFO, LIFO, and Weighted Average
Assume Oahu Kiki’s uses a periodic inventory system, which shows the
following for the month of January. Sales totaled 240 units.
Required:
3. Calculate the cost of ending inventory and cost of goods sold using the
(a) FIFO, (b) LIFO, and (c) weighted average cost methods.
(a) FIFO
Goods Available for Sale
– Ending Inventory (LIST) (200 × $11) + (260 x $9)
Cost of Goods Sold (FIFO) (120 x $8) + (120 × $9)
7-65
$ 6,580
4,540
$ 2,040
E7-5 Calculating Cost of Ending Inventory and Cost of Goods Sold
under Periodic FIFO, LIFO, and Weighted Average
Assume Oahu Kiki’s uses a periodic inventory system, which shows the
following for the month of January. Sales totaled 240 units.
Required:
3. Calculate the cost of ending inventory and cost of goods sold using the
(a) FIFO, (b) LIFO, and (c) weighted average cost methods.
(b) LIFO
Goods Available for Sale
– Ending Inventory (FIST) (120 × $8) + (340 x $9)
Cost of Goods Sold (LIFO) (200 × $11) + (40 x $9)
7-66
$ 6,580
4,020
$ 2,560
E7-5 Calculating Cost of Ending Inventory and Cost of Goods Sold
under Periodic FIFO, LIFO, and Weighted Average
Assume Oahu Kiki’s uses a periodic inventory system, which shows the
following for the month of January. Sales totaled 240 units.
Required:
3. Calculate the cost of ending inventory and cost of goods sold using the
(a) FIFO, (b) LIFO, and (c) weighted average cost methods.
Weighted average cost = $6,580 ÷ 700 units = $9.40 per unit
(c) Weighted Average
Goods Available for Sale
– Ending Inventory (460 × $9.40)
Cost of Goods Sold (240 × $9.40)
7-67
$ 6,580
4,324
$ 2,256
E7-10 Reporting Inventory at Lower of Cost or Market
Peterson Furniture Designs is preparing the annual financial statements
dated December 31, 2009. Ending inventory information about the five major
items stocked for regular sale follows:
Item
Alligator Armoires
Bear Bureaus
Cougar Beds
Dingo Cribs
Elephant Dressers
Quantity
on Hand
50
75
10
30
400
Ending Inventory, 2009
Unit Cost When Replacement Cost
LCM
Acquired (FIFO) (Market) at Year-End Per Item
$
15 $
12
40
40
50
52
30
30
10
6
Total
LCM
Required:
1. Complete the final two columns of the table and then compute the
amount that should be reported for the 2009 ending inventory using the
LCM rule applied to each item.
Item
Alligator Armoires
Bear Bureaus
Cougar Beds
Dingo Cribs
Elephant Dressers
7-68
Quantity
50
75
10
30
400
Total
Total Cost
× $15 = $ 750
×
40 = $ 3,000
×
50 = $ 500
×
30 = $ 900
×
10 = $ 4,000
$ 9,150
Total Market
× $12 = $ 600
×
40 =
3,000
×
52 =
520
×
30 =
900
×
6 =
2,400
$1,750
LCM
Per Item
$
12
40
50
30
6
LCM
Valuation
$
600
3,000
500
900
2,400
$ 7,400
E7-10 Reporting Inventory at Lower of Cost or Market
Peterson Furniture Designs is preparing the annual financial statements
dated December 31, 2009. Ending inventory information about the five major
items stocked for regular sale follows:
Item
Alligator Armoires
Bear Bureaus
Cougar Beds
Dingo Cribs
Elephant Dressers
Quantity
on Hand
50
75
10
30
400
Ending Inventory, 2009
Unit Cost When Replacement Cost
LCM
Acquired (FIFO) (Market) at Year-End Per Item
$
15 $
12
40
40
50
52
30
30
10
6
Total
LCM
Required:
2. Prepare the journal entry that Peterson Furniture Designs would record
on December 31, 2009.
dr Cost of Goods Sold (+E, SE)
cr Inventory (-A)
7-69
1,750
1,750
E7-10 Reporting Inventory at Lower of Cost or Market
Peterson Furniture Designs is preparing the annual financial statements
dated December 31, 2009. Ending inventory information about the five major
items stocked for regular sale follows:
Quantity
Item
on Hand
Alligator Armoires
50
Bear Bureaus
75
Cougar Beds
10
Dingo Cribs
30
Elephant Dressers
400
Ending Inventory, 2009
Unit Cost When Replacement Cost
LCM
Acquired (FIFO) (Market) at Year-End Per Item
$
15 $
12
40
40
50
52
30
30
10
6
Total
LCM
Required:
3. If the market values recovered by June 30, 2010, to greater than original
cost, would the journal entry in requirement 2 be reversed under GAAP?
Under IFRS?
GAAP does not allow inventory to be written up, even when the circumstances
that necessitated the write-down no longer exist. IFRS, on the other hand, does
require that a company record a recovery in the inventory’s market value back to
its original cost. That is, the previous write-down may be reversed, but only to
the point where the ending inventory is reported at the lower of cost or market.
7-70
E7-17 Analyzing and Interpreting the Inventory Turnover Ratio
Polaris Industries Inc. is the biggest snowmobile manufacturer in the world. It
reported the following amounts in its financial statements (in millions):
Required:
1. Calculate to one decimal place the inventory turnover ratio and average
days to sell inventory for 2008, 2007, and 2006.
Inventory
Turnover =
Ratio
Days to
Sell
=
Cost of Goods Sold
Average Inventory
365 Days
Inventory Turnover =
Ratio
*6.8 = $1,502 ÷ $220
7-71
=
2008
2007
2006
6.8*
6.2**
6.0***
times per year
53.7
**6.2 = $1,387 ÷ $224
58.9
60.8
days
***6.0 = $1,297 ÷ $216
E7-17 Analyzing and Interpreting the Inventory Turnover Ratio
Polaris Industries Inc. is the biggest snowmobile manufacturer in the world. It
reported the following amounts in its financial statements (in millions):
Required:
2. Comment on any trends, and compare the effectiveness of inventory
managers at Polaris to inventory managers at its main competitor, Arctic
Cat, where inventory turns over 4.5 times per year (81.1 days to sell).
Both companies use the same inventory costing method (FIFO).
The inventory turnover ratio reflects how many times average inventory
was made and sold during the year. The inventory turnover ratio for
Polaris Industries has increased each year since 2006, leading to a
decrease in the average days to sell. This trend suggests that Polaris is
selling its inventory more quickly. This is generally considered to be a
positive performance. Polaris is performing better than Arctic Cat,
where the inventory turnover is 4.5 times per year or every 81.1 days.
7-72
End of Chapter 7