Analyzing Inventory Disclosure Comparing LIFO and FIFO
The current asset section of the 2014 and 2013 fiscal year end balance sheets of The Kroger Co. are presented in the accompanying table:
$ millions | January 31, 2015 |
February 1, 2014 |
---|---|---|
Current assets | ||
Cash and temporary cash investments | $188 | $825 |
Deposits in-transit | 786 | 666 |
Receivables | 949 | 845 |
FIFO inventory | 6,297 | 5,793 |
LIFO credit | (1,083) | (827) |
Prepaid and other current assets | 288 | 319 |
Total current assets | $7,425 | $7,621 |
In addition, Kroger provides the following footnote describing
its inventory accounting policy (assume the following is their
complete disclosure):
Inventories are stated at the lower of cost (principally on a LIFO
basis) or market. In total, approximately 95% of inventories in
2014 and 2013 were valued using the LIFO method. Cost for the
balance of the inventories, including substantially all fuel
inventories, was determined using the FIFO method. Replacement cost
was higher than the carrying amount by $1,043 million at January
31, 2015 and $827 million at February 1, 2014. We follow the
Link-Chain, Dollar-Value LIFO method for purposes of calculating
our LIFO charge or credit.
Required:
a. At what dollar amount does Kroger report its inventory in its
January 31, 2015, balance sheet?
$Answer million
b. What is the cumulative effect (through January 31, 2015) of the
use of LIFO on Kroger's pretax earnings? (Show an increase as a
positive number and a decrease as a negative number.)
$Answer million
c. Assuming a 35% tax rate, what is the cumulative (through January
31, 2015) tax effect of the use of LIFO to determine inventory
costs?
(Show an increase as a positive number and a decrease as a negative
number.)
(Round your answers to one decimal place.)
$Answer million
d. Kroger reported net earnings of $602 million in its fiscal year
2014 income statement. Assuming a 35% tax rate, what amount of net
earnings would Kroger report if the company used the FIFO inventory
costing method?
(Round your answers to one decimal place.)
$Answer million
e. Kroger reported merchandise costs (cost of goods sold) of
$71,494 million in fiscal year 2014. Compute its inventory turnover
for the year.
(Round your answers to one decimal place.)
Answer
f. Calculate the inventory turnover ratio if the FIFO costing
method had been used.
(Round your answers to one decimal place.)
Answer
a. | LIFO inventory=FIFO inventory-LIFO reserve=6297-1083=5214 | ||||||||||
b. | Cumulative effect=Decrease in pre-tax income by $1083(LIFO credit) | ||||||||||
c. | Cumulalative tax savings=LIFO credit*(1-tax rate)=103*(1-0.35)=$ 66.95 | ||||||||||
d. | FIFO earnings=LIFO earnings+Change in LIFO reserve*(1-tax) | ||||||||||
FIFO earnings=602+(1083-827)*(1-0.35)=768.4 | |||||||||||
e. | Inventory turnover=Cost of goods sold/Average inventory | ||||||||||
Average inventory=(Beginning inventory+Ending inventory)/2=[(5793-827)+(6297-1083)]/2=5090 | |||||||||||
Inventory turnover=71494/5090=14.05 times | |||||||||||
f. | Inventory turnover=Cost of goods sold/Average inventory | ||||||||||
FIFO cost of goods sold=LIFO cost of goods sold-Change in LIFO reserve=71494-(1083-827)=71238 | |||||||||||
Average inventory=(Beginning inventory+Ending inventory)/2=(5793+6297)/2=6045 | |||||||||||
Inventory turnover=71238/6045=11.78 times | |||||||||||
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