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Financial Statement Analysis

(11th Edition)
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Chapter 4, Problem 3P 5 Bookmarks Show all steps: ON

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Excerpts from the annual report of Lands' End follow ($ in thousands): Continue to post
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  Year 9 Year 8

Inventory $219,686 $241,154 My Textbook Solutions

Cost of sales 754,661 675,138

Net income 31,185 64,150

Financial Single Statistical
Statement... Variable... Techniques...
11th Edition 8th Edition 17th Edition
Tax rate 37% 37%
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Note 1: If the first-in, first-out (FIFO) method of accounting for inventory had been used, inventory
would have been approximately $26.9 million and $25.1 million higher than reported at Year 9
and Year 8, respectively.

Required:

a. What would ending inventory have been at Year 9 and Year 8 had FIFO been used?

b. What would net income for the year ended Year 9 have been had FIFO been used?

c. Discuss the usefulness of LIFO to FIFO restatements for analysis purposes.

Step-by-step solution

Step 1 of 7

Thus the cost of goods sold is assigned to older inventory while the new inventory is to the
ending inventory.”

Comment

Step 2 of 7

a. Calculation of the ending inventory in year 8 and 9 by following the FIFO basis of
inventory valuation:

The figures for inventory as per the data are first converted into millions for making the
calculation:

Year 8:

Therefore the inventory valuation for year 8 would be:

Hence the inventory valuation for year 8 is $266.254 million.

Comment

Step 3 of 7

Year 9:

Therefore the inventory valuation for year 9 would be:

Hence the inventory valuation for year 9 is $246.586 million.

Comment

Step 4 of 7

Comment

Step 5 of 7

b. Calculation of the net income for the year ended 2009 by using the FIFO method:

The figures for net income as per the data are first converted into millions for making the
calculation:

Year 9:

Therefore the net income valuation for year 9 would be:

Hence the net income for the year 8 by adopting the FIFO basis of inventory valuation
would be $32.319 million.

Comment

Step 6 of 7

c. The methods of inventory valuation in a company can be of the type of FIFO and LIFO basis.

As per the FIFO basis is concerned the valuation is done on the basis of the oldest goods at their
newest sales while LIFO basis is just the opposite of that. But change of inventory valuation can
have affect both from the retrospective and prospective sides.

Retrospective Restatement –In this method the companies choosing to switch from LIFO to
FIFO basis have to restate their historical data from the beginning. The income statement which
is an important aspect of the financials is affected by changes in cost of goods sold which in turn
have effect on the net income and also on the operating income. These changes will also affect
the balance sheet valuation of inventory and also the cash flow statement.

Prospective Restatement-The companies following this policy adopt these approach when it
they have not maintained their records properly or it is mostly impractical so the following
approach is adopted as the base to be carried forward in the future periods. Thus the companies
adopting this approach should provide foot notes to explain the reasons why the process of
retrospective restatement is not possible for the historical records.

On the overall it can be concluded that changing of the methods is preferred by the companies to
show better adaptability when they use different methods of valuation of

Comment

Step 7 of 7

inventory. Also it is better for a company to use the most recent value in the balance sheet for the
inventory valuation.

Comment

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Recommended solutions for you in Chapter 4

Chapter 4, Problem 1Q Chapter 4, Problem 4E

Companies typically report compensating balances Inventory and cost of goods sold figures prepared
that are required under a loan agreement as under the LIFO cost flow assumption versus   the
unrestricted cash classified... FIFO cost flow assumption...

See solution See solution

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