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 CHAPTER 7

MERCHANDISE INVENTORY

BRIEF EXERCISES
BE7–1
The inventory purchases made by Hewlett-Packard during 2012 can be calculated as follows:
Beginning inventory $ 7.5 billion
+ Purchases X
– Cost of Goods Sold 59.5
=Ending Inventory $ 6.3 billion
Purchases = $58.3 billion
BE7–2
a. From the footnote it is apparent that Johnson & Johnson is a manufacturer. A retailer or a service
company would not have accounts called Raw materials and supplies or a Goods in process within the
detail of their inventory. These accounts are only used by manufacturing companies.

b. From this disclosure it appears that Johnson & Johnson uses the FIFO inventory cost flow assumption.
If a company uses LIFO it must disclose the amount of the LIFO reserve imbedded in the valuation of
the inventory.

BE7–3
If General Electric used the FIFO inventory cost flow assumption instead of LIFO, its inventory balance
for 2012 would be ($15.4 + 0.398) = $15.798 billion. This disclosure is useful to financial statement
users because it can make it easier to compare GE’s results with a company that uses a FIFO
assumption. It also tells the reader the financial statement and tax liability impact on GE if it were to
switch to a FIFO assumption.

EXERCISES
E7–1
(1) Since the goods were shipped FOB shipping point, legal title to the goods passes to the buyer when the
goods are shipped on December 30, 2014. Since Dallas is the buyer, Dallas has legal title to the
inventory as of December 31, 2014. Further, Dallas rightfully included the items in its inventory. There
will be no misstatement on any of the financial statements.

(2) The goods were shipped FOB shipping point, so legal title passes to the buyer when the goods are
shipped on December 31, 2014. Since Dallas is the seller, not the buyer, legal title passed from Dallas
on December 31, 2014. Dallas, wrongfully included the items in its ending inventory. This would result
in an overstatement of inventory on the balance sheet. Assuming

1
E7–1 Concluded
that Dallas has properly recorded the sale but did not yet record the COGS, there will be an
understatement of COGS on the income statement and an overstatement of net income and retained
earnings.

(3) Since the goods were shipped FOB destination, legal title to the goods passes to the buyer when the
goods reach their destination on January 2, 2015. Since Dallas is the seller, not the buyer, Dallas has
legal title to the inventory as of December 31, 2014. Dallas has rightfully included the items in its
inventory. Assuming no other entries regarding the sale have been made, there will not be any
misstatement on any of the financial statements.

(4) The goods were shipped FOB destination, so legal title to the goods passes to the buyer when the
goods reach their destination on December 31, 2014. Since Dallas is the buyer, Dallas has legal title to
the inventory as of December 31, 2014. Dallas has rightfully included the items in its inventory, and
assuming that the goods were correctly included in purchases as of December 31, 2014, there will not
be any misstatement on any of the financial statements.

(5) The goods were shipped FOB destination, so legal title to the goods passes to the buyer when the
goods reach their destination on January 3, 2015. Since Dallas is the buyer, Dallas does not have legal
title to the inventory as of December 31, 2014. Dallas has wrongfully included the items in its ending
inventory. This would result in an overstatement of inventory on the balance sheet. Assuming that
Dallas has also improperly recorded the purchases, there will be no effect on the COGS or the net
income.

E7–2
10/10 Inventory (+A) ................................................................................... 76,000
Accounts Payable (+L) ................................................................ 76,000
Purchased inventory on account.

10/11 Inventory (+A) ................................................................................... 36,000

Accounts Payable (+L) ................................................................ 36,000
Purchased inventory on account.

10/20 Accounts Payable (–L) ....................................................................... 76,000

Cash (–A) .................................................................................... 74,480
Inventory (–A) ............................................................................ 1,520*
Paid supplier.
_________________
* $1,520 = $76,000  2% discount

10/30 Accounts Payable (–L) ....................................................................... 36,000

Cash (–A) .................................................................................... 36,000
Paid supplier.
E7–3
3/3 Inventory (+A) ................................................................................... 50,000
Accounts Payable (+L) ................................................................ 50,000
Purchased inventory on account.

3/10 Inventory (+A) ................................................................................... 140,000

Accounts Payable (+L) ................................................................ 140,000
Purchased inventory on account.

3/20 Accounts Payable (–L) ....................................................................... 140,000

Cash (–A) .................................................................................... 135,800
Inventory (–A) ............................................................................ 4,200*
Paid supplier.
_________________
* $4,200 = $140,000  3% discount

4/25 Accounts Payable (–L) ....................................................................... 50,000

Cash (–A) .................................................................................... 50,000
Paid supplier

E7–4
12/31/10:
Ending inventory:
Cost of Goods Sold = Goods available for sale – Ending Inventory
$13,831 = $16,986 – Ending Inventory
Ending Inventory = $3,155

12/31/11:
Goods available for sale:
Goods available for sale = Cost of Goods Sold + Ending Inventory
Goods available for sale = $15,693 + $3,416
Goods available for Sale = $19,109

Purchases:
Purchases = Goods available for Sale – Beginning Inventory*
Purchases = $19,109 - $3,155
Purchases = $15,954

* Beginning inventory for 2011 is the Ending Inventory for 2010

12/31/12:
Goods available for sale:
Goods available for sale = Beginning Inventory** + Purchases
Goods available for sale = $3,416 + $16,106
Goods available for sale = $19,522
 **Beginning inventory for 2012 is the Ending inventory for 2011

Ending inventory:
Ending Inventory = Goods available for sale – Cost of goods sold
Ending Inventory = $19,522 - $15,685
Ending Inventory = $3,837

E7–5
With the perpetual method, the balance in the Cost of Goods Sold account is perpetually updated for
sales of inventory, as is the balance in the Inventory account for sales and acquisitions of inventory.
This implies that the balance in Cost of Goods Sold should correspond to a balance in the Inventory
account of $52,000, and that no entry is necessary at the end of the year to record Cost of Goods Sold.

Ending Inventory = Beginning Inventory + Net Purchases – Cost of Goods Sold

$52,000 = $32,000 + ($85,000 + $4,300) – Cost of Goods Sold
Cost of Goods Sold = $69,300

However, since the physical count indicates that Telly's has $2,000 less inventory than is recorded in its
Inventory account, the following adjusting entry is necessary at the end of the year.

Inventory Shrinkage (E, –SE) ............................................................. 2,000

Inventory (–A) ............................................................................ 2,000
Incurred inventory shrinkage.

E7–6
a. Error in Ending Inventory in 2011: The $50 understated error in the Ending inventory means that
the Ending Inventory should have been $220 + $50 = $270. This would change the Cost of goods sold to
$1,109 - $270 = $839 which would then increase the Gross profit to $530 ($1,369 - $839).

b. Error in Ending Inventory in 2012: = The 2011 error in the Ending Inventory changes the
Beginning Inventory in 2012 and the Goods Available for sale to $270 + $983 = $1,253. To calculate the
Cost of Goods Sold the Ending Inventory for 2012 is deducted from the revised Goods Available for
Sale: $1,253 – ($244 - $50) = $1,059. The gross profit would then be $1,443 - $1,059 = $384.

c. 2011 2012
Original Cost of Goods Sold $889 $ 959
Corrected Cost of Goods Sold $839 $1,059

E7–7
a. Net cash from operating activities is the sum of all cash inflows
and outflows that are related to the daily running of the company’s business operations. Net
income is the difference between revenues (which do not have to be collected in cash) and
expenses (which do not have to be paid out in cash). It is very possible for a company to show a
positive cash from operations even though its net income is negative; it is possible that many of the
expenses (which were subtracted from revenue to get net income) did not require a cash outlay,
 just as it is possible that cash inflows exceeded sales for the period (because, for example, cash was
also collected from sales from the prior period).
b. The basic form for the journal entry is:
Inventory Write Down Expense (E, -SE)
Inventory (-A)
As shown, this expense will reduce net income, retained earnings and stockholders’ equity but will
NOT reduce cash. To reconcile net income (revenue minus expenses) with cash from operations
(all cash flows related to operations), all non-cash expenses should be added back in the statement
of cash flow.

c. If Sony’s change to inventory (160,432) is being added back to

net income in the statement of cash flow, then the change must represent a “source” of cash,
which would mean that the inventory decreased from one year to the next. When assets decrease,
they free up cash, while asset increases “use” cash.

E7–8
a. If Marian wants to maximize profits and ending inventory, she should sell the customer the lowest
priced coat (i.e., Coat 4). If she sells Coat 4, Marian would report the following gross profit and ending
inventory.

Gross Profit Ending Inventory

Revenues $ 12,000 Coat 1 $ 8,400
COGS of Coat 4 6,800 Coat 2 7,100
Gross profit $ 5,200 Coat 3 7,600
Total $ 23,100

Marian may have several reasons to maximize profits and ending inventory. If Marian's Furs has
borrowed money and entered into debt covenants, the debt covenants may contain clauses stipulating
a certain current ratio, debt/equity ratio, and so forth. By maximizing profits and inventory, Marian can
also minimize the probability that she will violate one of these ratios, thereby decreasing the chance
that she will violate her debt covenants. Further, if Marian has a bonus linked to accounting earnings,
she could maximize her bonus by maximizing profits.

b. If Marian wants to minimize profits and ending inventory, she should sell the customer the highest
priced coat (i.e., Coat 1). If she sells Coat 1, Marian would report the following gross profit and ending
inventory.

Gross Profit Ending Inventory

Revenues $ 12,000 Coat 2 $ 7,100
COGS of Coat 1 8,400 Coat 3 7,600
Gross profit $ 3,600 Coat 4 6,800
Total $ 21,500

The most likely reason Marian would want to minimize profits and ending inventory is to minimize
taxes. Minimizing profits would minimize current tax payments, thereby minimizing the present value
 of tax payments. Further, some states charge taxes on a company's assets, thereby providing an
incentive to minimize assets.

E7–9
a. FIFO cost flow assumption:
Cost of Goods Sold = (75 units  $450) + (50 units  $500) + (5 units  $600)
= $33,750 + $25,000 + $3,000
= $61,750

Gross Profit = Sales – Cost of Goods Sold

= (130 units  $1,000) – $61,750
= $68,250

Ending Inventory = (60 units  $600)

= $36,000

Averaging cost flow assumption:

Cost per Unit = [(75 units  $450) + (50 units  $500) + (65 units  $600)] ÷ (75
units + 50 units + 65 units)
($33,750 + $25,000 + $39,000) ÷ 190 units
= $514.47 per unit (rounded)
Cost of Goods Sold = (130 units  $514.47)
= $66,881.10

Gross Profit = Sales – Cost of Goods Sold

= (130 units  $1,000) – $66,881.10
= $63,118.90
Ending Inventory = 60 units  $514.47
= $30,868.20
LIFO cost flow assumption:
Cost of Goods Sold = (65 units  $600) + (50 units  $500) + (15 units  $450)
= $39,000 + $25,000 + $6,750
= $70,750
Gross Profit = Sales – Cost of Goods Sold
= (130 units  $1,000) - $70,750
= $59,250
Ending Inventory = (60 units  $450)
= $27,000
E7–9 Concluded

b. If the monitors are identical, customers would be indifferent between any two monitors. Hence, Vinnie
could simply give a customer the monitor that allows him to either minimize or maximize cost of goods
sold, thereby maximizing or minimizing gross profit.
If Vinnie wants to maximize net income, he would first sell to customers the lowest-priced monitors,
followed by the second lowest-priced monitors, and so forth. Since the cost of the monitors is
increasing, this strategy is identical to the FIFO cost flow assumption. Therefore, the highest gross profit
Vinnie could report is $68,250 (from part [a]). Vinnie may want to maximize net income for several
reasons. First, if Vinnie receives any incentive compensation, such as a bonus that is tied to net income,
then he can maximize his compensation by maximizing net income. Second, if Vinnie has any existing
debt covenants, they may specify a maximum debt/equity ratio. By increasing net income, Vinnie
would increase equity, thereby decreasing his debt/equity ratio. In this manner, Vinnie decreases the
probability that he will violate the debt covenant. Finally, if Vinnie is in the process of trying to obtain
debt, potential creditors may use net income as a factor in determining whether or not to loan money
to Vinnie or what interest rate to charge.
If Vinnie wants to minimize net income, he would first sell to customers the highest-priced monitors,
followed by the second highest-priced monitors, and so forth. Since the cost of the monitors is
increasing, this strategy is identical to the LIFO cost flow assumption. Therefore, the lowest gross profit
Vinnie could report is $59,250 (from part [a]). The most likely reason Vinnie would want to minimize
net income is for tax purposes. If he uses the same set of books for tax and financial reporting
purposes, then by minimizing book income, Vinnie minimizes taxable income. Minimizing taxable
income, in turn, minimizes the present value of cash outflows for taxes.

E7–10
2013 FIFO Weighted Average LIFO

Cost of goods sold 160 170 180

Gross profit (Sales – COGS) 290 280 270
Ending inventory 180 170 160

2014 FIFO Weighted Average LIFO

Cost of goods sold 245 262.5 290

Gross profit (Sales – COGS) 455 437.5 410
Ending inventory 290 262.5 225

If the business is growing (inventory levels rising) and the cost of inventory is increasing, then if LIFO is
chosen, the company will lower its net income which will reduce its tax liability. This increases the
cash flow of the company. Using FIFO will increase its reported net income and tax liability but will
also increase its current assets. This choice impacts the company’s operating and liquidity ratios.
E7–11
a. LIFO cost flow assumption:
Year Calculation Amount
2011 5,000 units  $12 $ 60,000
2012 (12,000 units  $16) + (4,000 units  $12) 240,000
2013 2,000 units  $18 36,000
2014 10,000 units  $21 210,000
2015 (2,000 units  $23) + (3,000 units  $18)
+ (1,000 units  $12) 112,000
Total $ 658,000

FIFO cost flow assumption:

Year Calculation Amount
2011 5,000 units  $12 $ 60,000
2012 (5,000 units  $12) + (11,000 units  $16) 236,000
2013 (1,000 units  $16) + (1,000 units  $18) 34,000
2014 (4,000 units  $18) + (6,000 units  $21) 198,000
2015 (4,000 units  $21) + (2,000 units  $23) 130,000
Total $ 658,000
E7–11 Concluded
Averaging cost flow assumption:
Year Calculation Amount
2011 Cost/unit = $120,000 ÷ 10,000 units
= $12 per unit
COGS = 5,000 units  $12 $ 60,000
2012 Cost/unit = [(5,000  $12) + (12,000  $16)] ÷ 17,000 units
= $14.82 per unit
COGS = 16,000 units  $14.82 237,120
2013 Cost/unit = [(1,000  $14.82) + (5,000  $18)] ÷ 6,000 units
= $17.47 per unit
COGS = 2,000 units  $17.47 34,940
2014 Cost/unit = [(4,000  $17.47) + (10,000  $21)] ÷ 14,000 units
= $19.99 per unit
COGS = 10,000 units  $19.99 199,900
2015 Cost/unit = [(4,000  $19.99) + (2,000  $23)] ÷ 6,000 units
= $20.99 per unit
COGS = 6,000 units  $20.99 125,940
Total $ 657,900
(rounded)

b. Over the life of a company, Cost of Goods Sold would be the same regardless of the cost flow
assumption employed. Over the life of a business, all the units of inventory will be sold. Consequently,
all costs associated with inventory will be expensed. The choice of a cost flow assumption affects only
the allocation of inventory costs to particular accounting periods; it does not affect total inventory
costs.

c. Assume that accounting earnings equals tax earnings. Over the life of a business, a company's total
earnings are the same regardless of the cost flow assumption employed. Therefore, a company's total
tax liability over the company's life is the same, regardless of the cost flow assumption employed, as
long as tax rates are unchanged. The choice of a cost flow assumption does, however, affect the
allocation of inventory costs to particular years. These different cost allocations give rise to different
earnings in particular years. The different earnings amounts under different cost flow assumptions then
give rise to different tax liabilities (i.e., cash outflows) in particular years. Due to the time value of
money, the timing of cash flows affects the present value of the total tax payments.

In periods of inventory build-up, the LIFO cost-flow assumption will result in lower earnings while FIFO
will result in higher earnings. The opposite is true in times of inventory liquidation. Consequently, LIFO
results in lower tax payments when a company builds up its inventories and FIFO results in higher tax
payments. The timing of the tax payments means that the present value of tax payments under LIFO is
less than the present value of tax payments under FIFO. In times of deflation, the opposite situation
arises. The present value of tax payments under FIFO is less than the present value of tax payments
under LIFO.
E7–12
a. Inventories on LIFO basis ............................................................. $15,547
Add: Adjustment to LIFO basis ..................................................... 2,750
Inventories on FIFO basis ............................................................. $ 18,297

b. Accumulated tax savings can be computed by multiplying the tax rate by the total decrease in net
income due to LIFO adoption.

Accumulated Tax Savings = Tax Rate  (2012 LIFO Reserve)

= .31  ($2,750)
= $852.50

c. The 2012 reported net income under the FIFO cost flow assumption would be $5.907.32 ($5,681 +
($2,750 – 2,422)(1-.31)) if Caterpillar had chosen to change from LIFO to FIFO years earlier.

d. The information generated in parts (a), (b), and (c) could be useful to the users from several
perspectives. First, users could use the information to compare Caterpillar with other companies
within the industry that use FIFO cost flow assumption. Second, the users can readily see the tax
savings that the company has generated as a result of its choice of LIFO cost flow assumption.
Thirdly, along with other information, users can use this information to assess the quality of
earnings of Caterpillar.

e. Under IFRS the last-in, first-out (LIFO) inventory cost flow assumption is prohibited. The cost of
inventory generally is determined using the first-in, first-out (FIFO) or averaging assumption.
Caterpillar would have to abandon its LIFO method and the related benefits.

E7–13
a. Loss on Inventory Write-down (Lo, –SE) ................................................... 12
Inventory (–A) ..................................................................................... 12
Wrote inventory down to market value.

Cash (+A) ............................................................................................. 50

Sales (R, +SE)....................................................................................... 50
Sold Item #1.

Cost of Goods Sold (E, –SE) ....................................................................... 28

Inventory (–A) ..................................................................................... 28
Recorded cost of goods sold for Item #1.
Cash (+A) ............................................................................................. 50
 Sales (R, +SE)....................................................................................... 50
Sold Item #2.
Cost of Goods Sold (E, –SE) ....................................................................... 40
Inventory (–A) ..................................................................................... 40
Recorded cost of goods sold for Item #2.

E7–13 Concluded
b. 2014 2015 Total
Item #1 $12 loss $22 profit $10 profit
Item #2 0 10 profit 10 profit

c. As demonstrated in Part (b) for Item #1, a company can trade off a loss in one period for increased
profits in a later period. This implies that if a company is having a good year, it can hide some of those
profits by writing down its inventory and then recognize increased profits in future periods when the
company's profits may be lower.

E7–14
a. Unilever is a manufacturer. Manufacturing companies carrying raw materials inventory in addition
to finished goods inventory, while retailers only carry finished goods.
b. Unilever uses the First-In, First-Out (FIFO) method; under IFRS, the Last-In, First-Out (LIFO) method
is prohibited.
c. An inventory writedown is an adjustment to the carrying value of inventory when the market value
has decreased below the cost of the inventory. An inventory recovery is an adjustment to the
carrying value of inventory when the market value of inventory previously written down has
increased; the recovery restores some of the amount previously lost due to the writedown. The
appropriate journal entries for the writedown and recovery are:

Inventory Writedown Expense (E, -SE) 131

Inventory (-A) 131

Inventory (+A) 71
Inventory Recovery (R, +SE) 71

d. If Unilever used U.S. GAAP instead of IFRS, the company would have the option to use LIFO as an
inventory method. Secondly, the company would use a different market valuation for its inventory
when determining the amount of any writedown expense. (Under GAAP, the market value is
normally the replacement cost; under IFRS, the market value is normally the realizable value, the
amount at which the inventory could be sold.) Finally, the company would not be allowed to book
the recovery of inventory value; under GAAP, inventory may be written down but is never allowed
to be written up in value.
 PROBLEMS

P7–1
11/15 Inventory (+A) ................................................................................... 8,000
Accounts Payable (+L) ................................................................ 8,000
Purchased inventory on account.

11/26 Inventory (+A) ................................................................................... 12,000

Accounts Payable (+L) ................................................................ 12,000
Purchased inventory on account.

12/2 Accounts Payable (–L) ....................................................................... 8,000

Cash (–A) .................................................................................... 8,000
Paid supplier.

12/2 Accounts Payable (–L) ....................................................................... 12,000

Cash (–A) .................................................................................... 11,760
Inventory (–A) ............................................................................ 240
Paid supplier.

P7–2
a. 3/5 Inventory (+A) ............................................................................ 30,000
Accounts Payable (+L) ......................................................... 30,000
Purchased inventory on account.

3/10 Inventory (+A) ............................................................................ 60,000

Accounts Payable (+L) ......................................................... 60,000
Purchased inventory on account.

3/13 Accounts Payable (–L) ................................................................ 30,000

Cash (–A) ............................................................................. 29,400
Inventory (–A) ..................................................................... 600
Paid supplier.
 7/18 Accounts Payable (–L) ................................................................ 60,000
Cash (–A) ............................................................................. 60,000
Paid supplier.

P7–2 Concluded
b. 3/10 Inventory (+A) ............................................................................ 60,000
Accounts Payable (+L) ......................................................... 60,000
Purchased inventory on account.

3/19 Accounts Payable (–L) ................................................................ 40,000

Cash (–A) ............................................................................. 39,200
Inventory (–A) ..................................................................... 800*
Paid supplier.
_____________
* $800 = ($60,000  2/3)  2% discount

8/7 Accounts Payable (–L) ................................................................ 20,000

Cash (–A) ............................................................................. 20,000
Paid supplier.

P7–3
The correct amount that should be reported for Cost of Goods Sold is calculated using the following
formula.

Error in Ending Inventory = Error in Beginning Inventory + Error in Purchases – Error in

COGS
2010:
$500 = $0 + $0 – Error in COGS
Error in COGS = ($500). Therefore, COGS as reported is understated $500.
Correct COGS = $4,366 + $500 = $4,866

2011:
($150) = $500 + $0 – Error in COGS
Error in COGS = $650: COGS as reported is overstated $650.
Correct COGS = $5,068 – $650 = $4,418

2012:
$320 = ($150) + $0 – Error in COGS
Error in COGS = ($470). Therefore, COGS as reported is understated $470.
 Correct COGS = $4,796 + $470 = $5,266

The restated income statements follow:.

2012 2011 2010

Sales $ 22,603 $ 24,287 $ 23,076
Cost of goods sold 5,266 4,418 4,866
Gross profit $ 17,337 $ 19,869 $ 18,210
Expenses 13,718 14,871 13,640
Net income $ 3,619 $ 4,998 $ 4,570

P7–4
a. Cost of Goods Available for Sale = Cost of Goods in Beginning Inventory + Cost of
Goods Purchased
= (15,000 units x $1) + (6,000 units  $1.30) + (9,000
units  $1.50) + (7,000 units  $1.60)
= $47,500

Number of Units Available for Sale = Number of Units in Beginning Inventory + Number
of Units Purchased
= 15,000 + 22,000
= 37,000 units

FIFO:
Ending Inventory = (7,000 units  $1.60) + (4,000 units  $1.50)
= $17,200

Cost of Goods Sold = Cost of Goods Available for Sale – Ending Inventory
= $47,500 – $17,200
= $30,300
LIFO:
Ending Inventory = (11,000 Units  $1.00)
= $11,000

Cost of Goods Sold = Cost of Goods Available for Sale – Ending Inventory
= $47,500 – $11,000
= $36,500

Averaging:
Cost per Unit = Cost of Goods Available for Sale ÷ Number of Units Available for Sale
= $47,500 ÷ 37,000 Units
= $1.284 per Unit

Ending Inventory = Number of Units in Ending Inventory  Cost per Unit

= 11,000 units  $1.284 per unit
= $14,124

Cost of Goods Sold = Cost of Goods Available for Sale – Ending Inventory
= $47,500 – $14,124
 = $33,376

P7–4 Continued

Lumbermans and Associates

Income Statements
For the Year Ended December 31, 20XX

FIFO Averaging LIFO

Sales $ 55,000 $ 55,000 $ 55,000
Cost of goods sold 30,300 33,376 36,500
Gross profit $ 24,700 $ 21,624 $ 18,500
Other expenses 15,000 15,000 15,000
Income before taxes $ 9,700 $ 6,624 $ 3,500
Income taxes 2,910 1,987 1,050
Net income $ 6,790 $ 4,637 $ 2,450

b. By using LIFO rather than FIFO, Lumbermans and Associates would save $1,860 ($2,910 – $1,050) in
taxes.

c. Ending inventory at market value = 11,000 units  $1.35 per unit = $14,850

Lower-of-cost-or-market value:
FIFO Averaging LIFO
Cost $ 17,200 $ 14,124 $11,000
Market value 14,850 14,850 14,850
Excess of cost over market
value (cannot be negative) 2,350 0 0

FIFO method:
Loss on Inventory Write-down (Lo, –SE) ........................................................ 2,350
Inventory (–A) .......................................................................................... 2,350
Adjusted inventory to LCM.

Averaging method: No entry is necessary.

LIFO method: No entry is necessary.

d. Cost of Goods Available for Sale = Cost of Goods in Beginning Inventory + Cost of
Goods Purchased
= (15,000 units  $1.60) + (6,000 units  $1.40) +
(9,000 units  $1.30) + (7,000 units  $1.20)
= $52,500

Number of Units Available for Sale = Number of Units in Beginning Inventory + Number of
Units Purchased
= 15,000 + 22,000
= 37,000 units

P7–4 Concluded
FIFO:
Ending Inventory = (7,000 units  $1.20) + (4,000 units  $1.30)
= $13,600

Cost of Goods Sold = Cost of Goods Available for Sale – Ending Inventory
= $52,500 – $13,600
= $38,900

LIFO:
Ending Inventory = 11,000 units  $1.60
= $17,600

Cost of Goods Sold = Cost of Goods Available for Sale – Ending Inventory
= $52,500 – $17,600
= $34,900

Averaging:
Cost per Unit = Cost of Goods Available for Sale ÷ Number of Units Available for Sale
= $52,500 ÷ 37,000 units
= $1.419 per unit

Ending Inventory = Number of Units in Ending Inventory  Cost per Unit

= 11,000 units  $1.419 per unit
= $15,609

Cost of Goods Sold = Cost of Goods Available for Sale – Ending Inventory
= $52,500 – $15,609
= $36,891

Lumbermans and Associates

Income Statements
 For the Year Ended December 31, 20XX
FIFO Averaging LIFO
Sales $ 55,000 $ 55,000 $ 55,000
Cost of goods sold 38,900 36,891 34,900
Gross profit $ 16,100 $ 18,109 $ 20,100
Other expenses 15,000 15,000 15,000
Income before taxes $ 1,100 $ 3,109 $ 5,100
Income taxes 330 933 1,530
Net income $ 770 $ 2,176 $ 3,570
LIFO gives rise to the highest net income in this case. Under FIFO, the oldest costs flow into COGS
before the most recent costs. Under LIFO, the most recent costs flow into COGS before the older costs.
Under the averaging method, all the costs are averaged to determine COGS. In this case, the cost of the
inventory is decreasing, so the LIFO cost flow assumption uses lower, newer costs in computing COGS
than the other two methods. Since these lower costs flow into COGS under LIFO, the older, higher costs
flow into ending inventory.

P7–5
a. Cost of Goods Available for Sale = Cost of Goods in Beginning Inventory + Cost of
Goods Purchased
= (500 units x $70) + (1,000 units  $75) + (3,000 units 
$80) + (4,000 units  $82)
= $678,000

Number of Units Available for Sale = Number of Units in Beginning Inventory + Number
of Units Purchased
= 500 + 8,000
= 8,500 units

Units Sold = 6,000 units

Units remaining in Inventory = 2,500 units

FIFO:
Ending Inventory = 2,500 units  $82
= $205,000

Cost of Goods Sold = Cost of Goods Available for Sale – Ending Inventory
= $678,000 – $205,000
= $473,000
LIFO:
Ending Inventory = (500 units  $70) + (1,000 units x $75) + (1,000 units x $80)
= $190,000

Cost of Goods Sold = Cost of Goods Available for Sale – Ending Inventory
= $678,000 – $190,000
= $488,000

Averaging:
 Cost per Unit = Cost of Goods Available for Sale ÷ Number of Units Available for Sale
= $678,000 ÷ 8,500 Units
= $79.76 per Unit

Ending Inventory = Number of Units in Ending Inventory  Cost per Unit

= 2,500 units  $79.76 per unit
= $199,400

Cost of Goods Sold = Cost of Goods Available for Sale – Ending Inventory
= $678,000 – $199,400
= $478,600

P7–5 Continued

Laundryman’s Corporation
Income Statements
For the Year Ended December 31, 20XX

FIFO Averaging LIFO

Sales $ 900,000 $ 900,000 $ 900,000
Cost of goods sold 473,000 478,600 488,000
Gross profit $ 427,000 $ 421,400 $ 412,000
Other expenses 125,000 125,000 125,000
Income before taxes $ 302,000 $ 296,400 $ 287,000
Income taxes 90,600 88,920 86,100
Net income $ 211,400 $ 207,480 $ 200,900

b. By using LIFO rather than FIFO, Laundryman’s would save $4,500 ($90,600 – $86,100) in taxes.

c. Ending inventory
FIFO Averaging LIFO
Cost 2,500 units @ $82 2,500 units @ $79.76 500 units @ $70
1,000 units @ $75
1,000 units @ $80
Market /unit $78 $78 $78

Writedown 2,500 x ($82 - $78) 2,500 x ($79.76 - $78) 1,000 x ($80 - $78)
 FIFO method:
Loss on Inventory Write-down (Lo, –SE) ........................................................ 10,000
Inventory (–A) .......................................................................................... 10,000
Adjusted inventory to LCM.

Averaging method:
Loss on Inventory Write-down (Lo, –SE) ........................................................ 4,400
Inventory (–A) .......................................................................................... 4,400
Adjusted inventory to LCM.

LIFO method:
Loss on Inventory Write-down (Lo, –SE) ........................................................ 2,000
Inventory (–A) .......................................................................................... 2,000
Adjusted inventory to LCM.

P7–5 Concluded

d. Cost of Goods Available for Sale = Cost of Goods in Beginning Inventory + Cost of
Goods Purchased
= (500 units x $80) + (1,000 units  $78) + (3,000 units 
$77) + (4,000 units  $75)
= $649,000

Number of Units Available for Sale = Number of Units in Beginning Inventory + Number of
Units Purchased
= 500 + 8,000
= 8,500 units

Units Sold = 6,000 units

Units remaining in Inventory = 2,500 units
FIFO:
Ending Inventory = (2,500 units  $75)
= $187,500

Cost of Goods Sold = Cost of Goods Available for Sale – Ending Inventory
= $649,000 – $187,500
= $461,500
LIFO:
Ending Inventory = (500 units  $80) + (1,000 units x $78) + (1,000 units x $77)
= $195,000

Cost of Goods Sold = Cost of Goods Available for Sale – Ending Inventory
= $649,000 – $195,000
= $454,000
 Averaging:
Cost per Unit = Cost of Goods Available for Sale ÷ Number of Units Available for Sale
= $649,000 ÷ 8,500 units
= $76.35 per unit

Ending Inventory = Number of Units in Ending Inventory  Cost per Unit

= 2,500 units  $76.35 per unit
= $190,875

Cost of Goods Sold = Cost of Goods Available for Sale – Ending Inventory
= $649,000 – $190,875
= $458,125

Laundryman’s Corporation
Income Statements
For the Year Ended December 31, 20XX

FIFO Averaging LIFO

Sales $ 900,000 $ 900,000 $ 900,000
Cost of goods sold 461,500 458,125 454,000
Gross profit $ 438,500 $ 441,875 $ 446,000
Other expenses 125,000 125,000 125,000
Income before taxes $ 313,500 $ 316,875 $ 321,000
Income taxes 94,050 95,063 96,300
Net Income $219,450 $221,812 $224,700

Because Cost of Goods Sold is the lowest under LIFO due to deflation, LIFO yields the highest net
income in this case. Under FIFO, the oldest costs flow into COGS before the most recent costs. Under
LIFO, the most recent costs flow into COGS before the older costs. Under the averaging method, all the
costs are averaged to determine COGS. In this case, the cost of the inventory is decreasing, so the LIFO
cost flow assumption uses lower, newer costs in computing COGS than the other two methods. Since
these lower costs flow into COGS under LIFO, the older, higher costs flow into ending inventory.

P7–6
a. LIFO cost flow assumption:
(1) 1/3 Purchases (+A) ...................................................................... 140,000
 Accounts Payable (+L) .................................................... 140,000
Purchased inventory on account.

(2) 1/3 Cash (+A) ............................................................................... 100,000

Sales (R, +SE) .................................................................. 100,000
Made cash sales.

(3) 1/9 Accounts Receivable (+A)...................................................... 200,000

Sales (R, +SE) .................................................................. 200,000
Made sales on account.

(4) 1/10 Accounts Payable (–L) ........................................................... 140,000

Cash (–A) ........................................................................ 137,200
Purchase Discount (–A) .................................................. 2,800*
Made payment to supplier.
_____________
* $2,800 = $140,000  2% discount

(5) 1/15 Purchases (E, –SE) ................................................................. 248,500

Cash (–A) ........................................................................ 73,500
Accounts Payable (+L) .................................................... 175,000
Purchased inventory.

(6) 1/19 Purchases (+A) ...................................................................... 182,000

Accounts Payable (+L) .................................................... 182,000
Purchased inventory.

(7) 1/23 Accounts Payable (–L) ........................................................... 87,500

Cash (–A) ........................................................................ 85,750
Purchase Discount (–A) .................................................. 1,750*
Made payment to supplier.
_____________
* $1,750 = ($175,000 x ½)  2% discount

(8) 1/27 Purchases (+A) ...................................................................... 112,000

Cash (–A) ........................................................................ 112,000
Purchased inventory on account.

(9) 1/28 Accounts Payable (–L) ........................................................... 87,500

Cash (–A) ........................................................................ 87,500
Made payment to supplier.
P7–6 Continued
(10) 1/28 Accounts Payable (–L) ........................................................... 182,000
Cash (–A) ........................................................................ 178,360
Purchase Discount (–A) .................................................. 3,640*
Made payment to supplier.
_____________
* $3,640 = $182,000  2% discount

(11) 1/29 Cash (+A) ............................................................................... 360,000

Sales (R, +SE) .................................................................. 360,000
Made cash sales.

(12) 1/30 Accounts Receivable (+A)...................................................... 300,000

Sales (R, +SE) .................................................................. 300,000
Made sales on account.

(13) 1/31 Purchases (+A) ...................................................................... 60,000

Cash (–A) ........................................................................ 60,000
Purchased inventory.

(14) 1/31 Freight-In (+A) ....................................................................... 30,000

Accounts Payable (+L) .................................................... 30,000
Incurred freight costs on inventory.

a. LIFO cost flow assumption ....................

Adjusting entry
1/31 Inventory (ending) ................................................................ 393,250*
Cost of Goods Sold ................................................................ 466,060
Purchase Discount ................................................................ 8,190
Purchases ....................................................................... 742,500
Freight-In ........................................................................ 30,000
Inventory (beginning) ..................................................... 95,000
Recorded COGS and ending inventory.
_____________
* Units in Ending Inventory = Units in Beginning Inventory + Units Purchased – Units Sold
18,000 = 5,000 + 30,000 – 17,000: Cost of units in inventory using LIFO:
$393,250 = (5,000 units  $19.00) + (7,000 units  $20.60) + (6,000 units  $25.675)
The unit costs used to calculate the $393,250 were taken from the following table.

Date Number of Units Unit Cost Unit Freighta Unit Discount Total Unit Cost
Beg. Inv. 5,000 $19.00 $0.00 $ 0.00 $19.00
1/3 7,000 20.00 1.00 0.40 20.60
1/15 10,000 24.85b 1.00 0.175c 25.675
1/19 7,000 26.00 1.00 0.52 26.48
1/27 4,000 28.00 1.00 0.00 29.00
1/31 2,000 30.00 1.00 0.00 31.00
__________________
P7–6 Concluded

a $1.00 = $30,000 freight bill ÷ 30,000 units purchased

b $24.85 unit cost = [(3,000  $24.50) + (7,000  $25.00)] ÷ 10,000 units
c $0.175 unit discount = Total discount of $1,750 ÷ 10,000 units

b. FIFO cost flow assumption:

All entries throughout January would be identical under the FIFO and LIFO cost flow assumptions using
the periodic method. The only difference would be in the adjusting entry to record COGS and ending
inventory.

Adjusting entry
1/31 Inventory (ending)............................................................... 491,735*
Cost of Goods Sold .............................................................. 367,575
Purchase Discount ............................................................... 8,190
Purchases ....................................................................... 742,500
Freight-In ........................................................................ 30,000
Inventory (beginning) ..................................................... 95,000
Recorded COGS and ending inventory.
_________
* The computations for ending inventory are based upon the table used in part (a)
$491,735 = (2,000 units  $31.00) + (4,000 units  $29.00) + (7,000 units  $26.48) +
(5,000 units  $25.675)

P7–7
a. Current Assets ÷ Current Liabilities = Current Ratio
FIFO $22,406a ÷ $24,262 = .92
LIFO 21,411b ÷ 24,262 = .88
Decrease .04
_____________
a $22,406 = $14,911 in cash + $7,495 in inventory
b $21,411 = $14,911 in cash + $6,500 in inventory

b. FIFO LIFO
Sales $ 67,224 $ 67,224
Cost of goods sold:
Beginning inventory $ 6,285 $ 6,285
Purchases 22,868 22,868
Cost of goods available $ 29,153 $ 29,153
Ending inventory 7,495 6,500
Cost of goods sold 21,658 22,653
Gross profit $ 45,566 $ 44,571
Expenses 31,791 31,791
Income before taxes $ 13,775 $ 12,780
Income tax 3,261 3,067
Net income $ 10,514 $ 9,713
P7–7 Concluded
Change in gross profit = $45,566 – $44,571 = $995
Change in net income = $10,514 – $9,713 = $801

c. Tax dollars saved = $3,261 – $3,067 = $194

d. Using LIFO can have several disadvantages. First, LIFO requires a company to maintain records for older
inventory acquisitions. This practice usually results in higher bookkeeping costs. Second, to avoid
"eating into" a LIFO layer, which would result in older, lower inventory costs flowing into COGS and
raising the company's net income and associated tax liability, managers may purchase inventory at a
time or at a cost that is not advantageous to the company. Third, LIFO can adversely affect a company's
and/or manager's contracts. A company's debt covenants may stipulate a minimum current ratio, or
level of working capital. These both would be lower under LIFO than under FIFO (assuming inflation).
Also, using LIFO reduces net income during inflationary periods. If a manager has an incentive contract
linked to net income, the manager's compensation would decrease. Finally, the lower net income
achieved under LIFO may mislead current and potential investors into believing that the company is
performing poorly (although some current research indicates that this last point is not likely).

P7–8
a. Ending Inventory, 12/31/2014: LIFO layers:
2001 4,000 units x $5 per unit = $ 20,000

b.
Ruhe Auto Supplies
Income Statement
For the Year Ended December 31, 2014

Revenue ....................................................................................... $ 3,000,000

Cost of goods sold:
Beginning inventory ................................................................ $ 112,500
Purchases................................................................................. 902,500a
Cost of goods available for sale .............................................. $ 1,015,000
Ending inventory ..................................................................... 20,000b
Cost of goods sold ................................................................... 995,000
Gross profit .................................................................................. $ 2,005,000
Operating expenses ..................................................................... 800,000
Income before income taxes ....................................................... $ 1,205,000
Income taxes ................................................................................ 361,500
Net income................................................................................... $ 843,500
___________
a $902,500 = 9,500 units purchased during 2014  $95 per unit
b $ 20,000 = 4,000 units from 2001  $5 per unit

The company's income tax liability is $361,500, and its net income is $843,500.
P7–8 Concluded
c.
Revenue ....................................................................................... $ 3,000,000
Cost of goods sold:
Beginning inventory ................................................................ $ 112,500
Purchases................................................................................. 1,900,000a
Cost of goods available for sale ............................................... $2,012,500
Ending inventory ..................................................................... 112,500b
Cost of goods sold ................................................................... 1,900,000
Gross profit .................................................................................. $ 1,100,000
Operating expenses ..................................................................... 800,000
Net income before taxes.............................................................. $ 300,000
Income taxes ................................................................................ 90,000
Net income................................................................................... $ 210,000
___________
a $1,900,000 = (9,500 units + 10,500 units)  $95 per unit
b $ 112,500 = (14,000 units  $5) + (500 units  $85)

Purchasing an additional 10,500 units of inventory at $95 per unit on December 31, 2014 would cost
Ruhe Auto Supplies $997,500. By incurring these costs, the company would save only $271,500 in taxes
(i.e., $361,500 from part [b]) – $90,000). So on the face of it, it appears that it would not be a wise
decision to acquire these additional units of inventory. However, if Ruhe Auto Supplies was planning to
acquire additional inventory early in 2015 anyway, then it might not be a bad decision to acquire the
inventory at the end of 2014 to lower the company's taxes.

P7–9
a. Brady’s 2014 reported income under LIFO .................................................. $ 42,700
LIFO Layer Liquidation during 2014 (net of income taxes) .......................... – 5,200a
FIFO Based Net Income After Taxes ............................................................. $ 37,500

a
= $8,000 x (1- .35) = $5,200, after tax impact of no LIFO liquidation during 2014.

Brady has gone from reporting higher net income to having lower net income.

b. Restatement of Brady’s 2014 reported income, if it had always been a FIFO user, can be computed as
follows:
Brady’s 2014 reported income under LIFO ................................................ $ 42,700
Decrease in LIFO Reserve (net of income taxes) ..................................... – 845a
LIFO Layer Liquidation during 2014 (net of income taxes) ...................... – 5,200b
FIFO Based Net Income After Taxes ........................................................ $ 36,655

a=
($4,800 – $3,500)  1 – .35) = $845
b
= $8,000  (1– .35) = $5,200

According to the analysis given above, Brady’s restated reported income is $36,655 which is lower than
Danner’s reported net income. The reason Brady’s income under FIFO is lower than under LIFO is due
to the decline in the LIFO reserve and LIFO layer liquidation.
P7–9 Concluded
c. As of the end of 2014 Brady had a LIFO reserve of $3,500. A LIFO reserve shows the accumulated
benefit derived from the LIFO method. Due to the adoption of LIFO Brady reduced its cumulative pre-
tax income by $3,500. In other words, Brady saved taxes worth $3,500  .35 = $1,225 due to its choice
of LIFO.
As of the end of 2013, due to LIFO adoption, Brady’s cumulative net income decreased by $4,800 on a
pre-tax basis. The related tax savings were $4,800  .35 = $1,680.

The impact of a LIFO liquidation shows that adoption of LIFO does not necessarily save taxes in all
years. LIFO has adverse effects when the layer liquidation occurs.

d. From an income tax point it is not advisable for Brady to change its cost flow assumption. If it did so, it
would have to pay taxes on the $3,500 of additional income that would be created by eliminating the
LIFO reserve. However, if the company wishes to report higher income, the change may be desirable.

P7–10
a. and b.
IBT
Income Statements
For the Year Ended December 31, 2014
Part (a) Part (b)
Sales ................................................................ $ 67,500 $ 67,500
Cost of sales .................................................. 17,700 a 27,000 b
Gross profit ................................................... $ 49,800 $ 40,500
Other expenses ............................................. 20,000 20,000
Income (loss) before taxes ............................ $ 29,800 $ 20,500
Income taxes ................................................. 8,940 6,150
Net income (loss) .......................................... $ 20,860 $ 14,350

____________
a $17,700 = (350 units  $30) + (200 units  $15) + (350 units  $12)
b $27,000 = (900 units  $30)

c. The primary advantage of purchasing the additional 550 units on December 20 is the effect on income
taxes. Under part (a), IBT would have to pay $8,940 in income taxes. However, under part (b), IBT
would have to pay only $6,150 in income taxes. So the net difference between the income statements
of parts (a) and (b) is $2,790 in taxes saved. Since income taxes represent a cash flow, the strategy of
acquiring the additional 550 units would save IBT $2,790 in cash from income taxes.
This tax savings is not without a cost however. To obtain the savings, IBT had to purchase 550
additional units for $16,500. If IBT was planning on acquiring at least 550 units some time in the near
future, then the cost of the tax savings is not $16,500, but is rather the return lost on an alternative use
of the $16,500. If IBT was not planning on acquiring additional inventory, then the cost of obtaining the
tax savings would be the entire $16,500 plus the opportunity cost of not investing the $16,500.
P7–11
a. Ending Inventory = 400 x $1.50a = $600

Net Income: Sales $30,500

Cost of Goods Soldb 15,000
Gross Profit 15,500
Inventory Writedown Expensec 400
Net Income $15,100

a
market value of $1.50 per item is less than cost (FIFO) of $2.50 per item
bCOGS
(FIFO) = (500 x $2) + (5,600 x $2.50)
c($2.50 - $1.50) x 400 remaining items

b. Inventory (+A) 520a

Inventory Recovery(R, +SE) 520

aRecovery
= ($2.80 - $1.50) x 400 items

If Helio Brothers used U.S. GAAP instead of IFRS, no 2015 entry would be made. Under IFRS
previous inventory writedowns may be recovered, but under GAAP inventory recoveries are prohibited.
 ISSUES FOR DISCUSSION

ID7–1
If investors are solely interested in net income, then the partner is probably correct, and companies
should select FIFO if they want to raise capital. However, this view is probably not valid. One must
remember that net income is simply a measurement; one must not lose sight of what accountants are
measuring. Net income is only valuable if it truly represents an increase in the company's net assets.
FIFO will result in higher reported income, but the higher income is an illusion. That is, the increased
income under FIFO is due to the difference between the inventory's current market value and the
older, "understated" inventory costs matched against it. This is why FIFO results in "paper profits."
Alternatively, LIFO matches the most recent, higher inventory costs against revenue, which provides a
higher quality measure of the company's underlying economic condition. In addition, the reduced
income under LIFO implies lower taxes. The lower taxes, in turn, provide cash that the company can
plow back into the business to improve operations. Thus, although LIFO results in lower reported
income, LIFO provides a higher quality measure of income and results in lower taxes.

ID7–2
a. The choice of LIFO or FIFO will affect the amounts a company reports both in its balance sheet for
inventory and in its income statement for cost of goods sold (and consequently net income). Thus, in
order to evaluate a company's financial position and performance, particularly in comparison with
other companies' performances, investors and creditors need to know which cost-flow assumption the
company is using. In addition, the choice of LIFO or FIFO can have a large effect on the company's cash
flows. If inventory costs are rising, a company will have lower taxable income—and hence lower cash
outflows for taxes—if it uses LIFO than if it uses FIFO. For some companies the difference can be
several million dollars a year in tax savings.

b. Obsolete inventory, by definition, is inventory that has no value to the company; due to damage or
technological changes or other reasons, the company will not be able to convert this inventory into
cash. By deducting this line item from the balance sheet, the company is disclosing the value that it will
be able to realize from its inventory.

c. According to the footnote, Harley Davidson’s 2012 ending inventory under FIFO would be $45,889,000
more than under LIFO. Therefore, COGS under FIFO would be lower by the same amount and net
income before tax higher by the same amount. Based on a 35% tax rate, therefore, the company would
have to pay an additional income tax of $16.1 million.

d. Under IFRS the use of LIFO is prohibited. If IFRS were to be adopted, therefore, Harley Davidson would
switch to FIFO as its inventory method and would incur the additional tax expenses discussed above.

ID7–3
In times of rising inventory costs, LIFO allows companies to "hide" the value of their inventory. That is,
the inventory value reported on the balance sheet is assumed to consist of "old" inventory costs; the
most recent costs of inventory are allocated to cost of goods sold. However, the inventory is really
worth its current market value. Thus, the difference between the "old" inventory costs and the current
 market value represents a "hidden reserve" of profits. By manipulating its inventory acquisition, a
company can dip into this reserve and increase its reported income.

ID7–4
a. Loss on Inventory Write–down (Lo, –SE) .......................................... 12,000,000
Inventory (–A) ............................................................................ 12,000,000
Wrote down inventory to market value.

b. Period 1
Loss on Inventory Write–down (Lo, –SE) .......................................... 12,000,000
Inventory (–A) ............................................................................ 12,000,000
Wrote down inventory to market value.

Period 2
Accounts Receivable (or Cash) (+A) .................................................. 48,000,000
Sales Revenue (R, +SE) ............................................................... 48,000,000
Sold inventory.

Cost of Goods Sold (E, –SE) ............................................................... 40,000,000

Inventory (–A) ............................................................................ 40,000,000
Recorded cost of goods sold.

c. Because the lower-of-cost-or-market rule gives differential treatment to price decreases and price
increases, and because it forces the recognition of losses before they are realized, it may provide
inconsistent measures of net income. However, such conservative accounting treatments are employed
in response to the liability faced by those who provide and audit financial statements. The costs
associated with understating inventories and profits are typically less than the potential costs of
overstating them.

ID7–5
a. Valero is using the lower of cost or market exception to the historical cost principle that is applied to
inventory. If the market value of inventory is lower than the cost of that inventory, it must be written
down to the lower value.

b. The write-down will lower reported income, current assets and the equity of Valero.

c. Valero’s current ratio will decrease because inventory will be carried at a lower value, which lowers
current assets, while there is no change to current liabilities. Valero’s inventory turnover ratio will
increase because average inventory for the year will be lower.

d. By reducing the carrying value of inventory Valero is reducing earnings in the current quarter. As this
inventory is sold in future periods Valero will report higher earnings than it would have with no write-
down. Valero’s reporting strategy could be to either lower this quarter’s earnings because it produced
greater earnings than it anticipated, or Valero could be trying to take a large loss this quarter in order
to be able to report better earnings in future quarters.
e. Under U.S. GAAP, inventory is written down, if appropriate, but never written back up. Therefore,
Valero would simply leave the inventory at the written-down carrying cost, even if market prices
rebound. Under IFRS, on the other hand, the inventory writedowns can be recovered if market prices
move back up. In that case, if Valero used IFRS, the company would book an Inventory Recovery (which
would increase profits and equity) to balance out the increase in the carrying value of the asset.

ID7–6

a. If Sherwin Williams reported inventories at the end of 2012 based on a FIFO system, the ending
inventory balance would have been $1,277,627 ($920,324 + $357,303).

b. The following were the tax effects to Sherwin Williams as a result of using LIFO.
2010 2011 2012
(Decrease) in net income due to LIFO (16,394) (62,636) (13,365)
Pretax effect on net income (effect /(1-tax rate)) (24,469) (93,487) (19,948)
(Decrease) in tax liability ($8,075) ($30,851) ($6,583)

c. A LIFO inventory system operates on the premise that inventory that is sold is the inventory that was
most recently purchased and therefore reflects the most current prices for the inventory. By taking this
approach, this gives the best indication as to the future earnings potential of the company. This is
particularly true during periods of inflation where the cost of inventory could increase dramatically in
short periods of time. A LIFO inventory method most closely approximates the earnings power of
buying a new unit of inventory today and selling it in the marketplace today. In times of deflation, LIFO
still does a better job of matching current costs with current revenues.

ID7–7
a. A company “thins” its inventory when it reduces the amount of inventory it owns at any given time.
Inventory is an asset that has a cost; lower levels of inventory mean lower costs to carry that iventory.
Companies that are trimming their operations may opt to reduce their investment in inventory, just like
they might decide to own fewer buildings or a smaller number of company cars.

b. The balance sheet will show the lower investment in inventory from one time period to the next.
Another area in the financial statements to determine if a company is reducing its inventory would be
the Statemnt of Cash Flow (Indirect Method). If inventory is being reduced, the change in inventory will
show up as a source of Cash in the Operating Activities section.

c. FedEx acts as a transportation company and does not take ownership of the goods being shipped.
Although FedEx has physical possession of the item being shipped, it remains on the balance sheet of
FedEx’s customer.
Exploring the Variety of Random
Documents with Different Content
 SEXTON LOSES TO SLOSSON. Central Music Hall, Chicago,
October 24th.—Championship and $500 a side. Slosson, 500—3.55—
38; Sexton, 483—30.
Next day, Slosson resigned the emblem to its donor. Passing again
to Sexton without further competition, it eventually became his in
perpetuity.

Johnson vs. Reeves for $1,000 a Side. Madison Square Hall,

N. Y. City, November 9th.—4½ × 9 table. David Johnson, 250—2.14
—13; John T. Reeves, 233—12. (See Bookmakers’ Tournaments.)
 1884.
Carter vs. Gallagher. St. Louis, February 20th.—$500 a side.
C., 400—4.35—33; G., 327—31. [Carried a term higher, Carter’s
average becomes a shade better than the best prior match record,
being 4.348 to Daly’s 4.347.]

Championship of Massachusetts. W. P. Marshall’s Room,

Boston, tournament on 4½ × 9, ending March 1st.—Moses Yatter 8—
1, E. H. Marshall 7—2, C. F. Campbell 6—3, and T. W. Allen 3—4,
prize-winners. Allen made the best run, 26, and Campbell the
highest winning average, 3.33.
There were nine match-contests for the emblem, John Morse
winning the first three, Campbell the fourth and fifth, and Yatter the
remaining four.

Championship of Ohio. Mozart Hall, Cincinnati, April 21–26th.

—4½ × 9 table. Seven contestants, these four being prize-winners:
John A. Thatcher, 6—0, $200 and medal; Tony Honing, 4—3, $125;
Harry Bussey, 4—2 (beaten by Honing in play-off), $75; and West
(beat W. De Long in play-off), $50. Championship competition
ended with tournament.
 1885.
Second Massachusetts Championship. This was the pioneer
prohibition one, Yatter and Campbell being barred. Boston, January
12th to February 13th.—4½ × 9 table. Jas. O’Neil 9—0, Fred Eames 7
—2, E. H. Marshall 6—3, and Chas. Barnard 5—4, were prize-
winners. Best average, 3.45, was by Eames, whose 22 tied W. G.
Gilman’s for high-run prize, won by G. in playing off. Emblem was
held successively by O’Neil (forfeited through illness), Marshall,
O’Neil again, and Eames finally.

Sexton vs. Slosson. Irving Hall, N. Y. City, May 6th.—$2,550

($1,500 staked on Slosson against $1,050 on Sexton). Sexton, 500—
4.42—30; Slosson, 486—35. (See 1866 and 1887 for this match
average surpassed.)
 1886.
Bookmakers’ Handicaps. The Reeves-Johnson match of 1883,
which was a heavily speculative event, led to a series of bookmakers’
tournaments in this city, February 8–18, 1886; January 31st to
February 14, 1887; January 23–27, 1888; and January 14–22, 1889,
the winners of which severally were Chas. Davis, Joseph Cotton,
Davis again, and David Johnson. The last-named was at “scratch” in
two out of four, and Davis always at “scratch” except in the third,
when Reeves, playing 170 to his 150, tied him, but was beaten in the
play-off. All but the 1887 tournament were on a 4½ × 9.

Only Real Sweepstakes Known to Billiards. Two of the

foregoing bookmakers’ handicaps—those of 1888 and 1889, Davis
winning one and Cotton the other—were genuine sweepstakes.
Entrance fees may combine to form stakes, but not sweepstakes
when portioned out.

Slosson vs. Schaefer. Masonic Hall, St. Louis, November 27,

1886.—First game of home-and-home match, each for $2,000 a side.
Slosson, 500—4.07—26; Schaefer, 469—26.
Return game, Central Music Hall, Chicago, December 17th.—
Schaefer, 500—4.50—48; Slosson, 430—22.
 1887.
Slosson vs. Schaefer. Central Music Hall, Chicago, April 4th.—
First game of match of two (see “Balkline,” 14:2, 1887, for the other),
each for $500 a side. Slosson, 500—4.81—25; Schaefer, 488—49.
The average is still match-high. Winner overcame the longest lead
known to a public match at this game. When Schaefer needed but
130 to go, Slosson was 120 behind.

First Contest of Multiple Nights. Light Infantry Armory,

Washington, D. C., May 23–28th.—Game for a purse, 300 points
nightly. Daly, 1800—4.66—38; Sexton, 1182—46. Multiplying nights
at cushion caroms has been given a trial but once since, and then by
Slosson and Schaefer (see 1899).

First Public Handicap. Madison Street Theatre, Chicago,

November 5–22d.—This was Frank C. Ives’s tournamental début.
W. R. Av. G. A.
Carter (170) 9 29 6.80 4.53
Schaefer (200) 8 54 10. 5.53
Moulds (110) 7 24 3.79 2.66
Ives (110) 6 16 2.70 2.36
Thatcher (110) 6 25 2.60 2.24
J. Matthews (110) 6 25 4.40 2.60
Gallagher (160) 5 30 3.90 3.30
Slosson (200) 3 40 5.89 4.
J. F. Donovan (110) 2 21 2.44 1.77
Hatley (115) 2 20 2.57 1.90
Catton (160) 1 18 4. 2.50
Average of tournament, 3.005. There has been no technically
public handicap at cushion caroms since.
 Donovan vs. Chas. Schaefer. St. Louis, December 19th.—
Match for $500 a side. S., 200—1.98—13; D., 152—10.
 1888.
Championship of Pennsylvania. Continental Hotel,
Philadelphia, January 9–26th.—200–point games, eight contestants
and seven prize-winners, viz., McLaughlin, 7—0; Burris, 6—1;
Bullock, 5—2; Pollard, 4—3; P. Levy, 3—4; J. Cline, 2—5; Palmer, 1—
6. Eighth man was Edward Woods, 0—7. Matches were not meant to
follow. The championship emblem, won by McLaughlin along with
$210, was presented by H. J. Bergman.

Saratoga, N. Y., Three-handed Tournament. Town Hall,

August 6–8th.—Slosson, $500; Daly, $350; Sexton, $150. Play was
inconspicuous in runs and averages.
 1889.
Five-handed Tournament in Boston. John J. Murphy’s Hub
Palace, finishing January 4th.—4½ × 9 table. Eames, 4—0; Yatter, 3
—1; and John Dankleman; C. F. Campbell, and W. M. Gilman, 1—3
apiece, divided third money.
On January 16th, for $150 a side, 4½ × 9, Eames defeated Yatter
by 200 to 209, and in same room, March 7th, and at C. T. Shean’s
Room, Springfield, March 20th, he defeated L. A. Guillet in a home-
and-home, $100 a side.
 1892.
Garnier vs. Carter. Paris, February 2d.—$500 a side. G., 300;
C., 293. February 26th: G., 300; C., 233.

Carter vs. Vignaux. Paris, February 10th.—$500 a side. C., 50;

V., 49.

Schaefer vs. Vignaux. Paris, December 27th.—$500 a side. S.,

400—3.96; V., 345.
 1894.
Fournil vs. Gallagher. Daly’s Room, N. Y. City, December 3–
7th.—Formal American début of Edouard Fournil, of Paris, France.
Purse game, 200 points nightly. With 45 for high run against 37, F.
won by 1,000 to 848.
 1896.
Last Professional Tournament. Bumstead Hall, Boston, April
13–17th.—Under auspices of Daly and Ives, 300–point games.
W. R. Av. G. A.
Ives 3 85 5.88 5.29
Schaefer 2 39 5.36 4.91
Daly 1 29 4.62 4.35
Garnier 0 43 3.82
Approximate average of tournament, 4.67. Ives’s 85 was run
against Daly. While it is absolutely the highest in public, yet it cannot
properly be compared with Sexton’s 77 in virtually a $6,250 stake
match (not counting side bets) that he won from Schaefer by no
more than 4 per cent. in 600.
 1899.
Schaefer’s Highest Run of Record. Lenox Lyceum, N. Y. City,
May 22d.—Second game of match of two, each for $500 a side (see
Balkline, May 13, 1899, for first). Slosson, 500—4.60—34; Schaefer,
359—55.

Second Match of Multiple Nights. Madison Square Garden

Concert Hall, N. Y. City, October 30 to November 1st.—$500 a side.
Slosson, 900—4.57—37; Schaefer, 757—41.

McLaughlin vs. Gallagher. Maurice Daly’s, N. Y. City,

November 6–10.—Purse game, best in five. McLaughlin, who won
the odd, also made the more points—944 to 924.
 1902–3.
Amateur Revival Tournaments. After having been out of
fashion for years, the game was revived in winter of 1902–3 at
Maurice Daly’s, N. Y. City, by Messrs. Mark Muldaur, Albert Brock,
Wm. Gershel and F. Poggenburg, who finished in that order without
unusual play, and at Foley’s, Chicago, August 31st to October 31st, C.
F. Conklin (scratch at 125) winning by 7—1 in games, and making
best run (21), and highest winning average (2.75). S. W. Miller made
3.33 in the opening game, but it was canceled with the game itself
when Ballard, whom Miller had beaten, withdrew from tournament.
Miller, Beard and Hale tied, and play-off gave Miller second prize,
Beard third, and Hale fourth. Conklin was beaten by none but Hale
(100). Miller and Beard were at 70.
 BEST RECORD PERFORMANCES
ON 5 × 10 AND 4½ × 9 TABLES, BOTH
HAVING BEEN CHAMPIONSHIP
STANDARDS

CHAMPIONSHIP MATCH AVERAGE.

3.55 in 500—G. F. Slosson, 1883.

CHAMPIONSHIP MATCH RUN.

38 in 500 (still his best record in match, with 40 his best in tournament)—G. F.
Slosson, 1883.

CHAMPIONSHIP TOURNAMENT AVERAGE.

6.25 in 200—J. Schaefer (with 3.56 by G. F. Slosson for high general average, but
the two were second and third winners only), 1881.
10.00 in 500–point game, 4½ × 9 table—J. Schaefer, with 6.559 for best general
average, that of winner-in-chief (M. Daly) being 6.550, 1883.

CHAMPIONSHIP TOURNAMENT RUN.

45 in 200–point game—J. Dion, winner, 1881.

65 in 500–point game, 4½ × 9 table—W. Sexton, 1883 (T. Wallace ran 76 in
play-off for second prize, but championship tournament was then over).

NON-CHAMPIONSHIP AVERAGES.

3.92 in 400—J. Schaefer, 1881.

4.81 in 500—G. F. Slosson, 1887.
 4.05 in 600—W. Sexton, 1882 (see under 1881).
4.66 in 1800—M. Daly, 1887.
4.57 in 900—G. F. Slosson, 1902.

NON-CHAMPIONSHIP RUNS.

27 in 400—W. Sexton, 1881.

77 in 600—W. Sexton, 1881.
46 in 1800—W. Sexton, 1887.
55 in 500—J. Schaefer, 1899.
41 in 900—J. Schaefer, 1902.

NON-CHAMPIONSHIP TOURNAMENTS.

In Chicago, in 1887, Schaefer made his best average (10 in 200) on a 5 × 10

table, and Slosson his highest run of all (40); and in Boston, in 1896, Ives ran 85
(highest of all runs) and made the best general average on 5 × 10 table (5.29).
THREE-CUSHION CAROMS.