For this assessment, complete the Problems 4-1 and 4-2. You may use Word or Excel to complete the assessments throughout this course, but you will find Excel to be most helpful for creating spreadsheets. Tutorials for using Excel are provided in the Supplemental Resources in the left navigation menu. If you use Excel, submit the assessment in one Excel document, using separate tabs for each spreadsheet.
Problem 4-1: Determining and Evaluating the Effects on the Balance Sheet, the Income Statement and the Cash Flow Statement of Four Different Cost Flow Assumptions for Inventory
At the end of January 2012, the records of Shelton and Blair showed the following for a particular item that sold at $20 per unit:
Problem 4-1: Records of Sheldon and Blair
Inventory, January 1, 2011500 @ $6.00$3,000
Purchase, January 12600 @ $7.00$4,200
Purchase, January 26200 @ $7.10$1,420
Sale(400 units sold for $20 each)
Sale(300 units sold for $20 each)
Based on the information provided in the table above, complete the following. To complete this problem, you may wish to use the Excel template provided in the resources.
Assuming the use of a periodic inventory system, prepare a summarized income statement through gross profit for the month of January under each method of inventory:
Specific identification. For specific identification, assume that the first sale was selected from the beginning inventory and the second sale was selected from the January 12 purchase. Round the average cost per unit to the nearest cent. Show the inventory computations in detail.
Of FIFO and LIFO, which method would result in the higher pretax income? Which would result in the higher EPS?
Of FIFO and LIFO, which method would result in the lower income tax expense? Explain, assuming a 35 percent average tax rate.
Of FIFO and LIFO, which method would produce the more favorable cash flow? Explain.
Problem 4-2: Reading Publically Available Financial Statements
Refer to the Lowe’s 2011 10-K. You should have located these statements for previous assessment problems. Use these statements and your prior knowledge of accounting, supplemented by textbooks or other references of your choosing, to answer the following questions:
The company must use the lower of cost or market method to account for its inventory. At the end of the fiscal year 2012, do you expect the company to write its inventory down to replacement cost or net realizable value? Explain your answer. You may need to consult an intermediate accounting textbook or an Internet source.
What method does the company use to determine the cost of inventory for fiscal year 2012?
If the company overstated ending inventory by $10 million for the fiscal year ended 2012, what would be the corrected value for income before income taxes for that year?
Compute the inventory turnover ratio for the fiscal year 2012. Also compute it for the fiscal year 2011. What conclusions can you make?