Chapter Review
7-9iCases & Projects
Ethics in Action
Sizemo Elektroniks sells semiconductors that are used in games and small toys. The company has been extremely successful in recent years, recording an increase in earnings each of the past six quarters. At the end of the current quarter, Jay Shulz, the company’s staff accountant, calculated the ending inventory for the semiconductors and was surprised to find that the quantity of the Hayden 537X model had not changed during the quarter. Jay confirmed his calculation with the inventory control manager, who indicated that sales of the Hayden 537X had stopped when the Hayden 637X semiconductor was released early in the quarter. Jay researched the issue further and found that the Hayden 637X semiconductor has the same applications as the Hayden 537X, but has more computing power and a lower cost than the 537X. Jay e-mailed this information to Tina Vereen, the chief financial officer, and recommended that the company apply the lower-of-cost-or-market method to the Hayden 537X semiconductors in inventory. Later that day, Tina e-mailed Jay back, instructing him not to apply the lower-of-cost-or-market method to the 537X inventory because “the company is under considerable pressure to maintain its track record of earnings growth, and a lower-of-cost-or-market adjustment would result in a significant decline in earnings this quarter.” Reluctantly, Jay followed Tina’s instructions.
Evaluate the decision not to apply the lower-of-cost-or-market method in the current quarter.
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Who benefits from this decision?
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Who is harmed by this decision?
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Are Jay and Tina acting in an ethical manner? Explain.
Ethics in Action
Anstead Co. is experiencing a decrease in sales and operating income for the fiscal year ending October 31. Ryan Frazier, controller of Anstead Co., has suggested that all orders received before the end of the fiscal year be shipped by midnight, October 31, even if the shipping department must work overtime. Because Anstead Co. ships all merchandise FOB shipping point, it would record all such shipments as sales for the year ending October 31, thereby offsetting some of the decreases in sales and operating income.
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Discuss whether Ryan Frazier is behaving in a professional manner.
Team Activity
In teams, select a public company in the merchandising industry that interests you. Obtain the company’s most recent annual report on Form 10-K. The Form 10-K is a company’s annually required filing with the Securities and Exchange Commission (SEC). It includes the company’s financial statements and accompanying notes. The Form 10-K can be obtained either (a) by referring to the investor relations section of the company’s website or (b) by using the company search feature of the SEC’s EDGAR database service found at www.sec.gov/edgar/searchedgar/companysearch.html.
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Based on the information in the company’s most recent annual report, answer the following questions:
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What types of items are included in the company’s inventory?
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What inventory costing method or methods does the company use to determine the inventory amount reported on its balance sheet?
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How much inventory does the company have at the end of the most recent year?
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What percentage of total current assets is inventory during the two years presented? Has this percentage increased, decreased, or remained the same during this period?
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How much cost of merchandise sold does the company report for the most recent year?
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Using the information presented in the company’s annual report, determine the company’s inventory turnover for the current and previous years. Based on this information, has the company’s performance improved? Briefly explain your answer.
Communication
Golden Eagle Company began operations on April 1 by selling a single product. Data on purchases and sales for the year are as follows:
The president of the company, Connie Kilmer, has asked for your advice on which inventory cost flow method should be used for the 32,000-unit physical inventory that was taken on December 31. The company plans to expand its product line in the future and uses the periodic inventory system.
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Write a brief memo to Ms. Kilmer comparing and contrasting the LIFO and FIFO inventory cost flow methods and their potential impacts on the company’s financial statements.
LIFO and Inventory Flow
The following is an excerpt from a conversation between Paula Marlo, the warehouse manager for Musick Foods Wholesale Co., and its accountant, Mike Hayes. Musick Foods operates a large regional warehouse that supplies produce and other grocery products to grocery stores in smaller communities.
Mike, can you explain what’s going on here with these monthly statements?
Sure, Paula. How can I help you?
I don’t understand this last-in, first-out inventory procedure. It just doesn’t make sense.
Well, what it means is that we assume that the last goods we receive are the first ones sold. So the inventory consists of the items we purchased first.
Yes, but that’s my problem. It doesn’t work that way! We always distribute the oldest produce first. Some of that produce is perishable! We can’t keep any of it very long or it’ll spoil.
Paula, you don’t understand. We only assume that the products we distribute are the last ones received. We don’t actually have to distribute the goods in this way.
I always thought that accounting was supposed to show what really happened. It all sounds like “make believe” to me! Why not report what really happens?
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Respond to Paula’s concerns.
Comparing Inventory Ratios for Two Companies
Target Corp. sells merchandise primarily through its retail stores. On the other hand, Amazon.com uses its e-commerce services, features, and technologies to sell its products through the Internet. Recent balance sheet inventory disclosures for Target and Amazon.com (in millons) are as follows:
Target | Amazon.com | |
Cost of merchandise sold | $53,299 | $139,156 |
Inventory, end of year | 9,497 | 17,174 |
Inventory, beginning of year | 8,597 | 16,047 |
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Determine the inventory turnover for Target and Amazon.com. Round to two decimal places.
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Determine the days’ sales in inventory for Target and Amazon.com. Use 365 days and round to one decimal place.
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Interpret your results.
Comparing Inventory Ratios for Three Companies
The general merchandise retail industry has a number of segments represented by the following companies:
Company Name | Merchandise Concept |
Costco Wholesale Corporation | Membership warehouse |
Wal-Mart | Discount general merchandise |
JCPenney Company | Department store |
For a recent year, the following cost of merchandise sold and beginning and ending inventories have been provided from corporate annual reports (in millions) for these three companies:
Costco | Wal-Mart | JCPenney | |
Cost of merchandise sold | $123,152 | $385,301 | $7,870 |
Merchandise inventory, beginning | 9,834 | 43,783 | 2,803 |
Merchandise inventory, ending | 11,040 | 44,269 | 2,437 |
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Determine the inventory turnover ratio for all three companies. Round to two decimal places.
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Determine the days’ sales in inventory for all three companies. Use 365 days and round to one decimal place.
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Interpret these results based on each company’s merchandise concept.