External Reporting Issues

12 - 12 - 11© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell

External Reporting External Reporting

IssuesIssues

Chapter 12Chapter 12


Learning Objective 1Learning Objective 1

Characterize the importance Characterize the importance

ofof

external financial external financial

informationinformation

to financial statement users.to financial statement users.


External Financial ReportingExternal Financial Reporting

in assessing future cash flows,in assessing future cash flows,in assessing future cash flows,in assessing future cash flows,

and identifying enterprise resources,and identifying enterprise resources,and identifying enterprise resources,and identifying enterprise resources,

claims to resources, and changes in them.claims to resources, and changes in them.claims to resources, and changes in them.claims to resources, and changes in them.

The objective of accounting is to provideThe objective of accounting is to provideinformation that is useful in makinginformation that is useful in making

investment and credit decisions,investment and credit decisions,

The objective of accounting is to provideThe objective of accounting is to provideinformation that is useful in makinginformation that is useful in making

investment and credit decisions,investment and credit decisions,


External Financial ReportingExternal Financial Reporting

The SEC requires publicly held companiesThe SEC requires publicly held companiesto file quarterly (10Q) and annual (10K)to file quarterly (10Q) and annual (10K)

financial statements.financial statements.

The SEC requires publicly held companiesThe SEC requires publicly held companiesto file quarterly (10Q) and annual (10K)to file quarterly (10Q) and annual (10K)

financial statements.financial statements.


Importance of External Importance of External Information to ShareholdersInformation to Shareholders

Shareholders and potential investorsShareholders and potential investorsexpect safety for their investmentexpect safety for their investment

and return on the investment.and return on the investment.

Shareholders and potential investorsShareholders and potential investorsexpect safety for their investmentexpect safety for their investment

and return on the investment.and return on the investment.


The Road to BankruptcyThe Road to Bankruptcy

Beware ofBeware ofilliquidityilliquidity

Now enteringNow enteringunprofitableunprofitable

regionsregions

Danger ahead!Danger ahead!Watch out forWatch out for

insolvencyinsolvency

BankruptcyBankruptcy

Net profitNet profit

FinancialFinancialhealthhealth


Comparison ofComparison ofAnnual EarningsAnnual Earnings

-3000-2500-2000-1500-1000

-5000

5001000150020002500

In $

Million

s

SearsJCPenneyKmartThe Gap

1993 1994 1995 1996 1997 1998 1999 2000 2001


Comparison ofComparison ofAnnual Stock PricesAnnual Stock Prices

0

10

20

30

40

50

60

70

1993 1994 1995 1996 1997 1998 1999 2000 2001

Sto

ck P

rice in

$

SearsJCPenneyKmartGap


Importance of External Importance of External Information to CreditorsInformation to Creditors

Long-term creditorsLong-term creditorsLong-term creditorsLong-term creditors

Short-term creditorsShort-term creditorsShort-term creditorsShort-term creditors

TradeTradecreditorscreditors

TradeTradecreditorscreditors

CommercialCommerciallendinglending

institutionsinstitutions

CommercialCommerciallendinglending

institutionsinstitutions


Importance of External Importance of External Information to RegulatorsInformation to Regulators

Regulators depend upon periodic reports fromRegulators depend upon periodic reports fromthe organizations they oversee as evidencethe organizations they oversee as evidenceof compliance with rules and regulations.of compliance with rules and regulations.

Regulators depend upon periodic reports fromRegulators depend upon periodic reports fromthe organizations they oversee as evidencethe organizations they oversee as evidenceof compliance with rules and regulations.of compliance with rules and regulations.

– – Internal Revenue ServiceInternal Revenue Service– – Securities and Exchange CommissionSecurities and Exchange Commission

– – State taxation agenciesState taxation agencies– – Utility rate-setting agenciesUtility rate-setting agencies

– – Internal Revenue ServiceInternal Revenue Service– – Securities and Exchange CommissionSecurities and Exchange Commission

– – State taxation agenciesState taxation agencies– – Utility rate-setting agenciesUtility rate-setting agencies


Ethical Considerations of Ethical Considerations of External Financial ReportingExternal Financial Reporting

EthicsEthics

GoodGoodethicsethicsis goodis good

business.business.



Differentiate the differentDifferentiate the different

valuations used forvaluations used for

external financial external financial

reporting.reporting.


External Reporting External Reporting ValuationValuation

Net realizable valueNet realizable valueNet realizable valueNet realizable value

Lower of cost or marketLower of cost or marketLower of cost or marketLower of cost or market

Fair value or market valueFair value or market valueFair value or market valueFair value or market value

Historical costHistorical costHistorical costHistorical cost

Present valuePresent valuePresent valuePresent value


Alternative Accounting Alternative Accounting PrinciplesPrinciples

Alternative accounting principles haveAlternative accounting principles havedeveloped because of such differences.developed because of such differences.

Alternative accounting principles haveAlternative accounting principles havedeveloped because of such differences.developed because of such differences.

Using one accounting method instead ofUsing one accounting method instead ofanother should not make a materialanother should not make a material

difference in economic decision making.difference in economic decision making.

Using one accounting method instead ofUsing one accounting method instead ofanother should not make a materialanother should not make a material

difference in economic decision making.difference in economic decision making.

Many businesses have differentMany businesses have differentreporting requirements due toreporting requirements due to

the nature of their industry.the nature of their industry.

Many businesses have differentMany businesses have differentreporting requirements due toreporting requirements due to

the nature of their industry.the nature of their industry.


Accounting ConceptsAccounting Concepts

2. Full Disclosure2. Full Disclosure2. Full Disclosure2. Full Disclosure

3. Financial statements must3. Financial statements mustbe representationally faithful.be representationally faithful.

3. Financial statements must3. Financial statements mustbe representationally faithful.be representationally faithful.

1. Consistency1. Consistency1. Consistency1. Consistency



Compare and contrast the Compare and contrast the

straight-line and double-straight-line and double-

declining-balance methods of declining-balance methods of

depreciation and the effectsdepreciation and the effects

of using each on the balance of using each on the balance

sheet and income statement.sheet and income statement.


DepreciationDepreciation

TimeTime TimeTime


The Effect of EstimatesThe Effect of Estimates

Length of theLength of theasset’sasset’s

useful liveuseful live

Length of theLength of theasset’sasset’s

useful liveuseful live

Amount ofAmount ofresidualresidualvaluevalue

Amount ofAmount ofresidualresidualvaluevalue



It is assumed that the equipmentIt is assumed that the equipmentwould last for five years.would last for five years.

It is assumed that the equipmentIt is assumed that the equipmentwould last for five years.would last for five years.

Its estimated residual value is $15,000.Its estimated residual value is $15,000.Its estimated residual value is $15,000.Its estimated residual value is $15,000.

What is the depreciation expense?What is the depreciation expense?What is the depreciation expense?What is the depreciation expense?

Elevation Sports, Inc., purchasedElevation Sports, Inc., purchasedequipment for $75,000.equipment for $75,000.

Elevation Sports, Inc., purchasedElevation Sports, Inc., purchasedequipment for $75,000.equipment for $75,000.



$60,000 ÷ 5 = $12,000$60,000 ÷ 5 = $12,000$60,000 ÷ 5 = $12,000$60,000 ÷ 5 = $12,000

What is the depreciation expense if itsWhat is the depreciation expense if itsestimated residual value is $13,000.estimated residual value is $13,000.

What is the depreciation expense if itsWhat is the depreciation expense if itsestimated residual value is $13,000.estimated residual value is $13,000.

$75,000 – $15,000 = $60,000$75,000 – $15,000 = $60,000$75,000 – $15,000 = $60,000$75,000 – $15,000 = $60,000

$75,000 – $13,000 = $62,000$75,000 – $13,000 = $62,000$75,000 – $13,000 = $62,000$75,000 – $13,000 = $62,000

$62,000 ÷ 5 = $13,000$62,000 ÷ 5 = $13,000$62,000 ÷ 5 = $13,000$62,000 ÷ 5 = $13,000



Gains or losses are computedGains or losses are computedon the sale of assets.on the sale of assets.

Gains or losses are computedGains or losses are computedon the sale of assets.on the sale of assets.

$$GainGain

$$LossLoss


Straight-Line and Straight-Line and Accelerated Depreciation Accelerated Depreciation

MethodsMethods

Accelerated depreciation methods recordAccelerated depreciation methods recorda large amount of depreciation expensea large amount of depreciation expense

in the early years of an asset’s life.in the early years of an asset’s life.

Accelerated depreciation methods recordAccelerated depreciation methods recorda large amount of depreciation expensea large amount of depreciation expense

in the early years of an asset’s life.in the early years of an asset’s life.

The straight-line method assumesThe straight-line method assumesan asset is used equally in eachan asset is used equally in each

time period of its useful life.time period of its useful life.

The straight-line method assumesThe straight-line method assumesan asset is used equally in eachan asset is used equally in each

time period of its useful life.time period of its useful life.



Calculate depreciation Calculate depreciation

usingusing

the straight-line and the straight-line and

double-double-

declining-balance methods.declining-balance methods.


Straight-Line DepreciationStraight-Line Depreciation

Income before depreciationIncome before depreciation $117,300$117,300 $117,300$117,300 $117,300$117,300 $117,300$117,300

DepreciationDepreciation 12,000 12,000 $ 12,000$ 12,000 $ 12,000$ 12,000 $ 12,000$ 12,000

Income before taxesIncome before taxes $105,300$105,300 $105,300$105,300 $105,300$105,300 $105,300$105,300

Income tax expenseIncome tax expense 42,120 42,120 42,120 42,120 42,120 42,120 42,120 42,120

Net incomeNet income $ 63,180$ 63,180 $ 63,180$ 63,180 $ 63,180$ 63,180 $ 63,180$ 63,180

20022002 2005200520032003 20042004

Elevation Sports, Inc.Elevation Sports, Inc.Pro Forma Income StatementPro Forma Income StatementFor the Years Ended May 31For the Years Ended May 31


Straight-Line DepreciationStraight-Line Depreciation

CashCash $132,880$132,880 $208,060$208,060 $283,240$283,240 $358,420$358,420Other current assetsOther current assets 61,800 61,800 61,800 61,800 61,800 61,800 61,800 61,800EquipmentEquipment 75,000 75,000 75,000 75,000 75,000 75,000 75,000 75,000Less: Acc. depreciationLess: Acc. depreciation (12,000) (12,000) (12,000) (12,000) (12,000) (12,000) (12,000) (12,000)Other assetsOther assets 34,300 34,300 34,300 34,300 34,300 34,300 34,300 34,300Total assetsTotal assets $291,980$291,980 $355,160$355,160 $418,340$418,340 $481,520$481,520

Total liabilitiesTotal liabilities $128,800$128,800 $128,800$128,800 $128,800$128,800 $128,800$128,800Common stockCommon stock 100,000 100,000 100,100 100,100 100,000 100,000 100,000 100,000Retained earningsRetained earnings 63,180 63,180 126,360 126,360 189,540 189,540 252,720 252,720Total liabilities andTotal liabilities and stockholders’ equitystockholders’ equity $291,980$291,980 $355,160$355,160 $418,340$418,340 $481,520$481,520

20022002 2005200520032003 20042004

Elevation Sports, Inc.Elevation Sports, Inc.Pro Forma Balance SheetPro Forma Balance Sheet

May 31May 31


Double-Declining-Balance Double-Declining-Balance DepreciationDepreciation

20022002 $75,000$75,000 $30,000$30,000 $45,000$45,00020032003 45,000 45,000 18,000 18,000 27,000 27,00020042004 27,000 27,000 10,800 10,800 16,200 16,20020052005 16,200 16,200 1,200 1,200 15,000 15,00020062006 15,000 15,000 -0- -0- 15,000 15,000

20022002 $75,000$75,000 $30,000$30,000 $45,000$45,00020032003 45,000 45,000 18,000 18,000 27,000 27,00020042004 27,000 27,000 10,800 10,800 16,200 16,20020052005 16,200 16,200 1,200 1,200 15,000 15,00020062006 15,000 15,000 -0- -0- 15,000 15,000

YearYear

BeginningBeginningbookbookvaluevalue

DepreciationDepreciationexpenseexpense

EndingEndingbookbookvaluevalue


Learning Objectives 5 Learning Objectives 5 and 6and 6

Compare and contrast Compare and contrast differentdifferent

methods of accounting formethods of accounting forinventories and the effectsinventories and the effects

of using each on the balance of using each on the balance sheet and income sheet and income

statement.statement.Compute inventories usingCompute inventories using

different methods.different methods.


Differences inDifferences inInventory MethodsInventory Methods

Last-in, first out (LIFO)Last-in, first out (LIFO)Last-in, first out (LIFO)Last-in, first out (LIFO)

Average costAverage costAverage costAverage cost

Specific identificationSpecific identificationSpecific identificationSpecific identification

First-in, first out (FIFO) First-in, first out (FIFO) First-in, first out (FIFO) First-in, first out (FIFO)


The Flow of Inventory Cost: The Flow of Inventory Cost: Harwood ExampleHarwood Example

9-19-1 Beginning inventoryBeginning inventory 11 $ 800$ 8009-39-3 PurchasePurchase 22 $1,025$1,0259-179-17 Sale Sale 11 $1,500 $1,5009-229-22 PurchasePurchase 11 $1,100$1,1009-269-26 Purchase Purchase 11 $1,200$1,2009-29 9-29 PurchasePurchase 11 $1,450$1,4509-309-30 Sale Sale 2 $1,5002 $1,500

9-19-1 Beginning inventoryBeginning inventory 11 $ 800$ 8009-39-3 PurchasePurchase 22 $1,025$1,0259-179-17 Sale Sale 11 $1,500 $1,5009-229-22 PurchasePurchase 11 $1,100$1,1009-269-26 Purchase Purchase 11 $1,200$1,2009-29 9-29 PurchasePurchase 11 $1,450$1,4509-309-30 Sale Sale 2 $1,5002 $1,500

DateDate TransactionTransaction UnitsUnitsUnitUnitcostcost

UnitUnitsellingsellingpriceprice


First-in, First-out Method First-in, First-out Method (FIFO)(FIFO)

Beginning inventoryBeginning inventory 1 @ $ 8001 @ $ 800 $ 800$ 8009-3 Purchases9-3 Purchases 2 @ $1,0252 @ $1,025 2,050 2,050

Cost of units soldCost of units sold $2,850$2,850

Beginning inventoryBeginning inventory 1 @ $ 8001 @ $ 800 $ 800$ 8009-3 Purchases9-3 Purchases 2 @ $1,0252 @ $1,025 2,050 2,050

Cost of units soldCost of units sold $2,850$2,850

Total purchases = $5,800Total purchases = $5,800Total purchases = $5,800Total purchases = $5,800

What is the cost of the units sold?What is the cost of the units sold?What is the cost of the units sold?What is the cost of the units sold?


First-in, First-out Method First-in, First-out Method (FIFO)(FIFO)

9-299-29 purchasepurchase 1 @ $1,4501 @ $1,450 $1,450$1,4509-269-26 purchasepurchase 1 @ $1,2001 @ $1,200 1,200 1,2009-229-22 purchasepurchase 1 @ $1,1001 @ $1,100 1,100 1,100Cost of ending inventoryCost of ending inventory $3,750$3,750

9-299-29 purchasepurchase 1 @ $1,4501 @ $1,450 $1,450$1,4509-269-26 purchasepurchase 1 @ $1,2001 @ $1,200 1,200 1,2009-229-22 purchasepurchase 1 @ $1,1001 @ $1,100 1,100 1,100Cost of ending inventoryCost of ending inventory $3,750$3,750

Beginning inventory $800 + Purchases $5,800Beginning inventory $800 + Purchases $5,800= Goods available for sale $6,600 = Goods available for sale $6,600

Beginning inventory $800 + Purchases $5,800Beginning inventory $800 + Purchases $5,800= Goods available for sale $6,600 = Goods available for sale $6,600

$6,600 – $6,600 – $3,750$3,750 = Cost of goods sold $2,850 = Cost of goods sold $2,850 $6,600 – $6,600 – $3,750$3,750 = Cost of goods sold $2,850 = Cost of goods sold $2,850


Last-in, First-out Method Last-in, First-out Method (LIFO)(LIFO)

What is the cost of the units sold?What is the cost of the units sold?What is the cost of the units sold?What is the cost of the units sold?

9-299-29 purchasepurchase 1 @ $1,4501 @ $1,450 $1,450$1,4509-269-26 purchasepurchase 1 @ $1,2001 @ $1,200 1,200 1,2009-229-22 purchasepurchase 1 @ $1,1001 @ $1,100 1,100 1,100Cost of units soldCost of units sold $3,750$3,750

9-299-29 purchasepurchase 1 @ $1,4501 @ $1,450 $1,450$1,4509-269-26 purchasepurchase 1 @ $1,2001 @ $1,200 1,200 1,2009-229-22 purchasepurchase 1 @ $1,1001 @ $1,100 1,100 1,100Cost of units soldCost of units sold $3,750$3,750


Last-in, First-out Method Last-in, First-out Method (LIFO)(LIFO)

What is the cost of ending inventory?What is the cost of ending inventory?What is the cost of ending inventory?What is the cost of ending inventory?

Beginning inventoryBeginning inventory 1 @ $ 8001 @ $ 800 $ 800$ 8009-3 purchase9-3 purchase 2 @ $1,0252 @ $1,025 2,050 2,050

Cost of ending inventoryCost of ending inventory $2,850$2,850

Beginning inventoryBeginning inventory 1 @ $ 8001 @ $ 800 $ 800$ 8009-3 purchase9-3 purchase 2 @ $1,0252 @ $1,025 2,050 2,050

Cost of ending inventoryCost of ending inventory $2,850$2,850


Average Cost MethodAverage Cost Method

Cost of goodsCost of goodsavailableavailablefor salefor sale$6,600$6,600

Cost of goodsCost of goodsavailableavailablefor salefor sale$6,600$6,600

––EndingEnding

inventoryinventory$3,300$3,300

(3 (3 ×× $1,100) $1,100)

EndingEndinginventoryinventory$3,300$3,300

(3 (3 ×× $1,100) $1,100)==

Cost ofCost ofgoods soldgoods sold

$3,300$3,300(3 × $1,100)(3 × $1,100)

Cost ofCost ofgoods soldgoods sold

$3,300$3,300(3 × $1,100)(3 × $1,100)

Average cost = $6,600 ÷ 6 = $1,100/unitAverage cost = $6,600 ÷ 6 = $1,100/unitAverage cost = $6,600 ÷ 6 = $1,100/unitAverage cost = $6,600 ÷ 6 = $1,100/unit


Comparison of Methods:Comparison of Methods:Income StatementIncome Statement

SalesSales $4,500$4,500 $4,500$4,500 $4,500$4,500Cost of goods soldCost of goods sold 2,850 2,850 3,750 3,750 3,300 3,300Gross marginGross margin $1,650$1,650 $ 750$ 750 $1,200$1,200Operating expensesOperating expenses 200 200 200 200 200 200Net incomeNet income $1,450$1,450 $ 550$ 550 $1,000$1,000

SalesSales $4,500$4,500 $4,500$4,500 $4,500$4,500Cost of goods soldCost of goods sold 2,850 2,850 3,750 3,750 3,300 3,300Gross marginGross margin $1,650$1,650 $ 750$ 750 $1,200$1,200Operating expensesOperating expenses 200 200 200 200 200 200Net incomeNet income $1,450$1,450 $ 550$ 550 $1,000$1,000

AveragecostFIFO LIFOSeptember 30


Comparison of Methods: Comparison of Methods: Balance SheetBalance Sheet

CashCash $21,000$21,000 $22,300$22,300 $22,300$22,300 $22,300$22,300Accounts receivableAccounts receivable 1,500 1,500 4,500 4,500 4,500 4,500 4,500 4,500Merchandise inventoryMerchandise inventory 800 800 3,750 3,750 2,850 2,850 3,300 3,300Total assetsTotal assets $23,300$23,300 $30,550$30,550 $29,650$29,650 $30,100$30,100

Accounts payableAccounts payable $ -0-$ -0- $ 5,800$ 5,800 $ 5,800$ 5,800 $ 5,800$ 5,800Common stockCommon stock 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000Additional paid-in capitalAdditional paid-in capital 8,000 8,000 8,000 8,000 8,000 8,000 8,000 8,000Retained earningsRetained earnings 300 300 1,750 1,750 850 850 1,300 1,300Total liabilities andTotal liabilities and stockholders’ equitystockholders’ equity $23,300$23,300 $30,550$30,550 $29,650$29,650 $30,100$30,100

AveragecostFIFO LIFO

September 30August 31



Evaluate disclosureEvaluate disclosure

requirements forrequirements for

external reporting.external reporting.


Reporting Inventories in the Reporting Inventories in the Notes to Financial Notes to Financial

StatementsStatements

Before IRS instituted the LIFO Conformity Rule,Before IRS instituted the LIFO Conformity Rule,many firms used FIFO inventory for financialmany firms used FIFO inventory for financial

statements and LIFO inventory for tax purposes.statements and LIFO inventory for tax purposes.

Before IRS instituted the LIFO Conformity Rule,Before IRS instituted the LIFO Conformity Rule,many firms used FIFO inventory for financialmany firms used FIFO inventory for financial

statements and LIFO inventory for tax purposes.statements and LIFO inventory for tax purposes.

The LIFO Conformity Rule changed this practiceThe LIFO Conformity Rule changed this practiceby requiring firms to use the same inventoryby requiring firms to use the same inventory

method for tax purposes that they usemethod for tax purposes that they usefor financial statements purposesfor financial statements purposes

The LIFO Conformity Rule changed this practiceThe LIFO Conformity Rule changed this practiceby requiring firms to use the same inventoryby requiring firms to use the same inventory

method for tax purposes that they usemethod for tax purposes that they usefor financial statements purposesfor financial statements purposes


Comparison of Inventory Comparison of Inventory DisclosuresDisclosures

Family Dollar Stores, Inc. and SubsidiariesFamily Dollar Stores, Inc. and SubsidiariesNotes to Consolidated Financial StatementsNotes to Consolidated Financial StatementsYears Ended September 1, 2001, August 26, 2000, and August 28, 1999Years Ended September 1, 2001, August 26, 2000, and August 28, 1999

1. Description of Business and Summary of Significant Accounting Policies:1. Description of Business and Summary of Significant Accounting Policies:

Merchandise inventories:Merchandise inventories:Inventories are valued using retail prices less markon percentages,Inventories are valued using retail prices less markon percentages,and approximate the lower of first-in, first-out (FIFO) cost or marketand approximate the lower of first-in, first-out (FIFO) cost or market

Family Dollar Stores, Inc. and SubsidiariesFamily Dollar Stores, Inc. and SubsidiariesNotes to Consolidated Financial StatementsNotes to Consolidated Financial StatementsYears Ended September 1, 2001, August 26, 2000, and August 28, 1999Years Ended September 1, 2001, August 26, 2000, and August 28, 1999

1. Description of Business and Summary of Significant Accounting Policies:1. Description of Business and Summary of Significant Accounting Policies:

Merchandise inventories:Merchandise inventories:Inventories are valued using retail prices less markon percentages,Inventories are valued using retail prices less markon percentages,and approximate the lower of first-in, first-out (FIFO) cost or marketand approximate the lower of first-in, first-out (FIFO) cost or market


Comparison of Inventory Comparison of Inventory DisclosuresDisclosures

Target Corporation and subsidiariesTarget Corporation and subsidiariesnotes to financial statementsnotes to financial statements

InventoryInventoryInventory and the related cost of sales are accounted for by theInventory and the related cost of sales are accounted for by theretail inventory accounting method using the last-in, first-outretail inventory accounting method using the last-in, first-out(LIFO) basis and are stated at the lower of LIFO cost or market.(LIFO) basis and are stated at the lower of LIFO cost or market.The cumulative LIFO provision was $64 million and $57 millionThe cumulative LIFO provision was $64 million and $57 millionat year-end 2001 and 2000, respectively.at year-end 2001 and 2000, respectively.

Inventory (millions)Inventory (millions) 2001 2001 2000 2000TargetTarget $3,348$3,348 $3,090$3,090Mervyn’sMervyn’s 523 523 561 561Marshall Field’sMarshall Field’s 348 348 396 396OtherOther 230 230 201 201Total InventoryTotal Inventory $4,449$4,449 $4,248$4,248

Target Corporation and subsidiariesTarget Corporation and subsidiariesnotes to financial statementsnotes to financial statements

InventoryInventoryInventory and the related cost of sales are accounted for by theInventory and the related cost of sales are accounted for by theretail inventory accounting method using the last-in, first-outretail inventory accounting method using the last-in, first-out(LIFO) basis and are stated at the lower of LIFO cost or market.(LIFO) basis and are stated at the lower of LIFO cost or market.The cumulative LIFO provision was $64 million and $57 millionThe cumulative LIFO provision was $64 million and $57 millionat year-end 2001 and 2000, respectively.at year-end 2001 and 2000, respectively.

Inventory (millions)Inventory (millions) 2001 2001 2000 2000TargetTarget $3,348$3,348 $3,090$3,090Mervyn’sMervyn’s 523 523 561 561Marshall Field’sMarshall Field’s 348 348 396 396OtherOther 230 230 201 201Total InventoryTotal Inventory $4,449$4,449 $4,248$4,248


Implications of LIFOImplications of LIFOand Ratio Comparisonsand Ratio Comparisons

SalesSales $3,665$3,665 $39,176$39,176 $39,176$39,176Cost of salesCost of sales 2,439 2,439 27,246 27,246 27,239 27,239

Gross marginGross margin $1,226$1,226 $11,930$11,930 $11,937$11,937

Profit before taxesProfit before taxes $ 298$ 298 $ 2,216$ 2,216 $ 2,223$ 2,223

Ending inventoryEnding inventory $ 722$ 722 $ 4,449$ 4,449 $ 4,513$ 4,513

SalesSales $3,665$3,665 $39,176$39,176 $39,176$39,176Cost of salesCost of sales 2,439 2,439 27,246 27,246 27,239 27,239

Gross marginGross margin $1,226$1,226 $11,930$11,930 $11,937$11,937

Profit before taxesProfit before taxes $ 298$ 298 $ 2,216$ 2,216 $ 2,223$ 2,223

Ending inventoryEnding inventory $ 722$ 722 $ 4,449$ 4,449 $ 4,513$ 4,513

FamilyDollar

Target(LIFO)

Target(FIFO)(in millions)



Gross marginGross margin $1,226$1,226 $11,930$11,930 $11,937$11,937÷÷ SalesSales $3,665$3,665 $39,176$39,176 $39,176$39,176

== Gross profit %Gross profit % 33.45%33.45% 30.45%30.45% 30.47%30.47%

Profit before taxesProfit before taxes $ 298$ 298 $ 2,216$ 2,216 $ 2,223$ 2,223÷÷ SalesSales $3,665$3,665 $39,176$39,176 $39,176$39,176== Profit marginProfit margin

before taxesbefore taxes 8.13% 8.13% 5.66% 5.66% 5.67% 5.67%

Gross marginGross margin $1,226$1,226 $11,930$11,930 $11,937$11,937÷÷ SalesSales $3,665$3,665 $39,176$39,176 $39,176$39,176

== Gross profit %Gross profit % 33.45%33.45% 30.45%30.45% 30.47%30.47%

Profit before taxesProfit before taxes $ 298$ 298 $ 2,216$ 2,216 $ 2,223$ 2,223÷÷ SalesSales $3,665$3,665 $39,176$39,176 $39,176$39,176== Profit marginProfit margin

before taxesbefore taxes 8.13% 8.13% 5.66% 5.66% 5.67% 5.67%

FamilyDollar

Target(LIFO)




Cost of salesCost of sales $2,439$2,439 $27,246$27,246 $27,239$27,239÷÷ InventoryInventory $ 722$ 722 $ 4,449$ 4,449 $ 4,513$ 4,513

== Inventory turnoverInventory turnover 3.40 3.40 6.12 6.12 6.03 6.03

Days inventoryDays inventory 107.4 107.4 59.6 59.6 60.5 60.5(365 ÷ Inventory turnover)(365 ÷ Inventory turnover)

Cost of salesCost of sales $2,439$2,439 $27,246$27,246 $27,239$27,239÷÷ InventoryInventory $ 722$ 722 $ 4,449$ 4,449 $ 4,513$ 4,513

== Inventory turnoverInventory turnover 3.40 3.40 6.12 6.12 6.03 6.03

Days inventoryDays inventory 107.4 107.4 59.6 59.6 60.5 60.5(365 ÷ Inventory turnover)(365 ÷ Inventory turnover)

FamilyDollar

Target(LIFO)



End of Chapter 12End of Chapter 12

External Reporting Issues

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Transcript of External Reporting Issues