12 - 12 - 11© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
External Reporting External Reporting
IssuesIssues
Chapter 12Chapter 12
12 - 12 - 22© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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.
12 - 12 - 33© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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,
12 - 12 - 44© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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.
12 - 12 - 55© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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.
12 - 12 - 66© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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
12 - 12 - 77© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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
12 - 12 - 88© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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
12 - 12 - 99© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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
12 - 12 - 1010© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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
12 - 12 - 1111© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Ethical Considerations of Ethical Considerations of External Financial ReportingExternal Financial Reporting
EthicsEthics
GoodGoodethicsethicsis goodis good
business.business.
12 - 12 - 1212© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Learning Objective 2Learning Objective 2
Differentiate the differentDifferentiate the different
valuations used forvaluations used for
external financial external financial
reporting.reporting.
12 - 12 - 1313© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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
12 - 12 - 1414© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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.
12 - 12 - 1515© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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
12 - 12 - 1616© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Learning Objective 3Learning Objective 3
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.
12 - 12 - 1717© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
DepreciationDepreciation
TimeTime TimeTime
12 - 12 - 1818© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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
12 - 12 - 1919© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
The Effect of EstimatesThe Effect of Estimates
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.
12 - 12 - 2020© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
The Effect of EstimatesThe Effect of Estimates
$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
12 - 12 - 2121© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
The Effect of EstimatesThe Effect of Estimates
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
12 - 12 - 2222© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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.
12 - 12 - 2323© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Learning Objective 4Learning Objective 4
Calculate depreciation Calculate depreciation
usingusing
the straight-line and the straight-line and
double-double-
declining-balance methods.declining-balance methods.
12 - 12 - 2424© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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
12 - 12 - 2525© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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
12 - 12 - 2626© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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
12 - 12 - 2727© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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.
12 - 12 - 2828© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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)
12 - 12 - 2929© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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
12 - 12 - 3030© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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?
12 - 12 - 3131© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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
12 - 12 - 3232© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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
12 - 12 - 3333© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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
12 - 12 - 3434© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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
12 - 12 - 3535© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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
12 - 12 - 3636© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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
12 - 12 - 3737© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Learning Objective 7Learning Objective 7
Evaluate disclosureEvaluate disclosure
requirements forrequirements for
external reporting.external reporting.
12 - 12 - 3838© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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
12 - 12 - 3939© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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
12 - 12 - 4040© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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
12 - 12 - 4141© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
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)
12 - 12 - 4242© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Implications of LIFOImplications of LIFOand Ratio Comparisonsand Ratio Comparisons
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)
Target(FIFO)(in millions)
12 - 12 - 4343© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
Implications of LIFOImplications of LIFOand Ratio Comparisonsand Ratio Comparisons
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)
Target(FIFO)(in millions)
12 - 12 - 4444© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell
End of Chapter 12End of Chapter 12
Top Related