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Compute Kroger’s inventory turnovers for fiscal years ending January 31, 2015, and February 1, 2014, using:
(1)Cost of sales and LIFO inventory.
(2)Cost of sales and FIFO inventory.
(b) Some firms calculate inventory turnover using sales rather than cost of goods sold in the numerator. Calculate Kroger’s fiscal years ending January 31, 2015, and February 1, 2014, turnover, using:
(1)Sales and LIFO inventory.
Jan 31, 2015 – 108465/((5688+5651)/2) = 19.13
Feb 1, 2014 – 98375/((5651+5146)/2) = 18.22
(2)Sales and FIFO inventory.
Jan 31, 2015 – 108465/((6933+6801)/2) = 15.80
Feb 1, 2014 – 98375/((6801+6244)/2) = 15.08
(c) State which method you would choose to evaluate Kroger’s performance. Justify your choice.
If the company wants to report a higher net profit, they should use FIFO. If they want to pay lower tax, LIFO would be better. As this particular company used the LIFO method to measure the cost of goods sold, they should also use the LIFO method to measure the turnover/inventory.
#2
CA8-10 WRITING (FIFO and LIFO) Harrisburg Company is considering changing its inventory valuation method from FIFO to LIFO because of the potential tax savings. However, management wishes to consider all of the effects on the company, including its reported performance, before making the final decision.
The inventory account, currently valued on the FIFO basis, consists of 1,000,000 units at $8 per unit on January 1, 2017. There are 1,000,000 shares of common stock outstanding as of January 1, 2017, and the cash balance is $400,000.
The company has made the following forecasts for the period 2017–2019.
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