Macy's inventory turnover

For Question 1, pay particular attention to the first website at http://www.ur.umich.edu/0304/Jan19_04/10.shtml, (you might have to use the Open in New Window command) which contains an article title “CEO Pay, Earnings Manipulations Linked.” The article discusses how CEOs whose pay is based in part on the earnings (net income) of the companies run will sometimes use questionable accounting techniques to distort earnings, making net income look higher than it really is to get more pay. GAAP allows us to use one of three inventory cost-flow assumptions for a merchandising company like JCPenny: FIFO, LIFO or weighted average. GAAP requires us to choose one cost-flow assumption and stick with it for a while. GAAP doesn’t have a hard and fast rule about how often you can change costflow assumptions, but you certainly can’t change it every year or even every couple of years. You need a good reason to change, and then you need to stick with it for years. Which cost-flow assumption is best for a merchandising company depends on whether the economy has rising prices (inflation) or falling prices (deflation). LIFO puts the latest inventory costs on the income statement as Cost of Goods Sold (COGS) and keeps the oldest inventory costs on the balance sheet. Putting the newest inventory costs on the income statement as COGS gives us the lowest net income and lowest income tax during times of inflation. Over the about the past three-quarters of a century, the US economy has had inflation for all but three years (1949, 1955 and 2009). So the best inventory cost-flow assumption for three-quarters of a century has been LIFO. Switching to FIFO after years or decades of LIFO would put very, very old inventory costs on the income statement, shrinking COGS and artificially inflating net income. Artificially inflating net income will not only mislead investors, but also artificially inflate the company’s income tax. A company switching from LIFO to FIFO, and its investors, would be worse off by the inflated income tax bill, while the CEO would be better off with higher compensation. Does that sound ethical? :-) To make sure you’ve answered each question and that I can quickly see that you’ve answered each question, please label (number and letter) your answers as follows. I recommend that you just copy the questions and paste them into your answer and use them to make sure you’ve answered each little piece of this week’s discussion question: 1a. Is Jason's decision to select FIFO appropriate? Is it ethical? 1b. Is Jason wrong if this will help the company and also benefit him too? 2. What are some of the pitfalls of a company basing a manager’s or CEO’s compensation on the company’s earnings? 3. Inventory Turnover Ratio = COGS/AVERAGE Inventory. COGS refers to Cost of Goods Sold. Average Inventory = (Beginning Inventory + Ending Inventory)/2. Remember that last year's ending inventory = this year's beginning inventory. For JCPenny you can find COGS on page 26 of the 2018 (Year Ended February 2, 2019) 10K. You can find beginning inventory and ending (merchandise) inventory on page 61. For Macy's, you can find COGS (Cost of Sales) on page 17 (page 53 of the pdf) of the 2018-2019 Annual Report. You can find beginning inventory and ending inventory (merchandise inventories) on page F-7 (page 55 of the pdf). Hint for Question 3 and Question 4: The number one error that students make on the inventory turnover ratio and the number of days in inventory is that they use ending inventory rather than average inventory. 3a. Determine the inventory turnover ratio for JCPenney. 3b. Determine the inventory turnover ratio for Macy’s. 3.c. What does this ratio tell you about these companies? 4. Number of Days in Inventory = Average Inventory/Average Daily Cost of Goods Sold.