Chapter 15FSI, Problem 3IFRS

Under U.S. GAAP, LIFO is an acceptable inventory method. Financial statement information for three companies that use LIFO follows. All table numbers are in millions of dollars.

Assume these companies adopted IFRS, and thus were required to use FIFO, rather than LIFO.

a. Prepare a table with the following columns:

(1) Difference between FIFO and LIFO inventory valuation.

(2) Revised IFRS net income using FIFO.

(3) Difference between FIFO and LIFO inventory valuation as a percent of total current assets.

(4) Revised IFRS net income as a percent of the reported net income.

b. Complete the table for the three companies.

c. For which company would a change to IFRS for inventory valuation have the largest percentage impact on total current assets (Col. 3)?

d. For which company would a change to IFRS for inventory valuation have the largest percentage impact on net income (Col. 4)?

e. Why might Kroger have a negative impact on net income from using LIFO, while the other two companies have a positive impact on net income from using LIFO?

To determine

International Financial Reporting Standards (IFRS): IFRS are a set of international accounting standards which are framed, approved, and published by International Accounting Standards Board (IASB) for the preparation and disclosure of international financial reports.

Generally Accepted Accounting Principles (GAAP): These are the guidelines necessary to create accounting principles for the implementation of financial information reporting in the Country U.

First-in-First-Out(FIFO): In this method, items purchased initially are sold first. So, the value of the ending inventory consists the recent cost for the remaining unsold items.

Last-in-First-Out(LIFO): In this method, items purchased recently are sold first. So, the value of the ending inventory consists the initial cost for the remaining unsold items.

To draft: A table with the columns given in the problem

Explanation of Solution

Table is prepared as follows (amounts in millions of dollars):

	FIFO less LIFO	IFRS Net Income	$\frac{FIFOlessLIFO}{Totalcurrentassets}$	$\frac{IFRSNetIncome}{\begin{array}{l}ReportedNetIncome\hfill \end{array}}$
Company E
Company K
Company F

Table (1)

To determine

To complete: The table prepared in Part (a)

Explanation of Solution

Complete the table as follows (amounts in millions of dollars):

	FIFO less LIFO	IFRS Net Income	$\frac{FIFOlessLIFO}{Totalcurrentassets}$	$\frac{IFRSNetIncome}{\begin{array}{l}ReportedNetIncome\hfill \end{array}}$
Company E	$21,348	$30,143
Company K	827	1,173
Company F	865	4,686

Table (2)

Working Notes:

Compute FIFO less LIFO (amounts in millions of dollars).

	FIFO	LIFO	FIFO less LIFO
Company E	$31,200	$9,852	$21,348
Company K	5,793	4,966	827
Company F	6,782	5,917	865

Table (3)

Deduct the LIFO value from FIFO value to get FIFO less LIFO.

Compute IFRS net income (amounts in millions of dollars).

	Net Income as Reported	Impact on Net Income From Using LIFO Rather Than FIFO	IFRS Net Income
Company E	$30,460	$317	$30,143
Company K	1,116	(57)	1,173
Company F	4,690	4	4,686

Table (4)

Deduct the impact on net income value from net income reported value to get IFRS net income.

Compute FIFO less LIFO divided by total current assets (amounts in millions of dollars).

	FIFO less LIFO	Total Current Assets	$\frac{FIFOlessLIFO}{Totalcurrentassets}$
Company E	$21,348	$58,984	36%
Company K	827	7,621	11%
Company F	865	34,368	3%

Table (5)

Divide FIFO less LIFO value by total current assets value to get the value in last column. Refer to Table (3) for value and computation of FIFO less LIFO value.

Compute IFRS net come divided by reported net income(amounts in millions of dollars).

	IFRS Net Income	Net Income as Reported	$\frac{IFRSNetIncome}{\begin{array}{l}ReportedNetIncome\hfill \end{array}}$
Company E	$30,143	$30,460	99%
Company K	1,173	1,116	105%
Company F	4,686	4,690	100%

Table (6)

Divide IFRS net income value by reported net income value to get the value in last column. Refer to Table (4) for value and computation of IFRS net income value.

To determine

To indicate: The company which would have the highest impact on total current assets due to change in inventory valuation method, if the company uses IFRS instead of GAAP

Answer to Problem 3IFRS

If the inventory valuation method is changed to reflect the use of IFRS, Company E would have greatest impact on total current assets.

Explanation of Solution

Refer to Table (5) for value and computation of impact of change in inventory valuation method on total current assets.

To determine

To indicate: The company which would have the highest impact on net income due to change in inventory valuation method, if the company uses IFRS instead of GAAP

Answer to Problem 3IFRS

If the inventory valuation method is changed to reflect the use of IFRS, Company K would have greatest impact on net income.

Explanation of Solution

Refer to Table (6) for value and computation of impact of change in inventory valuation method on net income.

To determine

To discuss: The reasons for negative impact on net income if LIFO is used rather than FIFO

Explanation of Solution

During inflation, the inventory purchased last will have higher price than the inventory purchased first. Thus, under LIFO method, the inventory purchased last with higher price will be sold first, thereby increasing the cost of goods sold. Increase in cost of goods sold decreases the net income.