Question

Company: Campbell Soup

What inventory costing method does the company use (LIFO/FIFO, etc) in 2018? Do you think it is appropriate?

What are the key raw materials in 2018?

Are there supply or price change risks associated with the raw materials?

Answer 1

Inventories are the goods which are available with the company for sale. Inventories have significant impact on the computation of the net income of the company and the valuation of asset therefore it is important to evaluate the inventory.

Campbell Soup mainly uses the LIFO cost assumption in determining its cost of goods sold and inventory amounts. Compute both ending inventory and gross profit of Campbell Soup for Year 11 assuming the company uses FIFO inventory accounting

LIFO stands for last in first out which is an inventory method used to issue the inventory for sales assuming that the last time purchased inventory will be sold at first.

• In the case of LIFO, we know that under conditions of fluctuating price levels, it will have a smoothing effect on income. Moreover, the LIFO method yields, in times of price inflation, an unrealistically low inventory amount. This, in turn, lowers the current ratio and tends to increase the inventory turnover ratio. We also know that the LIFO method affords management an opportunity to manipulate profits by allowing inventory to be depleted in poor years, thus drawing on the low cost pool to inflate income. A judgment on all of these consequences can only be made on the basis of an assessment of all surrounding circumstances. For example, a slight change in a current ratio of 4:1 may be of no significance, whereas the same change in a ratio of 1.5:1 may be of far greater importance.

• The use of FIFO for the valuation of inventories will generally result in a higher inventory on the balance sheet and a lower cost of goods sold (and higher income) in comparison to LIFO.

• The average cost method smoothes out cost fluctuations by using a weighted average cost in valuing inventories and in pricing cost of goods sold. The resulting net income will be close to an average of the net income under LIFO and FIFO.

• The "lower of cost or market" principle of inventory accounting has additional implications for the analyst. In times of rising prices it tends to undervalue inventories regardless of the cost method used. This, in turn, will depress the current ratio below its true level since the other current assets (as well as current liabilities) are not valued on a co