In: Accounting
Analyzing Inventories Using LIFO Inventory
Footnote
The footnote below is from the 2014 10 -K report of Whole Foods
Market, Inc., a Texas-based retail grocery chain.
Inventories
The Company values inventories at the lower of cost or market. Cost
was determined using the dollar value retail last-in, first-out
("LIFO") method for approximately 93.5 % and 92.8 % of inventories
in fiscal years 2014 and 2013, respectively. Under the LIFO method,
the cost assigned to items sold is based on the cost of the most
recent items purchased. As a result, the costs of the first items
purchased remain in inventory and are used to value ending
inventory. The excess of estimated current costs over LIFO carrying
value, or LIFO reserve, was approximately $54 million and $47
million at September 28, 2014 and September 29, 2013, respectively.
Costs for remaining inventories are determined by the first-in,
first-out method. Cost before the LIFO adjustment is principally
determined using the item cost method, which is calculated by
counting each item in inventory, assigning costs to each of these
items based on the actual purchase cost (net of vendor allowances)
of each item and recording the actual cost of items sold.
Whole Foods operates the world's largest chain of natural and organic food stores. In 2014, Whole Foods reported sales revenue of $13,988 million and cost of goods sold of $8,755 million. The following information was extracted from the company's 2014 and 2013 balance sheets:
($ millions) | 2014 | 2013 | |||
---|---|---|---|---|---|
Merchandise inventories | $399 | $352 |
a. Calculate the amount of inventories purchased by Whole Foods in
2014. $Answer million
b. What amount of gross profit would Whole Foods have reported if the FIFO method had been used to value all inventories? $Answer million
c. Calculate the gross profit margin (GPM) as reported and assuming that the FIFO method had been used to value all inventories.
Round to the nearest percentage (i.e., 0.453 = 45 %) Answer%
a | Amount of inventories purchased by Whole Foods in 2014 | ||
Purchases = Ending inventory-Beginning inventory+Cost of goods sold | |||
Amount in millions | |||
Ending inventory | $399 | ||
Beginning inventory | $352 | ||
Cost of Goods sold | $8,755 | ||
Purchases | $8,802 | ||
b | Converting LIFO to FIFO | ||
Simple Way | |||
COGS (FIFO) = COGS (LIFO) - change in LIFO reserve | |||
COGS (LIFO) | $8,755 | ||
Change in LIFO reserve (54-47) | $7 | ||
COGS (FIFO) | $8,748 | ||
Another (complex ) way | |||
Ending inventory (FIFO) = Ending inventory (LIFO)+ending LIFO reserve | |||
Ending Inventory (LIFO) | $399 | ||
Ending reserve | $54 | ||
Ending inventory (FIFO) | $453 | ||
beginning inventory (FIFO) = beginning inventory (LIFO)+beginning LIFO reserve | |||
beginning Inventory (LIFO) | $352 | ||
beginning reserve | $47 | ||
beginning inventory (FIFO) | $399 | ||
COGS (FIFO) | |||
beginning inventory (FIFO) | $399 | ||
Purchases | $8,802 | ||
Ending inventory (FIFO) | $453 | ||
COGS (FIFO) | $8,748 | ||
Gross Profit | |||
Sales | $13,988 | ||
COGS | $8,748 | ||
Gross Profit | $5,240 | ||
c | Gross profit margin | ||
LIFO | FIFO | ||
Sales | $13,988 | $13,988 | |
COGS | $8,755 | $8,748 | |
Gross Profit | $5,233 | $5,240 | |
Gross profit margin | 37% | 37% |