Question

In: Accounting

Headquartered in Toronto, Indigo Books & Music Inc. (TSX: IDG) is Canada’s largest book retailer and...

Headquartered in Toronto, Indigo Books & Music Inc. (TSX: IDG) is Canada’s largest book retailer and the third largest in North America. The following information was taken from the management discussion and analysis section of the company’s March 31, 2020, annual report (in thousands):

2020

2019

2018

Cost of sales (cost of goods sold)

$600,400

$585,700

$538,500

Inventories

$229,706

$232,694

$224,406

Additional information from the company’s annual report:

1. Inventories are valued at the lower of cost, determined using a moving average cost formula, and market, being net realizable value. Under this method, inventory is recorded at the level of the individual article (stock-keeping unit or SKU).

2. Costs include all direct and reasonable expenditures that are incurred in bringing inventories to their present location and condition. Vendor rebates are recorded as a reduction in the price of the products and corresponding inventory is recorded net of vendor rebates.

3. The average cost of an article is continually updated based on the cost of each purchase recorded in inventory. When the company permanently reduces the retail price of an item, there is a corresponding reduction in inventory recognized in the period if the markdown incurred brings the retail price below the cost of the item.

4. The amount of inventory write-downs as a result of net realizable value lower than cost was $10.3 million in 2020 ($7.3 million in fiscal 2019), and there were no reversals of inventory write-downs that were recognized in 2020 or in prior

periods. The amount of inventory at March 31, 2020 with net realizable value equal to cost was $1.7 million ($2.3 million at March 31, 2019).

(a) Calculate the company’s inventory turnover and days sales in inventory ratios for 2020 and 2019. Comment on whether Indigo’s management of its inventory improved or weakened in fiscal 2020.  

Inventory Turnover

Days Sales in Inventory

2020

2019

(b) Does Indigo follow the lower of cost or net realizable value rule? Did the application of this rule have any effect on 2020 results? Explain

(c) Indigo uses the average cost formula to account for its inventories. A major competitor, Amazon Inc., uses the FIFO cost formula to account for its inventories. What difficulties would this create in comparing Indigo’s financial results with those of Amazon? Explain.  

Solutions

Expert Solution

(a)

The ratios have improved slightly. This means that the inventory is being sold a bit faster in 2012 than in 2011.

(b)   Indigo applies the lower of cost and net realizable value rule. The amount of inventory write-downs as a result of net realizable value lower than cost was $10.5 million in fiscal 2012. At March 31, 2012 there was $1.7 million of inventory on hand that was recorded at net realizable value.

(c)   Amazon.com Inc. would have a better balance sheet valuation because FIFO results in an ending inventory value that approximates replacement cost. This will cause difficulties in comparing the two companies because it is impossible to know what the inventory valuation of Amazon.com would have been if it used average. However, if inventory costs are relatively stable, both inventory methods would yield similar results.


Related Solutions

SportChek is Canada’s largest retailer of sporting goods and sports apparel and footwear, with over 130...
SportChek is Canada’s largest retailer of sporting goods and sports apparel and footwear, with over 130 stores across the country. Assume one of the SportChek stores reported current assets of $87,000 and its current ratio was 1.76. Assume that the following transactions were completed: Paid $6,100 on accounts payable. Purchased a delivery truck for $9,500 cash. Wrote off a bad account receivable for $2,100. Paid previously declared dividends in the amount of $24,000. Required: Compute the updated current ratio. (Round...
BK Books is an online book retailer that also has 10,000 "brick and mortar" outlets worldwide....
BK Books is an online book retailer that also has 10,000 "brick and mortar" outlets worldwide. You are a risk-neutral manager within the Corporate Finance Division and are in dire need of a new financial analyst. You only interview students from the top MBA programs in your area. Thanks to your screening mechanisms and contacts, the students you interview ultimately differ only with respect to the wage that they are willing to accept. About 10 percent of acceptable candidates are...
BK Books is an online book retailer that also has 10,000 “bricks and mortar” outlets worldwide....
BK Books is an online book retailer that also has 10,000 “bricks and mortar” outlets worldwide. You are a risk-neutral manager within the Corporate Finance Division and are in dire need of a new financial analyst. You only interview students from the top MBA programs in your area. Thanks to your screening mechanisms and contacts, the students you interview ultimately differ only with respect to the wage that they are willing to accept. About 10 percent of acceptable candidates are...
Walmart Stores, Inc. is the world's largest retailer. A large portion of the premises that the...
Walmart Stores, Inc. is the world's largest retailer. A large portion of the premises that the company occupies are leased. Its financial statements and disclosures notes revealed the following information: Balance Sheet (in millions): 2016 2015 Assets Property: Property under capital lease $11,096 $5,239 Less: Accumulated amortization (4,751) (2,864) Liabilities Current liabilities: Obligations under finance leases due w/in 1 yr 551 287 Long-term debt: Long-term obligations under finance leases 5,816 2,606 Required: 1. Discuss some possible reasons why Walmart leases...
Best Buy Co Inc. headquartered in Richfield, Minnesota is a multinational American retailer of Consumer Electronics...
Best Buy Co Inc. headquartered in Richfield, Minnesota is a multinational American retailer of Consumer Electronics Corporation. It also retails home office products, entertainment products, appliances and its related services . They operate under different names through their call centers, retail stores and online retail operations e.g. Best Buy (Bestbuy.com, Bestbuy.ca, Bestbuy.co.uk, BestBuyMobile.com etc). In addition to this, it also operates under the names of Carphone Warehouse (CarphoneWarehouse.com), Five Star (Five-Star.cn), Future Shop (FutureShop.ca), Geek Squad, Pacific sales, the Phone...
Massmart, the second largest retailer in Africa, is a subsidiary of Wal-Mart Inc., a U.S. company....
Massmart, the second largest retailer in Africa, is a subsidiary of Wal-Mart Inc., a U.S. company. Massmart reports its accounts in its local currency, the rand (R). Wal-Mart’s fiscal year ends January 31. On February 1, 2018, Massmart reports facilities with original cost of R500 million and accumulated depreciation of R280 million in its noncurrent assets, as follows: • Buildings acquired at a cost of R175 million when the exchange rate was $0.15/R, with accumulated depreciation of R100 million. The...
E-books, an online book retailer, has two operating departments—corporate sales and consumer sales—and two support departments—human...
E-books, an online book retailer, has two operating departments—corporate sales and consumer sales—and two support departments—human resources and information systems. Each sales department conducts merchandising and marketing operations independently. E-books uses number of employees to allocate human resources costs and processing time to allocate information systems costs. The following data are available for September 2017: Support Departments Operating Departments Human Resources Information Systems Corporate Sales Consumer Sales Budgeted costs for each department $72,700 $234,400 $998,270 $489,860 Budgeted Number of Employees...
Q5. Thomas Book Sales, Inc., supplies textbooks to college and university bookstores. The books are shipped...
Q5. Thomas Book Sales, Inc., supplies textbooks to college and university bookstores. The books are shipped with a proviso that they must be paid for within 30 days but can be returned for a full refund credit within 90 days. In 2009, Thomas shipped and billed book titles totaling $760,000. Collections, net of return credits, during the year totaled $690,000. The company spent $300,000 acquiring the books that it shipped. a. Using accrual accounting and the preceding values, show the...
Apple Inc. is the number one online music retailer through its iTunes music store. Apple sells iTunes gift cards in $15, $25, and $50 increments
Apple Inc. is the number one online music retailer through its iTunes music store. Apple sells iTunes gift cards in $15, $25, and $50 increments. Assume Apple sells $21 million in iTunes gift cards in November, and customers redeem $14 million of the gift cards in December. Required:1. Record the advance collection of $21 million for iTunes gift cards in November.2. Record the revenue recognized when $14 million in gift cards is redeemed in December.3. What is the ending balance...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT