Excerpts from the annual report of Lands\' End follow (S in thousands). Lands En
ID: 2657017 • Letter: E
Question
Excerpts from the annual report of Lands' End follow (S in thousands). Lands End PR Year 9 Year ? $219,686 Cost of sales. 754,661 Net income31,185 Tax rate 37% inventory $241 154 675.138 64,150 37% Note : If the irst-in, first-out (FIFO) method of accounting for investory had been ined, inventory would have been approximately $269 million and $251 milion higher than reported at Year 9 and Year 8, respectively Redaired a. What would ending inventory have been at Year 9 and Year 8had EIFO been used? b What would net incone for the jear ended Year 9 have been had e Dsciuse the usetulness of LIFO to FIFO restatemients for amalyis purponiesExplanation / Answer
a. Inventory for year 9 under FIFO: $ 219,686 x 1000 / 1,000,000 million + $ 26.9 million = $ 246.586 million
Inventory for year 8 under FIFO : $ 241,154 x 1,000 / 1,000,000 + 25.1 million = $ 266.254 million.
b. Net income for year 9 if FIFO was used = [(31,185 x 1,000 / 1000,000 ) / ( 1 -0.37) + $ 26.9 million] x ( 1 - 0.37) = $ 48.132 million.
Net income for year 8 if FIFO was used = [ ( 64,150 x 1,000 / 1,000,000) / ( 1- 0.37) + $ 25.1 million ] x ( 1 -0.37) = $ 79.963 million.
c. While the ending inventories under LIFO are the oldest in stock, they do not represent the current market values, specially under inflationary conditions. On the other hand, ending inventories under FIFO are the newest in stock, therefore representing current market values. A restatement would not only help in valuing the inventory more precisely, it would also help to rectify the understatement of net income which occurs using LIFO.
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