Financial Accounting: An Integrated Statements Approach, 2nd Edition

288 Chapter 6 Inventories

EXERCISES

Exercise 6-1

Manufacturing inventories

Goal 1

Exercise 6-2

Television costs of Walt

Disney Company

Goal 1

Exercise 6-3

Control of inventories

Goal 2

Qualcomm Incorporatedis a leading developer and manufacturer of digital wireless telecom-

munications products and services. Qualcomm reported the following inventories on September

30, 2004, in the notes to its financial statements:

(In millions)

September 30, 2004

Raw materials $ 20

Work-in-process 3

Finished goods 131

$154

a. Why does Qualcomm report three different inventories?

b. What costs are included in each of the three classes of inventory?

The Walt Disney Companyshows “television costs” as an asset on its balance sheet. In the notes

to its financial statements, the following television cost disclosure was made:

Sept. 30, 2004 Sept. 30, 2003

Television costs:

Released, less amortization $ 893 $ 961

Completed, not released 175 126

In-process 292 283

In development or pre-production 24 11

$1,384 $1,381

a. Interpret the four television cost asset categories.

b. How are these classifications similar or dissimilar to the inventory classifications used in a

manufacturing firm?

Onsite Hardware Store currently uses a periodic inventory system. Dana Cogburn, the owner,

is considering the purchase of a computer system that would make it feasible to switch to a per-

petual inventory system.

Dana is unhappy with the periodic inventory system because it does not provide timely in-

formation on inventory levels. Dana has noticed on several occasions that the store runs out of

good-selling items, while too many poor-selling items are on hand.

Dana is also concerned about lost sales while a physical inventory is being taken. Onsite

Hardware currently takes a physical inventory twice a year. To minimize distractions, the store

8. If merchandise inventory is being valued at cost and the
   price level is steadily rising, which of the three methods
   of costing—fifo, lifo, or average cost—will yield (a) the
   highest inventory cost, (b) the lowest inventory cost, (c)
   the highest gross profit, (d) the lowest gross profit?


9. Which of the three methods of inventory costing—fifo,
   lifo, or average cost—will in general yield an inven-
   tory cost most nearly approximating current replacement
   cost?


10. If inventory is being valued at cost and the price level is
    steadily rising, which of the three methods of costing—
    fifo, lifo, or average cost—will yield the lowest annual in-
    come tax expense? Explain.


11. Can a company change its method of costing inventory?
    Explain.


12. Because of imperfections, an item of merchandise cannot
    be sold at its normal selling price. How should this item
    be valued for financial statement purposes?


13. How is the method of determining the cost of inventory
    and the method of valuing it disclosed in the financial
    statements?


14. What is the lifo reserve, and why would an analyst be
    careful in interpreting the earnings of a company that has
    liquidated some of its lifo reserve?


15. Why would a company such as Target Corporationpre-
    fer a quick response inventory policy?