Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 6 Inventories 297

FINANCIAL ANALYSIS AND REPORTING CASES

The following note was taken from the 2004 financial statements of Walgreen Company:

Inventories are valued on a...last-in, first-out (lifo) cost...basis. At August 31, 2004 and

2003, inventories would have been greater by $736,400,000 and $729,700,000 respectively, if

they had been valued on a lower of first-in, first-out (fifo) cost or market basis.

Additional data are as follows:

Earnings before income taxes, 2004 $2,176,300,000

Total lifo inventories, August 31, 2004 4,738,600,000

Based on the preceding data, determine (a) what the total inventories at August 31, 2004,

would have been, using the fifo method, and (b) what the earnings before income taxes for the

year ended August 31, 2004, would have been if fifo had been used instead of lifo.

TheNeiman Marcus Group, Inc., is a high-end specialty retailer, while Amazon.comuses its

e-commerce services, features, and technologies to sell its products through the Internet. The bal-

ance sheet inventory disclosures for Neiman Marcus and Amazon.com are as follows for finan-

cial statements dated in 2004:

End-of-Period Beginning-of-Period

Inventory Inventory

Neiman Marcus Group, Inc. $720,277,000 $687,062,000

Amazon.com 479,709,000 293,917,000

The cost of merchandise sold reported by each company for the fiscal 2004 period was:

Neiman Marcus Group, Inc. Amazon.com

Cost of merchandise sold $2,321,110,000 $5,319,127,000

a. Determine the inventory turnover and number of days’ sales in inventory for Neiman

Marcus and Amazon.com.

b. Interpret your results.

Saks Incorporateddisclosed the following note regarding its merchandise inventories for its

January 31, 2004, financial statements:

Merchandise Inventories and Cost of Sales

Merchandise inventories are valued by the retail method and are stated at the lower of cost (last-

in, first-out “LIFO”), or market and include freight, buying and distribution costs. The Company

takes markdowns related to slow moving inventory, ensuring the appropriate inventory valua-

tion. At January 31, 2004 and February 1, 2003, the LIFO value of inventories exceeded market

value and, as a result, inventory was stated at the lower market amount.

Consignment merchandise on hand of $127,861 and $112,435 at January 31, 2004 and

February 1, 2003, respectively, is not reflected in the consolidated balance sheets.

a. Why were inventories recorded at market value?

b. What are consignment inventories, and why were they excluded from the balance sheet

valuation?

Case 6-1

Fifo vs. lifo

Case 6-2

Comparing inventory ratios
for two companies

Case 6-3

Saks Incorporated inventory

note