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Financial Statement Analysis

(11th Edition)
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Chapter 4, Problem 5E 4 Bookmarks Show all steps: ON

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Problem

Refer to the financial statements of Campbell Soup Company in Appendix A. Continue to post
Required: 14 questions remaining

a. Compute Year 10 cost of goods sold and gross profit under the FIFO method. (Note: At the
end of Year 9, LIFO inventory is $816.0 million, and the excess of FIFO inventory over LIFO
inventory is $88 million.) My Textbook Solutions

b. Explain the potential usefulness of the LIFO to FIFO restatement in a.

c. Compute ending inventory under the FIFO method for both Years 10 and 11. Financial Single Statistical
Statement... Variable... Techniques...
11th Edition 8th Edition 17th Edition

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d. Explain why the FIFO inventory computation in c might be useful for analysis.

Step-by-step solution

Step 1 of 8

Inventories

Inventories are the goods which are available with the company for sale. Inventories have
significant impact on the computation of the net income of the company and the valuation of
asset therefore it is important to evaluate the inventory. Inventory can be calculated as:

Comment

Step 2 of 8

There are two methods used for evaluating the inventories:

Comment

Step 3 of 8

Under FIFO method all the units that are purchased first only those units are sold first. Whereas
under LIFO methods all those units which are purchased in last only those units are sold first.
Although it is important to consider that LIFO method of inventory valuation is not used under
IFRS.

Comment

Step 4 of 8

After considering the financial statement of company C (Appendix A) with reference to this book.

Calculate the cost of goods sold and gross profit for year 10 by using FIFO method:

Comments (7)

Step 5 of 8

Above statement is prepared using MS Excel with the appropriate formula.

Therefore, the gross profit under FIFO method is and cost of goods sold is

Comment

Step 6 of 8

b.

Conversion of LIFO to FIFO method enables the company to achieve the compatibility between
the firms using different methods of inventory.

Comment

Step 7 of 8

c.

Calculate inventory under FIFO at end:

Year 10

Year 11

Therefore, the inventory at end for year 10 and 11 is and .

Comment

Step 8 of 8

d.

When LIFO method is used by the company for valuating inventory the values of inventories are
understated at the time of increase of prices therefore, it is more profitable for the company to
change the reported method to FIFO because the inventory valued under FIFO shows cost of
inventory more significantly and also it reflects the most current cost of units that are acquired.

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Recommended solutions for you in Chapter 4

Chapter 4, Problem 1Q Chapter 4, Problem 4E

Companies typically report compensating balances Inventory and cost of goods sold figures prepared
that are required under a loan agreement as under the LIFO cost flow assumption versus   the
unrestricted cash classified... FIFO cost flow assumption...

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