Case 3: The Kroger Company

The Kroger Company reported the following data in its annual report (in millions).

Â	January 31, 2015	February 1, 2014	February 2, 2013
Net sales	$108,465	$98,375	$96,619
Cost of sales (using LIFO)	  85,512	 78,138	 76,726
Year-end inventories using FIFO	   6,933	  6,801	  6,244
Year-end inventories using LIFO	   5,688	  5,651	  5,146

Instructions

1.      Some firms calculate inventory turnover using sales rather than cost of goods sold in the numerator. Calculate Kroger’s fiscal years ending January 31, 2015, and February 1, 2014, turnover, using:

2.      Sales and FIFO inventory.

 

 

 

 

 

CA8-10 WRITING (FIFO and LIFO) Harrisburg Company is considering changing its inventory valuation method from FIFO to LIFO because of the potential tax savings. However, management wishes to consider all of the effects on the company, including its reported performance, before making the final decision.

The inventory account, currently valued on the FIFO basis, consists of 1,000,000 units at $8 per unit on January 1, 2017. There are 1,000,000 shares of common stock outstanding as of January 1, 2017, and the cash balance is $400,000.

The company has made the following forecasts for the period 2017–2019.

Â	2017	2018	2019
Unit sales (in millions of units)	1.1	1.0	1.3
Sales price per unit	$10	$12	$12
Unit purchases (in millions of units)	1.0	1.1	1.2
Purchase price per unit	$8	$9	$10
Annual depreciation (in thousands of dollars)	$300	$300	$300
Cash dividends per share	$0.15	$0.15	$0.15
Cash payments for additions to and replacement of plant and equipment (in thousands of dollars)	$350	$350	$350
Income tax rate	40%	40%	40%
Operating expenses (exclusive of depreciation) as a percent of sales	15%	15%	15%
Common shares outstanding (in millions)	1	1	1

Instructions

(a)Prepare a schedule that illustrates and compares the following data for Harrisburg Company under the FIFO and the LIFO inventory method for 2017–2019. Assume the company would begin LIFO at the beginning of 2017.

(1)Year-end inventory balances.

(2)Annual net income after taxes.

(3)Earnings per share.

(4)Cash balance.

Assume all sales are collected in the year of sale and all purchases, operating expenses, and taxes are paid during the year incurred.

(b)Using the data above, your answer to (a), and any additional issues you believe need to be considered, prepare a report that recommends whether or not Harrisburg Company should change to the LIFO inventory method. Support your conclusions with appropriate arguments.