Income statement and balance sheet information abstracted from a recent annual r
ID: 2446948 • Letter: I
Question
Income statement and balance sheet information abstracted from a recent annual report of The Kroger Company, one of the world's largest retailers, appears below:
Balance Sheet:
Jan.29, 2011 Jan.30, 2010
Current assets:
Inventories (1/29/2011) $4,966 mill; (1/30/2010) $4,935 mill
Income Statement:
Net Sales (1/29/2011) $82,189 mill; (1/30/2010) $76,733 mill
COGS (1/29/2011) $63,927 mill; (1/30/2010) $58,958 mill
Gross Profit (1/29/2011) $18,262 mill; (1/30/2010) $17,777 mill
*The significant accounting policies note disclosure contained the following:*
Inventories are stated at the lower of cost (principally on a LIFO basis) or market. In total, approximately 97% of inventories were valued using the LIFO method. Cost for the balance of the inventories, including substantially all fuel inventories, was determined using the FIFO method. Replacement cost was higher than carrying amount by $827 million at January 29, 2011 and $770 million at January 30, 2010.
Required:
1. Why is Kroger disclosing the replacement cost of its LIFO inventory?
2. Assuming that year-end replacement cost figures approximate FIFO inventory values, estimate what the beginning and end inventory balances for the fiscal year ended 1/29/2011 would have been if Kroger had used FIFO for all its inventories.
3. Estimate the effect on cost of goods sold (that is, would it have been greater or less and by how much?) for the fiscal year end 1/29/2011 if Kroger had used FIFO for all of its inventories.
Explanation / Answer
1. under LIFO method, stock that has entered in stock had been sold first and thus under closing stock, old items will accumulate and there are very high chances of absolete stock. Hence it is essential for the company to mention the replacement value of those items.
2.
3.
29/01/2011 30/01/2010 A Inventories 4966.00 4935.00 B 97% inv values at LIFO (A*97%) 4817.02 4786.95 C 3% inv values at LIFO (A*3%) 148.98 148.05 D FIFO cost of 97% inv 5644.02 5556.95 E Revised Inventory C + D 5793.00 5705.00