Financial
Reporting Problem
The Procter & Gamble Company (P&G)
The financial statements of P&G are presented in Appendix B. The company’s complete annual report, including the notes to the financial statements, is available online.
Instructions
Refer to P&G’s financial statements and the accompanying notes to answer the following questions.
(a) How does P&G value its inventories? Which inventory costing method does P&G use as a basis for reporting its inventories?
(b) How does P&G report its inventories in the balance sheet? In the notes to its financial statements, what three descriptions are used to classify its inventories?
(c) What costs does P&G include in Inventory and Cost of Products Sold?
(d) What was P&G’s inventory turnover in 2014? What is its gross profit percentage? Evaluate P&G’s inventory turnover and its gross profit percentage.
Comparative Analysis Case
The Coca-Cola Company and PepsiCo, Inc.
The financial statements of Coca-Cola and PepsiCo are presented in Appendices C and D, respectively. The companies’ complete annual reports, including the notes to the financial statements, are available online.
Instructions
Use the companies’ financial information to answer the following questions.
(a) What is the amount of inventory reported by Coca-Cola at December 31, 2014, and by PepsiCo at December 31, 2014? What percent of total assets is invested in inventory by each company?
(b) What inventory costing methods are used by Coca-Cola and PepsiCo? How does each company value its inventories?
(c) In the notes, what classifications (description) are used by Coca-Cola and PepsiCo to categorize their inventories?
(d) Compute and compare the inventory turnovers and days to sell inventory for Coca-Cola and PepsiCo for 2014. Indicate why there might be a significant difference between the two companies.
Financial Statement Analysis Cases
Case 1: Robots, Inc.
Robots, Inc. reported the following information regarding 2016–2017 inventory…
Instructions
(a) Comment on why Robots, Inc., might disclose how its LIFO inventories would be valued under FIFO.
(b) Why does the LIFO liquidation reduce operating costs?
(c) Comment on whether Robots, Inc. would report more or less income if it had been on a FIFO basis for all its inventory.
Case 2: Barrick Gold Corporation
Barrick Gold Corporation, with headquarters in Toronto, Canada, is the world’s most profitable and largest gold mining company outside South Africa. Part of the key to Barrick’s success has been due to its ability to maintain cash flow while improving production and increasing its reserves of gold-containing property. In the most recent year, Barrick achieved record growth in cash flow, production, and reserves.
The company maintains an aggressive policy of developing previously identified target areas that have the possibility of a large amount of gold ore, and that have not been previously developed. Barrick limits the riskiness of this development by choosing only properties that are located in politically stable regions, and by the company’s use of internally generated funds, rather than debt, to finance growth.
Barrick’s inventories are as follows...
Instructions
(a) Why do you think that there are no finished goods inventories? Why do you think the raw material, ore in stockpiles, is considered to be a non-current asset?
(b) Consider that Barrick has no finished goods inventories. What journal entries are made to record a sale?
(c) Suppose that gold bullion that cost $1.8 million to produce was sold for $2.4 million. The journal entry was made to record the sale, but no entry was made to remove the gold from the gold in process inventory. How would this error affect the following?
Accounting, Analysis, and Principles
Englehart Company sells two types of pumps. One is large and is for commercial use. The other is smaller and is used in residential swimming pools. The following inventory data is available for the month of March…
In addition to the above information, due to a downturn in the economy that has hit Englehart’s commercial customers especially hard, Englehart expects commercial pump prices from March 31 onward to be considerably different (and lower) than at the beginning of and during March. Englehart has developed the following additional information.
Commercial Pumps Residential Pumps
Net realizable value (per unit) $900 $580
The normal profit margin is 16.67% of cost. Englehart uses the FIFO accounting method.
Accounting
(a) Determine the dollar amount that Englehart should report on its March 31 balance sheet for inventory. Assume Englehart applies lower-of-cost-or-net realizable value at the individual product level.
(b) Repeat part (a) but assume Englehart applies lower-of-cost-or-net realizable value at the major categories level.
Englehart places both commercial and residential pumps into the same (and only) category.
Analysis
Which of the two approaches above (individual product level or major categories) for applying LCNRV do you think gives the financial statement reader better information?
Principles
Assume that during April, the net realizable value of commercial pumps rebounds to $1,050.
(a) Briefly describe how Englehart will report in its April financial statements the inventory remaining from March 31.
(b) Briefly describe the conceptual trade-offs inherent in the accounting in part (a).
