The following information is from the 2005 annual report of American Greetings Corporation (all dollars in thousands).

Feb. 28, Feb. 29, 2005 2004 Inventories Finished goods $228,088 S202 252 Work in process 19,719 30,047 Raw materials and supplies 50,957 69,526 298,764 311,825 Less: LIFO reserve 75,890 2S Total (as reported) $222,874 $238,612 Cost of goods sold $905,201 $912,705 Current assets (as reported) $1,281,639 $1,199,045 Current liabilities $487,667 $424,579 The following information comes from the notes to the company’s financial statements.

Finished products, work in process, and raw material inventories are carried at the lower-of-cost-or-market. The last-in, first-out (LIFO) cost method is used for approximately 65% of the domestic inventories in 2005 and approximately 50%

in 2004. The foreign subsidiaries principally use the first-in, first-out method.

Display material and factory supplies are carried at average cost.

Instructions

(a) Define each of the following: finished goods, work in process, and raw materials.

(b) The company experienced an increase in finished goods inventory and a decline in raw materials. Discuss the likely cause of this.

(c) What might be a possibie explanation for why the company uses FIFO for its nondomestic inventories?

(d) Calculate the company’s inventory turnover ratio and days in inventory for 2004 and 2005. (2003 inventory was $278,807.) Discuss the implications of any change in the ratios.

(e) What percentage of total inventory does the 2005 LIFO reserve represent? If the company used FIFO in 2005, what would be the value of its inventory? Do you consider this difference a “material” amount from the perspective of an analyst? Which value accurately represents the value of the company’s inventory?

(£) Calculate the company’s 2005 current ratio with the numbers as reported, then recalculate after adjusting for the LIFO reserve.

Broadening Your Perspective 311 FINANCIAL ANALYSIS ON THE WEB