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Campbell's Soup Note 14 reports adjustments of inventories to LIFO basis (the LIFO reserve) are $89.6 million in Year 11 and $84.6 million in Year
Campbell's Soup Note 14 reports "adjustments of inventories to LIFO basis" (the LIFO reserve) are $89.6 million in Year 11 and $84.6 million in Year 10. To restate Year 11 LIFO inventories to a FIFO basis we use the following analytical entry (an analytical entry is an adjustment aid for purposes of accounting analysis): Inventories() ILLUSTRATION 4.2 Deferred Tax Payable) Retained Earnings 89.6 30.5 59.1 (4) Inventories increase by $89.6 to approximate current cost (note: a low turnover ratio can result in inventories of FIFO not reflecting current cost). Since inventories increase, a provision for taxes payable in the future is made, using a tax rate of 34% (from Note 9)- computed as $89.6 x 34%. The reason for tax deferral is this analytical entry reflects an accounting method different from that used for tax purposes. Higher ending inventories imply lower cost of goods sold and higher cumulative net income flowing into retained earnings (net of tax)-computed as $89.6 x (1-34%). Similarly, to adjust Year 10 LIFO inventories to FIFO, we use the following analytical entry: Inventories Deferred Tax Payable Retained Earnings 84.6 28.8. 55.8 Refer to the financial statements of Campbell Soup Company in Appendix A. Required: Campbell Soup EXERCISE 4-5 Restating Inventory from LIFO to FIFO 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.) 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. d. Explain why the FIFO inventory computation in c might be useful for analysis. CHECK (c) Year 11 FIFO Inventory, $796.3 mil
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