JUDY GENT$$INVENTORY

Judy Gent was a driven person who had a knack for numerical analysis, deductive reasoning, and quick insights. She also had a desire for maintaining as many career options as possible for as long as possible. Thus as a forward$-$looking young professional, she had both the CPA and CFA professional certifications in her sights$\mathrm{.}1$ The CPA exam, as well as Level $1$ of the CFA exam, was on her spring schedule, and she had begun her preparation with the resolute dedication that she was always able to muster when she saw hard work and accomplishment on the horizon. One of this week$$s topics slated for her review was the financial reporting of$,$ and the accounting choices available for, corporate inventories. For most people, she guessed the topic would not hold much attraction, but she knew there were some nuances and interesting aspects of the topic to be explored. It was $9$:$30$ a$.$m$.$ Saturday. She had already gone for a run, showered, eaten, walked the dog, and set out the materials for her review. She would tackle her review in five phases.

Phase One

During the week, Gent had assembled materials from her undergraduate days, various online exam study sites, and notes given to her by some of her slightly older friends who had already taken the exams. She had synthesized all of it$,$ and she wanted to succinctly and expertly answer some fundamental background questions pertaining to the topic of inventories in the first phase of study she had set up for herself. The initial questions for which she wanted to be sure she had the comprehensive answers:

$1.$ What is meant by the terms $$physical flow$$ and $$cost flow$$ of inventory materials? Does the financial reporting principle of matching dictate that they be the same? For a merchandising company such as Wal$-$Mart, what kinds of costs would be included in its cost flow focus? How about for a manufacturing company such as Ford Motor?

$2.$ As cost flow options, are LIFO, FIFO, and weighted average each available to U$.$S$.$ companies for financial reporting purposes?$2$ How do they differ and how are they similar? Are all three available for companies to use on their corporate tax returns? If not, which one$($s$)?$ Does a company have to choose one of the three for all of its different inventories, or could it choose one method for some inventory items and another method for other items?

$3.$ What do the terms $$periodic inventory system$$ and $$perpetual inventory system$$ mean, and do companies have a choice between the two systems?

$4.$ Conceptually, what is meant by the term $$LIFO reserve$?$

$5.$ What is the best way to explain $$LIFO liquidation$?$

$6.$ In a head$-$to$-$head financial comparison of LIFO to FIFO, and assuming inventory quantities for a hypothetical U$.$S$.$ manufacturer of a technology$-$based but nonspecialized product that had not declined during the year, are each of the following generally true or not, and why?

a$.$ Cost of goods sold for the income statement calculated under the LIFO method would be higher than under FIFO if$,$ during the year, the company had incurred ever$-$higher costs of production.

b$.$ FIFO presents ending inventory on the balance sheet as a function of the latest costs incurred for producing $($or buying$)$ inventory items still on hand.

c$.$ FIFO results in a higher ending inventory monetary figure on the balance sheet than LIFO if$,$ after several years of production costs holding steady, during the current year costs of production had declined.

d$.$ If$,$ over the foreseeable future, the company$$s cost of supplies, raw materials, and manufacturing labor are projected to increase, the company could reduce its tax bill, all other things equal, by adopting LIFO.

e$.$ The company$$s income statement will best reflect the matching of current costs to current revenues by the company adopting FIFO.

f$.$ If$,$ over the years, the cycle time for production is short $($e$.$g$.,$ days, not months$)$ and sales are continuous and inventory levels are lean, there would not be much difference between a FIFO$-$based and a LIFO$-$based ending inventory balance sheet figure and an income statement cost of goods sold figure for the company.