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 Two

Gent felt pretty confident about the accurate way she had been able to address the foregoing conceptual questions she had teed up for herself. She was ready to move on$.$ From her collection of materials, she pulled out a set of actual annual report excerpts pertaining to the inventory of Custom Manufacturing Inc. that her friend Kirk had given her $($Exhibit $1).$ As she looked at the annual report information, several questions popped into her head. She felt driven to answer them in as complete and coherent a manner as possible. Specifically, she wondered:

$1.$ What would the balance sheet inventory amounts have been as of September $30,2013$ and $2012,$ if all inventories had been reported on a FIFO basis?

$2.$ What criteria might Custom Manufacturing have used to decide that LIFO would be adopted for certain inventory categories while FIFO would be applied to others?

$3.$ What is the meaning and significance of the liquidations mentioned in Custom Manufacturing$$s inventory footnote?

$4.$ If Custom Manufacturing had always used FIFO for all inventories, what difference would it have made in the $2013$ income statement, $2013$ balance sheet, and $2013$ cash flow statement? In pondering that intriguing question, Gent realized she had to assume an income tax rate$$she chose to use $30\%$and she also assumed all tax effects immediately affected cash $($i$.$e$.,$ taxes payable were not affected$).$