Introduction
The objective of this paper is to reply to questions pertaining to the two cases on financial statement analysis.
In this case, Robots, Inc. uses LIFO method of valuing inventory and its subsidiaries use FIFO method. There are no established or general rules, but firms usually prefer LIFO method of valuing in circumstances. First, the selling price of the goods and total revenues of the firm show an upward trend, but costs move downward. In such cases, near term profits are blown up so much that it gives an unrealistic picture. Second, the decision of using LIFO may be based on the fact that LIFO has been traditionally used in this industry. FIFO method is usually preferred in situations where selling pricing is trailing and costs are increasing, where specific isolation is easy and traditionally used like sale of diamond jewellery and unit cost of production decreases with scale of operation. There are cases where choice of valuation method does not make much difference in accounting, like businesses that have high inventory movement.
In this case, it is difficult to ascertain the exact reason of use of different valuation methods. But, surely, the firm will be benefiting from use of LIFO in on form of inventory and FIFO in another form of inventory.
Question (b): Comment on why Robots, Inc. might disclose how its LIFO inventories would be valued under FIFO.
The firm is not mandated to disclose how its LIFO inventories would be valued under FIFO. However, if the firm decides to do so, it would be because the firm believes that the value of its inventory and income would be greater if it used FIFO method.
Question (c): Why does LIFO liquidation reduce operating costs?
In LIFO method of liquidation, the high-cost inventory is subtracted from the sales revenue. So, the remaining inventory is of comparatively lower cost, corresponding to the current revenue.
Question (d): Comment on whether Robots, Inc., would report more or less income if it had been on a FIFO basis for all its inventory.
Robots, Inc. would have reported higher income if it had used FIFO method of inventory valuation. For instance, if FIFO method was used the firm’s total inventory would have been $364, 960 more, as per the following calculation.
Total Inventory under LIFO method - $1,635,040
Total Inventory if FIFO was used - $2,000,000
Difference - $ 364,960
But, decrease in operating cost would not have taken place due to LIFO liquidation if FIFO method was used from beginning. This reduction was valued at $24,000 in 2014.
Question 1: Why do you think that there are no finished goods inventories? Why do you think the raw material, ore in stockpile, is to be considered as non-current asset?
Gold is a current asset with high liquidity. Unlike, a mobile handset or fashion apparel, gold can be sold instantly in the market. So, there is high probability that all gold was sold immediately after processing, and nothing was left stored. Ore in the stock pile should be considered as non-current asset because its processing time extends beyond a year. So, unlike current assets, the asset is not liquid enough to be converted into cash within a year.
Question 2: Consider that Barrack has no finished goods inventories. What journal entries are made to record a sale?
If Barrack Gold Corporation has no finished goods inventory, the journal entries for recording a sale will be as follows:
Question 3: 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 the process inventory. How would this error affect the following?
