Question: Suppose the following information is from the 2017 annual report of American Greetings Corporation (all dollars in thousands)
The notes to the company's financial statements also include the following information.
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 75% of the domestic inventories in 2017 and approximately 70% in 2016. The foreign subsidiaries principally use the first-in,
first-out (FIFO) 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) What might be a possible explanation for why the company uses FIFO for its nondomestic inventories?
(c) Calculate the company's inventory turnover and days in inventory for 2016 and 2017. (2015 inventory was $182,618.) Discuss the implications of any change in the ratios.
(d) What percentage of total inventory does the 2017 LIFO reserve represent? If the company used FIFO in 2017, 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?
(e) Calculate the company's 2017 current ratio with the numbers as reported, then recalculate after adjusting for the LIFO reserve.