A Large Manufacturer Recently Changed Its Cost-Flow Assumption Method for Inventories

question 45

Essay

A large manufacturer recently changed its cost-flow assumption method for inventories at the beginning of 2012. The manufacturer has been in operation for almost 40 years, and for the last decade, it has reported moderate growth in revenues. The firm changed from the LIFO method to the FIFO method and reported the following information:
$\begin{array}{|l|l|l|}\hline \text { December 31: (amounts in millions) } & 2011 & 2012 \\\hline \text { Inventories at FIFO cost } & \$ 388.1 & \$ 419.7 \\\hline \text { Excess of FIFO cost over LIFO cost } & (229.0) & (210.4) \\\hline \text { Cost of goods sold(FIFO) } & & \$ 2,050.8 \\\hline \text { Cost of goods sold(LIFO) } & & \$ 2,417.1 \\\hline\end{array}$
Calculate the inventory turnover ratio for 2012 using the LIFO and FIFO cost-flow assumption methods. Explain why the costs assigned to inventory under LIFO at the end of 2011 and 2012 are so much less than they are under FIFO.

---

Definitions:

State Law

Legislation enacted by individual states that governs within the state's boundaries, as opposed to federal law which governs at the national level.

Franchise Relationships

Legal and commercial bonds formed between a franchisor and franchisee, where the franchisor licenses its trade name and operations model to the franchisee.

Federal Trade Commission's Franchise Rule

A regulation established by the FTC that requires franchisors to provide all potential franchisees with a disclosure document containing important information about the franchise.

Material Facts

Important information that could influence decisions or outcomes in legal, financial, or other professional contexts.