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(solution) please help. I do not know how to analyze this question

please help. I do not know how to analyze this question

Taken from the 2016 annual report of SUPERVALU (a large grocery chain, which also owns




Inventories, Net


Inventories are valued at the lower of cost or market. Substantially all of the Company?s


inventory consists of finished goods. Inventories are recorded net of vendor allowances and


cash discounts. The Company evaluates inventory shortages (shrink) throughout each fiscal


year based on actual physical counts in its facilities. Allowances for inventory shortages are


recorded based on the results of these counts to provide for estimated shortages as of the


end of each fiscal year.


To value discrete inventory items at lower of cost or market before application of any last-in,


first-out (?LIFO?) reserve, the Company uses the weighted average cost method, the retail


inventory method (?RIM?) or replacement cost method. Inventories were valued at the


lower of cost or market under the following methods as of February 27, 2016: weighted


average cost method, 56 percent; replacement cost method, 22 percent; and RIM, 22




The replacement cost approach under the FIFO method is predominantly utilized in


determining the value of high turnover perishable items, including produce, deli, bakery,


meat and floral. Under the replacement cost method applied on a LIFO basis, the most


recent purchase cost is used to calculate the current cost of inventory before application of


any LIFO reserve. The replacement cost approach results in inventories valued at the lower


of cost or market because of the high inventory turnover and the resulting low inventory


days supply on hand combined with infrequent vendor price changes for these items of




RIM is used in valuing retail inventories. Under this method, the valuation of inventories is


at cost and the resulting gross margins are calculated by applying a calculated cost-to-retail


ratio to the retail value of inventories. RIM is an averaging method that has been widely


used in the retail industry. Inherent in the RIM calculations are certain significant


management judgments and estimates, including inventory shortages and cost-to-retail


ratios, which impact the ending inventory valuation at cost, as well as the resulting gross


margins. Management consistently applies its application of RIM valuations by product


category and believes that the Company?s RIM provides an inventory valuation that


reasonably approximates cost. For fiscal 2016, a 1 percent change in the cost-to-retail ratios


used to value inventories would impact Gross profit by less than 10 basis points.


As of February 27, 2016 and February 28, 2015, approximately 57 percent and 55 percent,


respectively, of the Company?s inventories were valued under the LIFO method. During fiscal


2015 and 2014, inventory quantities in certain LIFO layers were reduced. These reductions


resulted in a liquidation of LIFO inventory quantities carried at lower costs prevailing in


prior years as compared with the cost of fiscal 2015 and 2014 purchases. As a result, Cost of


sales decreased by $1 and $14 in fiscal 2015 and 2014, respectively. If the FIFO method had


been used to determine cost of inventories for which the LIFO method is used, the


Company?s inventories would have been higher by approximately $215 and $211 as of


February 27, 2016 and February 28, 2015, respectively. SUPERVALU INC. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS


(In millions, except per share data)


Fiscal Years Ended


February 27, 2016 (52 weeks) February 28, 2015 (53 weeks) February 22, 2014 (52




Net sales


$ 17,529


$ 17,917


$ 17,252


Cost of sales








Gross profit






2,540 3a. If SUPERVALU had used FIFO for all of its LIFO inventories, what would its cost of


goods sold have been for 2016? And the impact on gross profit?


3b. If SUPERVALU had a tax rate of 35%, by how much and in what directions would its


income tax bill have changed?


3c. Why does SUPERVALU use FIFO at all? What other method does SUPERVALU




3d. What caused LIFO Liquidation in 2014 and 2015?


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Sep 13, 2020





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