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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

 

Save-A-Lot):

 

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

 

percent.

 

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

 

inventory.

 

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

 

weeks)

 

Net sales

 

$ 17,529

 

$ 17,917

 

$ 17,252

 

Cost of sales

 

14,945

 

15,329

 

14,712

 

Gross profit

 

2,584

 

2,588

 

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

 

use?

 

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

 


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