Describe the LIFO reserve

Describe the LIFO reserve

should be able to:

1 Describe the steps in determining inventory quantities.

2 Explain the basis of accounting for inventories and apply the inventory cost flow methods under a periodic inventory system.

3 Explain the financial statement and tax effects of each of the inventory cost flow assumptions.

4 Explain the lower-of-cost-or-market basis of accounting for inventories.

5 Compute and interpret the inventory turnover ratio.

6 Describe the LIFO reserve and explain its importance for comparing results of different companies.





● Scan Study Objectives

● Read Feature Story

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● Read Text and Answer p. 285 p. 291 p. 296 p. 298

● Work Using the Decision Toolkit

Review Summary of Study Objectives

● Work Comprehensive p. 308

● Answer Self-Test Questions

● Complete Assignments

● Go to WileyPLUS for practice and tutorials

● Read A Look at IFRS p. 330

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c06ReportingandAnalyzingInventory.qxd 8/14/10 2:23 PM Page 280

feature story


Let’s talk inventory—big, bulldozer-size inventory.

Caterpillar Inc. is the world’s largest manufacturer of

construction and mining equipment, diesel and natu-

ral gas engines, and industrial gas turbines. It sells its

products in over 200 countries, making it one of the

most successful U.S. exporters. More than 70% of its

productive assets are located domestically, and nearly

50% of its sales are foreign.

During the 1980s, Caterpillar’s

profitability suffered, but today it is

very successful. A big part of this

turnaround can be attributed to ef-

fective management of its inventory.

Imagine what a bulldozer costs. Now imagine what it

costs Caterpillar to have too many bulldozers sitting

around in inventory—a situation the company definitely

wants to avoid. Conversely, Caterpillar must make sure

it has enough inventory to meet demand.

At one time during a 7-year period, Caterpillar’s

sales increased by 100%, while its inventory increased

by only 50%. To achieve this dramatic reduction in the

amount of resources tied up in inventory, while contin-

uing to meet customers’ needs, Caterpillar used a

two-pronged approach. First, it completed a factory

modernization program, which dramatically increased

its production efficiency. The program reduced by

60% the amount of inventory the company processed

● A Big Hiccup (p. 283) ● Falsifying Inventory to Boost Income (p. 284) ● Is LIFO Fair? (p. 294) ● Improving Inventory Control with RFID (p. 298)


at any one time. It also reduced by

an incredible 75% the time it takes

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