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.
REPORTING AND ANALYZING INVENTORY
● Scan Study Objectives
● Read Feature Story
● Scan Preview
● Read Text and Answer p. 285 p. 291 p. 296 p. 298
● Work Using the Decision Toolkit
● Work Comprehensive p. 308
● Answer Self-Test Questions
● Complete Assignments
● Go to WileyPLUS for practice and tutorials
● Read A Look at IFRS p. 330
● the navigator
c06ReportingandAnalyzingInventory.qxd 8/14/10 2:23 PM Page 280
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)
INSIDE CHAPTER 6 . . .
at any one time. It also reduced by
an incredible 75% the time it takes
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