Prab Robots, Inc., reported the following information regarding 2011??2012 inventory. Instructions(a) Why might Prab Robots, Inc., use
Question:
Prab Robots, Inc., reported the following information regarding 2011??2012 inventory.
Instructions(a) Why might Prab Robots, Inc., use two different methods for valuing inventory?(b) Comment on why Prab Robots, Inc., might disclose how its LIFO inventories would be valuedunder FIFO.(c) Why does the LIFO liquidation reduce operating costs?(d) Comment on whether Prab would report more or less income if it had been on a FIFO basis for all itsinventory.
LiquidationLiquidation in finance and economics is the process of bringing a business to an end and distributing its assets to claimants. It is an event that usually occurs when a company is insolvent, meaning it cannot pay its obligations when they are due....
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Prab Robots, Inc. 2012 2011 Current assets Cash $ 153,010 $ 538,489 Accounts recelvable, net of allowance for doubtful accounts of $46,000 in 2012 and $160,000 in 2011 Inventories (Note 2) Other current assets 2,596,291 1,627,980 1,340,494 1,734,873 123,388 90,592 Assets of discontinued operations 32,615 3,244,872 4,993,060 Total current assets Notes to Consolidated Financial Statements Note 1 (in part): Nature of Business and Significant Accounting Policies Inventories– Inventories are stated at the lower-of-cost-or-market. Cost is determined by the last-in, first-out (LIFO) method by the parent company and by the first-in, first-out (FIFO) method by its subsidiaries. Note 2: Inventories Inventories consist of the following. 2012 $1,264,646 240,988 2011 Raw materials Work in process Finished goods and display units Total inventories Less: Amount classified as long-term $2,321,178 171,222 711,252 129,406 1,635,040 3,203,652 1,468,779 294,546 Current portion $1,340,494 $1,734,873 Inventories are stated at the lower of cost determined by the LIFO method or market for Prab Robots, Inc. In- ventories for the two wholly-owned subsidiaries, Prab Command, Inc. (U.S.) and Prab Limited (U.K.) are stated on the FIFO method which amounted to $566,000 at October 31, 2011. No inventory is stated on the FIFO method at October 31, 2012. Included in inventory stated at FIFO cost was $32,815 at October 31, 2011, of Prab Command inventory classified as an asset from discontinued operations (see Note 14). If the FIFO method had been used for the entire consolidated group, inventories after an adjustment to the lower-of-cost-or-market, would have been approximately $2,000,000 and $3,800,000 at October 31, 2012 and 2011, respectively. Inventory has been written down to estimated net realizable value, and results of operations for 2012, 2011, and 2010 include a corresponding charge of approximately $863,000, $960,000, and $273,000, respectively, which represents the excess of LIFO cost over market. Inventory of $294,546 and $1,468,779 at October 31, 2012 and 2011, respectively, shown on the balance sheet as a noncurrent asset represents that portion of the inventory that is not expected to be sold currently. Reduction in inventory quantities during the years ended October 31, 2012, 2011, and 2010 resulted in liquida- tion of LIFO inventory quantities carried at a lower cost prevailing in prior years as compared with the cost of fiscal 2009 purchases. The effect of these reductions was to decrease the net loss by approximately $24,000, $157,000 and $90,000 at October 31, 2012, 2011, and 2010, respectively.
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a Although no absolute rules can be stated preferability for LIFO can ordinarily be established if 1 selling prices and revenues have been increasing ...View the full answer
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