High Liner Foods Incorporated, which is headquartered in Lunenburg, Nova Scotia, operates in the North American packaged foods industry. The company’s brands include High Liner, Fisher Boy, FPI, Sea Cuisine, Mirabel, and Royal Sea. The company also manufactures products for private labels. The information in Exhibits 7.26A to 7.26D was taken from the company’s 2016 annual report.

EXHIBIT 7.26A High Liner Foods Incorporated’s 2016 Consolidated Statement of Financial Position

HIGH LINER FOODS INCORPORATED
Consolidated Statement of Financial Position
(in thousands of United States dollars)

EXHIBIT 7.26B High Liner Foods Incorporated’s 2016 Consolidated Statement of Income

HIGH LINER FOODS INCORPORATED 

Consolidated Statement of Income 

(in thousands of United States dollars, except per share amounts)

EXHIBIT 7.26C Excerpt from Notes to High Liner Foods Incorporated’s 2016 Financial Statements

HIGH LINER FOODS INCORPORATED

Excerpt from to Financial Statements

(f) Inventories

Inventories are measured at the lower of cost and net realizable value. The cost of manufactured inventories is based on the first-in first-out method. The cost of procured finished goods and unprocessed raw material inventory is based on weighted average cost. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. The cost of inventories includes expenditures incurred in acquiring the inventories, production or conversion costs, and other costs incurred in bringing the inventories to their existing location and condition. In the case of manufactured inventories and semi-finished materials, cost includes an appropriate share of production overheads based on normal operating capacity. Cost may also include transfers from OCI of any gain or loss on qualifying cash flow hedges of foreign currency related to purchases of inventories.

EXHIBIT 7.26D Excerpt from Notes to High Liner Foods Incorporated’s 2016 Financial Statements

HIGH LINER FOODS INCORPORATED

Excerpt from to Financial Statements

Note 7. Inventories

Total inventories at the lower of cost and net realizable value on the statement of financial position comprise the following:

During 2016, $753.2 million (2015: $799.8 million) was recognized as an expense for inventories in cost of sales on the consolidated statement of income. Of this, $4.4 million (2015: $4.9 million) was written-down during the year and included a reversal for unused impairment reserves of $0.5 million (2015: $0.8 million). As of December 31, 2016, the value of inventory subject to a reserve was $11.1 million (January 2, 2016: $13.9 million). As of December 31, 2016, the value of inventory pledged as collateral for the Company’s working capital facility (see Note 10) was $117.4 million (January 2, 2016: $125.3 million).

Required

a. Note 7 (Exhibit 7.26D) breaks down High Liner’s inventory into two classifications. Which classifications of inventory do you believe should be used in determining the inventory turnover ratio? Why?

b. Describe High Liner’s inventory valuation policies in your own words. Specifically, explain what High Liner includes in inventory cost, what cost formula(s) the company uses, and how it values its inventory on the statement of financial position.

c. Does High Liner use the same cost formula for all of its inventories? If not, explain what methods are used for which inventories and why this might be the case.

d. Calculate the inventory turnover ratio and days to sell inventory ratio for both periods. Use the yearend inventory balances instead of the average inventory amounts.

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December 31, January 2, Notes 2016 2016 ASSETS Current $ 18,252 $ 1,043 Cash Accounts receivable 75,190 76,335 6. Income taxes receivable 3,783 5,218 Other financial assets 22 1,705 6,453 Inventories 252,118 261,771 Prepaid expenses Total current assets 3,340 2,051 354,388 352,871 Non-current Property, plant and equipment 111,322 115,879 Deferred income taxes 2,495 17 2,290 Other receivables and miscellaneous assets 22 864 1,683 Intangible assets Goodwill Total non-current assets 97,176 102,315 117,824 340,196 118,101 329,753 Total assets $684,141 $693,067 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities $ 621 S 17,158 Bank loans 10 Accounts payable and accrued liabilities 120,336 11 135,272 Provisions 12 386 263 Other current financial liabilities 22 1,626 817 Other current liabilities 416 Income taxes payable Current portion of long-term debt Current portion of finance lease obligations Total current liabilities 851 2,242 13 11,816 13 721 1,015 139,893 153,647 Non-current liabilities Long-term debt 13 266,327 281,017 Other long-term financial liabilities Other long-term liabilities Long-term finance lease obligations Deferred income taxes 22 196 89 888 483 13 702 715 45,183 46,966 17 Future employee benefits Total non-current liabilities 8,190 14 9,631 321,486 338,901 Total liabilities 461,379 492,548 Shareholders' equity Common shares 15 86,094 85,282 Contributed surplus Retained earnings Accumulated other comprehensive loss Total shareholders' equity 14,654 13,999 125,843 146,340 (24,326) (24,605) 222,762 200,519 Total liabilities and shareholders' equity $684,141 $693,067 Fifty-two weeks ended December 31, January 2, Notes 2016 2016 Revenues $ 956,016 $ 1,001,507 Cost of sales 753,179 799,843 Gross profit Distribution expenses 202,837 201,664 43,610 48,037 Selling, general and administrative expenses Impairment of property, plant and equipment Business acquisition, integration and other expenses Results from operating activities Finance costs Income before income taxes 96,978 93,597 2,327 4,787 7,473 55,135 52,557 25 14,296 16,247 40,839 36,310 Income taxes Current 8,737 (848) 17 5,707 Deferred 17 1,022 Total income tax expense Net income 7,889 6,729 29,581 32,950 Earnings per common share Basic 18 1.07 0.96 Diluted 18 1.06 0.95 Weighted average number of shares outstanding Basic 18 30,917,412 30,818,804 Diluted 18 31,174,788 31,264,671