1. The company uses lower of cost or market to account for its inventory. At the
ID: 2458500 • Letter: 1
Question
1. The company uses lower of cost or market to account for its inventory. At the end of the year, do you expect the company to write its
2. What method does the company use to determine the cost of its inventory?
Where did you find this information?
3. If the company overstated ending inventory by $10 million for the year ended January 31, 2012, what would be
4. Compute the inventory turnover ratio for the current year.
Fiscal Year Ended
Cost of Goods Sold /
Average Inventory
= Inventory Turnover
1/31/2012
What does an inventory turnover ratio tell you?
4. Compute the inventory turnover ratio for the current year.
Fiscal Year Ended
Cost of Goods Sold /
Average Inventory
= Inventory Turnover
1/31/2012
What does an inventory turnover ratio tell you?
The accompanying notes are an integral part of these consolidated financial statements URBAN OUTFITTERS, INC. Consolidated Statements of Income (in thousands, except share and per share data) Fiscal Year Ended January 31 2011 2012 2010 Net sales Cost of sales, including certain buying, distribution and S 2,473,801 2,274,102 S 1,937,815 1,613,265 860,536 575,811 284,725 5,120 553 1,337,482 936,620 522,417 414,203 4,669 486 1,151,670 786,145 447,161 338,984 6,290 463 (1,331) 344,406 124,513 S 219,893 cy costs Gross profit Selling, general and administrative expenses Income from operations Interest income Other income Other expenses (2,150) Income before income taxes Net income Basic 288,831 103,580 $185,251 417,208 144,250 S 272,958 Income tax expense Net income per common share 1.20 1.19 1.64 1.60 1.31 1.28 Diluted Weighted average common shares outstanding Basic Diluted 154,025,589 156,191,289 166,896,322 170,333,550 168,053,502 171,230,245Explanation / Answer
Answer:1 Given the general trend of little or no inflation every year, it would be unlikely that the replacement cost of Urban Outfitters’ inventory would be lower than its current book value. And, unless a severe market downturn (or extreme change in fashion) took place, it would be unlikely that the net realizable value of the company’s current season inventory would drop below its original cost. Since the end of the year coincides with the end of the selling season for winter clothes, only these remaining goods are likely to have a net realizable value below original cost. Therefore, it is likely that only these items would require a writedown at the end of the year, because the company’s book value for other inventory items will be lower than both replacement cost and net realizable value.
Answer:2 First-in, first-out method does the company use to determine the cost of its inventory.
Where did you find this information?
Notes to the Consolidated Financial Statements. Summary of Significant Accounting Policies. Inventories subsection
Answer:3 If the company had overstated its ending inventory by $10 million, its income before income taxes would be overstated by $10 million.. Recall that ending inventory reduces cost of goods sold, which is an expense. Therefore, cost of goods sold would be $10 million lower and income before income taxes would be $10 million higher (i.e., $298,831,000 reported instead of the correct amount of $288,831,000).
Answer:4
Urban Outfitters
Inventory
=
Cost of Goods Sold
$1,613,265
=
6.73
Turnover
Average Inventory
239,817*
* (250,073 + $229,561) / 2
It indicates how many times the average inventory was purchased and sold during the year.
American Eagle Outfitters
Urban Outfitters
Inventory
=
Cost of Goods Sold
$2,031,477
=
5.98
$1,613,265
=
6.73
Turnover
Average Inventory
339,817*
239,817**
*(301,208 + $378,426) / 2
** (250,073 + $229,561) / 2
Urban Outfitters has a higher inventory turnover ratio than American Eagle Outfitters. This higher ratio implies that Urban Outfitters was more successful than American Eagle in moving inventory quickly through the purchasing and sales processes to the ultimate customer.
Industry Average
American Eagle Outfitters
Urban Outfitters
4.92
5.98
6.73
Both American Eagle Outfitters and Urban Outfitters have a higher inventory turnover than the industry average. That means that they are doing a better job at managing inventory levels, and moving inventory quickly through the purchasing and sales processes to the ultimate customer.
Urban Outfitters
Inventory
=
Cost of Goods Sold
$1,613,265
=
6.73
Turnover
Average Inventory
239,817*
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