The financial statements for the fiscal year ending Jan 31, 2012 for urban outfi

Question

The financial statements for the fiscal year ending Jan 31, 2012 for urban outfitters can be found online. It can be googled.

CP7-2 Finding Financial Information LO7-2, 7-4, 7-5, 7-7 Refer to the financial statements of Urban Outfitters given in Appendix C at the end of this book. Required: 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 inventory down to replacement cost or net realizable value? Explain your answer. 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 the corrected value for Income before Income Taxes? 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?

Explanation / Answer

1.According to 10-K filed on 4/2/12, the company says that its majority of the inventory consist of finished goods. And add on that unfinished goods and work-in-process were not material to the overall

Net inventory value. The company in the same paragraph also says they reduce their inventory to Net Realizable value at the end of the fiscal year.

Note: Refer to page 27 of 10-K

2. The company uses Lower of cost or Market to value their inventory. This information is available in the same paragraph as mentioned above.

3. If the company overstated inventory by $10 mm, then its COGS (Cost ­of goods sold) is reduced by $10mm implies gross profit increased by $10mm which would result increase of income before taxes by $10mm.

Now company corrected its overstated inventory, all the transactions mentioned above are reversed and income before income taxes will be decreased by $10mm. Correct value would be 288,831,000 – 10,000,000 = $ 278,831,000

4. Inventory Turnover Ratio = Cost of Goods sold / Average inventory

Average Inventory = (250,073 + 229,561) / 2 = 239,817

Inventory Turnover Ratio = 1,613,265 / 239,817 = 6.73

Let’s calculate inventory turnover days which is a better measure

Inventory turnover days = 365 / Inventory Turnover Ratio = 365 / 6.73 = 54.26 days

This means company is selling all its inventories in a little over 54 days. All old inventory is replaced by new inventory 6.73 times in FY 2012.

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