The following information is from the 2007 annual report of American Greetings Corporation (all dollars in thousands).
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Feb. 28, |
Feb. 28, |
|
|
Inventories |
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Finished goods |
$207,676 |
$235,657 |
|
Work in process |
11,315 |
15,399 |
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Raw materials and supplies |
42,772 |
41,456 |
|
261,763 |
292,512 |
|
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Less: LIFO reserve |
79,145 |
79,403 |
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Total (as reported) |
$182,618 |
$213,109 |
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Cost of goods sold |
$826,791 |
$846,958 |
|
Current assets (as reported) |
$799,281 |
$1,165,845 |
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Current liabilities |
$373,000 |
$559,082 |
The following information comes from the notes to the company’s financial statements. Finished products, work in process, and raw material inventories are carried at the lower of cost or market. The last in, first out (LIFO) cost method is used for approximately 65% of the domestic inventories in 2007 and approximately 55% in 2006. The foreign subsidiaries principally use the first in, first out method. Display material and factory supplies are carried at average cost.
Instructions
(a) Define each of the following: finished goods, work in process, and raw materials.
(b) What might be a possible explanation for why the company uses FIFO for its nondomestic inventories?
(c) Calculate the company’s inventory turnover ratio and days in inventory for 2006 and 2007. (2005 inventory was $218,711.) Discuss the implications of any change in the ratios.
(d) What percentage of total inventory does the 2007 LIFO reserve represent? If the company used FIFO in 2007, what would be the value of its inventory? Do you consider this difference a “material” amount from the perspective of an analyst? Which value accurately represents the value of the company’s inventory?
(e) Calculate the company’s 2007 current ratio with the numbers as reported, then recalculate after adjusting for the LIFO reserve.