Question

Mayfair Department Stores, Inc. operates over 30 retail stores in the Pacific Northwest. Prior to 2021, the company used the FIFO method to value its inventory. In 2021, Mayfair decided to switch to the dollar-value LIFO retail inventory method. One of your responsibilities as assistant controller is to prepare the disclosure note describing the change in method that that will be included in the company's 2021 financial statements. Kenneth Meier, the controller, provided the following information:

* Internally developed retail price indices are used to adjust for the effects of changing prices.
* If the change had not been made, cost of goods sold for the year would have been $22 million lower. The company's income tax rate is 40% and there were 100 million shares of common stock outstanding during 2021.
* The cumulative effect of the change in prior years' income is not determinable.
* The reasons for the change were (a) to provide a more consistent matching of merchandise costs with sales revenues, and (b) the new method provides a more comparable basis of accounting with competitors that also use the LIFO method.

REQUIRED:

Prepare a draft of the disclosure note that will be included in the 2021 financial statements for review by Meier.

Answer 1

Mayfair Department Stores, Inc. changed their inventory accounting method to the dollar-value LIFO retail inventory method in 2021 to better match costs with revenues and to align with competitors' practices. The change increased cost of goods sold by $22 million, and the effects on prior years are not determinable. The company has 100 million shares of common stock outstanding.

Step-by-step explanation:

Draft of Disclosure Note on Inventory Accounting Method Change

Mayfair Department Stores, Inc., which operates over 30 retail stores in the Pacific Northwest, has made a change in its inventory accounting method. Beginning in the year 2021, the company has adopted the dollar-value LIFO retail inventory method as opposed to the FIFO method used in previous years. This change has been reflected in the financial statements for 2021.

Several reasons prompted this change. Firstly, the new method is expected to provide a more consistent matching of merchandise costs with sales revenues. Secondly, it allows for a more comparable basis of accounting with competitors, many of whom also utilize the LIFO method. These reasons align with the company's goals of enhanced financial representation and comparability.

To account for the effects of changing prices, Mayfair has utilized internally developed retail price indices. It should be noted that had this change not been enacted, the cost of goods sold for the year would have been $22 million lower. Considering the company's income tax rate of 40%, this adjustment would impact after-tax income. However, the cumulative effect of the change on prior years' income is not determinable.

The company has 100 million shares of common stock outstanding during 2021, which should be factored in when considering the per-share impact of this accounting method change.

Answer 2

The draft disclosure note for Mayfair Department Stores, Inc. communicates the change in inventory accounting method from FIFO to dollar-value LIFO, the impact of this change on cost of goods sold, and the reasons behind the change.

Step-by-step explanation:

Disclosure Note Draft for Inventory Accounting Method Change

During the fiscal year ended 2021, Mayfair Department Stores, Inc., which operates over 30 retail stores in the Pacific Northwest, changed its inventory valuation method from FIFO (First-In, First-Out) to the dollar-value LIFO retail inventory method. This change has been enacted to align the company's inventory valuation method more closely with industry practices and to ensure a more consistent matching of merchandise costs with revenue. Our internally developed retail price indices are applied to mitigate the impacts of price fluctuations.

As a result of this change, the reported cost of goods sold for the year increased by $22 million. If the previous FIFO method had been used, the cost of goods sold would have been lower by this amount. Given the company's income tax rate of 40% and with 100 million shares of common stock outstanding during the year, the increase in cost of goods sold equates to an adjustment of approximately $0.22 per share before tax effects.

Note that the cumulative effect on income from previous years preceding this change cannot be accurately determined. The shift to the dollar-value LIFO retail inventory method is in part due to the company's continuous efforts for more reliable cost and revenue matching, and to ensure compatibly with competitors who also utilize the LIFO method for inventory accounting.