Question

Robots, Inc. Robots, Inc. reported the following information regarding 2016–2017 inventory. Robots, Inc. 2017 2016 Current assets Cash \( 153,010 \) 538,489 Accounts receivable, net of allowance for doubtful accounts of \(46,000 in 2017 and \)160,000 in 2016 1,627,980 2,596,291 Inventories (Note 2) 1,340,494 1,734,873 Other current assets 123,388 90,592 Assets of discontinued operations — 32,815 Total current assets 3,244,872 4,993,060 Notes to Consolidated Financial Statements Note 1 (in part): Nature of Business and Significant Accounting Policies Inventories—Inventories are stated at the lower-of-cost-or-market. Cost is determined by the last-in, first-out (LIFO) method. Note 2: Inventories consist of the following. 2017 2016 Raw materials \(1,264,646 \)2,321,178 Work in process 240,988 171,222 Finished goods and display units 129,406 711,252 Total inventories 1,635,040 3,203,652 Less: Amount classified as long-term 294,546 1,468,779 Current portion \(1,340,494 \)1,734,873 Inventories are stated at the lower of cost determined by the LIFO method or market for Robots, Inc. If the FIFO method had been used for the entire consolidated group, inventories after an adjustment to the lower-of-cost-ormarket would have been approximately \(2,000,000 and \)3,800,000 at October 31, 2017 and 2016, respectively. Inventory has been written down to estimated net realizable value, and results of operations for 2017, 2016, and 2015 include a corresponding charge of approximately \(868,000, \)960,000, and \(273,000, respectively, which represents the excess of LIFO cost over market. Inventory of \)294,546 and \(1,468,779 at October 31, 2017 and 2016, respectively, shown on the balance sheet as a noncurrent asset represents that portion of the inventory that is not expected to be sold currently. Reduction in inventory quantities during the years ended October 31, 2017, 2016, and 2015 resulted in liquidation of LIFO inventory quantities carried at a lower cost prevailing in prior years as compared with the cost of fiscal 2014 purchases. The effect of these reductions was to decrease the net loss by approximately \)24,000, \(157,000, and \)90,000 at October 31, 2017, 2016, and 2015, respectively. Instructions (a) Comment on why Robots, Inc., might disclose how its LIFO inventories would be valued under FIFO. (b) Why does the LIFO liquidation reduce operating costs? (c) Comment on whether Robots, Inc. would report more or less income if it had been on a FIFO basis for all its inventory

Short answer

All the requirements are mentioned in the steps.

Step-by-step solution

Explanation of disclosures

(a) Informing about the inventory valuation per FIFO will help the stakeholders know the effect of the valuation on the net income and inventory, as it will be higher in this case.

Effect on operating costs

(b) Operating costs are reduced by the LIFO liquidation, as the inventories with low prices are tallied with the current year's revenue, which reduces the operating costs of the business.

Effect on Net income

The company will report a higher net income. In the case of FIFO, inventories purchased first are sold on priority. Hence, if prices are rising, the cost of goods sold will include inventories purchased at lower prices, increasing the company's net income.