Question

Analysis of Inventory Disclosure

Foot Locker, Inc. is a specialty athletic retailer that operates approximately 3,220 stores in 27 countries in North America, Europe, Asia, Australia, and New Zealand. Through its Foot Locker, Kids Foot Locker, Lay Foot Locker, Champs Sports, Footaction, Runner Point, Sidestep, and SIX:02 retail stores, as well as its direct-to-customer channels, including Eastbya.com, the Company is a leading provider of athletic footwear and apparel.

We selected disclosures related to Foot Locker Company’s’ inventory for the fiscal year ended January 28, 2017 (see numbers below) . Use these disclosures to answer the following questions:

a. What percentage of inventory at the end of 2016 is accounted for under each cost-flow assumption that Foot Locker uses?

b. Why would Foot Locker use LIFO for domestic U.S. inventories but FIFO for international inventories?

c. How does Foot Locker apply the retail inventory method?

d. What types of costs are included in the cost of sales?

e. Why does Foot Locker not report a LIFO reserve?

f. What is Foot Locker’s gross profit percentage in 2014, 2015 and 2016?

g. What is Foot Locker’s inventory turnover ratio and days inventory on hand in 2016?

Sales (in millions) $7,766 (2016), 7,412 (2015), 7,151 (2014)

Cost of Sales (in millions) $5,130 (2016), $4,907 (2015), $4,777 (2014)

LIFO Inventories (in millions) $861 (2016), $847 (2015)

FIFO Inventories (in millions) $446 (2016) , $438 (2015)

Total Merchandise Inventories $1,307 (2016) , $,1,285 (2015)

From Financial Statement Notes: NOTE 1: Summary of Significant Accounting Policies (excerpt) Merchandise Inventories and Cost of Sales Merchandise inventories for the Company's Athletic Stores are valued at the lower of cost or market using the retail inventory method. Cost for retail stores is determined on the last-in, first-out ("LIFO") basis for domestic inventories and on the first-in, first-out ("FIFO") basis for international inventories. Merchandise inventories of the Direct-to-Customers business are valued at the lower of cost or market using weighted-average cost, which approximates FIFO. The retail inventory method is common ly used by retail companies to value inventories at cost and calculate gross margins due to its practicality. Under the retail inventory method, cost is determined by applying a cost-to-retail percentage across groupings of similar items, known as departments. The cost- to-retail percentage is applied to ending inventory at its current owned retail valuation to determine the cost of ending inventory on a department basis. The Company provides reserves based on current sell- ing prices when the inventory has not been marked down to market. Transportation, distribution center, and sourcing costs are capitalized in merchandise inventories. The Company expenses the freight associated with transfers between its store locations in the period incurred. The Company maintains an accrual for shrinkage based on historical rates Cost of sales is composed of the cost of merchandise, as well as occupancy, buyers' compensation, and shipping and handling costs. The cost of merchandise is recorded net of amounts received from suppliers for damaged product returns, markdown allowances, and volume rebates, as well as coop- erative advertising reimbursements received in excess of specific, incremental advertising expenses Occupancy includes the amortization of amounts received from landlords for tenant improvements

Answer 1

Ans a

Foot lockers merchandise inventory in 2016 is as under:

Amount % share

LIFO inventories (in $ million) 861 65.88 (861/1307x100)

FiIFO inventories (in $ million) 446 34.12 (446/1307x100)

Total 1307

Therefore the percentage of inventory under LIFO is 65.88% and FIFO is 34.12%

Ans b.

Domestic inventories are valued at LIFO and international inventories are valued at FIFO. These method are used by retail companies for practicality purposes. LIFO is used in domestic inventories to ensure that better matching is done with sales and costs are allocated to cost of goods sold. This is also done as goods sold in local market generally receive latest products which need to be valued at current prices whereas generally products sold in international locations take some time before they are sold due to more transportation and also allied costs which needs to be allocated thereon. FIFO is preferred by retail companies.

Ans c,

Under the retail method of accounting, cost is determined by applying cost to retail percentage across groupings of similar items or departments.The cost to retail percentage is applied to closing inventory at current retail valuation to determine the cost at department basis. The company also provides for reserves where inventory is not market down to market.

Ans d.

Cost of sales include the following: merchandise cost, occupancy cost, buyers compensation and shipping and handling costs. Cost of merchandise is adjusted for amounts received from suppliers for damaged product returns, markdown allowances and volume rebates, cooperative advertising reimbursements received in excess or incremental advertisement expenses.

Ans e

The company has not reported any LIFO reserves as the inventory has been suitably adjusted for cost or market which ever is lower. A reserve is created when the inventory value is not re-aligned based on current market prices. In the instant case no such case is there.