1. Three important pieces of inventory information are (a) the cost of inventory on hand, (b) the cost of sales, and (c) the cost of inventory purchases. Identify or compute each of these items for Under Armour, Inc., at December 31, 2014. Assume “food and paper” are cost of goods sold.
2. Which item in requirement 1 is most directly related to cash flow? Why? (Challenge)
3. Assume that all inventory purchases were made on account and that only inventory purchases increased Accounts Payable and Other Current Liabilities. Compute Under Armour, Inc.’s cash payments for inventory during 2014.
4. How does Under Armour, Inc., value its inventories? Which costing method does Under Armour use?
5. Did Under Armour, Inc.’s gross profit percentage and rate of inventory turnover improve or deteriorate in 2014 (versus 2013)? Consider the overall effect of these two ratios. Did Under Armour, Inc., improve during 2014? How did these factors affect the net income for 2014? Under Armour, Inc.’s inventories totaled $319 million at the end of fiscal 2012. Round decimals to three places.
Note: Spreadsheet detailing calculations embedded below.
Cost of goods sold (millions) = $1,572
Less: Beginning inventory (millions) = ($469)
Add: Ending inventory (millions) = $537
Cost of inventory (millions) = $1,640
Cost of inventory purchases.
Beginning accounts payable (millions) = $165
Add: Cost of inventory (inventory purchases) (millions) = $1,640
Less: Ending account payable (millions) = ($210)
Cash payments for inventory (millions) = $1,595
Under Armour values inventories using Lower-of-Cost-or-Market Value.
Under Armour FIFO to compute cost of inventory.
Stated in Appendix B, Under Armour, Inc. 2014 Annual Report – page 860, Note 2 (Summary of Significant Accounting Policies) under Inventories.
2014 Gross profit percentage = 49.03%
2013 Gross profit percentage = 48.76%
Gross profit from 2013 to 2014 improved.
2014 Inventory turnover ratio = 3.125
2013 Inventory turnover ratio = 3.033
The inventory turnover ratio from 2013 to 2014 improved.
Both gross profit and inventory turnover improved from 2013 to 2014.
Gross profit percentages and increase in gross profits suggest increasing efficiency and value and healthy business which is avoiding commoditization.
The higher inventory ratio shows that Under Armour is moving more inventory faster indicating increasing sales.
Note: Spreadsheet detailing calculations