6.5 Presentation and Analysis of Inventory

Question 1

what is NRV

Answer 1

net realizable value: the future economic benefit a company will recieve when selling an item of inventory

selling price-cost

Question 2

why do we care about NRV

Answer 2

because even tho companies want to sell goods at a higher price than their cost, we have to be realistic in ho wmuch money the good can be sold for

Question 3

if NRV is lower than the cost
(Cost>nrv)

Answer 3

company must adjust the inventory account balance to the NRV

this is the lower of cost and nrv rule

Question 4

what is the lcnrv rule

Answer 4

lower cost of nrv rule is that if nrv is lower than the cost of a good, we must adjust inventory to the nrv

Question 5

when do companies apply the lcnrv rule?

Answer 5

at the end of each accounting period

Question 6

if NRV is higher than cost?

Answer 6

do nothing!!!! because if u increase it then you are violating the concept of reporting at lcnrv!!

Question 7

how to apply the lcnrv rule

Answer 7

1) determine the cost for each type of inventory (specific id, fifo, or avg cost)
2) determine nrv of each inventory type
3) compare nrv of each inventory type to its cost (determine if cost >nrv)
4) if cost > nrv, ADJUSTING ENTRY!!
(COGS DR, AND INVENTORY CR) (similar to the shrinkage je)

Question 8

what balance of inventory do you report to the sofp?

Answer 8

sum of lcnrvs

Question 9

what do ifrs and aspe require companies to disclose in fs/ notes to fs

Answer 9

the total (carrying) amount of inventory in the current assets section of the statement of financial position;

the cost of goods sold;

the cost formula(s) used (specific identification, FIFO, or average cost);

the amount of any writedown to net realizable value or reversals of previous writedowns, including the reason why the writedown was reversed;

andthe amount of any inventory pledged as security.

Question 10

what is inventory turnover ratio

Answer 10

measure the number of times, on avg, that it sells inventory during the period

cogs for the period/average inventory

cogs for the period=
avg inventory= (begin inv + end inv )/2

Question 11

days in inventory ratio

Answer 11

365 days/inventory turnover

this tells u inventory turnover daily!!! this measures the average age of the inventory or avg number of days it takes to sell inventory on hand

Question 12

higher or lower value better for inventory turnover?

Answer 12

higher

extremely high is bad= shortages

Question 13

higher or lower value better for idays in invetory?

Answer 13

lower!! sellig inventory quikly

extremely low is bad= shortage

Question 14

how do you measure inventory turnover units?

Answer 14

times

Question 15

how do you measure days in inventory units

Answer 15

days

Question 16

what types of ratios are inventory turnover and days in inventory

Answer 16

liquidity ratios along with current ratio

Question 17

Inventory is a significant component of the current ratio, and a high level of inventory will result in a high current ratio. However, if inventory is not turning over very quickly, this will result in an “artificially” high current ratio that is not indicative of high liquidity. Consequently, we can never interpret the current ratio unless we look more closely at the nature of its components, such as inventory, and assess its turnover(

Answer 17

Inventory is a significant component of the current ratio, and a high level of inventory will result in a high current ratio. However, if inventory is not turning over very quickly, this will result in an “artificially” high current ratio that is not indicative of high liquidity. Consequently, we can never interpret the current ratio unless we look more closely at the nature of its components, such as inventory, and assess its turnover(

Question 18

Many companies have moved to streamline their supply chain operations, which include purchasing inventory and transporting it to a desired destination. One way of managing inventory on hand is to use a just-in-time approach. This means that a company avoids ordering large quantities of an inventory item, particularly one that is not in high demand, because ordering large quantities increases the time that the company will hold this inventory. This leads to an increase in a company’s holding costs, such as interest on loans received to buy the inventory, storage costs, and insurance. If a company orders goods more frequently and in smaller quantities, it can receive and sell these goods at or about the same time. This reduces inventory quantities on hand. It also improves the inventory turnover ratio. However, during COVID and other times when inventory supply chains can be disrupted, companies must ensure that enough inventory is on hand to meet demand.

Answer 18

Many companies have moved to streamline their supply chain operations, which include purchasing inventory and transporting it to a desired destination. One way of managing inventory on hand is to use a just-in-time approach. This means that a company avoids ordering large quantities of an inventory item, particularly one that is not in high demand, because ordering large quantities increases the time that the company will hold this inventory. This leads to an increase in a company’s holding costs, such as interest on loans received to buy the inventory, storage costs, and insurance. If a company orders goods more frequently and in smaller quantities, it can receive and sell these goods at or about the same time. This reduces inventory quantities on hand. It also improves the inventory turnover ratio. However, during COVID and other times when inventory supply chains can be disrupted, companies must ensure that enough inventory is on hand to meet demand.