Book 3_FinAn_READING-34_ANALYSIS-OF-INVENTORIES

Question 1

Under IFRS, inventories valuation

Answer 1

are valued at the lower of cost or net realizable value (NRV)

Question 2

Net realizable value (NRV)

Answer 2

the expected sales price - the estimated selling costs and completion costs

Question 3

Inventory write-ups

Answer 3

are allowed, but only to the extent that a previous write-down to NRV was recorded.

Question 4

Under U.S. GAAP, inventory valuation

Answer 4

inventories are valued at the lower of cost or NRV for companies using cost methods other than LIFO or the retail method

Question 5

Under U.S. GAAP, For companies using LIFO or the retail method

Answer 5

• Inventories are valued at the lower of cost or market.
• Market is usually equal to replacement cost,
• Replacement cost is in the rate of NRV and (NRV minus a normal profit margin)

Question 6

Under US GAAP, Inventory write-ups

Answer 6

No subsequent write-up is allowed for any company reporting under U.S. GAAP.

Question 7

A write-down of inventory value from cost to NRV

Answer 7

Decrease inventory, assets, and equity => Effect to ratios

Question 8

FIFO

Answer 8

• If cost increase: produces the highest ending inventory value and the lowest cost of sales.
• If cost decrease: reverse

Question 9

LIFO

Answer 9

• If cost increase: produces the lowest ending inventory and the highest cost of sales
• If cost decrease: reverse

Question 10

Average cost

Answer 10

• If cost increase: produce ending inventory and cost of sales between LIFO and FIFO.
• If cost decrease: reverse

Question 11

LIFO Liquidation

Answer 11

Occurs when a LIFO firm’s inventory quantities decline, results in higher profit margins and higher income taxes

Question 12

Required inventory disclosures areas

Answer 12

• The cost flow method (LIFO, FIFO, etc.) used
• Total carrying value of inventory and carrying value by classification
• Carrying value of inventories reported at fair value less selling costs
• The cost of inventory recognized as an expense (COGS) during the period
• Amount of inventory write-downs
• Reversals of inventory write-downs
• Carrying value of inventories pledged as collateral

Question 13

the finished goods category is growing while raw materials and goods in process are declining

Answer 13

may indicate decreasing demand and potential future inventory write-downs

Question 14

raw materials and goods in process are increasing

Answer 14

may indicate increasing future demand and higher earnings

Question 15

increases in finished goods are greater than increases in sales,

Answer 15

may indicate decreasing demand or inventory obsolescence and potential future inventory write-downs

Question 16

Inventory turnover that is too low

Answer 16

may be an indication of slow-moving or obsolete inventory.

Question 17

High inventory turnover, together with low sales growth relative to the industry,

Answer 17

may indicate inadequate inventory levels and lost sales because customer orders could not be fulfilled.

Question 18

High inventory turnover, together with high sales growth relative to the industry average

Answer 18

suggest that high inventory turnover reflects greater efficiency rather than inadequate inventory.