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Financial Analysis And Reporting > Inventories > Flashcards

Inventories Flashcards

1
Q

Inventory costs that can be capitalized

A

ie Inventories on B.S
Cost of purchase (price, import tax, transport and handling)
Cost of conversion (labor, material, overheads, raw mat to finished goods)
Transportation to showroom/final location

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2
Q

Inventory costs that are expensed

A 
ie COGS on I.S
Abnormal waste
Storage of final/finished goods
Admin overhead
Selling costs
Shipping to customers
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3
Q

Inventory Valuation Methods

A

Specific Identification
FIFO
Weighted Average Cost
LIFO

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4
Q

Weighted Average Cost formula

A

= Total cost of units available for sale / total units available for sale

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5
Q

LIFO

A
  • newest items purchased/manuf are sold first
  • oldest goods remain in ending inventory
  • COGS reflects COGS of purchaed/manuf recently
  • value of inventory reflects cost of older goods
  • not allowed under IFRS
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6
Q

LIFO during inflation v FIFO

A

LIFO will have higher COGS and lower NI

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7
Q

COGS formula

A

= beginning inventory + purchases - ending inventory

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8
Q

Ending inventory formula

A

= beginning inventory + purchases - COGS

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9
Q

Periodic and perpetual systems COGS and ending inventory will be the same for

A

Specific identification and FICO

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10
Q

Periodic and perpetual systems COGS and ending inventory will be different for

A

LIFO and WAC

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11
Q

LIFO v FIFO with rising prices and stable inventory levels. (which is higher or lower)

COGS

A

LIFO: higher
FIFO: lower

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12
Q

LIFO v FIFO with rising prices and stable inventory levels. (which is higher or lower)

Taxes

A

LIFO: lower
FIFO: higher

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13
Q

LIFO v FIFO with rising prices and stable inventory levels. (which is higher or lower)

EBT

A

LIFO: lower
FIFO: higher

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14
Q

LIFO v FIFO with rising prices and stable inventory levels. (which is higher or lower)

NI

A

LIFO: lower
FIFO: higher

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15
Q

LIFO v FIFO with rising prices and stable inventory levels. (which is higher or lower)

Ending Inventory

A

LIFO: lower
FIFO: higher

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16
Q

LIFO v FIFO with rising prices and stable inventory levels. (which is higher or lower)

Working capital

A

LIFO: lower
FIFO: higher

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17
Q

LIFO v FIFO with rising prices and stable inventory levels. (which is higher or lower)

Cash flow (after tax)

A

LIFO: higher
FIFO: lower

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18
Q

US GAAP firms prefer LIFO because

A

taxes paid are lower

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19
Q

When prices are increasing, LIFO results in:

A 
higher COGS
lower profit
lower net income tax
lower net income
higher after tax cash flow
20
Q

LIFO Reserve

-definition

A

The LIFO reserve is the difference between the reported LIFO inventory carrying amount and the inventory amount that would have been reported if FIFO would have been used.

21
Q

LIFO Reserve

-equation

A

LIFO Reserve = FIFO inventory value - LIFO inventory value

*LIFO reserve amount must be disclosed

22
Q

FIFO Inventory value =

Formulas for adjusting inventory

A

FIFO Inventory = LIFO inventory value + LIFO reserve

23
Q

FIFO COGS =

Formulas for adjusting inventory
“What amount would ABC’s COGS have been if it had used FIFO instead of LIFO?”

A

LIFO COGS - (ending LIFO reserve - beginning LIFO reserve)

24
Q

FIFO NI =

Formulas for adjusting inventory
“What net income would ABC report for yr x if it had used the FIFO method instead of LIFO method”

A

FIFO NI = LIFO NI + changes in LIFO reserve (1-t)

25
Q

FIFO retained earnings =

Formulas for adjusting inventory

A

LIFO retained earnings + LIFO reserve (1-t)

26
Q

CFO FIFO

Formulas for adjusting LIFO to FIFO
By what amount would net cash flow from operating activities change if ABC used FIFO instead of LIFO?

A

CFO FIFO = CFO LIFO - impact of the change on income tax paid

27
Q

Formula:

What is the tax savings that ABC has generated for yr X by using LIFO method instead of FIFO?

A

Tax savings = change in LIFO reserve * new tax rate + last year LIFO * old tax rate

28
Q

LIFO liquidation

A

when the number of units sold in a period exceeds the number of units produced
*can be used to manipulate earnings. warning sign if gross profit increases and LIFO reserve decreases

29
Q

Consequences of LIFO liquidation:

A
  1. COGS does not reflect recent costs during periods of rising prices
  2. overstates net income
  3. higher taxable income and higher tax payments
  4. positive cash flow
30
Q

Net realizable value

- definition and who’s perspective

A

NRV is the estimated selling price under ordinary business conditions minus estimated costs needed for sale

from the seller’s perspective

31
Q

NRV formula

A

NRV = estimated sales price - estimated selling costs

32
Q

Market value

- definition and who’s perspective

A

current replacement cost subject to lower or upper limits

from buyer’s perspective

33
Q

Market value formula

A

Market value limits = (NRV - normal profit margin, NRM)

34
Q

Inventory measurement under GAAP

A
  • measured at the lower of cost or market value
  • if cost exceeds market value, inv is written down to market value on BS and loss is recognized
  • no revised write-downs
  • *commodities and agricultural goods prices can be reported above historical costs
35
Q

Inventory measurement under IFRS

A
  • measured at cost or net realizable value
  • if NRV is less than BS cost, inv is written down to NRV
    and loss in IS COGS
  • inventory can be written up and gain is recogn. on IS
  • only written up to loss previously recognized
    -*commodities and agricultural goods prices can be reported above historical costs
36
Q

Inventory write-downs has a ________ effect on profitability, liquidity and solvency rations, but has a _______ effect on activity ratios.

A

negative effect on profitability, liquidity and solvency rations,
but has a positive effect on activity ratios.

37
Q

Inventory Turnover ratio

*inflationary environment impact on inventory-related ratios

A

Numerator: COGS is higher under LIFO

Denominator: Avg inventory is lower under LIFO

Impact on ration: Higher under LIFO

38
Q

Days of inventory ratio

*inflationary environment impact on inventory-related ratios

A

Numerator: number of days is the same

Denominator: inventory turn over is higher under LIFO

Impact on ration: lower under LIFO

39
Q

Total asset turnover ratio

*inflationary environment impact on inventory-related ratios

A

Numerator: Revenue is the same

Denominator: average total assets is lower under LIFO

Impact on ration: higher under LIFO

40
Q

Current ratio

*inflationary environment impact on inventory-related ratios

A

Numerator: Ending inventory is lower under LIFO so CA are lower

Denominator: current liabilities are the same

Impact on ration: lower under LIFO

41
Q

Cash ratio

*inflationary environment impact on inventory-related ratios

A

Numerator: cash is higher under LIFO bc taxes are lower

Denominator: CL are the same

Impact on ration: higher under LIFO

42
Q

Gross profit margin

*inflationary environment impact on inventory-related ratios

A

Numerator: gross profit is lower under LIFO bc COGS are higher

Denominator: revenue is the same

Impact on ration: lower under LIFO

43
Q

ROA

*inflationary environment impact on inventory-related ratios

A

Numerator: NI is lower under LIFO as COGS are higher

Denominator: lower avg total assets under LIFO

Impact on ration: lower under LIFO

44
Q

Debt to equity

*inflationary environment impact on inventory-related ratios

A

Numerator: debt is the same

Denominator: lower equity under LIFO bc assets are lower

Impact on ration: higher under LIFO

45
Q

Which inflationary environment impact on inventory-related ratios are
HIGHER UNDER LIFO

A
  1. inventory turnover
  2. total asset turnover
  3. cash ratio
  4. debt to equity
46
Q

Which inflationary environment impact on inventory-related ratios are
LOWER UNDER LIFO

A
  1. days of inventory
  2. current ratio
  3. gross profit margin
  4. ROA

Financial Analysis And Reporting (12 decks)

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