Inventory Valuation

Question 0

Four methods of inventory cost flow methods

Answer 0

FIFO
LIFO
Weighted average cost
Specific identification

Question 1

How to calc cost of goods sold

Answer 1

COGS = Beginning inventory + purchases - ending inventory

Question 2

How to calculate FIFO

Answer 2

Earliest inventory in is sold first

Lower COGS
Higher inventory on balance sheet

W/increasing prices

Question 3

How to calculate LIFO

Answer 3

Most recent inventory is sold first, oldest inventory sold last

Higher COGS
Lower inventory

(Assuming increasing prices)

Question 4

How to calc weighted average cost

Answer 4

Weighted average by number of units purchased at given rate

Results in COGS and inventory values between LIFO and FIFO

Question 5

How to calc specific identification

Answer 5

Identify which exact products were sold and which remain in inventory

Only done for big ticket items with few sales

Question 6

What is LIFO reserve

Answer 6

Difference between LIFO and FIFO ending inventory

Adjust LIFO to FIFO for comparison purposes

Question 7

Steps on how to adjust LIFO statements to FIFO

Answer 7

1. Ending inventory + LIFO reserve
2. Cash - LIFO reserve*tax
3. Shareholder equity + LIFO reserve*(1-tax)
4. COGS - change in LIFO reserve
5. Income tax exp + (change in LIFO reserve*(1-tax))

Question 8

What is LIFO liquidation

Answer 8

Firm sells more inventory than it replaces - results in lower COGS and higher profit

Not sustainable

Question 9

LIFO results in

Answer 9

^ COGS
V taxes
V net income 
V inventory balances 
V working capital 
^ cash flows (lower tax)
V net / gross margin
V current ration
^ inventory turnover 
^ debt-to-equity

Question 10

FIFO results in…

Answer 10

V COGS
^ taxes
^ net income 
^ inventory balances 
^ working capital 
V cash flows (more tax)
^ net / gross margin
^ current ratio
V inventory turnover 
V debt-to-equity

Question 11

Diff between inventory valuation under IFRS and GAAP

Answer 11

IFRS - lower of cost and net realizable value
Write ups allowed up to prev write down

GAAP - lower of cost or market
No subsequent write ups allowed

Question 12

Three key accounts to look at when reviewing inventory analysis

Answer 12

Raw materials
Work in process
Finished goods

Question 13

List potential issues w/misalignment between accounts

Answer 13

Finished goods > sales => v demand
Finished goods > raw materials and work in process => v demand
^ raw mat and work in process => ^ demand