Module 25.4: Inventory Valuation Flashcards
Under IFRS how is inventory recorded on the balance sheet?
reported at the lower of cost or net realizable value.
Net realizable value = expected sales price less the estimated selling costs and completion costs.
Under US GAAP how is inventory recorded on the balance sheet?
For all other besides LIFO or retail method - report inventories at the lower of cost or NRV.
For LIFO or retail method - report at the lower of cost or market.
market is equal to replacement cost, but cannot be greater than NRV or less than NRV minus a normal profit margin.
Is LIFO more or less likely to recognize inventory write-downs than other cost flow methods?
Yes, LIFo firms are less likely to recognize inventory write-downs.
Is inventory every reported above historical cost in GAAP and IFRS? IF yes, how is it measured on the balance sheet?
yes, products like agricultural and forest products, mineral ores, and precious metals.
reported at net realizable value and any unrealized gains and losses from changing market prices are reported on the income statement.
How does a write down affect total and current assets?
decreases
How does a write down affect the current and quick ratio?
current ratio decreases, quick ratio is unaffected because inventory is not included
How does a write down affect inventory turnover, inventory on hand, and the cash conversion cycle?
is increased, which decreases days inventory on hand and the cash conversion cycle
How does a write down affect total asset turnover and the debt to assets ratio?
decreases both
What happens to equity and the debt-to-equity ratio during a write down?
both decrease
What happens to COGS in a write down?
increase in COGS which reduces all margins
What happens to ROA and ROE during a write down?
ROA and ROE are decreased.
What are inventory disclosures?
found in the financial statement footnotes, are useful for evaluating a firm’s inventory management.
What are 7 required inventory disclosures under IFRS and GAAP?
1) Cost flow method
2) Total carrying value of inventory, with classification
3) Carrying value of inventories reported at fair value less selling costs
4) the cost of inventory recognized as an expense during period
5) amount of inventory write-downs
6) reversals of inventory write downs
7) Carrying value of inventories pledged as collateral.
When a firm changes the cost flow method, are prior period financials adjusted? Does this also apply for LIFO?
Yes, they are recast based on the new cost flow method. reported as an adjustment to the beginning retained earnings.
No, LIFO is prospectively changed.
Under IFRS and GAAP what must happen if a firm changes cost flow method?
IFRS - must demonstrate that the change will provide reliable and more relevant information.
GAAP - the firm must explain why the change in cost flow method is preferable.
