Reading 25: Inventories Flashcards
Explain the impact if growth in inventories is greater than the growth in sales.
It could indicate a decrease in demand, which may force a company to sell its products at lower prices. Further, there may be a possibility of future write-downs of inventory.
Differentiate between FIFO and LIFO in periods of rising prices.
Under FIFO, the prices assigned to units in ending inventory are higher than the prices assigned to units sold.
Under LIFO, the prices assigned to units in ending inventory are lower than the prices assigned to units sold.
Identify the characteristics of LIFO.
Newest units purchased or manufactured are assumed to be the first ones sold.
Oldest units purchased or manufactured are assumed to remain in ending inventory.
COGS is composed of units valued at most recent prices.
EI is composed of units valued at oldest prices.
Which valuation methods of inventory do IFRS and U.S. GAAP allow?
IFRS: separate identification, FIFO, AVCO
U.S. GAAP: separate identification, FIFO, AVCO, LIFO
Describe the elements of FIFO.
Oldest units purchased or manufactured are assumed to be the first ones sold.
Newest units purchased or manufactured are assumed to remain in ending inventory.
COGS is composed of units valued at oldest prices.
EI is composed of units valued at most recent prices.
Describe cost of goods sold for rising, falling, and stable prices.
If prices are rising, FIFO and AVCO will understate replacement costs in COGS and overstate profits.
If prices are falling, FIFO and AVCO will overstate replacement costs in COGS and understate profits.
When prices are stable, the three methods will value COGS at the same level.
Describe the increase in LIFO reserve.
In every period during which prices are rising and inventory quantities are stable or rising, the LIFO reserve will increase as the excess of FIFO ending inventory over LIFO ending inventory increases.
How is the LIFO reserve calculated?
It is the difference between the value of inventory under LIFO, and its value under FIFO.
Explain what it means if a company has a higher inventory turnover ratio and a lower number of days of inventory than the industry average.
It could indicate that the company is more efficient in inventory management, as fewer resources are tied up in inventory.
It could also suggest that the company does not carry enough inventory at any point in time, which could hurt sales.
It could also mean that the company might have written down the value of its inventory.
Identify the 2 reasons for a decline in LIFO reserve.
LIFO liquidation When a firm that uses LIFO sells more units during a given period than it purchases over the period. This causes year-end inventory levels to be lower than the beginning-of-year inventory levels.
Declining prices
Identify the disclosures IFRS requires companies to make relating to inventory.
Accounting policies used to value inventory.
Cost formula used for inventory valuation.
Total carrying value of inventories; carrying value of different classifications.
Value of inventories carried at fair value less selling costs.
Amount of inventory-related expenses for the period.
Amount of any write-downs recognized during the period.
Amount of reversal recognized on any previous write-down.
Description of the circumstances that led to the reversal.
Carrying amount of inventories pledged as collateral for liabilities.
Describe the gross profit margin.
It indicates the percentage of sales that is contributing to net income as opposed to covering the cost of sales.
Identify the items that are not capitalized inventory costs.
Abnormal costs from material wastage.
Abnormal costs of labor or wastage of other production inputs.
Storage costs that are not a part of the normal production process.
Administrative expenses.
Selling and marketing costs.
Describe ending inventory value for rising, falling, and stable prices.
If prices are rising, LIFO and AVCO will understate ending inventory value.
If prices are falling, LIFO and AVCO will overstate ending inventory value.
When prices are stable, the three methods will value inventory at the same level.
Define net realizable value (NRV).
The estimated selling price in the ordinary course of business less the estimated costs necessary to make the sale and estimated costs to get inventory in condition for sale.
