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18 Cards in this Set
- Front
- Back
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Costs included in inventory on the balance sheet |
purchase cost, conversion cost, and other costs necessary to bring inventory to its present location and condition |
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Period costs expensed as incurred |
Abnormal waste, most storage costs, admin costs, selling costs |
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I/S and B/S Preferred Inventory Methods |
I/S: LIFO B/S: FIFO |
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Periodic vs Perpetual Inventory System |
Periodic: inventory values and COGS are determined at end of period Perpetual: inventory values and COGS are updated continuously |
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Which methods are the same regardless of whether perpetual or periodic system is used? |
Specific identification and FIFO |
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Which methods are different based on whether perpetual or periodic system is used? |
Weighted avg cost and LIFO |
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LIFO Reserve |
Differences between LIFO inventory reported and inventory had the firm used the FIFO method |
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When is LIFO reserve positive and negative? |
Positive during periods of rising inventory costs and negative during periods of decreasing inventory costs |
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LIFO Liquidation |
When a firm using LIFO sells more inventory during a period than it produces |
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How to convert a firm's financial statements form LIFO to FIFO |
1) Add LIFO reserve to inventory 2) subtract change in LIFO reserve from COGS 3) decrease cash by LIFO reserve * tax rate 4) increase R/E by LIFO reserve * (1-tax rate) |
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How are inventories valued under GAAP? |
Lower of cost and market Market is usually equal to replacement cost but cannot exceed net realizable value or be less than net realizable value minus a normal profit margin |
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How are inventories valued under IFRS? |
Lower of cost or net realizable value Write-ups are permitted but only to the extent that a previous write down to NRV was recorded |
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Net Realizable Value |
Expected sales - estimated selling & completion costs |
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How will financial statements be impacted if inventory is written down to NRV? |
1) decrease in inventory, assets and equity 2) increase asset turnover, debt to equity ratio and debt to assets ratio 3) result in loss on I/S, which will decrease NI and net profit margin, as well as ROE and ROA |
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Required inventory disclosures |
1) cost flow method used 2) carrying value of inventory by classification (raw materials, WIP, finished goods) if appropriate 3) carrying value of inventories reported at fair value less selling costs 4) COGS 5) amount of write-downs 6) reversals of write-downs (only IFRS) 7) carrying value of inventories pledged as collateral |
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What may indicate slow-moving or obsolete inventory? |
Low inventory turnover |
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What does high inventory turnover + low sales growth relative to industry indicate? |
Inadequate inventory levels and lost sales b/c orders could not be fulfilled |
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What does high inventory turnover + high sales growth relative to industry indicate? |
High inventory turnover reflects greater efficiency rather than inadequate inventory |
