International Financial Statement Analysis

CHAPTER 10

INVENTORIES

Elbie Antonites, CFA University of Pretoria Pretoria, South Africa

 

Michael A. Broihahn, CFA Barry University Miami, Florida

LEARNING OUTCOMES

After completing this chapter, you will be able to do the following:

• Explain International Financial Reporting Standards (IFRS) and U.S. generally accepted accounting principles (U.S. GAAP) rules for determining inventory cost including which costs are capitalized and methods of allocating costs between cost of goods sold and inventory.

• Discuss how inventories are reported in the financial statements and how the lower of cost or net realizable value is used and applied.

• Compute ending inventory balances and cost of goods sold using the first in, first out (FIFO), weighted average cost, and last in, first out (LIFO) methods to account for product inventory and explain the relationship among and the usefulness of inventory and cost of goods sold data provided by the FIFO, weighted average cost, and LIFO methods when prices are (1) stable, (2) decreasing, or (3) increasing.

• Discuss ratios useful for evaluating inventory management.

• Analyze the financial statements of companies using different inventory accounting methods to compare and describe the effect of the different methods on cost of goods sold, inventory balances, and other financial statement items; and compute and describe the effects of the choice of inventory method on profitability, liquidity, activity, and solvency ratios.

• Make adjustments to reported ...