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INVENTORIES
Presenters name
Presenters title
dd Month yyyy
Beginning
Inventory
Goods
Purchased
Balance Sheet
Goods
Available
For
Sale
Ending
Inventory
Cost of
Goods Sold
Income Statement
Description
Specific Identification
Purchases
100 kg @
110/kg
Goods Available
600 kg @
58,000 total
100 kg @ 110/kg
180 kg @ 100/kg
240 kg @ 90/kg
520 kg @ 50,600
Total =
600 kg @
58,000
Ending inventory
(cost)
200 kg @
100/kg
300 kg @
90/kg
20 kg @ 100/kg
60 kg @ 90/kg
80 kg @ 7,400
Copyright 2013 CFA Institute
Purchases
100 kg @
110/kg
Goods Available
600 kg @
58,000 total.
AVERAGE
96.667/kg
520 kg @
96.667/kg
= 50,267
200 kg @
100/kg
300 kg @
90/kg
Total =
600 kg @
58,000
Ending inventory
(cost)
80 kg @
96.667/kg
= 7,733
Goods Available
600 kg @
58,000 total
100 kg @ 110/kg
200 kg @ 100/kg
220 kg @ 90/kg
520 kg @ 50,800
Total =
600 kg @
58,000
Ending inventory
(cost)
200 kg @
100/kg
300 kg @
90/kg
80 kg @ 90/kg
80 kg @ 7,200
10
Goods Available
600 kg @
58,000 total
20 kg @ 110/kg
200 kg @ 100/kg
300 kg @ 90/kg
520 kg @ 49,200
Total =
600 kg @
58,000
Ending inventory
(cost)
200 kg @
100/kg
300 kg @
90/kg
80 kg @ 110/kg
80 kg @ 8,800
11
Weighted
Average Cost
FIFO
LIFO
Cost of sales
50,600
50,267
50,800
49,200
Ending inventory
7,400
7,733
7,200
8,800
58,000
58,000
58,000
58,000
Gross profit
74,200
74,533
74,000
75,600
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13
Cost
Remaining
Units
Units
$110
Apr
July 200
Sold
100
80
$100
Nov
COGS - perpetual
20
220
100
120
COGS
=80@$110 = $8,800
=100 @$100 = $10,000
=$8,800+$10,000=$18,800
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100 $110
Apr
July
COGS -periodic
100
80
200 $100
Nov
Units
20
NA
220
100
120
Goods
available
Ending
inventory
COGS
NA
= 0+ 100 *$110 + 200*$100
=$31,000
= 100 *$110 + 20*$100
= $13,000
= $31,000 - $13,000
= $18,000
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Costs
FIFO
FIFO:
Earlier,
lower
costs in
COGS
FIFO:
Later,
higher
costs in
inventory
Time
Period end
16
LIFO RESERVE
LIFO reserve is the difference between inventory amount
as reported using LIFO and the inventory amount that
would have been reported using FIFO.
FIFO inventory value - LIFO inventory value = LIFO
reserve.
Companies using the LIFO method must disclose the
amount of the LIFO reserve.
An analyst can use the disclosure to adjust a companys
reported cost of goods sold and ending inventory from
LIFO to FIFO.
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18
19
2008
2007
38,415 32,626
566
214
37,849 32,412
20
2008
3,557
566
2007
3,541
214
113
4,010
64
3,691
21
2008
$61,171
$898
$62,069
31 December ($millions )
Equity as reported (LIFO)
Retained earnings
Equity as adjusted (FIFO)
2008
$6,087
$2,285
$8,372
22
COMPARATIVE RATIOS
Calculate Caterpillars Inventory Turnover, Gross Profit margin, and
Net Profit margin for 2008 under the LIFO and FIFO methods.
Caterpillars 2008 revenues were $48,044 million from machinery
sales and $3,280 from financial products.
Inventory turnover
LIFO
FIFO
4.81
3.47
= 38,415
= 37,849
[(8,781 + 7,204) 2] [(11,964 + 9,821) 2]
Gross profit margin
20.04%
21.22%
6.93%
7.81%
= (3,557 51,324)
= (4,010 51,324]
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COMPARATIVE RATIOS
Calculate Caterpillars Current Ratio and Total liabilities-toequity for 2008 under the LIFO and FIFO methods.
In 2008, Caterpillar reported $31,633 million current assets,
$26,069 million current liabilities, 61,171 million total liabilities,
and $6,087 million total equity.
Current ratio
LIFO
FIFO
1.21
1.34
= (31,633 26,069)
= [(31,633 + 3,183)
26,069]
10.05
7.41
= (61,171 6,087)
= [(61,171 +898)
(6,087 + 2,285)]
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LIFO LIQUIDATION
Units in to
inventory:
Purchase or
Manufacture
Units out of
inventory:
Sales
Inventory
25
LIFO LIQUIDATION
Units in to
inventory:
Purchase or
Manufacture
Units out of
inventory:
Sales
Inventory
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27
28
0
10,000
9,000
1,000
1,000
10,000
9,000
Total costs
$5
$5
$50,000
$45,000
$6
$6
$5,000
$ 5,000
$60,000
$54,000
2,000
$11,000
2,000
8,000
$11,000
$56,000
Units sold
Ending inventory Year 3
10,000
$7
$67,000
0
In Year 3, the old layers at $5 from Year 1 and
$6 from Year 2 flow to cost of goods sold
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Year
Revenue
per unit Total revenue
COGS
Gross
profit
Gross
margin
$10
$ 90,000
$ 45,000
$ 45,000
50%
$12
$ 108,000
$ 54,000
$ 54,000
50%
$14
$ 140,000
$ 67,000
$ 73,000
52%
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INVENTORY ADJUSTMENTS
Inventory is measured and carried on the balance sheet at the lower of
cost of market.
- IFRS:
- Lower of cost or net realizable value
- Subsequent reversals allowed
- U.S. GAAP:
- Lower of cost or market, defined as current replacement cost
subject to upper and lower limits
- Upper limit of market: net realizable value
- Lower limit of market: net realizable value less a normal profit
margin
- Subsequent reversals prohibited
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INVENTORY ADJUSTMENTS
The Volvo Group reported:
Total inventories (net of allowance) at year end 2008 and 2007,
respectively, as reported on Balance Sheet: SEK 55,045 million and
SEK 43,645 million.
Cost of sales for 2008, as reported on Income Statement: SEK
237,578
Allowance for inventory obsolescence at year end 2008 and 2007,
respectively, as disclosed in footnote: SEK 3,522 million and SEK
2,837 million
Compare inventory turnover
- Using numbers reported
- Assuming all past inventory write downs were reversed in 2008.
Copyright 2013 CFA Institute
32
INVENTORY ADJUSTMENTS
The Volvo Group reported:
Total inventories (net of allowance) at year end 2008 and 2007,
respectively, as reported on Balance Sheet: SEK 55,045 million and
SEK 43,645 million.
Cost of sales for 2008, as reported on Income Statement: SEK
237,578
Allowance for inventory obsolescence at year end 2008 and 2007,
respectively, as disclosed in footnote: SEK 3,522 million and SEK
2,837 million
Compare inventory turnover
Inventory Turnover = Cost of Goods Sold/ Average Inventory
Using numbers reported, 4.81 = 237,578 [(55,045 + 43,645) 2]
Assuming all past inventory write downs were reversed, using adjusted
numbers = 4.51 = 236,893 [(58,567 + 46,482) 2]
Copyright 2013 CFA Institute
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SUMMARY
Total cost of inventories comprises all costs of purchase, costs of conversion,
and other costs incurred in bringing the inventories to their present location
and condition.
The choice of inventory valuation method determines how the cost of goods
available for sale during the period is allocated between inventory and cost
of sales. It affects the financial statements and any financial ratios that are
based on them.
IFRS allow three inventory valuation methods (cost formulas): first-in, firstout (FIFO); weighted average cost; and specific identification.
U.S. GAAP allow the three methods above plus the last-in, first-out (LIFO)
method.
Companies that use the LIFO method must disclose in their financial notes
the amount of the LIFO reserve. This information can be used to adjust
reported LIFO inventory and cost of goods sold balances to the FIFO method
for comparison purposes.
Copyright 2013 CFA Institute
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