International Financial Statement Analysis, 3rd Edition

CHAPTER 8

INVENTORIES

Michael A. Broihahn, CFA

LEARNING OUTCOMES

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

• Distinguish between costs included in inventories and costs recognized as expenses in the period in which they are incurred.
• Describe different inventory valuation methods (cost formulas).
• Calculate and compare cost of sales, gross profit, and ending inventory using different inventory valuation methods and using periodic and perpetual inventory systems.
• Calculate and explain effects of inflation and deflation of inventory costs on the financial statements and ratios of companies that use different inventory valuation methods (cost formulas or cost flow assumptions).
• Explain LIFO reserve and LIFO liquidation and their effects on financial statements and ratios.
• Convert a company's reported financial statements from LIFO to FIFO for purposes of comparison.
• Describe implications of valuing inventory at net realizable value for financial statements and ratios.
• Describe the financial statement presentation of and disclosures relating to inventories.
• Explain issues that analysts should consider when examining a company's inventory disclosures and other sources of information.
• Analyze and compare the financial statements and ratios of companies, including those that use different inventory valuation methods.

1. INTRODUCTION

Merchandising and manufacturing companies generate revenues and profits through the sale of inventory. Further, inventory may represent ...