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1、九 Investment Tools: Financial Statement Analysis: Assets1.A: Analysis of Inventoriesa: Compute ending inventory balances and cost of goods sold using the LIFO, FIFO, and average cost methods to account for product inventory.Example: Given the following inventory data:January 1 (beginning inventory):
2、 2 units $2 per unit = $ 4January 7 purchase: 3 units $3 per unit = $9January 19 purchase: 5 units $5 per unit = $25 Cost of goods available (BI + P): 10 units = $38 Units sold during January: 7 units FIFO cost of goods sold (value the 7 units sold at unit cost of last units purchased). Start at the
3、 top and work down:From beginning inventory: 2 units $2 per unit = $4From first purchase: 3 units $3 per unit = $ 9 From second purchase: 2 units $5 per unit = $10 FIFO cost of goods sold: 7 units = $23 Ending inventory: 3 units $5 = $15 LIFO cost of goods sold (value the 7 units sold at unit cost o
4、f first units purchased). Start at the bottom and work up:From second purchase: 5 units $5 per unit = $25 From first purchase: 2 units $3 per unit = $6 LIFO cost of goods sold: 7 units = $31 Ending inventory: 2 $2 + 1 $3 = $7 Average cost of goods sold (value the 7 units sold at the average unit cos
5、t of goods available).Average unit cost = $38 / 10 = $3.80 per unitWeighted average cost of goods sold = 7 $3.80 = $26.60Ending inventory = 3 $3.80 = $11.40b: Explain the usefulness of inventory and cost-of-goods-sold data provided by the LIFO, FIFO, and average cost methods when prices are 1) stabl
6、e, or 2) rising.Balance sheet: Inventories based on FIFO are preferable since these values most closely resemble current cost and hence current economic value. GAAP requires that firms use the lower of cost or market when valuing inventory. Applying the lower-of-cost-or-market to the inventory calcu
7、lated under any cost flow assumption would decrease income and inventory on the balance sheet if market is lower than cost. If assigned costs to ending inventory using one of the cost flow assumptions (LIFO, FIFO, or average cost) is greater than the replacement market cost of that inventory, then t
8、hat ending inventory must be written-down to market. This rule is applied individually to each major classification of inventory. Inventory is not changed if market price is greater than cost. This potentially increases cost of goods sold and decreases net income and current assets.Income statement:
9、 LIFO allocates the most recent prices to the cost of goods sold. For income statement purposes, LIFO is the most informative accounting method and provides a better measure of current income. The quandary, FIFO provides the best balance sheet measure and LIFO the best income statement measure. From
10、 an analysts perspective there is often information available to permit restatement of one method to another to provide a better analysis. The discussion above assumes the value for purchases is known but this too may be affected by management choice.c: Discuss the impact of LIFO and FIFO (in period
11、s of rising prices and stable or increasing inventory quantities) on a companys cost of goods sold, income, cash flow, and working capital.In periods of rising prices and stable or increasing inventory quantities:LIFO results in: FIFO results in:higher COGS lower COGSlower taxes higher taxeslower ne
12、t income (EBT & EAT) higher net income (EBT & EAT)lower inventory balances higher inventory balanceslower working capital higher working capitalhigher cash flows (less taxes paid out) lower cash flows (more taxes paid out)d: Describe the effects of adjustment from LIFO to FIFO on inventory balances,
13、 cost of goods sold, and income.Adjustment for inventory balances: Add the LIFO reserve to LIFO inventory. This transforms LIFO inventory to FIFO. Now, since you changed inventory on the left side of the balance sheet to current cost, the left side of the balance sheet doesnt balance with the right
14、side. So, you must then: increase retained earnings by the LIFO reserve times (1 t). Retained earnings increases, because accumulated FIFO profits would be greater than LIFO profits. Increase deferred tax liability by the LIFO reserve times the tax rate, t. This deferred tax liability would exist if
15、 LIFO were used for taxes and FIFO for the financial statements.Adjustment of cost of goods sold The next step is to adjust the LIFO income statement to an approximation of a FIFO income statement. The COGS adjustment uses the difference in the beginning and ending LIFO reserves. The change in the L
16、IFO reserve between two years represents the impact of using LIFO during that year. During periods of rising prices, LIFO COGS will be greater than FIFO COGS. So, to convert LIFO COGS to FIFO COGS you must reduce the LIFO COGS by the current years increase in the LIFO reserve. This will, in turn, cause after tax income to increase by the change in the LIFO Reserve times 1 - the tax rate. Note, if the LIFO reserve should fall, then the analysis above woul
