Class 6.1 Slides_Profitability Analysis_Instructor (1).pptx

Class 6.1 Slides_Profitability Analysis_Instructor (1).pptx...

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BUS-A310 Unit 2: Balance Sheet - Assets
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LEARNING OBJECTIVES At the end of this lesson, you should be able to: Calculate and use profitability ratios to evaluate a firm’s financial performance [CO2}] Discuss the impact of judgment re. the inventory system and method to use on financial statements and profitability ratios [CO4]
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CHOICE OF INVENTORY METHOD
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INVENTORY METHOD CHOICE Disclosure FIFO, LIFO, and average are all permissible under GAAP Companies need not use the same method for entire inventory Companies must identify in a disclosure note method(s) used # Companies % Companies FIFO 312 47% LIFO 163 24 Average 133 20 Other* and not disclosed 61 9 Total 669 100% * “Other” includes the specific identification method and misc. less popular methods In Practice:
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INVENTORY METHOD CHOICE Choices are a combination of: Managers sometimes make these choices to maximize their own personal benefits rather than those of the company or its external constituents Inventory cost flow assumption Depreciatio n method Pension assumptio ns Other choices To meet a particular objective
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FACTORS INFLUENCING METHOD CHOICE Example : Companies often attempt to sell the oldest goods in inventory first
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