九 Investment Tools Financial Statement Analysis Assets

九 Investment Tools Financial Statement Analysis Assets

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
九 Investment Tools: Financial Statement Analysis: Assets 1.A: Analysis of Inventories a: 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 units @ $2 per unit = $ 4 January 7 purchase: 3 units @ $3 per unit = $9 January 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 top and work down: From beginning inventory: 2 units @ $2 per unit = $4 From 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 of 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 cost of goods available). Average unit cost = $38 / 10 = $3.80 per unit Weighted average cost of goods sold = 7 @ $3.80 = $26.60 Ending inventory = 3 @ $3.80 = $11.40 b: Explain the usefulness of inventory and cost-of-goods-sold data provided by the LIFO, FIFO, and average cost methods when prices are 1) stable, 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
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
inventory calculated 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 that 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 : 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 an analyst's 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.
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern