Archive

Posts Tagged ‘fifo’

Implications for Financial Statements & Ratios of Inventories

February 5, 2011 4 comments

Summary of new* chapter in 2011 – Inventories  & Implications for Financial Statements & Ratios (longish…)

CFA Level 2 – Financial Reporting & Analysis

Study Session 5, Chapter 21 in textbook

*(I am certain I have read this material before for CFA, don’t remember if it was Level 1 or 2)

—————–

Terminology & Formula:

  • Inventory Valuation Method = Cost Formula (IFRS) = Cost Flow Assumption (US GAAP)
  • Cost of Sales = Cost of Goods Sold (COGS) = Beginning Inventory + Purchases – Ending Inventory
  • Inventory Turnover = Activity Ratio = COGS ÷ Ending Inventory (sometime Average Inventory)
  • Gross Profit Margin = Gross Profit ÷ Sales
  • LIFO Reserve = FIFO Inventory Value – LIFO Inventory Value (needed to convert COGS under LIFO to FIFO)
  • Days of Inventory on Hand = # of Days in Period ÷ Inventory Turnover Ratio

Converting from LIFO to FIFO

  • Inventory in FIFO = Inventory in LIFO + LIFO Reserve
  • COGS in FIFO = COGS in LIFO – Change in LIFO Reserve
  • Total Assets in FIFO = Total Assets in LIFO + LIFO Reserve – Cash Paid for Additional Income Tax

———-

Table1: Allowed methods of Inventory Accounting under IFRS & US GAAP

Methods of Inventory Valuation IFRS, US GAAP or Both
FIFO (first-in first-out) Both
LIFO (last-in first-out) US GAAP only
WAC (Weighted Average Cost) Both
SI (Specific Identification) Both

Read more…

Advertisements