Learning Module 6 Analysis of Inventories

Under IFRS, inventories are measured at:

A company using LIFO in a period of rising costs will most likely report compared with FIFO:

Which inventory method tends to show ending inventory that more closely reflects current replacement cost in an environment of rising prices?

If a company writes inventories down to net realizable value in Year 1 and IFRS permits reversal in Year 2 when value recovers, the Year 2 effect on cost of sales is most likely:

Which of the following items is most likely a permanent difference between accounting profit and taxable income?

A company has inventory on its balance sheet of 10,000 units at FIFO cost CHF5 per unit (CHF50,000). It also reports a LIFO reserve of CHF8,000. What would be the reported inventory if the company’s LIFO-based balance were converted to FIFO?

Inventory turnover is defined as:

Days of inventory on hand can be calculated as:

A company recognizes an inventory write-down in 2020 that reduces net income. Under US GAAP, in 2021 the inventory’s value recovers. Which statement is most accurate?

Which disclosure is required under IFRS but not relevant under US GAAP because US GAAP prohibits the event?

An analyst wants to estimate free cash flow and needs a consistent inventory method across comparables; one issuer reports LIFO with a disclosed LIFO reserve of USD12 million and LIFO inventory of USD48 million. The analyst converts the LIFO inventory to approximate FIFO by reporting inventory of:

Which inventory valuation method will typically produce the most stable gross profit margin over time all else equal?

A company reports COGS USD800, average inventory USD200. Its inventory turnover and days on hand are respectively:

Which of the following is most likely to cause an analyst to investigate a company’s inventory write-downs?

If a firm has a material inventory write-down in the current year, activity ratios such as inventory turnover will most likely:

An analyst converting a peer’s LIFO COGS to FIFO-based COGS for comparability should:

A firm reports inventory net of allowance of USD5,000 and discloses an allowance of USD500. What is the gross inventory?

Which method produces inventory values that may be least likely to require write-downs when costs rise steadily?

When management discloses that inventories are valued at 'standard cost' with regular variance adjustments, an analyst should expect to find in the notes:

A company reports gross inventory USD120, valuation allowance USD20, net inventory USD100. If inventory write-down recoveries of USD10 occur under IFRS next period, the new net inventory will be:

Which inventory classification movement could signal future margin pressure if finished goods inventory rises sharply while sales are flat?

A company reports gross margin of 30% and after recording large inventory write-downs net margin falls. Which ratio will most directly reflect the write-down impact?

If two otherwise identical companies differ only by inventory method and prices are decreasing over time, which company will likely show higher reported profit?

A company discloses in notes that raw materials and purchased finished goods are valued at purchase cost using FIFO while manufacturing WIP and finished goods are valued at production cost using weighted average. This indicates:

If inventory replacement costs rise sharply while a company uses LIFO, which statement is most likely true about reported COGS and inventory?

A firm’s inventory turnover ratio improved from 6.0 to 7.5 year-over-year. Management discloses a large write-down in the current year. Which interpretation is most likely?

Which of the following is least likely to be included in production costs for manufactured inventory under typical accounting policies?

A company reports the following: beginning inventory 1,200, purchases 4,800, ending inventory 1,400. What are purchases less change in inventory (i.e., cash purchases converted to cost of goods sold basis for supplier cash outflow) that an analyst would use to estimate cash paid to suppliers?

Which inventory accounting method is prohibited under IFRS (but may be permitted under US GAAP historically)?

A company with finished goods inventory rising significantly while accounts payable decline may be experiencing:

If net realizable value of inventory is below cost in period 1 and above cost in period 2, under IFRS the appropriate accounting across the two periods is most likely:

An analyst comparing gross margins between peers should be most concerned if one peer uses LIFO and another uses FIFO when industry purchase costs are increasing because:

Which of the following industry signals would most likely increase the probability that an analyst anticipates future inventory write-downs for a technology company?

A company reports inventories net of allowance USD9,000 and total inventory classified as: raw materials 2,700; WIP 2,300; finished goods 4,000 (net). The notes show allowance allocated as raw materials 100, WIP 200, finished goods 700. What is gross finished goods amount?

If auditors find that ending inventory is overstated by USD2 million, which of the following immediate effects on the current year's financial statements is most likely?

An analyst modeling steady revenue growth wants to forecast inventory. Which common-size approach could help forecast inventory-related cash flows as a percentage of revenue?

A company reports NRV for a commodity inventory because an active market exists. Under IFRS, this measurement is allowed because:

Which action by management would increase the likelihood of inventory write-downs being viewed as aggressive or opportunistic by analysts?

When performing common-size analysis of cash flows, expressing operating cash flows as a percentage of total cash inflows is appropriate when:

A firm’s inventory was written down by EUR400 last year. This year management notes NRV recovered by EUR250. Under IFRS the income statement will show:

When reconciling LIFO to FIFO in order to compare gross margin across companies, which item is commonly used?

A retailer reports inventories net of allowance USD2,000 and disclosure shows write-downs charged to income this year USD500. Which line in the financial statements most directly reflects that USD500 expense?

An analyst sees a significant decrease in inventory days on hand despite flat sales growth. A likely accounting reason could be:

Which disclosure would most help an analyst evaluate the risk of future inventory write-downs?

If a company’s LIFO reserve decreases sharply year-over-year, one plausible explanation is:

When forecasting future gross profit, which inventory-related item should be adjusted out of current-year operating profit because it may be non-recurring and distort trend estimates?

Which statement about inventory measurement under IFRS for producers of agricultural products is correct?

A high-end luxury retailer typically has low inventory turnover and high gross margins compared to a discount grocer. This difference is primarily explained by:

Which adjustment would an analyst typically make when comparing asset-based ratios across companies where one uses FIFO and another uses LIFO?

Which of the following best summarizes why analysts care about a company’s inventory disclosures in MD&A and footnotes?