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LIFO Liquidation is when # units sold > # units purchased and decreases LIFO inventory. Results in inventory-related increase in
gross profits
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LIFO Liquidation is when # units sold > # units purchased and decreases LIFO inventory.
Results in inventory-related increase in gross profits
convert a company's reported financial statements from LIFO to FIFO for purposes of
comparison
...
describe the implications of valuing inventory at net realisable value for financial statements and
ratios;
Any write-down reduces the value of the inventory, and the loss in value (expense) is generally
reflected in the income statement in cost of goods sold. An inventory write-down reduces both
profit and the carrying amount of inventory on the balance sheet and thus has a negative effect
on profitability, liquidity, and solvency ratios. However, activity ratios (for example, inventory
turnover and total asset turnover) will be positively affected by a write-down because the asset
base (denominator) is reduced
analyze and compare the financial statements and ratios of companies, including those that use
different inventory valuation methods;
...
explain issues that analysts should consider when examining a company's inventory disclosures
and other sources of information.
It is critical for the analyst to be aware of industry trends toward product obsolescence and to
analyze the financial ratios for their sensitivity to potential inventory impairment. Companies can
minimise the impact of inventory write-downs by better matching their inventory composition
and growth with prospective customer demand. To obtain additional information about a
company's inventory and its future sales, a variety of sources of information are available.
Analysts should consider the Management Discussion and Analysis (MD&A) or similar sections
of the company's financial reports, industry-related news and publications, and industry
economic data.
COGS (adjusted)
= COGS (LIFO method) - Charges included in COGS for inventory write-downs - Change in
LIFO reserve