Companies are required to disclose the carrying amounts within inventory classifications such as raw materials, work-in-progress, and finished goods. Changes in these amounts, along with the growth rates of sales and finished goods inventories, may provide signals about a company's future sales, profits, cash positions and working capitals.
Relevant information with respect to inventory management and future sales may be found in the Management Discussion and Analysis or similar items within the annual or quarterly reports, industry news and publications, and industry economic data.
Inventory management may have a substantial impact on a company's activity, profitability, liquidity, and solvency ratios. For example, a possible inventory write-down can have a negative impact on profitability, solvency and liquidity ratios but a positive impact on activity ratios. It is critical for the analyst to be aware of industry trends and management's intentions.
A. The use of FIFO will lead to a meaningful inventory turnover.
Inventory turnover will be distorted under both LIFO and FIFO. Because FIFO uses earlier, lower costs for cost of goods sold, the inventory turnover will likely be too low. Under LIFO, the inventory value is too low, which can lead to an inventory turnover that is too high.
A. understated, not affected.
EI = BI + purchase - COGS.
If both purchase on account and ending inventory are overstated by the same amount, the current ratio will be understated (current ratio = current assets / current liabilities, in which both numerator and the denominator are overstated, but the ratio will be lowered since it is bigger than 1). However, the working capital which equals current assets - current liability should be unaffected.
A. it is overstated by $5,000.
The effect of the error in 2008 on net income will be counterbalanced in 2009, leaving the net income of 2010 unaffected.
A. The cost of goods sold for the current year is understated.
Net income is understated, and capital (retained earnings) is understated. For the following year, the cost of goods sold will be understated and net income overstated.
Ending Cost of
Which condition is true with regard to the ending inventory?
A. Condition A.
When ending inventory is understated, inventory costs assigned to the cost of goods sold will be overstated and consequently the net income will be understated.
Beginning Cost of
Which condition is true with regard to the beginning inventory, assuming FIFO is used?
A. Condition A.
When beginning inventory is overstated, inventory costs assigned to the cost of goods sold will be overstated and consequently the net income will be understated.
A. Retained Earnings at the end of Period A is understated.
The Retained Earnings balance of Period B will be correct. The Period A error caused the net income of Period A to be overstated, therefore, the income of Period B to be understated by that same amount. The Retained Earnings balance will be correct at the end of period B.
A. Higher, lower.