Financial Statement AnalysisModule 6 of 9

Analysis of Inventories

Concepts

Formulas

Decisions

Quiz Questions

Key Concepts

5 concepts covered in this module.

FIFO

First In, First Out. Ending inventory reflects recent costs (closer to replacement cost). In rising prices: higher income, higher inventory.

LIFO

Last In, First Out (US GAAP only). COGS reflects recent costs. In rising prices: lower income (tax savings), lower inventory, better cash flow.

Weighted Average

Average cost of all units available. Results fall between FIFO and LIFO.

LIFO Reserve

Difference between LIFO and FIFO inventory values. Disclosed by LIFO companies. Used to convert LIFO to FIFO for comparison.

Inventory Write-Down

IFRS: lower of cost or NRV (reversals allowed). US GAAP: lower of cost or market (no reversals).

Formulas

4 essential formulas for this module.

FIFO Inventory from LIFO

FIFO Inventory = LIFO Inventory + LIFO Reserve

Where: To make LIFO companies comparable to FIFO

FIFO COGS from LIFO

FIFO COGS = LIFO COGS - ΔLIFO Reserve

Where: Δ = change in LIFO reserve during period

Inventory Turnover

Inv Turnover = COGS / Average Inventory

Where: Higher = faster inventory movement

Days of Inventory

DOH = 365 / Inventory Turnover

Where: Days to sell inventory

Decision Frameworks

1 decision frameworks to guide your analysis.

FIFO vs LIFO in rising prices?

FIFO: higher income, higher BS inventory, higher taxes
LIFO: lower income, lower taxes (cash flow benefit), lower BS inventory

Mind Map

Visual overview of how concepts connect in this module.

Inventory Analysis

Methods

FIFO

LIFO (GAAP only)

Weighted Average

Specific Identification

Rising Prices Impact

FIFO: higher income, higher inventory

LIFO: lower income, tax savings

WA: between FIFO and LIFO

LIFO Reserve

FIFO Inv = LIFO + Reserve

FIFO COGS = LIFO - ΔReserve

Conversion for comparability

Write-Downs

IFRS: NRV, reversals OK

GAAP: market, no reversals

Study Analysis of Inventories

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