Analysis of Inventories - 32.c

Question 1

Where are inventory disclosures found?

Answer 1

Inventory disclosures are usually found in the financial statement footnotes - useful for evaluating firms inventory management

Question 2

What required inventory disclosure are required?

Answer 2

• Cost Flow Method used
• Total Carrying value (by classification)
• Carrying Value of inventories reported at fair value - selling cost
• Cost of Inventory
• Amount of inventory write-downs
• Reversals of inventory write-downs during the period, including reasons for reversal
• Carrying value of inventories pledged as collateral

Question 3

How do Manufacturing and Merchandising firms differ in reporting inventory

Answer 3

Merchandising firms - purchase inentory that is ready for sale, reported in one account on the balance sheet
Manufacturing firms - normally report inventory using three seperate accounts: Raw Materials, Work in Progress, Finished Goods

Question 4

What does an increase in raw materials or work in progress inventory mean

Answer 4

Firms should expet an increase in demand - resulting in higher revenues and earnings. Converesly, an increase in finished goods inventory while others are decrease may indivate decreassed demand

Question 5

What is the relationship between sales and finished goods?

Answer 5

Finished goods inventory growing faster than sales indicate declining demand / obselete inventory / excessive inventory

Question 6

What does inventory turnover ratio mean

Answer 6

Inventry turnover ratio mesures how quickly a firm sells it’s inventory

Question 7

What is a good ratio

Answer 7

High ratio is desirable - although it can be too high (suggesting that customers needs are not being satisfied)/