R17 Inventories: Implications for Financial Statements and Ratios

[IFT Team]

[costi...@gmail.com]

Can someone take a look at Question 20 

Which observation is most likely a result of looking only at the information reported in Note 9?

The Industry and Business Risk excerpt states that, “Increased competition may lead to lower unit sales and excess production capacity and excess inventory. This may result in a further downward price pressure.” The downward price pressure could lead to inventory that is valued above current market prices or net realisable value. Any write-downs of inventory are least likely to have a significant effect on the inventory valued using:

A. weighted average cost. B. first-in, first-out (FIFO). C. last-in, first-out (LIFO

The answer given is C.

This would be the correct answer in a normal environment of rising prices, but in this scenario with declining prices should not the answer be B.( FIFO) as FIFO  would be least likely to result in a write down as the higher priced inventory is sold first leaving the declining priced inventory on the balance sheet ???

 (Institute 42)

Institute, CFA. Level II 2013 Volume 2  Financial Reporting and Analysis. John Wiley & Sons P&T, 7/9/2012. VitalBook file.

On Tuesday, August 6, 2013 8:37:26 AM UTC-4, IFT Team wrote: