Reading25. Inventories

25.1 Initial recognition of cost of inventory

25.1.1 生产成本（Product costs）and 期间成本（period costs）

Product costs(capitalized)	Period costs(expensed)
Purchase cost—discounts and rebates	Abnormal waste of materials, labor, or overhead
Conversion costs including labor and production overhead	Storage costs
Other costs necessary to bring the inventory to its present location and condition	Administrative overhead
	Selling costs

25.2 发出存货的计量

25.2.1 发出存货的计价方法（Inventory COGS valuation method）

一、个别计价法（Specific Identification）

The actual costs incurred to purchase the items specifically identified as sold

二、先进先出法（First-In, First-Out (FIFO)）

Oldest goods purchased (or manufactured) are sold first

三、后进先出法（Last-In, First-Out (LIFO)）

Newest goods purchased (or manufactured) are sold first

COGS reflect current costs

四、加权平均法（Weighted Average Cost）

Assigns the average cost of the goods available for sale

五、总结对比

	IFRS	U.S. GAAP
Specific identification	√	√
Weighted average cost	√	√
First-in, first-out (FIFO)	√	√
Last-in, first-out (LIFO)	×	√

• Assuming increasing prices

  	B/S
  	LIFO	FIFO
  Inventory
  Current Assets	Lower	Higher
  Quick ratio	No change	No change
  Current ratio	Lower	Higher
  Inventory turnover	Higher	Lower
  Total assets	Lower	Higher
  Total asset turnover	Higher	Lower
  Debt-to-assets	Higher	Lower
  Equity	Lower	Higher

  	I/S
  	LIFO	FIFO
  COGS	Higher	Lower
  Operating margin	Lower	Higher
  Tax	Lower	Higher
  Net Income	Lower	Higher
  Net profit margin	Lower	Higher
  ROA, ROE<1	Lower	Higher

25.2.2 存货盘点方法

一、实地盘存法（Periodic inventory system）

Inventory value and COGS are determined at the end of an accounting period.

Need a purchase account

二、永续盘存法（Perpetual inventory system）

Inventory value and COGS are updated continuously

Inventory purchased and sold is recorded directly in inventory when the transactions occur.

三、总结归纳

Perpetual inventory system= Periodic inventory system in FIFO and specific identification method

Perpetual inventory system≠ Periodic inventory system in LIFO and weighted average cost method

25.2.3 后进先出法的特殊问题

一、后进先出储备（LIFO Reserve）

$$\begin{gathered} Inventor{y}_{FIFO}=Inventor{y}_{LIFO}+LIFOReserve \\ COG{S}_{FIFO}=COG{S}_{LIFO}–\Delta LIFOReserve \end{gathered}$$

• Income Statement Changes
  $$\begin{gathered} N{I}_{FIFO}=N{I}_{LIFO}+\Delta LIFOReserve\ast (1-Tax) \\ COG{S}_{FIFO}=COG{S}_{LIFO}-\Delta LIFOReserve \end{gathered}$$

• Balance Sheet Changes
  $$\begin{gathered} Inventor{y}_{FIFO}=Inventor{y}_{LIFO}+LIFOReserve \\ R/E_{FIFO}=R/E_{LIFO}+LIFOReserv{e}_{Ending}\ast (1-Tax) \\ Cas{h}_{FIFO}=Cas{h}_{LIFO}-LIFOReserv{e}_{Ending}\ast (Tax) \end{gathered}$$

  • For companies using the LIFO method, U.S. GAAP requires disclosure the amount of LIFO reserve in the footnotes.
  • LIFO reserve is used to compare companies using LIFO with companies not using LIFO.

二、后进先出储备损耗（LIFO Liquidation）

• A LIFO liquidation
  • Incurs when purchased volume is less sales volume , the decrease in volume or quantity of inventory.
  • When sold > produced, ending inventory＜beginning Inv, the firm experiences a LIFO liquidation.
  • LIFO liquidation→operating margins ↑ and income taxes ↑ → Decreased cash expenses (from not producing inventory) → CFO ↑
  • Management could use a LIFO liquidation (draw down inventory) to artificially inflate current period earnings.
  • Increases in profit margins from LIFO liquidation are not sustainable.
• COGS does not reflect current costs.
• LIFO reserve may decline.
• An analyst should adjust COGS for decrease in LIFO reserve.

25.3 Impairment of Inventory under IFRS & US.GAAP

25.3.1 Inventory in IFRS

• Inventory is the lower of the cost or Net realizable value.
  $$NRV=Sellingprice–Sellingcost$$

• If cost > NRV

  • Inventory is written down to NRV on B/S.
  • A loss is recognized in I/S. (COGS)
  • Can be written up and a gain is recognized in I/S. (COGS)

25.3.2 Inventory in U.S. GAAP

• Inventory is the lower of the cost or market.

  • If replacement cost > NRV (net realizable value)
    $$market=NRV$$

  • If replacement cost < NRV – normal profit margin
    $$market=NRV–normalprofitmargin$$

  • If NRV – normal profit margin < replacement cost < NRV
    $$market=replacementcost$$

• If cost > market

  • Inventory is written down to market on B/S.
  • A loss is recognized in I/S. (COGS)
  • No subsequent written up is allowed.

25.3.3 总结

	IFRS	U.S. GAAP
Valuation	Min(cost, net realizable value)net realizable value=Sales-selling cost	Min(cost, market)Replacement cost∈(NRV-NPM,NRV)
Reverse	√	×
	Exception:commodity-like products大豆等农产品，有活跃的期货市场，按fair value计量。	Exception:commodity-like products大豆等农产品，有活跃的期货市场，按fair value计量。

25.3.4 Effects of inventory write-downs on financial statements

B/S
Inventory	Decrease
Current Assets	Decrease
Quick ratio	No change
Current ratio	Decrease
Inventory turnover	Increase
Total assets	Decrease
Total asset turnover	Increase
Debt-to-assets	Increase
Equity	Decrease
Debt-to-equity	Increase

I/S
COGS	Increase
Operating margin	Decrease
Net Income	Decrease
Net margin	Decrease
ROA,ROE<1	Decrease

25.3.5 Inventory cost flow methods changes

• When a firm change inventory cost flow methods, the change is made retrospectively.

  • Under IFRS, the firm must demonstrate that the change will provide reliable and more relevant information.
  • Under U.S. GAAP, the firm must explain why the change in cost flow method is preferable.

• An exception

  • when a firm changes to LIFO from another cost flow method, the change is applied prospectively.
  • Changes form LIFO to FIFO
  • Add the LIFO reserve to LIFO inventory.
  • Subtract the change in the LIFO reserve for the period from COGS.
  • Decrease cash by △LIFO reserve * tax rate.
  • Increase retained earnings (equity) by LIFO reserve * (1 – tax rate).

• Assuming increasing prices

  LIFO to FIFO
  Profitability	Higher
  Liquidity	Higher
  Activity	Lower
  Solvency	Higher

25.4 与存货相关的其他问题

25.4.1 Inventory disclosures

• Inventory disclosures
  • The cost flow method (LIFO,FIFO).
  • Total carrying value of inventory (raw materials, work-in-process, and finished goods).
    • An increase in raw materials and/or work-in-process inventory may be an indication of an expected increase in demand.
    • An increase in finished goods inventory, while raw materials and work-in-process are decreasing,may be an indication of decreasing demand and potential inventory write-downs in the future.
  • Carrying value of inventories reported at fair value less selling costs.
  • The cost of inventory recognized as COGS.
  • Amount of inventory write-downs during the period.
  • Reversals of inventory write-downs during the period, including a discussion of the circumstances of reversal(IFRS only).
  • Carrying value of inventories pledged as collateral.