Lesson 7 of 8 · All lessons in this module
- Inventory cost formulas and inventory systemsVideo lesson
- Rising and falling costs: effects on statements and ratiosVideo lesson
- The LIFO reserve, LIFO-to-FIFO conversion and LIFO liquidationVideo lesson
- Measuring inventory: lower of cost and net realisable valueVideo lesson
- Inventory write-downs: effects on ratios and analysis
- Inventory disclosures, ratios and analyst checks
- Integrated cases: reading the inventory note and restating to one basis
- Integrated cases: a two-year ratio panel and 'what if the cost formula changed'
Lesson 7 of 8 · 16 min
Integrated cases: reading the inventory note and restating to one basis
A restatement question hides its inputs in a note: find the LIFO reserve, the valuation allowance and the write-down charge actually booked in cost of sales, then adjust inventory, cost of sales, income and equity, in that order.
In short
- Three numbers sit in the note and one in the income statement: gross or net inventory, the valuation allowance, the LIFO reserve, and the charge included in cost of goods sold. Find all four before you calculate anything.
- Inventory on a comparable basis = net inventory + allowance + LIFO reserve, at each year-end, and then averaged.
- Cost of goods sold on the same basis = reported COGS − write-down charge − increase in the LIFO reserve (a decrease is added).
- The charge in cost of sales is not the change in the allowance: the allowance is also released as written-down goods are sold.
- Net income moves by the after-tax adjustments; equity moves by the cumulative allowance and reserve after tax, so profit can fall while equity rises.
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