Lesson 6 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 6 of 8 · 13 min
Inventory disclosures, ratios and analyst checks
The inventory note tells you the cost formula, the mix of raw materials, work in progress and finished goods, and the write-downs; combined with turnover, days on hand and gross margin, it reveals how well inventory is managed and where sales may be heading.
In short
- IFRS disclosures: cost formula and policy, carrying amounts by category, inventory at fair value less costs to sell, amount expensed (cost of sales), write-downs, reversals and why they occurred, inventory pledged as security.
- US GAAP is similar but has no reversal disclosures, and adds significant estimates and any material LIFO liquidation income.
- Inventory turnover = cost of sales ÷ average inventory; days of inventory on hand = 365 ÷ turnover; gross profit margin = gross profit ÷ sales.
- High turnover can mean efficiency, too little stock, or write-downs; low turnover can mean slow-moving or obsolete stock. Compare with sales growth, the industry and the notes.
- Shifts in the mix of raw materials, work in progress and finished goods hint at future sales; MD&A, industry news and economic data add context.
Unlock this lesson free for 7 days
Create a free account to get 7 days free: every lesson, video and flashcard, and the question bank. No card needed.