Module 6 · FRA

Analysis of Inventories

EN: Inventory cost flow methods (FIFO, LIFO, weighted average) and the LIFO reserve.
VN: Phương pháp tính giá vốn hàng tồn kho và LIFO reserve.

1. Inventory Equation Core

\[ \text{Beg. Inv} + \text{Purchases} = COGS + \text{End. Inv} \]

Practice problem

Beg = 80, COGS = 320, End = 100. Solve for purchases.

Show solution

80 + P = 320 + 100 → P = 340

Purchases = $340

2. Cost-Flow Methods Comparison (Rising Prices) Core

Effect during inflation

FIFO COGS lower (uses oldest cheap costs) → Net Income higher, ending inventory higher (recent costs).
LIFO COGS higher (uses newest expensive costs) → Net Income lower, ending inventory lower (old costs). Tax savings → CFO higher.
Wgt. avg. Between FIFO and LIFO.

Note: LIFO is permitted under US GAAP only; IFRS prohibits it.

3. LIFO Reserve Core

\[ \text{LIFO reserve} = \text{Inv}_{FIFO} - \text{Inv}_{LIFO} \]

Conversion adjustments (LIFO → FIFO)

Inv + LIFO reserve.
CA, TA + LIFO reserve.
COGS − ΔLIFO reserve.
NI + ΔLIFO reserve × (1 − t).
RE / Equity + LIFO reserve × (1 − t).

Practice problem

FIFO inventory $300, LIFO inventory $220. Compute LIFO reserve and adjusted COGS impact for converting LIFO→FIFO when ΔReserve = +$15 this period (t = 25%).

Show solution

Reserve = 300 − 220 = $80

COGS adjustment: subtract ΔReserve = −15 → lower COGS, higher NI

NI impact = +15 × (1 − 0.25)

Reserve $80; COGS −$15; NI +$11.25

4. Inventory Write-down (Lower of Cost or NRV) Concept

IFRS Lower of cost and net realizable value (NRV); reversal allowed up to original cost.
US GAAP Lower of cost and market (or NRV under FIFO/wgt avg); reversals NOT allowed.

5. Inventory Activity Ratios Core

\[ \text{Inventory turnover} = \frac{COGS}{\text{Avg. inventory}} \] \[ DOH = \frac{365}{\text{Inventory turnover}} \]

Practice problem

COGS = $480, average inventory = $80. Compute inventory turnover and DOH.

Show solution

Turnover = 480/80 = 6×

DOH = 365/6

Turnover 6×; DOH ≈ 60.8 days

Practice problem Practice

Practice problem

Beginning inventory = $100, purchases = $400, ending inventory = $150. Compute COGS.

Show solution

COGS = Beg + Purch − End

= 100 + 400 − 150

COGS = $350