Reading 36: Inventories-LOS h 习题精选 2011, management, interpret, number, center

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Session 9: Financial Reporting and Analysis: Inventories, Long-lived Assets, Income Taxes, and Non-current Liabilities
Reading 36: Inventories

LOS h: Calculate and interpret ratios used to evaluate inventory management.

 

 

The inventory turnover ratio and the number of days in inventory are least likely used to evaluate the:

A) effectiveness of a firm’s inventory management.

B) age of a firm’s inventory.

C) stability of a firm’s inventory levels.

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Neither metric is directly relevant in evaluating the stability of a firm’s inventory levels. Determining stability would presumably require other information such as purchase and sales levels, for example. The inventory turnover ratio and the number of days in inventory can be used to evaluate the relative age of a firm’s inventory as well as the effectiveness of a firm’s inventory management.

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Which of the following ratio levels would suggest that a company is holding obsolete inventory?

A) Low inventory turnover ratio.

B) Low inventory value compared to cost of goods sold.

C) Low number of days in inventory.

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Low inventory turnover (high number of days in inventory) may be a sign of slow-moving or obsolete inventory, especially when coupled with low or declining revenue growth compared to the industry. Low inventory value compared to cost of goods sold, however, implies a high inventory turnover ratio. This suggests much less risk of obsolescence.

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When analyzing profitability ratios, which inventory accounting method is preferred?

A) Last in, first out (LIFO).

B) Weighted average.

C) First in, first out (FIFO).

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Using LIFO cost of goods sold (COGS) gives a more accurate measure of future earnings because the LIFO COGS is more representative of the current cost of product sold as compared to using FIFO therefore net income will be more accurately represented.