Learning Objectives
- Understand the risks and benefits of holding inventory.
- Explain how cost flow assumptions affect inventory balances and cost of goods sold.
- Analyze the activity in inventory and related accounts.
- Consider the financial statement effects of using different cost flow assumptions and of International Financial Reporting Standards (IFRS) for inventory.
- Restate a company's inventory balances and cost of sales to reflect IFRS-like reporting.
- Calculate inventory ratios under different cost flow assumptions.
Refer to the fiscal 2012 financial statements and notes of Deere & Company and CNH Global N.V. Note that Deere has an October 31 year end and CNFI a December 31 year end.
Concepts
a. Explain the risks and benefits associated with holding inventory.
b. Note 15 reveals that the balance sheet inventory amount consists of three types of inventory. What types of costs do you expect to be in the raw materials inventory? In the work-in-process inventory? In the finished goods inventory?
c. Why do companies use cost flow assumptions to determine inventory cost? What cost flow assumption(s) does Deere and Company use to determine inventory cost?
d. Assume that prices that Deere and CNH Global pay for inventory typically increase over time. CNI I uses the first-in, first-out (FIFO) cost flow assumption to measure its inventories. In general terms, how do the balance sheet values for inventories of the two companies differ due to their cost flow assumptions? What numbers on the two companies' income statements would differ? What if prices typically decrease over time?