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

About: Beg + Purchases = COGS + Ending. Identity that links the income statement (COGS) to the balance sheet (Ending Inv). Always solve for the missing piece.Tóm tắt: Beg + Purchases = COGS + End. Đẳng thức nối KQKD (COGS) với CĐKT (End Inv).

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

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

About: FIFO uses oldest costs first; LIFO uses newest. In rising prices: LIFO has lower NI and lower ending inventory but higher COGS. IFRS bans LIFO.Tóm tắt: FIFO (cũ trước), LIFO (mới trước). Lạm phát: LIFO có NI và End Inv thấp, COGS cao. IFRS cấm LIFO.

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

About: Difference between FIFO and LIFO inventory values. Disclosed by US LIFO firms. Used to convert LIFO statements to FIFO for cross-firm comparability.Tóm tắt: Chênh lệch FIFO − LIFO inventory. DN LIFO Mỹ phải công bố. Dùng quy đổi LIFO sang FIFO.

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

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

About: IFRS — lower of cost and NRV; reversals allowed up to original. US GAAP — lower of cost and market; no reversals. NRV = selling price − costs to complete & sell.Tóm tắt: IFRS: cost vs NRV, đảo được. US GAAP: cost vs market, không đảo.

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

About: Inventory turnover = COGS / avg inv (how fast inventory sells). DOH = days inventory sits = 365/turnover. High turnover = efficient (or stockout risk).Tóm tắt: Vòng quay HTK = COGS/avg inv. DOH = số ngày HTK = 365/vòng quay. Vòng cao = hiệu quả (hoặc thiếu hàng).

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

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