CFA Level 2 - Inventory
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9 terms
Terms | Definitions |
|---|---|
 LIFO Reserve | The diffference in LIFO Ending inventory, for a company using LIFO, the difference between inventory reported using LIFO and inventory using FIFO |
| LIFO effect | The change from one period to the next in the balance of the account (Allowance to Reduce Inventory to LIFO, also called the LIFO reserve) that companies use to record the difference between the non-LIFO inventory method used for internal-reporting purposes and LIFO used for tax or external-reporting purposes. (p. 398). |
| Adjusting LIFO to FIFO | 1.Add LIFO reserve to inventory 2. Subtract the income taxes on the LIFO reserve from cash 3. Add the LIFO reserve, net of tax, to RE 4. Subtract the Change in LIFO reserve from COGS 5. Add the income taxes from the change in the LIFO reserve to income tax expense. |
| LIFO Liquidation | The result of selling more units than are purchased during the period, which can have negative tax consequences if a company is using LIFO. |
| Lower of cost or net realizable value | Inventory reported under IFRS |
| Net realizable value | The estimated selling price of an item of inventory less any direct costs of disposal, such as sales commissions. |
| Lower-of-cost-or market | US GAAP: method of valuing inventory that reports the inventory at the lower of its cost or current market value.Inventory gains are only recognized when the inventory is sold under US GAAP. |
| Market | Market is usually equal to replacement cost. Determined by selecting the middle value from net realizable value, replacement cost and net realizable value less a normal PM. |
| Declining demand | Finished goods inventory is growing faster than sales and potentially obsolete inventory. |
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