Interesting inventory question..

CFA Level I
#1

From 2012’s mock exam:

_The following information is available about a manufacturing company: __ million__ Cost of ending inventory computed using FIFO __4.3__ Net realizable value __4.1__ Current replacement cost __3.8__ If the company is using International Financial Reporting Standards (IFRS), instead of U.S. GAAP, its cost of goods sold ( millions) is most likely: A. the same. B. 0.3 lower._C. 0.3 higher. The answer provided was: A is correct. Under IFRS, the inventory would be written down to its net realizable value ($4.1 million), whereas under U.S. GAAP, market is defined as current replacement cost and hence would be written down to its current replacement cost ($3.8 million). The smaller write down under IFRS will reduce the amount charged to the cost of goods sold, as compared with U.S. GAAP, and result in a lower cost of goods sold of $0.3 million.

Shouldn’t it be B) 0.3 lower instead?

Under IFRS, the write down is -0.2 million and is included in COGS ,while under US GAAP, the write down will be -0.5 million and expensed through COGS.

So if they were reporting under IFRS, then the amount that is written off from inventory and expensed will be 0.3 million lower.

#2

Can anyone provide some feedback on this question? Thank you.

#3

I came across this question in one of the mocks. Ending inventory= begining inventory + purchases - COGS. So when you impair the inventory COGS goes up. In IFRS you impair it down by 0.2, in GAAP by 0.5. So in IFRS COGS increases by 0.2 and in GAAP it increases by 0.5. Hence in IFRS COGS in 0.3 lower than in GAAP.

B) is correct