The attached articles provide comprehensive illustrations for analyzing different investment activities, including cash, inventory, receivables, combinations, associates, etc. Proper investment analysis helps evaluate company performance, financial positions and future prospects. FIFO and LIFO inventory methods illustrate their different impacts on inventory values, cost of goods sold, profits and taxes in periods of rising prices. With thoughtful investment illustration, analysts gain invaluable insights into corporate investing behaviors and their implications on financial statements.
Illustration of FIFO and LIFO inventory methods shows their contrasting effects
The sample analysis illustrates FIFO tends to result in higher inventory values, lower COGS, higher profits and taxes compared to LIFO in periods of rising prices and stable/increasing inventory. Meanwhile, LIFO yields lower inventory, higher COGS, lower profits and taxes. For solvency ratios, FIFO provides more useful estimates as inventory is not understated. To fairly evaluate ratios for LIFO firms, LIFO inventory can be restated to FIFO by adding back the LIFO reserve.
Steps to restate LIFO inventory to FIFO for proper ratio analysis
The article outlines a three step process to restate LIFO to FIFO: 1) Reported LIFO Inventory + LIFO reserve; 2) Deferred tax payable + [LIFO reserve x Tax rate]; 3) Retained earnings + [LIFO reserve x (1-Tax rate)]. This shows the equity impact of the LIFO reserve. For firms unlikely to pay tax, the adjustment is solely to retained earnings.
Illustration of consolidation method in business combinations
The consolidation method aggregates assets, liabilities, revenues and expenses of the parent and subsidiary. It eliminates intercompany transactions and accounts. Consolidated financials provide a comprehensive view of the parent and subsidiaries. The illustration shows the step-by-step aggregation, and how minority interest is reflected for non-wholly owned subsidiaries.
Illustration of equity method for investment in associates
The equity method is commonly used when an investor has significant influence over the investee, but not control. The investment is initially recorded at cost, then increased/decreased by the investor’s share of the investee’s earnings/dividends. The illustration shows how an investor would record its 25% interest in an investee under the equity method.
In summary, thoughtful investment illustration is invaluable for evaluating corporate investing behaviors and their implications. The illustrations here highlight the contrasting effects of FIFO and LIFO, consolidation and equity methods, and steps to properly restate LIFO financials. With detailed illustrations, analysts gain critical insights to assess performance, financial positions and prospects.