Q2IFRS - Intermediate Accounting (Kieso)

Question

LaTour Inc. is based in France and prepares its financial statements in accordance with IFRS. In 2017, it reported cost of goods sold of \(578 million and average inventory of \)154 million. Briefly discuss how analysis of LaTour’s inventory turnover (and comparisons to a company using GAAP) might be affected by differences in inventory accounting between IFRS and GAAP.

Step-by-Step Solution

Answer

The inventory turnover ratio is 3.75 times.

Step1: Calculation of inventory turnover ratio

The inventory turnover ratio is calculated as follows: 

$$\begin{gathered} \mathbf{InventoryTurnoverRatio}\mathbf{=}\frac{\mathbf{CostofGoodsSold}}{\mathbf{AverageInventory}} \\ \mathbf{=}\frac{\mathbf{\$}\mathbf{578}\mathbf{Million}}{\mathbf{\$}\mathbf{154}\mathbf{Million}} \\ \mathbf{=}\mathbf{3}\mathbf{.}\mathbf{75}\mathbf{Times} \end{gathered}$$

Step2: Analysis of inventory turnover ratio

The inventory turnover ratio is the financial ratio, which measures the number of times the average inventory of the business is converted into sales. The inventory turnover ratio is 3.75 times, which indicates that the average inventory is converted by 3.75 times into sales.