valuation allowance

问题如下：

Question

Which of the following conclusions is most accurate based on the foregoing information?

选项：

A.The company faces a strong possibility of future write-downs.

B.The price of supplies increased significantly.

C.Management anticipates a strong increase in product demand.

解释：

Solution

1. Correct. The company experienced a large buildup of finished goods (38% increase) and a decline in both raw materials (–11.3%) and work in process (–4.0%). This scenario suggests a decline in demand for the company’s products and a strong likelihood of future write-downs. Supplies grew by less than 2.0%, but sales increased by less than 5.0%, so it is unlikely that the price of supplies increased significantly.

2. Incorrect. Supplies have grown by less than 2.0%, but sales have increased by just under 5.0%, so it is unlikely that there has been a significant increase in the price of supplies.

3. Incorrect. There is a large buildup of finished goods (38% increase) and a decline in both raw materials (–11.3%) and work in process (–4.0%). This suggests a decline in demand for the firm’s products.

Analysis of Inventories

• describe the presentation and disclosures relating to inventories and explain issues that analysts should consider when examining a company’s inventory disclosures and other sources of information