Analysis of Inventories
2025 Curriculum
CFA® Program Level I
Financial Reporting and Analysis
Refresher reading access
Introduction
The choice of inventory valuation method (also known as the cost formula or cost flow assumption) can have a significant impact on inventory carrying amounts and cost of sales. These items in turn affect other financial statement items, such as current assets, total assets, gross profit, and net income. A company’s financial statements and accompanying notes provide important information about its inventory accounting policies that the analyst needs to correctly assess financial performance and compare it with that of other companies.
Learning Outcomes
The candidate should be able to:
- describe the measurement of inventory at the lower of cost and net realisable value and its implications for financial statements and ratios
- calculate and explain how inflation and deflation of inventory costs affect the financial statements and ratios of companies that use different inventory valuation methods
- 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
1.25 PL Credit
If you are a CFA Institute member don’t forget to record Professional Learning (PL) credit from reading this article.