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Type of Securities Investment Strategies Fundamental Analysis Technical Analysis
Understanding Financial Statements Income Statement Analysis Balance Sheet Analysis Cash Flow Analysis Shareholders' Equity Analysis Ratios and Definitions


Balance Sheet Analysis

 - Leverage and financial
   strength affect share value

 - Liquidity concerns can
   decimate a business

 - Cash is critical, to a point
    * Window Dressing
    * Cash Gap
    * Cash per Share
    * Burn Rate

 - Marketable Securities

 - Receivables are interwoven
    with cash flow
    * Past Dues and Write-offs
    * Receivables turnover ratios
    * Securitizations

 - Inventory - focus on the
   profit margins
   * Perpetual vs. Periodic
      Inventory
   * Inventory Accounting
      Calculation
   * Inventory Costing Methods
   * Lower of Cost of Market
   * Inventory Categories
   * Inventory Turnover Ratios

 - Fixed assets are necessary in
   order to be a world class
   company

 - Liabilities with equity attributes
   are enriching

 - Emphasizing debt net of cash
   can be misleading

 - Book value is a tool to
   properly evaluate a stock

 - Off-balance sheet assets and
   liabilities are legal

 

 


Inventory Costing Methods

How companies account for inventory movement results in different balance sheet and cost of sales values. Inventory items can be traced by actual specific identification cost, by an average cost per item, by “FIFO” costing (first in first out), or “LIFO” costing (last in first out). All of these methods, plus others, are valid approaches in the attempt to match product revenues with the appropriate product cost of sales.

FIFO vs. LIFO

The FIFO inventory method leaves the latest purchases, thus the most recent costs, in inventory.  This results in the earlier items and associated costs being considered as sold first.

The LIFO costing method results in the earlier purchases and their associated costs being considered as remaining in inventory; the current period’s cost of sales represents the latest cost. In an inflationary period, this can result in inventory valuation on the balance sheet being understated, when compared with current fair market values. LIFO allows companies to “manage earnings” by liquidating inventory layers that have lower associated costs. “Eating” into old layers can result in higher gross profit margins than the current market is bearing, distorting the basic principle of matching revenues with appropriate expenses.

In an inflationary environment FIFO results in the highest profit, while LIFO results in the lowest inventory value. The balance sheet differential between FIFO and LIFO inventory book values is referred to as the LIFO reserve. Most investors don’t consider this to be an issue any longer, as inflation is relatively stable.

Click here for information on:
-Focus on the Profit Margins
-Perpetual vs. Periodic Inventory
-Inventory Accounting Calculation
-Lower of Cost or Market
-Inventory Categories
-Inventory Turnover Ratios

 

 

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