Question

Applying IFRS - LVMH is a Paris-based manufacturer of luxury goods that prepares its financial statements using IFRS. During the year, the management of the company undertook a review of the fair value of its inventory and found that the inventory had appreciated above its book value of 12 million euros. According to the company’s management, the inventory was undervalued by 2 million euros. Prepare the journal entry to revalue the company’s inventory. How would the revaluation immediately affect the company’s (a) current ratio, (b) inventory turnover, and (c) days’ sales in inventory?

Answer 1

AS per IFRS:

• Any losses related to the inventory and write down of inventory to its NRV will be recorded as expense in the relevant period in which loss or write down arises.

• The reversal of write down related to inventory will be recorded as reduction in expense in the period in which reversal of write down arises.

Journal Entry for revaluing Company's Inventory:

Debit Inventory $ 2000,000

Credit Cost of good Sold $2000,000.

The current ratio = Current Assets/Current Liabilities.

The Current ratio will increase since the closing Inventory will be increased by 2 Million.

Inventory Turnover will be decrease since, Inventory Turnover = Cost of gooods sold/ Average Inventory.

Costs of goods sold is decreased by 2 million whereas the closing inventory is increased by 2 million, on doing average with opening, the increase in inventory is less than decrease in costs of goods sold, thus the ratio will be lower.

No of days inventory = 365/Inventory Turnover

Since the inventory turnover ratio will decrease, days' sales in inventory will increase.