Question

RI7-2  

(Inventory turnover and valuation)

Brick Brewing Co. Limited is a Canadian-owned brewery with its head office in Kitchener, Ontario. The company brews, sells, and markets its products under the Waterloo, Laker, Red Baron, Red Cap, and Formosa brand names. The company also produces, sells, markets, and distributes Seagram's Coolers across Canada. The information in Exhibits 7.24A to 7.24C was taken from the company's 2017 annual financial statements.

EXHIBIT 7.24ABrick Brewing Co. Limited's Statements of Financial Position

BRICK BREWING CO. LIMITED

Statements of Financial Position

(As at January 31, 2017 and January 31, 2016)

	Notes	January 31, 2017	January 31, 2016
ASSETS
Non-current assets
Property, plant and equipment	12	$21,709,425	$21,986,070
Intangible assets	13	15,499,186	15,375,392
Construction deposits		2,462,328	-
Deferred income tax assets	11	-	1,262,769
		39,670,939	38,624,231
Current assets
Cash		2,831,959	393,645
Accounts receivable	14	7,035,714	6,176,421
Inventories	15	5,619,329	3,291,529
Prepaid expenses		593,180	354,650
		16,080,182	10,216,245
TOTAL ASSETS		$55,751,121	$48,840,476
LIABILITIES AND EQUITY
Equity
Share capital	16	$39,651,096	$39,526,573
Share-based payments reserves	17	943,565	932,201
Deficit		(2,758,560)	(4,933,195)
TOTAL EQUITY		37,836,101	35,525,579
Non-current liabilities
Provisions	19	411,599	388,548
Obligation under finance lease	20	3,781,855	4,523,152
Long-term debt	21	2,498,580	1,548,584
Deferred income tax liabilities	11	82,389	-
		6,774,423	6,460,284
Current liabilities
Accounts payable and accrued liabilities	23	9,655,405	4,908,722
Current portion of obligation under finance lease	20	741,297	713,699
Current portion of long-term debt	21	743,895	1,232,192
		11,140,597	6,854,613
TOTAL LIABILITIES		17,915,020	13,314,897
COMMITMENTS	25,26
TOTAL LIABILITIES AND EQUITY		$55,751,121	$48,840,476

EXHIBIT 7.24BExcerpt from Notes to Brick Brewing Co. Limited's 2017 Financial Statements

BRICK BREWING CO. LIMITED

Excerpt from Notes to Financial Statements

5.10. Inventories

Inventories are recorded at the lower of cost and net realizable value. Cost includes expenditures incurred in acquiring the inventories and bringing them to their existing location and condition. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs to complete and sell the product.

The cost of raw materials and supplies are determined on a first-in, first-out basis. The cost of finished goods and work-in-process are determined on an average cost basis and include raw materials, direct labour, and an allocation of fixed and variable overhead based on normal capacity.

Inventories are written down to net realizable value if that net realizable value is less than the carrying amount of the inventory item at the reporting date. If the net realizable value subsequently increases, a reversal of the loss initially recognized is applied to cost of sales.

EXHIBIT 7.24CExcerpt from Notes to Brick Brewing Co. Limited's 2017 Financial Statements

BRICK BREWING CO. LIMITED

Excerpt from Notes to Financial Statements

15. Inventories

The inventories balance consists of the following:

	January 31, 2017	January 31, 2016
Raw materials, supplies and other	$1,991,068	$1,568,442
Work in progress and finished goods	3,628,261	1,723,087
	$5,619,329	$3,291,529

As at January 31, 2017, a provision of $121,170 (January 31, 2016 − $56,670) has been netted against inventory to account for obsolete materials.

The cost of inventories recognized as cost of sales during the year ended January 31, 2017 are $25,126,291 (January 31, 2016 − $22,766,711). Included in this amount are charges related to impairment caused by obsolescence. During the year ended January 31, 2017, these charges amounted to $97,780 (January 31, 2016 − $22,446).

Required

a.  

Note 15, shown in Exhibit 7.24C, breaks down Brick's inventory into two classifications. Which classifications of inventory do you believe should be used in determining the inventory turnover ratio? Why?

b.  

Describe Brick Brewing's inventory valuation policies in your own words. Specifically, explain what Brick Brewing includes in inventory cost, what cost formula(s) the company uses, and how it values its inventory on the statement of financial position.

c.  

Calculate the inventory turnover ratio and days to sell inventory ratio for 2017 and 2016. Use the inventory values in 2017 and 2016 rather than the average inventory to calculate the ratios. Explain the amounts you selected from the financial statements to use in your calculation.

Answer 1

1. The Financial Statement presents 2 classifications namely Raw Material, supplies and other as first and WIP and finished goods as second.

Both the should be used together for the purpose of inventory turnover ratio becuase realisation of cash and replacement of finished goods and raw material number of times and hence, both category should be used.

2. The Inventory valuation is as follows-

Raw material supplies- valued at cost or net realisable value, whichever is lower. Cost is calculated using first in first out basis. It means that cost is determined and then compared with the net realisable value and whichever is lower is used for recording the inventory.

Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs to complete and sell the product i.e. advertisement, sales promotion cost is reduced from sales price to arrive at net realisable value.

Finished goods and WIP- valued at cost or net realisable value, whichever is lower. Cost in valuation of Finished goods and WIP is includes average of the expenditures incurred in acquiring the inventories and bringing them to their existing location and condition.

Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs to complete and sell the product.i.e. advertisement, sales promotion cost is reduced from sales price to arrive at net realisable value.

3.

Inventory turnover ratio= Cost of goods sold / Average inventory

	2017	2016
COGS	25,126,291	22,766,711
Inventory value	5,619,329	3,291,529
Inventory turnover ratio	4.47	6.92