Study Session #9
Learning Outcome Statements
Last revised 12/18/04

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1. A. “Analysis of Inventories”
a) compute ending inventory balances and cost of goods sold using the LIFO, FIFO, and average
cost methods to account for product inventory;
b) explain the relationship among and the usefulness of inventory and cost-of-goods sold data
provided by the LIFO, FIFO, and average cost methods when prices are 1) stable or 2) changing;
c) adjust the financial statements of companies using different inventory accounting
methods to compare and describe the effect of the different methods on cost of goods sold and
d) discuss how a company’s choice of inventory accounting method affects other financial items such
as income, cash flow, and working capital;
e) compute and describe the effects of the choice of inventory method on profitability, liquidity,
f) discuss the reasons why a LIFO reserve might decline during a given period, and discuss the
implications of such a decline for financial analysis.
B. “Analysis of Long-Lived Assets: Part I . The Capitalization Decision”
a) compute and describe the effects of capitalizing versus expensing on net income, shareholders’
equity, cash flow from operations, and financial ratios;
b) explain the effects on financial statements of capitalizing interest costs;
c) explain the circumstances in which intangible assets, including software development costs and
research and development costs, are capitalized.
C. “Analysis of Long-Lived Assets: Part II . Analysis of Depreciation and Impairment”
a) identify the different depreciation methods, and discuss how the choice of depreciation method
affects a company’s financial statements, ratios, and taxes;
b) explain the role of depreciable lives and salvage values in the computation of depreciation
expenses;
c) compute and describe how changing depreciation methods or changing the estimated useful life or
salvage value of an asset affects financial statements and ratios;
d) discuss the use of fixed asset disclosures to compare companies’ average age of depreciable assets,
and calculate, using such disclosures, the average age and average depreciable life of fixed assets;
e) define impairment of long-lived assets and explain what effect such impairment has on a
company’s financial statements and ratios;
f) list the requirements of SFAS 143, Accounting for Asset Retirement Obligations (AROs), and
explain the likely financial statement and ratio effects for most firms.

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