ZP Corporation is a (hypothetical) multinational corporation headquartered in Japan that trades on numerous stock exchanges. ZP prepares its consolidated financial statements
23 Item set developed by Karen O’Connor Rubsam, CFA (Fountain Hills, Arizona, U.S.A.).
in accordance with U.S. GAAP. Excerpts from ZP’s 2009 annual report are shown in Exhibits J−L.
EXHIBIT L Selected Disclosures in the 2009 Annual Report
Management’s Discussion and Analysis of Financial Condition and Results of Operations
“Cost reduction efforts were offset by increased prices of raw materials, other production materials
and parts.” . . . “Inventories decreased during fiscal 2009 by ¥122.1 billion, or 20.1%, to ¥486.5 billion. Th is reflects the impacts of decreased sales volumes and fluctuations in foreign currency translation rates.”
Management and Corporate Information
Industry and Business Risks
Th e worldwide market for our products is highly competitive. ZP faces intense competition from other manufacturers in the respective markets in which it operates. Competition has intensified due to the worldwide deterioration in economic conditions. In addition, competition is likely to further intensify because of continuing globalization, possibly resulting in industry reorganization Factors affecting competition include product quality and features, the amount of time required for innovation and development, pricing, reliability, safety, economy in use, customer service, and financing terms. Increased competition may lead to lower unit sales and excess production capacity and excess inventory. Th is may result in a further downward price pressure. ZP’s ability to adequately respond to the recent rapid changes in the industry and to maintain its competitiveness will be fundamental to its future success in maintaining and expanding its market share in existing and new markets.
Notes to Consolidated Financial Statements
2. Summary of significant accounting policies:
Inventories. Inventories are valued at cost, not in excess of market. Cost is determined on the “average-cost” basis, except for the cost of finished products carried by certain subsidiary companies which is determined “last-in, first-out” (“LIFO”) basis. Inventories valued on the LIFO basis totaled ¥94,578 million and ¥50,037 million at 31 December 2008 and 2009, respectively. Had the “first-in, first-out” basis been used for those companies using the LIFO basis, inventories would have been ¥10,120 million and ¥19,660 million higher than reported at 31 December 2008 and 2009, respectively.
Inventories consist of the following:
Which observation is most likely a result of looking only at the information reported in Note 9?
A. Increased competition has led to lower unit sales.
B. Th ere have been significant price increases in supplies.
C. Management expects a further downturn in sales during 2010.