...TrueBlood Case 04-4 - Inventory The FASB Codification provides guidance on how developing animals and animals available and held for sale are to be valued. Section 905-330-35-2 states that developing animals are to be valued at the lower of cost or market. Section 05-330-32-3 states that animals available and held for sale are to be valued: a. The lower of cost or market b. At sales price less estimated costs of disposal, if all the following conditions exist: 1. The product has a reliable, readily determinable, and realizable market price. 2. The product has relatively insignificant and predictable costs of disposal. 3. The product is available for immediate delivery. In the case of Three Little Pigs, Inc. it is clear that inventory is valued at the lower of cost or market. Section 330-10-35-1 provides the conditions under which inventory should be evaluated for impairment: A departure from the cost basis of pricing the inventory is required when the utility of the goods is no longer as great as their cost. Where there is evidence that the utility of goods, in their disposal in the ordinary course of business, will be less than cost, whether due to physical deterioration, obsolescence, changes in price levels, or other causes, the difference shall be recognized as a loss of the current period. This is generally accomplished by stating such goods at a lower level commonly designated as market. In this case, the company has recognized that...
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...Company’s main processing plants. As a result, these live hogs must be sold to third parties at spot market prices. 3. There are several factors, including increased supply of pork due to the capture of the Big Bad Wolf, have lead to the declining prices for their live hog on the spot market. * Solution Analysis Complying with the periodicity assumption and the conservative principle, marking inventories down will better reflect the value of the inventory. There are several parts mentioned the inventory impairment in ARB43, Ch.4 Par.9: "The rule of cost or market whichever is lower is intended to provide a means of measuring the remaining usefulness of an inventory expenditure." "Inventory losses from market declines should not be deferred beyond the interim period in which the decline occurs." There are four alternatives to deal with this inventory case of the Company. i) Under the lower of cost or market method on a total inventory basis GAAP requires that the inventory be written down to the lower of cost or market when substantial evidence exists that market prices will recover before the inventory is sold. A write-down is generally required unless the decline is due to seasonal price fluctuations (FASB Cod. # 270-10-45-6). In this case, if it can be determined that the future prices for lean hogs decline only for a temporary period and...
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...Three Little Pigs Case I. INTRODUCTION Three Little Pigs, Inc.(PIGS) provides pork products, and sells a quantity of hogs produced to a number of wholesalers, retailers, and third parties across the United States. PIGS has three inventory departments which consist of live hogs ready for sale, developing animals, and processed pork items. Management has concerns about how to evaluate their different levels of inventory, and how they should account for impairment. The issue of impairment relates only to the live hogs and developing animals sold to third parties because management believes the internal pork products will be able to satisfy the cost of live hogs and animals processed internally. II. How should the company determine whether an inventory impairment exists i. Should inventory be evaluated for impairment under the lower of cost or market method on a total inventory basis? According to the FASB Accounting Standards Codification ASC 330-10-35-8 (inventory) " Depending on the character and composition of the inventory, the rule of lower of cost or market may properly be applied either directly to each item or to the total of the inventory (or in some cases, the total of the components of each category). The method shall be that which most clearly reflects periodic income." When a firm chooses to value its inventories based on the profitability of one inventory division it makes the assumption that all of the inventory divisions are...
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...the market price of pork is on the decline. Although the market price for hogs is forecasted to stabilize within the year, Three Little Pigs, Inc. (PIGS) is dealt with the dilemma of whether they should impair their inventory of hogs, effective September 30, 2002. With three categories of hog inventory (live hogs for sale, developing animals, and processed pork products), PIGS is only considering to impair their inventories of live hogs and developing animals to be sold to third parties at market prices. Concerning processed pork prices, they are believed to be sufficient to cover production costs. II. Issues Management refuses to write off their inventory as they believe future stabilized prices will cover the losses from the previous quarters. However, specific scenarios must be evaluated to decide what the best solution is for PIGS to efficiently report their inventory. The issue is whether impairment should exist at September 30, 2002. If impairment shall exist, the question remains whether the impairment would be evaluated under the lower cost or market method on a total inventory basis, category basis, end product basis, or on an individual basis. If deemed necessary to impair, PIGS will need to determine whether impairment should be recognized in an interim period where prices are expected to recover. III. Conclusion On behalf of Titan Union Accountants, I believe the best way to represent fair income is to evaluate impairment under the lower cost or market...
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...increase the wealth of the shareholders, also identifying the associated risks and how those could be minimized. Assuming the development costs are correctly estimated and the market response is properly gauged, the reasons to go forward with the project outweigh those against it. The market competition corroborated with the unfavorable economic conditions prompt a swift and decisive answer from Boeing. The new 7E7 will have lower operating costs due to increased cargo space and increased fuel economy due to new engine design, would also be versatile and suitable for both short and long flight routes. Ensuring the development and manufacturing costs are kept down by employing decades of engineering expertise and already proven technologies and solutions, it is recommended that Boeing undertakes the 7E7 project. Cost of Equity The 7E7 Project is a risky project. With a beta of 2.540738, which is substantially higher than the stock market average company, volatility is expected in this investment. However, with risk comes a reward. The 7E7 project would need to provide returns of 22.7009% in order to be considered a sound investment. E(Ri) = .0456+ 2.540738 [.117 - .0456] E(Ri) = .0456+ 2.540738 [.0714] E = 22.7009% Market Risk Premium The equity market risk premium should equal the return expected by investors on a market portfolio relative to riskless assets. We have decided to use the 30-Year Treasury Bond as the risk free return because it most closely mimics...
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...even though market prices fell below the cost, Three Little Pigs Inc. is unwilling to accept impairment on their inventory due to increase revenue believed to be made up in the fourth quarter which will cover all losses from the decline. Secondly, we must determine an appropriate solution for recording their inventory. Possible Solutions: * Inventory be evaluated for impairment under the lower of cost or market method by inventory category, such as processed pork products, live hogs for sale, and developing animals. * Inventory be evaluated for impairment under the lower of cost or market method based on end product category, such as separating inventory into two groups: • nternal live hogs & developing animals to be processed are combined with processed pork products • Developing animals and live hogs sold to third parties in another group * Inventory evaluated for impairment on some other basis not described above Codification: 330-10-35 A departure from the cost basis of pricing the inventory is required when the utility of the goods is no longer as great as their cost. Where there is evidence that the utility of goods, in their disposal in the ordinary course of business, will be less than cost, whether due to physical deterioration, obsolescence, changes in prices levels, or other causes, the differences shall be recognized as a loss of the current period. This is generally accomplished by stating such goods at lower level commonly designated as market (asc.fasb...
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...question of impairment applies only to the live hogs and developing animals to be sold to a third party because it is believed that internally processed pork products will be able to cover the costs of live hogs and developing animals to be processed internally. Question: How should the Company determine whether an inventory impairment exists at September 30, 2002? More specifically, how should management evaluate impairment? Response: ASC 330-10-35-2 states that, “in accounting for inventories, a loss shall be recognized whenever the utility of goods is impaired by damage, deterioration, obsolescence, changes in price level, or other causes.” In PIGS case they should recognize a loss because the utility of their live hogs to be sold to a third party and their developing animals to be sold to a third party have suffered from a decrease in price level. When determining whether inventory should be evaluated for impairment under the lower of cost or market method or on a total inventory basis, ASC 905-330-35-2 states, “developing animals to be held for sale shall be valued at lower of cost or market.” As for the live hogs to sold to a third party, ASC 905-330-35-3 states that unless the following conditions are all met, “1) The product has a reliable, readily determinable, and realizable market price. 2) The product has relatively insignificant and...
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...Constantine Brocoum Courtney Delia Stephanie Doherty David Dubois Radu Oprea October 15th, 2009 Contents Objectives 1 Management Summary 1 Cost of Equity 1 Equity Market Risk Premium 1 Beta 2 Risk Free Rate 2 Capital Structure Weights 2 Boeing 7E7 Project Evaluation 4 Circumstances for an economically attractive project 4 Market Demand 4 Market Share 4 Sensitivity Analysis 4 Conclusion 7 Board approval for the project? 7 Appendices 7 Appendix A 7 Objectives This report seeks to answer the following three questions about the Boeing 7E7 project: 1. What is an appropriate required rate of return against which to evaluate the prospective IRRs from the Boeing 7E7? a. Please use the capital asset pricing model to estimate the cost of equity. b. Which equity market risk premium (EMRP) did you use? Why? c. What Beta did you use and how did you derive it? d. Which risk-free rate did you use? Why? e. Which capital-structure weights did you use? Why? 2. Judged against your WACC, how attractive is the Boeing 7E7 project? a. Under what circumstances is the project economically attractive? b. What does sensitivity analysis (your own and/or that shown in the case) reveal about the nature of Boeing’s gamble on the 7E7? 3. Should the board approve the 7E7? Management Summary The analysis identifies...
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...prospective IRRs from the Boeing 7E7? a. Please use the capital asset pricing model to estimate the cost of equity. b. Which equity market risk premium (EMRP) did you use? Why? c. What Beta did you use and how did you derive it? d. Which risk-free rate did you use? Why? e. Which capital-structure weights did you use? Why? 2. Judged against your WACC, how attractive is the Boeing 7E7 project? a. Under what circumstances is the project economically attractive? b. What does sensitivity analysis (your own and/or that shown in the case) reveal about the nature of Boeing’s gamble on the 7E7? 3. Should the board approve the 7E7? Management Summary The analysis identifies both risks and benefits associated with undertaking the 7E7 project. Giving a calculated WAAC of 15.44% for the commercial division of Boeing, the project is feasible and profitable. As you will find, the financial calculations provided in this report show that the project will increase the wealth of the shareholders, also identifying the associated risks and how those could be minimized. Assuming the development costs are correctly estimated and the market response is properly gauged, the reasons to go forward with the project outweigh those against it. The market competition corroborated with the unfavorable economic conditions prompt a swift and decisive answer from Boeing. The new 7E7 will have lower operating costs due to increased cargo space and increased fuel economy due to new engine design, would also...
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...live hogs on the spot market. Also as shown bellow futures prices will remain below the carrying cost for live hogs until nearly the end of the fiscal year. However processed pork products such as bacon, loins, and ham remain above the current cost of production. Three Little Pigs Inc. is capable of processing hogs into these products internally at some locations. Unfortunately, not all hogs can be transported and processed at the main processing plants and must be sold as live hogs to third parties at spot market prices. There are four potential alternatives for dealing with the possible need to impair the value of Three Little Pigs Inc.'s inventories. Alternative 1: Continue to carry all inventories at cost basis. ARB28, Par.14c ?Such temporary market declines need not be recognized at the interim date since no loss is expected.? EITF, 86-13 Discussion ?? option 28 requires inventory be written to lower of cost or market unless (1) substantial evidence exists that market prices will recover before the inventory is sold? Write down is generally required unless the decline is due to seasonal pricing fluctuation.? ARB43, Ch.4, Par.9 ?Where evidence indicates that cost will be recovered with an approximately normal profit upon sale in the ordinary course of business, no loss should be recognized...? If it can be determined that the depressed prices for lean hogs are only temporary, inventories could and should be kept at cost basis. In this case, adjusting prices to...
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...impairment applies only to the live hogs and developing animals to be sold to a third party because it is believed that internally processed pork products will be able to cover the costs of live hogs and developing animals to be processed internally. Question: How should the Company determine whether an inventory impairment exists at September 30, 2002? More specifically, how should management evaluate impairment? Response: ASC 330-10-35-2 states that, “in accounting for inventories, a loss shall be recognized whenever the utility of goods is impaired by damage, deterioration, obsolescence, changes in price level, or other causes.” In PIGS case they should recognize a loss because the utility of their live hogs to be sold to a third party and their developing animals to be sold to a third party have suffered from a decrease in price level. When determining whether inventory should be evaluated for impairment under the lower of cost or market method or on a total inventory basis, ASC 905-330-35-2 states, “developing animals to be held for sale shall be valued at lower of cost or market.” As for the live hogs to sold to a third party, ASC 905-330-35-3 states that unless the following conditions are all met, “1) The product has a reliable, readily determinable, and realizable market price. 2) The product has relatively...
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...transportation carriers charge for their services; price representing the value of services performed based on prevailing market forces. 2. The theory of contestable markets is offered to identify the relevant market structure for the deregulated transportation environment. Explain the theory. ANS: Explanation is offered for the case of airline deregulation. For deregulation to work, its market structure must closely resemble pure competition. The airline industry appeared to be oligopolistic and would prevent new entrants. Some consensus did exist that the airline industry could perform competitively. This provides the rationale for the theory, which proposes that potential competition be substituted for the active participation of many sellers. For the theory to work, four conditions have to be met: no barrier to market entry, no economics of scale, consumers would be willing to switch quickly among carriers, and existing carriers had to be prevented from responding to new entrants' lower prices. 3. Define and discuss Cost of Service Pricing. ANS: Cost of service pricing takes a marginal-cost approach to pricing. Cost of service pricing can also be analyzed as a total cost or fully allocated cost approach to price setting, where the price charged by a carrier for a movement of a commodity represents the recovery of the related costs to make the movement. Here: Price = FC + VC + Profit. Price is determined by the allocation of...
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....7 Liquidity.....................................................................................................................................8 Non-recurring items..................................................................................................................8 Valuation Assumptions...............................................................................................................................8 Dividend Discount Model........................................................................................................11 Free cash flow to the firm........................................................................................................12 Market multiples......................................................................................................................13 Sensitivity Analysis..............................................................................................................................14...
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...Darren Fedon - DLF0011 Case 04-4 Three Little Pigs, Inc. Background Three Little Pigs, Inc. (PIGS) is a provider of pork products to the food service industry and institutional markets in the U.S. PIGS develops and produces the majority of their hogs for internal processing (processed pork products) and while selling a portion for outside third parties (live hogs). During PIGS fiscal year 2003, an external factor has increased the supply of hogs on the market which in turn is pushing down futures prices. Management believes that this decline hog prices warrants reviewing their inventory because there may be a lower of cost or market issue. The basis for this assumption is the decline in futures prices in both the second and third quarters. However, the CEO believes that the price fluctuations are due to seasonality and thus temporary in nature, referencing the price recovery in the fourth quarter of the futures market and therefore impairment isn’t necessary. Issue PIGS management has concerns about how to evaluate their pig inventory for impairment. Two issues were raised related to inventory evaluation and reporting of the impairment (if applicable). The two issues are as follows: 1) The options for inventory evaluation presented to them are as follows a) total inventory basis, b) inventory category, c) end product category or d) individual basis. 2) Once a correct method has been selected; management will need to determine if impairment is needed,...
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...Microeconomic Assignment | The cost of Competition | Case Analysis | Justine Liu MBA Candidate at TiasNimbas Business School | * Explain how between January and September 1997 the game changed compared to that which had existed prior to January 1997. Prior to January 1997, there were only two big players in the market of flights between Turin in Italy and Innsbruck in Austria. These two players are Air Turin and Innsbruck Air. Thus we can conclude this market was a duopoly one. There were some features in this market. First, they provided differentiated services. Air Turin flied twice-daily whereas Innsbruck Air flied once a day. And their flight schedules were never the same. Second, they avoided conflicts with each other intelligently. Air Turin did not provide Sunday services, whereas Innsbruck Air did not provide Saturday services. Third, the pricing strategies they used were similar. As table shown the fare structure all in the same currency, we can find that there was no large differences between their price. Also, they even use the same price differentiation segmentations for customer with higher or lower price elasticity. Forth, they share almost half the market. In year, 1996, Air Turin achieved an average load factor of 65 per cent, and Innsbruck Air achieved 68 per cent. The market shares for Air Turin and Innsbruck Air, recorded at December 1996 on the Innsbruck-Turin route, were 58 per cent and 42 per cent respectively. There is interesting...
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