Finning International Inc. is a Canadian company that sells, rents, finances, and provides customer support services (supplies parts and performs maintenance services) for Caterpillar equipment and engines. Caterpillar equipment is used in industries such as mining and forestry, and in large infrastructure projects. The inventory values from the 2009 and 2008 consolidated balance sheets are:
$993,523 thousand (2009) and $1,473,504 thousand (2008).
The cost of sales amounts from the 2009 and 2008 statements of income are:
$3,407,972 thousand (2009) and $4,318,542 thousand (2008).
Refer back to Exhibit 7-4 in this chapter for Note 1(e) on inventory from the summary of significant accounting policies.
Required:
Using the above information, answer the following questions:
a. Calculate the inventory turnover ratios for Finning International Inc. for 2009 and 2008, and comment on any changes. Use the inventory in 2009 and 2008 rather than the average inventory to calculate the ratios.
b. Note 10 to the 2009 financial statements breaks down inventories into three categories: on-hand equipment, parts and supplies, and internal service work in progress. While the revenue on the income statement is broken down into many categories, cost of sales on the income statement is shown as one amount. Explain how this impacts the analysis done in part "a." What other information would you like to be able to obtain from the income statement? How would this help your analysis of the company's inventory management?
c. Note 1(e) in Exhibit 7-4 indicates that Finning uses the specific item basis for on-hand equipment. Explain why this is possible and appropriate.
d. Note 1(e) indicates that Finning uses the average cost basis for the parts and supplies inventory. Why would the specific item basis not be appropriate for this category of inventory?