1. Evaluate this statement from Intel’s Q1 2004 10-Q footnote disclosure (Exhibit 2): “In addition, Q1 2003 benefited from the unusually high level of sales of microprocessor and chipset inventory that had been previously reserved.”
2. Evaluate this statement from Intel’s Q2 2007 10- Q footnote disclosure: “Sales of desktop microprocessor inventory that had been previously written off further offset the effect of the revenue decline.”
3. Evaluate this statement from Intel’s Q2 2008 10-Q: These increases were partially offset by sales in the first half of 2007 of desktop microprocessor inventory that had been previously written off.
4. How much flexibility does Intel have in writing down excess inventories? Explain.
5. Evaluate the quality of the inventory disclosures in Exhibit 2.
Both the International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting Principles ( GAAP) require that inventory be valued at the lower of cost or some measure of what that inventory can be sold for in the market. Under U. S. GAAP, the rule is usually called lower of cost or market; under IFRS it is called lower of cost or net realizable value. Inventory cost includes the purchase price, import duties, shipping costs, and similar items. It also includes conversion costs such as direct labor and an allocation of indirect labor and both variable and fixed production overhead. In many instances, the cost of inventories may not be recoverable. Electronics manufacturers, such as Dell and Palm, purchased large inventories of chips that were in short supply. When chip manufacturers drastically reduced the price on those chips, Dell and Palm wrote down their inventories. Similarly, when demand for Intel’s products decline, Intel must write down its inventories. Firms also write down damaged goods, and the fashion industry will write down goods toward the end of a season, when items may sell for less than their cost.
Under IFRS, inventories must be written down to lower of cost or “net realizable value” (IAS 2, par. 28), where net realizable value is defined as: