The Volvo Group (OMX Nordic Exchange: VOLV B), based in Göteborg, Sweden, is a leading supplier of…

The Volvo Group (OMX Nordic Exchange: VOLV B), based in Göteborg, Sweden, is a leading supplier of commercial transport products such as construction equipment, trucks, buses, and drive systems for marine and industrial applications as well as aircraft engine components. Excerpts from Volvo’s consolidated financial statements are shown in and. Notes pertaining to Volvo’s inventories are presented.

Volvo Group Consolidated Income Statements (Swedish Krona in millions, except per share data)

For the Years Ended 31 December

2008

2007

2006

Net sales

303,667

285,405

258,835

Cost of sales

(237,578)

(219,600)

(199,054)

Gross income

66,089

65,805

59,781

Operating income

15,851

22,231

20,399

Interest income and similar credits

1,171

952

666

Income expenses and similar charges

(1,935)

(1,122)

(585)

Other financial income and expenses

(1,077)

(504)

(181)

Income after financial items

14,010

21,557

20,299

Income taxes

(3,994)

(6,529)

(3,981)

Income for the period

10,016

15,028

16,318

Attributable to:

Equity holders of the parent company

9,942

14,932

16,268

Minority interests

74

96

50

Profit

10,016

15,028

16,318

Volvo Group Consolidated Balance Sheets (Swedish Krona in millions)

Year Ended 31 December

2008

2007

2006

Assets

Total noncurrent assets

196,381

162,487

124,039

Current assets:

Inventories

55,045

43,645

34,211

Cash and cash equivalents

17,712

14,544

10,757

Total current assets

176,038

159,160

134,388

Total assets

372,419

321,647

258,427

Shareholders” equity and liabilities

Shareholders” equity:

Share capital

2,554

2,554

2,554

Reserves

5,078

2,146

1,664

Retained earnings

66,436

62,570

66,418

Income for the period

9,942

14,932

16,268

Equity attributable CO equity holders of the parent company

84,0 10

82,202

86,904

Minority interests

630

579

284

Total shareholders” equity

84,640

82,781

87,188

Total noncurrent provisions

29,031

26,202

19,864

Total noncurrent liabilities

92,608

71,729

45,457

Total current provisions

11,750

10,656

9,799

Total current liabilities

154,390

130,279

96,119

Total shareholders” equity and liabilities

372,419

321,647

258,427

1. What inventory values would Volvo have reported for 2008, 2007, and 2006 if it had no allowance for inventory obsolescence?

2. Assuming that any changes to the allowance for inventory obsolescence are reflected in the cost of sales, what amount would Volvo’s cost of sales be for 2008 and 2007 if it had not recorded inventory write-downs in 2008 and 2007?

3. What amount would Volvo’s profit (net income) be for 2008 and 2007 if it had not recorded inventory write-downs in 2008 and 2007? Assume tax rates of 28.5 percent for 2008 and 30 percent for 2007.

4. What would Volvo’s 2008 profit (net income) have been if it had reversed all past inventory write-downs in 2008? This question is independent of 1, 2, and 3. Assume a tax rate of 28.5 percent for 2008.

5. Compare the following for 2008 based on the numbers as reported and those assuming no allowance for inventory obsolescence as in questions 1, 2, and 3: inventory turnover ratio, days of inventory on hand, gross profit margin, and net profit margin.

6. CAT (Example 9-5) has no disclosures indicative of either inventory write-downs or a cumulative allowance for inventory obsolescence in its 2008 financial statements. Provide a conceptual explanation as to why Volvo incurred inventory write-downs for 2008 but CAT did not.

 

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