FINANCIAL STATEMENT ANALYSIS CASE 2 (a) The most likely physical flow of goods for a pharmaceutical manufacturer would be FIFO; that is, the first goods manufactured would be the first goods sold. This is because pharmaceutical goods have an expiration date. The manufacturer would be careful to ship the goods made earliest first and thereby reduce the risk that outdated goods will remain in the warehouse. (b) Noven should consider first whether the inventory costing method will make a difference. If the prices in the economy, especially if the raw materials prices, are stable, then the inventory cost will be nearly the same under any of the measurement methods. If inventory levels are very small, then the method used will make little difference. Noven should also consider the cost of keeping records. A small company might not want to invest in complicated record keeping. The tax effects of any differences should be considered, as well as any international rules that might dictate Noven’s measurement of part of its inventory. (c) This amount is likely not shown in a separate inventory account because it is immaterial; that is, it is not large enough to make a difference with investors. Another possible reason is that no goods have yet been offered for sale. This amount might be in the Inventory of supplies account, but it is more likely to be included with Prepaid and other current assets, since it clearly is not just an article of supplies. This will definitely be shown separately as soon as Noven begins to sell its products to outside customers. LO: 3, Bloom: AN, Difficulty: Moderate, Time: 10-15, AACSB: Analytic, Communication, AICPA BB: None Reporting, Research, AICPA PC: Communication 8-73