The Industry and Business Risk excerpt states that, Increased competition may lead to lower unit…

ZP Corporation is a (hypothetical) multinational corporation headquartered in Japan that trades on numerous stock exchanges. ZP prepares its consolidated financial statements in accordance with U.S. GAAP. Excerpts from ZP’s 2009 annual report are shown.

Consolidated Balance Sheets (¥ millions)

Year Ended 31 December

2008

2009

Current assets

Cash and cash equivalents

¥542,849

¥814,760

?

?

?

Inventories

608,572

486,465

?

?

?

Total current assets

4,028,742

3,766,309

?

?

?

Total assets

¥10,819,440

¥9,687,346

?

?

?

Total current liabilities

¥3,980,247

¥3,529,765

?

?

?

Total long-term liabilities

2,663,795

2,624,002

Minority interest in consolidated subsidiaries

218,889

179,843

Total shareholders equity

3,956,509

3,353,736

Total liabilities and shareholders equity

¥10,819,440

¥9,687,346

Selected Disclosures in the 2009 Annual Report

Management’s Discussion and Analysis of Financial Condition and Results of Operations

“Cost reduction efforts were offset by increased prices of raw materials, other production materials and parts.”. . .“Inventories decreased during fiscal 2009 by ¥122.1 billion, or 20.1%, to ¥486.5 billion. This reflects the impacts of decreased sales volumes and fluctuations in foreign currency translation rates.”

Management and Corporate Information Risk Factors

Industry and Business Risks

The worldwide market for our products is highly competitive. ZP faces intense competition from other manufacturers in the respective markets in which it operates. Competition has intensified due to the worldwide deterioration in economic conditions. In addition, competition is likely to further intensify because of continuing globalization, possibly resulting in industry reorganization. Factors affecting competition include product quality and features, the amount of time required for innovation and development, pricing, reliability, safety, economy in use, customer service, and financing terms. Increased competition may lead to lower unit sales and excess production capacity and excess inventory. This may result in a further downward price pressure.

ZP’s ability to adequately respond to the recent rapid changes in the industry and to maintain its competitiveness will be fundamental to its future success in maintaining and expanding its market share in existing and new markets.

Notes to Consolidated Financial Statements

2. Summary of significant accounting policies: Inventories.

Inventories are valued at cost, not in excess of market. Cost is determined on the “average-cost” basis, except for the cost of finished products carried by certain subsidiary companies which is determined “last-in, first-out” (“LIFO”) basis. Inventories valued on the LIFO basis totaled ¥94,578 million and ¥50,037 million at 31 December 2008 and 2009, respectively. Had the “first-in, first-out” basis been used for those companies using the LIFO basis, inventories would have been ¥10,120 million and ¥19,660 million higher than reported at 31 December 2008 and 2009, respectively.

The Industry and Business Risk excerpt states that, “Increased competition may lead to lower unit sales and excess production capacity and excess inventory. This may result in a further downward price pressure.” The downward price pressure could lead to inventory that is valued above current market prices or net realizable value. Any write-downs of inventory are least likely to have a significant effect on the inventory valued using:

A. weighted average cost.

B. first-in, first-out (FIFO).

C. last-in, first-out (LIFO).