Question 17.2: Balance Sheet Reclassifications Merck & Co., Inc. and Su......
Balance Sheet Reclassifications
Merck & Co., Inc. and Subsidiaries
In the 2002 Annual Report, inventory was reported at $3,411.8 million. In the 2003 Annual Report, the 2002 inventory value was reported at $2,964.3 million and $447.5 million of inventory was included in other assets. This information was contained in Note 6 to the financial statements, reproduced in Exhibit 3.
Inventories valued under the LIFO method comprised approximately 51% and 39% of inventories at December 31, 2003 and 2002, respectively. Amounts recognized as Other assets consist of inventories held in preparation for product launches and not expected to be sold within one year. The reduction in finished goods is primarily attributable to the spin-off of Medco Health in 2003.
1 . The reclassification of a portion of inventory to other assets will most likely result in the days of inventory on hand:
A . decreasing.
B . staying the same.
C . increasing.
2 . As a result of the reclassification of a portion of inventory to other assets, the current ratio will most likely:
A . decrease.
B . stay the same.
C . increase.
EXHIBIT 3 Note 6 to Consolidated Financial Statements
6. Inventories
Inventories at December 31 consisted of:
| ($ in millions) | 2003 | 2002 |
| Finished goods | $552.5 | $1,262.3 |
| Raw materials and work in process | 2,309.8 | 2,073.8 |
| Supplies | 90.5 | 75.7 |
| Total (approximate current cost) | $2,952.8 | $3,411.8 |
| Reduction to LIFO cost | — | — |
| $2,952.8 | $3,411.8 | |
| Recognized as: | ||
| Inventories | $2,554.7 | $2,964.3 |
| Other assets | 398.1 | 447.5 |
to 1: A is correct. The number of days of inventory on hand calculated using the reported inventory number will most likely decrease because the amount of inventory relative to cost of goods sold will decrease.
to 2: A is correct. The current ratio will decrease because current assets will decrease and current liabilities will stay the same.