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 US GAAP. Excerpts from ZP’s 2018 annual report are presented below.


Exhibit 1:

ZP Corporation Financial Statements






A. Consolidated Balance Sheets (millions in Japanese yen)


31 December
2017

2018




Current Assets





Cash and cash equivalents
JPY542,849

JPY814,760


⁝
⁝

⁝


Inventories
608,572

486,465


⁝
⁝

⁝


Total current assets
4,028,742

3,766,309


⁝
⁝

⁝


Total assets
JPY10,819,440

JPY9,687,346


⁝
⁝

⁝


Total current liabilities
JPY3,980,247

JPY3,529,765


⁝
⁝

⁝


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
JPY10,819,440

JPY9,687,346








B. Consolidated Statements of Income (millions in Japanese yen)


For the years ended 31 December
2016

2017

2018




Net revenues







Sales of products
JPY7,556,699

JPY8,273,503

JPY6,391,240


Financing operations
425,998

489,577

451,950



7,982,697

8,763,080

6,843,190


Cost and expenses







Cost of products sold
6,118,742

6,817,446

5,822,805


Cost of financing operations
290,713

356,005

329,128


Selling, general and administrative
827,005

832,837

844,927


⁝
⁝
⁝
⁝

⁝


Operating income (loss)
746,237

756,792

–153,670


⁝
⁝
⁝
⁝

⁝


Net income
JPY548,011

JPY572,626

–JPY145,646






Exhibit 2:

Excerpt from the 2018 Annual Report, Selected Disclosures






Management 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 2018 by JPY122.1 billion, or 20.1 percent, to JPY486.5 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 on a last-in, first-out (LIFO) basis. Inventories valued on the LIFO basis totaled JPY94,578 million and JPY50,037 million at 31 December 2017 and 2018, respectively. Had the FIFO basis been used for those companies using the LIFO basis, inventories would have been JPY10,120 million and JPY19,660 million higher than reported at 31 December 2017 and 2018, respectively.


9. Inventories:
Inventories consist of the following:








31 December (millions in Japanese yen)
2017

2018




Finished goods
JPY 403,856

JPY 291,977


Raw materials
99,869

85,966


Work in process
79,979

83,890


Supplies and other
24,868

24,632



JPY 608,572

JPY 486,465








Question


Q. Inventory levels decreased from 2017 to 2018 for all of the following reasons except: