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Question introductive

Robert Groff, an equity analyst, is preparing a report on Crux Corp. As part of his
report, Groff makes a comparative financial analysis between Crux and its two
main competitors, Rolby Corp. and Mikko Inc. Crux and Mikko report under US
GAAP and Rolby reports under IFRS.
Groff gathers information on Crux, Rolby, and Mikko. The relevant financial information
on the three companies, and on the industry, is provided in Exhibit 1.

<table style="width:95%;text-align:center">
<caption>Exhibit 1: Selected Financial Information (millions of US dollars)</caption>
<tr><th colspan="4">A. Balance Sheets and Income Statements</th></tr>
<tr><th> </th><th>Crux</th><th>Rolby</th><th>Mikko</th></tr>
<tr><td class="left">Inventory valuation method</td><td class="right">LIFO</td><td class="right">FIFO</td><td class="right">LIFO</td></tr>
<tr><td class="left" style=" border-bottom: 2px solid black;">From the Balance Sheets</td><td class="right"></td><td class="right"></td><td class="right"></td></tr>
<tr><td class="left">As of 31 December 2018</td><td class="right"></td><td class="right"></td><td class="right"></td></tr>
<tr><td class="left">Inventory, gross</td><td class="right">480</td><td class="right">620</td><td class="right">510</td></tr>
<tr><td class="left">Valuation allowance</td><td class="right">20</td><td class="right">25</td><td class="right">14</td></tr>
<tr><td class="left">Inventory, net</td><td class="right">460</td><td class="right">595</td><td class="right">496</td></tr>
<tr><td class="left">Total debt</td><td class="right">1,122</td><td class="right">850</td><td class="right">732</td></tr>
<tr><td class="left">Total shareholders’ equity</td><td class="right">2,543</td><td class="right">2,403</td><td class="right">2,091</td></tr>
<tr><td class="left">As of 31 December 2017</td><td class="right"></td><td class="right"></td><td class="right"></td></tr>
<tr><td class="left">Inventory, gross</td><td class="right">465</td><td class="right">602</td><td class="right">401</td></tr>
<tr><td class="left">Valuation allowance</td><td class="right">23</td><td class="right">15</td><td class="right">12</td></tr>
<tr><td class="left">Inventory, net</td><td class="right">442</td><td class="right">587</td><td class="right">389</td></tr>
<tr><td class="left" style="border-bottom: 2px solid black;">From the Income Statements</td><td class="right"></td><td class="right"></td><td class="right"></td></tr>
<tr><td class="left">Year Ended 31 December 2018</td><td class="right"></td><td class="right"></td><td class="right"></td></tr>
<tr><td class="left">Revenues</td><td class="right">4,609</td><td class="right">5,442</td><td class="right">3,503</td></tr>
<tr><td class="left">Cost of goods solda</td><td class="right">3,120</td><td class="right">3,782</td><td class="right">2,550</td></tr>
<tr><td class="left">Net income</td><td class="right">229</td><td class="right">327</td><td class="right">205</td></tr>
<tr><td class="left">aCharges included in cost of goods sold for inventory
write-downs*</td><td class="right">13</td><td class="right">15</td><td class="right">15</td></tr>
<tr><th colspan="4"> B. LIFO Reserve</th></tr>
<tr style="border-bottom: 2px solid black;"><td class="left">LIFO Reserve </td><th> </th><th> </th><th> </th></tr>
<tr><td class="left">As of 31 December 2018</td><td class="right">55</td><td class="right">0</td><td class="right">77</td></tr>
<tr><td class="left">As of 31 December 2017</td><td class="right">72</td><td class="right">0</td><td class="right">50</td></tr>
<tr><td class="left">As of 31 December 2016</td><td class="right">96</td><td class="right">0</td><td class="right">43</td></tr>
<tr><td class="left" style="border-bottom: 2px solid black;">Tax Rate</td><td class="right"></td><td class="right"></td><td class="right"></td></tr>
<tr><td class="left">Effective tax rate</td><td class="right">30%</td><td class="right">30%</td><td class="right">30%</td></tr>
<tr><th colspan="4">C. Industry Information</th></tr>
<tr><th> </th><th>2018</th><th>2017</th><th>2016</th></tr>
<tr><td class="left">Raw materials price index</td><td class="right">112</td><td class="right">105</td><td class="right">100</td></tr>
<tr><td class="left">Finished goods price index</td><td class="right">114</td><td class="right">106</td><td class="right">100</td></tr>
</table>

*This does not match the change in the inventory valuation allowance because the valuation allowance is
reduced to reflect the valuation allowance attached to items sold and increased for additional necessary
write-downs.
To compare the financial performance of the three companies, Groff decides to
convert LIFO figures into FIFO figures, and adjust figures to assume no valuation
allowance is recognized by any company.

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