Question introductive<p style="text-align: justify;">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.</p> <table style="width:95%;text-align:center"> <caption>Exhibit 1: ZP Corporation Financial Statements</caption> <tr><th colspan="4"><b>A. Consolidated Balance Sheets (millions in Japanese yen)</b></th></tr> <tr><th colspan="2"><b> 31 December</b></th><th><b>2017</b></th><th><b>2018</b></th></tr> <tr><td colspan="2" class="left"><b>Current Assets</b></td><td></td><td></td></tr> <tr><td colspan="2" class="left">Cash and cash equivalents</td><td>JPY542,849</td><td>JPY814,760</td></tr> <tr><td colspan="2" class="left">⁝</td><td>⁝</td><td>⁝</td></tr> <tr><td colspan="2" class="left">Inventories</td><td>608,572</td><td>486,465</td></tr> <tr><td colspan="2" class="left">⁝</td><td>⁝</td><td>⁝</td></tr> <tr><td colspan="2" class="left">Total current assets</td><td>4,028,742</td><td>3,766,309</td></tr> <tr><td colspan="2" class="left">⁝</td><td style="border-bottom: 2px solid black;">⁝</td><td style="border-bottom: 2px solid black;">⁝</td></tr> <tr><td colspan="2" class="left"><b>Total assets</b></td><td><b>JPY10,819,440</b></td><td><b>JPY9,687,346</b></td></tr> <tr><td colspan="2" class="left">⁝</td><td>⁝</td><td>⁝</td></tr> <tr><td colspan="2" class="left">Total current liabilities</td><td>JPY3,980,247</td><td>JPY3,529,765</td></tr> <tr><td colspan="2" class="left">⁝</td><td>⁝</td><td>⁝</td></tr> <tr><td colspan="2" class="left">Total long-term liabilities</td><td>2,663,795</td><td>2,624,002</td></tr> <tr><td colspan="2" class="left">Minority interest in consolidated subsidiaries</td><td>218,889</td><td>179,843</td></tr> <tr><td colspan="2" class="left">Total shareholders’ equity</td><td style="border-bottom: 2px solid black;">3,956,509</td><td style="border-bottom: 2px solid black;">3,353,736</td></tr> <tr><td colspan="2" class="left"><b>Total liabilities and shareholders’ equity</b></td><td><b>JPY10,819,440</b></td><td><b>JPY9,687,346</b></td></tr> <tr><th colspan="4"><b>B. Consolidated Statements of Income (millions in Japanese yen)</b></th></tr> <tr><th><b>For the years ended 31 December</b></th><th><b>2016</b></th><th><b>2017</b></th><th><b>2018</b></th></tr> <tr><td class="left"><b>Net revenues</b></td><td></td><td></td><td></td></tr> <tr><td class="left">Sales of products</td><td>JPY7,556,699</td><td>JPY8,273,503</td><td>JPY6,391,240</td></tr> <tr><td class="left">Financing operations</td><td style="border-bottom: 2px solid black;">425,998</td><td style="border-bottom: 2px solid black;">489,577</td><td style="border-bottom: 2px solid black;">489,577</td></tr> <tr><td class="left"></td><td>7,982,697</td><td>8,763,080</td><td>8,763,080</td></tr> <tr><td class="left"><b>Cost and expenses</b></td><td></td><td></td><td></td></tr> <tr><td class="left">Cost of products sold</td><td>6,118,742</td><td>6,817,446</td><td>5,822,805</td></tr> <tr><td class="left">Cost of financing operations</td><td>290,713</td><td>356,005</td><td>329,128</td></tr> <tr><td class="left">Selling, general and administrative</td><td>827,005</td><td>832,837</td><td>844,927</td></tr> <tr><td class="left">⁝</td><td>⁝</td><td>⁝</td><td>⁝</td></tr> <tr><td class="left"><b>Operating income (loss)</b></td><td>746,237</td><td>756,792</td><td>–153,670</td></tr> <tr><td class="left">⁝</td><td style="border-bottom: 2px solid black;">⁝</td><td style="border-bottom: 2px solid black;">⁝</td><td style="border-bottom: 2px solid black;">⁝</td></tr> <tr><td class="left"><b>Net income</b></td><td>JPY548,011</td><td>JPY572,626</td><td>–JPY145,646</td></tr> </table> <br> <table style="width:95%;text-align:center"> <caption>Exhibit 2: Excerpt from the 2018 Annual Report, Selected Disclosures</caption> <tr><th colspan="3"><b>Management Discussion and Analysis of Financial Condition and Results of Operations</b></th></tr> <tr><td colspan="3"><p style="text-align: justify;">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.</p></td></tr> <tr><th colspan="3"><b>Management and Corporate Information</b></th></tr> <tr><td colspan="3"><b>Risk Factors Industry and Business Risks</b> <p style="text-align: justify;">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.</p> <p style="text-align: justify;">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.</p></td></tr> <tr><th colspan="3"><b>Notes to Consolidated Financial Statements</b></th></tr> <tr><td colspan="3"><b>2. Summary of significant accounting policies: Inventories</b> <p style="text-align: justify;">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.</p> <b>9. Inventories: Inventories consist of the following:</b></td></tr> <tr><th class="left">31 December (millions in Japanese yen)</th> <th>2017</th> <th>2018</th></tr> <tr><td class="left">Finished goods</td><td>JPY 403,856</td><td>JPY 291,977</td></tr> <tr><td class="left">Raw materials</td><td>99,869</td><td>85,966</td></tr> <tr><td class="left">Work in process</td><td>79,979</td><td>83,890</td></tr> <tr><td class="left">Supplies and other</td><td>24,868</td><td>24,632</td></tr> <tr><td class="left"></td><th>JPY 608,572</th><th>JPY 486,465</th></tr> </table>

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