Inventories: Implications for Financial Statements and Ratios
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Test ID: 7440393
Inperiodsoffalling prices, which ofthefollowing statementsisCORRECT? ComparedtoFIFO, LIFO resultsin:
higher inventory balances and lower working capital. higherinventorybalancesand higher working capital. lowerCOGS, lowertaxesand highernetincome.
Explanation
Inperiodsoffalling prices, LIFO resultsinlowerCOGS, highertaxes, highernetincome, higherinventorybalances, higher working capital, andlowercash flowscomparedtoFIFO.
The OrchardSupplyCompanyuses LIFO inventoryvaluation. OrchardSupply hadacostof goodssoldof $1millionfortheperiod.The inventoryatthebeginning oftheperiod was $0.5 million, andtheinventoryattheendoftheperiod was $0.6 million. OrchardSupply's
LIFO reserve was $0.1millionforthepreviousyearand $0.2millionforthecurrentyear. Whatis OrchardSupply'sending inventory according toFIFO inventoryvaluation?
$0.5 million. $0.7 million.
$0.8 million.
Explanation
FIFO Inventory = $0.6 + 0.2 = $0.8 million.
JME hadbeginning inventoryof $200 andending inventoryof $300. JME hadCOGSof $800. JME must havepurchasedinventory amounting to:
$1,100. $700.
$900.
Explanation
beginning inv. + purchases - COGS = ending inv.
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purchases = 900
Units Unit Price Beginning Inventory 709 $2.00
Purchases 556 $6.00
Sales 959 $13.00
Whatis gross profit using the FIFO method and LIFO method?
FIFO LIFO
$9,549 $8,325
$8,325 $8,862
$8,862 $9,549
Explanation
FIFO COGS = (709 units)($2/unit) + (959 − 709)($6/unit) = $1,418 + $1,500 = $2,918 Sales = (959 units)($13/unit) = $12,467
Gross profit = Sales − COGS = 12,467 − 2,918 = $9,549
LIFO COGS = (556 units)($6/unit) + (959 − 556)($2/unit) = $3,336 + $806 = $4,142 Sales = (959 units)($13/unit) = $12,467
Gross profit = Sales − COGS = 12,467 − 4,142 = $8,325
Tim Rogersisseniorequity analyst with White Capital LLP. While analyzing the financial statements of Drako Toys Inc., a toy manufacturer based in Cleveland, Ohio, Tim concludesthat Drako isexpected to see above-averagesales growth overthe nextthree years. Which of the following conditionsmostlikelysupportTim'sconclusion?
Increase in finished goods inventory and corresponding decline in ra w-materials and work-in-progress inventory over the last two years.
Increaseinraw-materialsand work-in-progressinventory andcorresponding decline infinished goodsinventory overthe lasttwo years.
Finished goodsinventory growing fasterthansalesinthe lasttwo years.
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Anincreaseinraw materialsand/or work-in-processinventory isprobably anindication ofanexpectedincreaseindemand. Conversely, anincreaseinfinished goodsinventory, whileraw materialsand work-in-processaredecreasing, may bean indication ofdecreasing demand.Finished goodsinventory thatis growing fasterthansales may beanindication ofdeclining demand.
Ananalystacquiresthefollowing informationregarding acompany:
Units Unit Price Beginning Inventory 559 $1.00
Purchases 785 $5.00
Sales 848 $15.00
SGA Expenses $3,191perannum
Whatarethe EarningsBeforetaxesusing the WeightedAverage Method? $5,500.
$6,200. $6,700.
Explanation
EBT = Sales − (COGS + SGA)
COGS = Beginning inventory + Purchases − Ending inventory Ending inventory inunits = 559 + 785 − 848 = 496 units Averagecost = (559 × $1 + $785 × $5) / (559 + 785) = ($559 + $3,925) / 1,344 = $3.3363
Ending inventory = 496 × $3.3363 = $1,654.81 COGS = $559 + $3,925 − $1,654.81 = $2,829.19 EBT = 12,720 − (2,829.19 + 3,191) = $6,699.81.
The MountainBikeSupply Company had 500 unitsinitsbeginning inventory. Each oftheseunitscost $5. During theperiod, MountainBikeSupply firstpurchased 400 unitsat $6 each andthen200 unitsat $7 each.Attheend oftheperiod, Mountain BikeSupply had 600 units. Whatisthecost of goodssoldandinventory for MountainBikeSupply ifitusesFIFO inventory valuation?
COGS Inventory
$2,500 $3,800
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QuestionID: 462023ᅞ A) ᅞ B) ᅚ C)
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QuestionID: 461997ᅚ A) ᅞ B) ᅞ C) Explanation UnderFIFO:
COGS = 500 @ $5 = $2,500
Inventory= 200 @ $7 + 400 @ $6 = $3,800
Selectedinformationfrom Jenner, Inc.'sfinancial statementsforthe yearended December 31includedthefollowing (in $):
Cash $200,000 AccountsPayable $300,000
AccountsReceivable 300,000 DeferredTax Liability 600,000
Inventory 1,500,000 Long-term Debt 8,100,000
Property, Plant & Equip. 11,000,000 CommonStock 2,200,000
TotalAssets 13,000,000 Retained Earnings 1,800,000
LIFO Reserveat Jan.1 400,000 Total Liabilities & Equity $13,000,000
LIFO Reserveat Dec. 31 600,000
NetIncome
(after 40% tax rate) 800,000
Jennerusesthe lastin, first out (LIFO)inventory costflow assumption.If Jennerchangedfrom LIFO to firstin, first out (FIFO) in2001, return ontotal equity would:
decrease from 20.0 to 18.3%. increasefrom 20.0 to 23.0%. increasefrom 20.0 to 21.1%.
Explanation
Return ontotal equity (netincome / total equity) was ($800,000 / ($2,200,000 + $1,800,000) =)20%.UnderFIFO, netincome increasesby theincreaseinthe LIFO reserve multipliedby (1 - tax rate).FIFO netincomefor2001 was ($800,000 +
($600,000 - $400,000) (1 - 0.40) = ) $920,000.Total equity increasesby theamount ofaccumulatedFIFO profitsthatare addedto retainedearnings which iscalculatedby multiplying theamount oftheending LIFO reserveby (1 - tax rate)foran increase of (($600,000) × (1 - 0.40) =) $360,000.Total equity is ($2,200,000 + $1,800,000 + $360,000 =) $4,360,000.FIFO return ontotal equity is ($920,000 / $4,360,000 =)21.1%.
Which inventory method will providethe largestnetincomeduring periods offalling prices?
LIFO.
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QuestionID: 462057Explanation
During periods offalling prices lastin, first out (LIFO)providesa highernetincomethanfirstin, first out (FIFO) ortheaverage cost methodsbecausetheitems mostrecently purchasedarethe onesbeing soldfirstandthesecostsarecontinually falling increasing netincome.Using FIFO during periods offalling prices wouldcausenetincometo be lowerthan LIFO oraverage cost methodsbecausethefirstinventory purchasedisthefirstsoldbutduring periods offalling pricesthisisthe most expensiveinventory causing netincometo be lower.
Incase ofadeclinein LIFO reserve, to obtainabetteranalysisananalystshould:
adjust the income statement, regardless of the reasons for the decline. not makeany adjustments.
adjusttheincomestatement, only ifsuch adeclineisdueto LIFO liquidation.
Explanation
Adeclinein LIFO reserveisdueto eitherfalling prices or LIFO liquidations.Inthecase of LIFO liquidation, theincome statementdoesnotreflectthecurrentcostsandshouldbeadjusted.Inthecase offalling prices, the LIFO incomestatement amountsarecurrentanddo notneedadjustment.
Wallace Lumberuses LIFO and hadthefollowing noteinits lastfinancial statement: "Wallace Lumbershoweda LIFO reserve of $90,000 in2012and $86,000 in2013." Wallace's marginal tax rateis 31%.Assumenormal inflationary conditions.
If Wallace's2013 year-end LIFO inventory balance was $400,000, thefirm'sinventory based onFIFO wouldbe closestto: $400,000.
$314,000. $486,000.
Explanation
INV = INV + LIFO reserve
= $400,000 + $86,000
= $486,000
(LOS17.c)
If Wallace's2013 LIFO COGS was $70,000, thefirm'sFIFO COGS wouldbe closestto:
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ᅞ C) Explanation
LIFO inventory wouldbe lowerby the LIFO reserve, henceFIFO currentratio will be higherthanthe LIFO currentratio. (LOS 17.e)
Ananalyst wanting to use Wallace Lumber'sprofit marginratio forforecasting purposes, wouldmostlikely: use the profit margin without adjustment, as LIFO reflects the most-recent
costs.
useFIFO profit margininstead. adjustthecomputedratio lower.
Explanation
Underinflationary conditions, Wallace Lumber'sdecreasing LIFO reserve mustbedueto a LIFO liquidation, leading to a one -offboostto reportedprofits which isnotsustainable.Ananalystshouldrevisethecomputedratio lower. (LOS17.b)
Assuming inventory levelsremainconstantduring the yearandprices havebeenstable overtime, COGS wouldbe: higher under the average cost than LIFO or FIFO.
higherunder LIFO thanFIFO oraveragecost. thesameforboth LIFO andFIFO.
Explanation
During stablepricesinventory levelsarethesameforboth LIFO andFIFO.
Inperiodsofrising pricesandstableorincreasing inventory quantities, acompanyusing LIFO ratherthanFIFO willreportcostof goods soldandcash flows which are, respectively:
COGS Cash Flows
Lower Lower Higher Higher Higher Lower
Explanation
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Costiuk Ltd.usesthe LIFO inventory costflow assumption.Itsinventory balanceis $400 attheend of20X8 and was $350 at theend of20X7.Afootnoteinitsfinancial statementsreads: "Inventories would havebeen $70 higherin20X8 and $80 higher in20X7 using theFIFO costflow assumption."
Which ofthefollowing amountsrepresentstheinventory balanceunderFIFO attheend of20X8?
$410. $390. $470.
Explanation
The $70 and $80 amountsrepresentthe LIFO reserves which aredifferencesbetween LIFO inventory anditsvalueunder FIFO.
FIFO inventory (20X8) = LIFO inventory (20X8) + LIFO reserve (20X8) $400 + $70 = $470
Acompany'sbeginning inventory was overstatedby $3,000, now ending inventory isunderstatedby $2,000.Ifpurchases wereproperly reported, thenearningsbeforetaxes will be:
understated by $5,000. overstatedby $1,000. overstatedby $5,000.
Explanation
The key relationshipbeing testedisbeginning inventory + purchases - COGS = ending inventory.So, beginning inventory + purchases - ending inventory = COGS. Youcouldsolvetheequationas +3000 +0 - -2000 = +5000. However, itisprobably easierto conceptualizeby making upnumbersthat meettherequirements.
Actual (I madethesenumbersup): 20,000 + 5,000 - 15,000 = 10,000 Reported:
(20,000 + 3,000) + 5,000 - (15,000-2,000) = 15,000
COGS will be overstatedby 5,000 so earningsbeforetaxes (EBT) will beunderstatedby 5,000.
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QuestionID: 414454Profitability and leverage. Inventory turnoverand leverage. Profitability andinventory turnover.
Explanation
Aninventory write-down would lowerinventory valuesandthecurrentperiod'sreportedprofits.Profitability ratios wouldsuffer. Theturnoverratio wouldbefavorabledueto the lowerasset (inventory)values. Leverageratios wouldalso sufferdueto lower equity (viaretainedearnings). (LOS17.d)
Which cost-flow assumptionisleastlikelytobeassociated with inventory writedowns? Specific Identification.
LIFO. FIFO.
Explanation
SpecificIdentification, FIFO and weightedaveragecostmethodsaremore likely tobeassociated with inventory write-downs comparedtothe LIFO method. LIFO reflectstheoldestcostsininventory andinanormal inflationary environment would already reflectaconservativevaluationofinventory. (LOS17.a, d)
Which ofthefollowing ismostlikelytosignal inventory obsolescence? Anincreasein: raw material and work-in-progress inventory.
raw material inventory only.
finished goodsinventory with falling raw material inventory.
Explanation
Anincreaseinfinished goodsinventory, along with falling raw material/work-in-progressinventory, is generally anindicationof obsoleteinventory.Increasesinraw material/work-in-progressmay signal expectationsofincreasing demandforacompany's products. (LOS17.f)
Giventhefollowing dataandassuming aperiodicinventory system, whatistheending inventory valueusing theFIFO method?
Purchases Sales
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$3,600. $3,200. $3,250.
Explanation
Purchased 50 + 60 + 70 = 180 units.Sold25 + 30 + 45 = 100. Ending inventory = 180 - 100 = 80 ofthe lastunitspurchased. (70 units)($40/unit) + (10 units)($45/unit) = $2,800 + $450 = $3,250.
Which ofthefollowing statementsconcerning aperiodofrising pricesisleastaccurate? The debt-to-equity ratio is greater using the last in, first out (LIFO) inventory valuation method than using the first in, first out (FIFO) method.
Inventoryturnoveris lessusing the lastin, firstout (LIFO)inventoryvaluationmethod thanusing thefirstin, firstout (FIFO)method.
Grossprofitusing the lastin, firstout (LIFO)inventoryvaluationmethodis lessthan the grossprofitusing thefirstin, firstout (FIFO)method.
Explanation
LIFO resultsin lowerinventoryand highercostof goodssold (COGS)during aperiodofrising prices, hencea higherinventory turnover.
Arlington, Inc.usesthefirstin, firstout (FIFO)inventorycostflow assumption.Beginning inventoryandpurchasesof refrigeratedcontainersforArlington wereasfollows:
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300,000
In November, Arlingtonsold 35 refrigeratedcontainersto JohnsonCompany. Whatisthecostof goodssoldassignedtothe 35 soldcontainers?
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QuestionID: 414472Explanation
UnderFIFO, costof goodssoldisthevalueofthefirstunitspurchased.The 35 unitssoldconsistofthe20 unitsinbeginning inventory, the10 unitspurchasedinApril, and 5 oftheunitspurchasedin July.COGS = $200,000 + $120,000 + (5 × $12,500) = $382,500.
Assuming high inflationintheshortrunand lower levelsofinflationinthe long run, thecurrentratioofacompanyusing lastin, firstout (LIFO)relativetoafirmusing firstin, firstout (FIFO), will be:
higher, and the difference between the two firms' current ratios will decrease as inflation decreases.
lower, andthedifferencebetweenthetwofirms' currentratios will increaseasinflation decreases.
lower, andthedifferencebetweenthetwofirms' currentratios will decreaseas inflationdecreases.
Explanation
The LIFO firm'scurrentratio will be lowerandthedifferencebetweenthetwofirms' currentratios will increaseasinflation decreases.Forexample, assumepurchasesequal salessothe quantityofinventoryisconstant.Inventoryvalueunder LIFO will alsoremainconstantasinflationdecreases, whereasFIFO inventoryvalue will increaseevenastheinflationrate decreases.As long asinflationremainspositive, theFIFO inventoryvalueandthedifferencebetween LIFO andFIFO inventoryvalues will increase, as will thedifferencebetweenthe LIFO andFIFO firms' currentratios.
JME purchased 400 unitsofinventorythat cost $4.00 each. Later thefirmpurchasedanadditional 500 unitsthat cost $5.00 each. JME
sold 700 unitsofinventoryfor $7.00 each.If JME usesafirstin, firstout (FIFO) costflow method, theamountof grossprofitappearing ontheincomestatementis:
$2,400. $1,800. $3,100.
Explanation
(unitssold × salesprice) - [(inventorycost × unitcost) + (inventorycost × unitcost)] = sales - COGS = grossprofit (700 × 7.00) - [(400 × 4.00) + (300 × 5.00)] = 1,800
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QuestionID: 414447ᅞ A) ᅚ B) ᅞ C)
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QuestionID: 414451ᅚ A) ᅞ B) ᅞ C)
For LIFO companies, whenmore goodsaresoldthanarepurchasedduring aperiod, the goods heldinopening inventoryare inincludedinCOGS.This will resultin LIFO liquidation.
Giventhefollowing data whatistheending inventoryvalueusing the LIFO method, assuming aperiodicinventorysystem?
Purchases Sales
50 unitsat $50/unit 25 unitsat $55/unit 60 unitsat $45/unit 30 unitsat $50/unit 70 unitsat $40/unit 45 unitsat $45/unit
$3,200. $3,850. $3,250.
Explanation
Purchased 50 + 60 + 70 = 180 units.Sold25 + 30 + 45 = 100. Ending inventory = 180 - 100 = 80 ofthefirstunitspurchased. (50 units)($50/unit) + (30 units)($45/unit) = $2,500 + $1,350 = $3,850.
Giventhefollowing inventorydataaboutafirm: Beginning inventory20 unitsat $50/unit Purchased10 unitsat $45/unit
Purchased 35 unitsat $55/unit Purchased20 unitsat $65/unit Sold 60 unitsat $80/unit
Whatistheinventoryvalueattheendoftheperiodusing LIFO?
$1,225. $1,575. $3,450.
Explanation
Ending inventoryequals20 + 10 + 35 + 20 − 60 = 25 ofthefirstunitspurchasedequals: (20 units)($50/unit) + (5 units)($45/unit) =
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QuestionID: 414463ᅞ A) ᅞ B) ᅚ C)
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QuestionID: 462003ᅞ A) ᅚ B) ᅞ C)
During periodsofrising prices, which ofthefollowing ismostlikelytooccur?
LIFO COGS < FIFO COGS, therefore LIFO net income < FIFO net income. LIFO COGS > FIFO COGS, therefore LIFO netincome > FIFO netincome. LIFO COGS > FIFO COGS, therefore LIFO netincome<FIFO netincome.
Explanation
Undertheassumptionsofthis questionandusing LIFO, themostexpensiveunits gotoCOGS, resulting in lowernetincome.
During aperiodofrising prices, thefinancial statementsofafirmusing firstin, firstout (FIFO)reporting, insteadof lastin, first out (LIFO)reporting wouldshow:
lower total assets and higher net income. lowertotal assetsand lowernetincome. highertotal assetsand highernetincome.
Explanation
WhentheFIFO methodisused whenpricesarerising, thecheaper goodsinbeginning inventory, reflecting earlierpurchases, areassignedtoCOGS (hence, higherincome)andthemoreexpensiveunits (lastpurchases)areassignedtoending
inventory (greatercurrentassets). Whenthe LIFO methodisusedduring aperiod whenpricesarerising, themoreexpensive lastpurchasesareassignedtoCOGS (hence, lowerincome)andthecheaperunitsinbeginning inventoryandearlier purchasesareassignedtoending inventory.
Ananalyst gathersthefollowing informationaboutafirm: Lastin, firstout (LIFO)inventory = $10,000
Beginning LIFO reserve = $2,500 Ending LIFO reserve = $4,000 LIFO costof goodssold = $15,000 LIFO netincome = $1,500 Tax rateis 40%
Toconvertthefinancial statementstoaFIFO basis, theamounttheanalystshouldaddtothestockholders' equityisclosest to:
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QuestionID: 461971ᅞ A)
ᅚ B) ᅞ C) Explanation
Ifthefirm hadusedFIFO inventorycost, tax liability wouldbe higherby (LIFO reserve × tax rate)andretainedearnings would be higherby [LIFO reserve × (1 − tax rate)].
(LIFO reserve)(1 − t) = $4,000(1 − 0.4) = $2,400
Duetodeclining prices, SteffenInc. hasa LIFO reserveof -$20.Itsincometax rateis 35%.Ifananalystisconverting Steffen's financial statementstoaFIFO basis, which ofthefollowing adjustmentsismostlikelyrequired?
Increase cash by $7.
Increaseshareholders' equityby $13. Increaseassetsby $20.
Explanation
Declining prices (negative LIFO reserve) wouldresultinFIFO inventorybeing lessthan LIFO inventorybasedonthefollowing equation:
FIFO inventory = LIFO inventory + LIFO reserve
Thebalancesheetadjustment woulddecreaseassets (inventory)bythe $20 LIFO reserve.Inaddition, theanalyst would increasecash by $7 ($20 LIFO reserve × 35% tax rate).Tobring theaccounting equationintobalance, theanalyst would decreaseshareholders' equityby $13 [$20 LIFO reserve × (1 − 35% tax rate)].
Afirmusesthe lastin, firstout (LIFO)accounting methodandposts $100,000 asending inventory. Lastyear'sfinancial statementsshow inventoryat $110,000.Thisperiod'sincomestatementshowscostsof goodssoldat $90,000 with a LIFO reserveof $30,000. How much inventory waspurchasedthisperiod, and what wouldtheending inventorybalancebeunder firstin, firstout (FIFO)?
Inventorypurchases Ending inventory (FIFO)
$90,000 $130,000
$80,000 $130,000
$80,000 $70,000
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QuestionID: 461989ᅚ A) ᅞ B) ᅞ C) Explanation
In general, ananalystshoulduse LIFO whenexamining profitabilityorcostratiosandFIFO whenexamining assetorequity ratios.
Afinancial analystcouldadjustthecurrentratioin which acompanyusesthe LIFO inventoryvaluationmethodtotheFIFO methodby:
deducting the LIFO reserve from the current asset. adding the LIFO reservetothecurrentassets. adding the LIFO reservetothecurrent liabilities.
Explanation
The LIFO reserveincreasestheinventoryvalueunderFIFO andinventoryisincludedinthenumeratorinthecurrentratio.
Which accounting methodsarepreferableforincomestatementsandbalancesheets?
Last in, first out (LIFO) for income statements and first in, first out (FIFO) for the balance sheet.
Firstin, firstout (FIFO)forboth incomestatementsandbalancesheets. Lastin, firstout (LIFO)forthebalancesheetandfirstin, firstout (FIFO)forthe incomestatement.
Explanation
LIFO allocatesthemostrecentpricestothecostof goodssoldandprovidesabettermeasureofcurrentincome.Forbalance sheetpurposes, inventoriesbasedonFIFO arepreferablesincethesevaluesmostcloselyresemblecurrentcostand economicvalue.
Inaperiodof rising pricesandstableor increasing inventory quantities, useofthefirstin, firstout (FIFO)inventory costflow assumption resultsinallofthefollowing EXCEPT:
lower inventory balances than under last in, first out (LIFO). higher earningsbeforetaxesthan under lastin, firstout (LIFO). higher earningsafter taxesthan under lastin, firstout (LIFO).
Explanation
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QuestionID: 462006cheaper goods.Both beforeandafter tax earnings under FIFO willbe higher becauselessexpensive goodsare usedfor the costof goods sold (COGS). Working capital, which isequalto currentassets - currentliabilities willalsobe higher under FIFO duethe higher inventory balance causing a higher levelof currentassets.
The OrchardSupplyCompanyuses lastin, firstout (LIFO)inventoryvaluation. OrchardSupply hadacostof goodssold (COGS)of $1millionfortheperiod.Theinventoryatthebeginning oftheperiod was $500,000 andtheinventoryattheendof theperiod was $600,000. OrchardSupply's LIFO reserve was $100,000 attheendofthepreviousyearand $200,000 atthe endofthecurrentyear. Whatis OrchardSupply'sCOGSaccording tofirstin, firstout (FIFO)inventoryvaluation?
$800,000. $1.1million. $900,000.
Explanation
FIFO COGS = LIFO COGS − changein LIFO reserve FIFO COGS = $1million − $100,000 = $900,000
Thefollowing information hasbeen gatheredaboutafirm: LIFO inventory = $10,000
Beginning LIFO reserve = $2,500 Ending LIFO reserve = $4,000 LIFO costof goodssold = $15,000 LIFO netincome = $1,500 Tax rateis 40%
WhatistheFIFO COGS?
$16,500. $19,000. $13,500.
Explanation
FIFO COGS = LIFO COGS - changein LIFO reserve = $15,000 - (4,000 − 2,500) = $13,500
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QuestionID: 461972ᅞ A) ᅞ B) ᅚ C)
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QuestionID: 461991ᅞ A) ᅞ B) ᅚ C)
LIFO inventory +LIFO reserve.
thechangein LIFO reserve − LIFO ending reserve. LIFO costof goodssold − changesin LIFO reserve.
Explanation
Toconvert LIFO inventorybalancestoaFIFO basis, simplyaddthe LIFO reservetothe LIFO inventory: INV = INV + LIFO Reserve
Afirm'sfinancial statementsreflectthefollowing information:
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inv
e
ntory
$
2
,
1
00,000
S
a
l
es
$4,800,000
G
ro
ss
profit
m
a
r
g
in
????
What wasthefirm's grossprofitmargin?
0.58. 2.29. 0.42.
Explanation
First wecandeterminetheCOGSby:COGS = beginning inventory + purchases - ending inventory = $2,800,000. Then, grossprofitmargin = (sales - COGS) / sales = 0.42.
Which ofthefollowing statementsregarding inventorymethodsusedduring periodsofrising pricesisleastaccurate? FIFO results in higher taxes than LIFO.
FIFO resultsin higherinventorybalancesthan LIFO. LIFO resultsin lowercostof goodssoldthanFIFO.
Explanation
LIFO resultsinhighercostof goodssoldduring periodsofrising pricesbecausethe lastitemsbought, which arethemost expensive, arethefirstitemssoldresulting ina highercostof goodssold.
Question #
5
2 of 111
QuestionID: 462000ᅞ A) ᅞ B) ᅚ C)
Question #
53
of 111
QuestionID: 461990ᅚ A) ᅞ B) ᅞ C)
Question #
54
of 111
QuestionID: 462017ᅞ A) ᅞ B) ᅚ C)
Question #
55
of 111
QuestionID: 461976Which ofthefollowing isleastlikelytobearesultofusing lastin, firstout (LIFO)astheinventorymethodduring periodsof decreasing pricescomparedtousing firstin, firstout (FIFO)?
Lower COGS. Highertaxes. Highercash flows.
Explanation
Using LIFO during periodsofdeclining prices will resultin lowercash flowsbecausenetincome will be higherthanifFIFO is used leading tomoretaxesbeing paidout.
Inaninflationaryenvironment, a company's:
assets will be lower if it uses last in, first out (LIFO) as opposed to FIFO. COGS sold willbelower ifit uses LIFO asopposedtoFIFO.
netincome willbelarger ifit uses LIFO thanifit usesFIFO.
Explanation
Inaninflationaryperiod, assets willbelower under LIFO sincethelast, higher priceditemsare chargedtotheincomestatement.
Which ofthefollowing isleastlikelyto happenaftera lastin, firstout (LIFO) liquidationinanenvironmentofrising prices? Increase taxable income.
Increase grossincome.
Increasecostof goodssold (COGS).
Explanation
Ina LIFO liquidation, afirmallowsinventorytodecreasesothatitisusing lower-costmaterials (purchasedinthepast).This will lowertheCOGSandincreaseincomeandprofit.Thisisoneofthe waysthatafirm'smanagementcanmanipulate earnings.
ᅞ A)
ᅞ B)
ᅚ C)
Question #
56
of 111
QuestionID: 462034ᅚ A) ᅞ B) ᅞ C)
Question #
57
of 111
QuestionID: 414468In a period of rising prices,LIFOgives the best COGS,whereas FIFOgives the best inventory balance on the balance sheet.
LIFO producesatax benefitinaperiodofrising prices, thereforeresultsin higher cash flowsthanFIFO.
Inaperiodofrising prices, FIFO givesthebestCOGS, whereas LIFO givesthebest inventorybalanceonthebalancesheet.
Explanation
Ifpricesarerising steadily, FIFO inventoryisvaluedatthemorerecentpurchaseprices which are higherandprovideabetter estimateofthereplacementvalueoftheinventory. LIFO costing will produceacostof goodssoldmuch closertoreplacement cost which providesabetterestimatethanusing FIFO.
Selectedfinancial datafrom Krandall, Inc.'sbalancesheetfortheyearended December 31 wasasfollows (in $):
C
as
h
$
1
,
1
00,000
Account
s
P
a
y
a
b
l
e
$400,000
Account
s
R
e
c
e
iv
a
b
l
e
300,000 D
e
f
e
rr
e
d
T
a
x L
i
a
bi
l
ity
700,000
Inv
e
ntory
2
,400,000 L
on
g-
t
e
rm
D
e
bt
8,
2
00,000
Prop
e
rty
,
P
l
a
nt
& Eq
.
8,000,000
Common
Stock
1
,000,000
Tot
a
l
A
sse
t
s
11
,800,000
R
e
t
a
in
e
d
E
a
rnin
g
s
1
,500,000
L
IF
O
R
ese
rv
e
a
t
J
a
n.
1
600,000
Tot
a
l
L
i
a
bi
l
iti
es
& Eq
uity
11
,800,000
L
IF
O
R
ese
rv
e
a
t
D
e
c.
3
1
900,000
Krandall usesthe lastin, firstout (LIFO)inventorycostflow assumption.Thetax rateis 40%.If Krandall usedfirstin, firstout (FIFO)insteadof LIFO andpaidanyadditional tax due, itsassets-to-equityratio wouldbeclosestto:
4.06 3.73 4.18
Explanation
With FIFO insteadof LIFO:
Inventory wouldbe higherby $900,000, theamountoftheending LIFO reserve.
Cumulativepretax income wouldalsobe higherby $900,000, sotaxespaid wouldbe higherby 0.40($900,000) = $360,000.Thereforecash wouldbe lowerby $360,000.
Cumulativeretainedearnings wouldbe higherby (1 − 0.40)($900,000) = $540,000.
ᅚ A) ᅞ B) ᅞ C)
Question #
58
of 111
QuestionID: 462018ᅚ A) ᅞ B) ᅞ C)
Question #
59
of 111
QuestionID: 414473ᅞ A) ᅞ B) ᅚ C)
Question #
60
of 111
QuestionID: 462024During periodsofdeclining prices, which inventorymethod wouldresultinthehighestnetincome? LIFO.
AverageCost. FIFO.
Explanation
Whenpricesaredeclining and LIFO isusedtheCOGSissmallerthanifFIFO isused leading toa largernetincome.
Afirmendedthe lastperiod with inventoryof $4.0 millionanda lastin, firstout (LIFO)reserveof $175,000. During theyear, it madepurchasesof $2.0 millionandreportedsalesof $5.5 million with a grossmarginof 0.32.Attheendoftheyear, it reporteda LIFO reserveof $75,000. Whatisthevalueofthefirm'scostof goodssold (COGS)onafirstin, firstout (FIFO) basis?
$3,840,000. $3,740,000. $3,640,000.
Explanation
With salesof $5.5 millionanda grossmarginof 0.32, theCOGS (ona LIFO basis)is $3.74 million.InordertoconvertCOGS toaFIFO basis, weneedtosubtractthechangein LIFO reserveduring theyear: $3,740,000 − ($75,000 − $175,000) = $3,840,000.
Using the lowerofcostormarketprincipleunderU.S. GAAP, ifthemarketvalueofinventoryfallsbelow its historical cost, the minimumvalueat which theinventorycanbereportedinthefinancial statementsisthe:
net realizable value minus selling costs. netrealizablevalue.
marketpriceminusselling costsminusnormal profitmargin.
Explanation
Wheninventoryis writtendowntomarket, thereplacementcostoftheinventoryisitsmarketvalue, butthe "marketvalue" mustfall betweennetrealizablevalue (NRV)and NRV lessnormal profitmargin. NRV isthemarketpriceoftheinventory less selling costs.Thereforetheminimumvalueisthemarketpriceminusselling costsminusnormal profitmargin.
ᅞ A) ᅚ B) ᅞ C)
Questions #
6
1
-66
of 111
Question #
6
1 of 111
QuestionID: 461979ᅞ A) ᅚ B) ᅞ C)
Question #
6
2 of 111
QuestionID: 461980ᅞ A) ᅞ B) ᅚ C)
$24,400. $26,000. $18,000.
Explanation
FIFO INV = LIFO INV + LIFO Reserve
X = 22,000 + 4,000 X = 26,000
Theeffectivetax rateisnot usedinthis calculation.
Inventorytransactioninformationforamanufacturing firmisprovidedchronologicallybelow. Purchases Sales
20 unitsat $50 15 unitsat $60 35 unitsat $40 35 unitsat $45 85 unitsat $30 85 unitsat $35
Assumethatbeginning inventory was zero.
Inventoryvalueattheendoftheperiodusing theaveragecostmethodisclosestto: $4,680.
$177. $1,540.
Explanation
AverageCost = Costof GoodsAvailable / Total UnitsAvailable AverageCost = $4,950 / 140 = $35.36
EOPInventory Value = $35.36 × 5 = $176.79 (LOS17.a)
Inventoryvalueattheendoftheperiodifusing FIFO isclosestto: $1,200.
$175. $150.
ᅚ C)
Question #
67
of 111
QuestionID: 461970ᅞ A)
ᅚ B)
ᅞ C)
Question #
68
of 111
QuestionID: 461993ᅞ A) ᅚ B) ᅞ C)
IFRSbutnotunderU.S. GAAP.
Explanation
Reversal ofpreviousinventory write-downsmayoccurunderIFRSbutisnotallowedunderU.S. GAAP. (LOS17.d)
Which ofthefollowing statementsaboutinventoryaccounting isleastaccurate?
During periods of rising prices, last in, first out (LIFO) income will be lower than under first in, first out (FIFO) but cash flows will be higher.
During periodsofrising prices, firstin, firstout (FIFO)basedcurrentratios will be smallerthan lastin, firstout (LIFO)basedcurrentratios.
IfaU.S.firmuses lastin, firstout (LIFO)fortax reporting itmustuse LIFO forfinancial reporting.
Explanation
During periodsofrising prices, FIFO basedcurrentratios will belargerthan LIFO basedcurrentratiosbecausethemore expensiveunits (lastpurchases)areassignedtoending inventory, resulting in greatercurrentassets.
Afirm'sfinancial statementsreflectthefollowing information:
B
e
g
innin
g
inv
e
ntory
$
2
,900,000
Purc
h
ase
durin
g
t
h
e
y
ea
r
$
1
,600,000
E
ndin
g
inv
e
ntory
????
S
a
l
es
$3,900,000
G
ro
ss
M
a
r
g
in
0
.
4
1
What wasthefirm'sending inventoryforthisperiod?
$1,699,000. $2,199,000. $2,799,000.
Explanation
Question #
69
of 111
QuestionID: 462007ᅞ A) ᅞ B) ᅚ C)
Question #
70
of 111
QuestionID: 414469ᅚ A)
ᅞ B)
ᅞ C)
Question #
7
1 of 111
QuestionID: 462048ᅞ A) ᅚ B) ᅞ C)
Giventhefollowing data:
Beginning LIFO Reserve $2,300
Costof Goods Sold (COGS) using LIFO $6,100 COGS using FIFO of $4,300
Whatisthe Ending LIFO reserve?
$500. $2,800. $4,100.
Explanation
Ending LIFO Reserve = (LIFO COGS − FIFO COGS) + Beginning LIFO Reserve = (6,100 − 4,300) + 2,300 = $4,100.
During periodsofdecreasing prices, afirmusing aperiodicinventorysystem will report higher grossprofitifitsinventorycost assumptionis:
LIFO because during periods of decreasing prices, COGS will be lower, resulting in a higher gross profit.
FIFO becauseduring periodsofdecreasing prices, COGS will be higher, resulting ina higher grossprofit.
FIFO becauseduring periodsofdecreasing prices, COGS will be lower, resulting ina higher grossprofit.
Explanation
Inperiodsoffalling prices, LIFO resultsin lowerCOGS, andtherefore higher grossprofitthanFIFO, because LIFO assumes themostrecentlypurchased (lowercost) goodsaresoldfirst.
Ifall else holdsconstantinperiodsofrising pricesandinventory levels: FIFO firms have higher debt to equity ratios than LIFO firms do. FIFO firms will have greaterstockholder'sequitythan LIFO firmsdo. LIFO firms have higher grossprofitmarginsthanFIFO firmsdo.
Explanation
Question #72 of 111
QuestionID: 462054ᅞ A) ᅞ B) ᅚ C)
Question #73 of 111
QuestionID: 462016ᅞ A) ᅞ B)
ᅚ C)
Question #74 of 111
QuestionID: 462015Explanationsforotherchoices:
Inperiodsofrising pricesandinventory levels (all elseconstant):
FIFO firms havelowerdebttoequityratiosthan LIFO firmsdobecausestockholder'sequityis higheranddebtisconstant.
LIFO firms havelowergrossprofitmargins ((Sales-COGS)/Sales)becausethemoreexpensive lastpurchasesare assignedtoCOGS, lowering thenumerator.
During periodsofrising prices:
LIFOGross Profit Margin > FIFOGross Profit Margin. LIFO InventoryTurnover<FIFO InventoryTurnover.
LIFO Debtto EquityRatio > FIFO Debtto EquityRatio.
Explanation
FIFO inventory, andthereforeFIFO assetsandequity, will be higherbythe LIFO reserve.
TheBakerCompanyusesthe lastin, firstout (LIFO)inventoryvaluationmethodandreporteditsinventoryat $200,000 andits costof goodssold (COGS)at $500,000.Thecompany's LIFO reserveincreasedfrom $5,000 to $30,000 during theyear.
Whatamounts wouldthecompanyreportforending inventoryandcostof goodssoldifit weretousethefirstin, firstout
(FIFO)method? Ending
Inventory COGS
$170,000 $525,000
$230,000 $525,000 $230,000 $475,000
Explanation
Ending inventoryunderFIFO isequal to LIFO ending inventory + LIFO reserve = 200,000 + 30,000 = 230,000
COGSunderFIFO equals LIFO COGS − (ending LIFO reserve − beginning LIFO reserve)
= 500,000 − (30,000 − 5,000) = 475,000.
ᅞ A) ᅚ B) ᅞ C)
Question #75 of 111
QuestionID: 414482ᅞ A) ᅚ B) ᅞ C)
Question #76 of 111
QuestionID: 462050ᅞ A)
ᅚ B)
ᅞ C)
Question #77 of 111
QuestionID: 462009producesoracquires, theresultis:
lower earnings.
anunderstatementofthecostof goodssold (COGS).
anincreaseinthe LIFO reserve.
Explanation
Thisisa LIFO liquidation which referstoadeclining inventorybalance (theunitsavailableforsalearedeclining).Inthiscase thepricesfor goodsthatarebeing soldareno longerrecentpricesandcanbemanyyearsoutofdate. This wouldmake COGSappeartobevery low and grossandnetprofitstobeartificially high.
Whenanalyzing profitabilityratios, which inventoryaccounting methodispreferred?
First in, first out (FIFO). Lastin, firstout (LIFO).
Weightedaverage.
Explanation
Using LIFO costof goodssold (COGS) givesamoreaccuratemeasureoffutureearningsbecausethe LIFO COGSismore representativeofthecurrentcostofproductsoldascomparedtousing FIFO thereforenetincome will bemoreaccurately represented.
Which ofthefollowing statementsregarding inventoryaccounting methodsismostaccurate? Inperiodsof:
rising prices and stable unit purchases, using the FIFO method results in higher inventory turnover than the LIFO method.
rising pricesandstableunitpurchases, using the LIFO methodresultsina lower currentratiothantheFIFO method.
declining pricesFIFO resultsin highernetincomethan LIFO.
Explanation
Inperiodsofrising prices LIFO resultsin lowercurrentassetsbecausetheending inventoryisbasedoninventoryitemsthat
werepurchasedfirstata lowerprice.
ᅚ A) ᅞ B) ᅞ C)
Question #78 of 111
QuestionID: 462013ᅚ A) ᅞ B) ᅞ C)
Question #79 of 111
QuestionID: 462010ᅞ A) ᅚ B) ᅞ C)
Question #80 of 111
QuestionID: 414465FIFO inventory =LIFO inventory +LIFO reserve.
FIFO inventory = LIFO inventory × LIFO reserve. FIFO inventory = LIFO inventory − LIFO reserve.
Explanation
Theformulato convertanending inventoryvaluefromthe LIFO totheFIFO methodistoFIFO inventory = LIFO inventory + LIFO reserve.
Pischke Motorsprovidedyou with thefollowing financials: Beginning LIFO reserve $2,484.
Costof goodssold (COGS)using LIFO $3,988. COGSusing FIFO $2,004.
Whatistheending LIFO reserve?
$4,468. $500.
$1,984.
Explanation
Ending LIFO reserve = (LIFO COGS − FIFO COGS) + Beginning LIFO reserve = ($3,988 − $2,004) + $2,484
= $4,468
Ifafirm hasafirstin, firstout (FIFO)inventoryof 9,000 anda lastin, firstout (LIFO)inventoryof 6,500, whatisthevalueof the LIFO reserveassuming a 40% tax rate?
$1,000
$2,500.
$1,500.
Explanation
LIFO reserve = FIFO inventory − LIFO inventory = 9,000 − 6,500 = 2,500
ᅞ A)
ᅞ B)
ᅚ C)
Question #81 of 111
QuestionID: 461986ᅚ A) ᅞ B) ᅞ C)
Question #82 of 111
QuestionID: 462043ᅞ A)
LIFO are preferable to those based on FIFO, as they more closely reflect the current costs.
LIFO arepreferabletothosebasedonaveragecost, astheymorecloselyreflectthe currentcosts.
FIFO arepreferabletothosebasedon LIFO, astheymorecloselyreflectcurrent
costs.
Explanation
TheinventoriesbasedonFIFO arepreferabletothosepresentedunder LIFO oraveragecostforbalancesheetpurposes. UnderFIFO, theolderinventoriesaretakenoutfirst, andtheending inventorybalanceconsistsoftherecentpurchasesand thusmostcloselyreflectthecurrent (economic)value.
Ananalystprovidedthefollowing informationabouta company:
Purchasesthroughouttheyear $55,000
COGS $60,000
Ending inventory $35,000
Thebeginning inventory was:
$40,000. $55,000.
$45,000.
Explanation
COGS of $60,000 + ending inventoryof $35,000, lesspurchasesof $55,000.
Selectedinformationfrom Mendota, Inc.'sfinancial statementsfortheyearended December 31includesthefollowing (in $):
Sales 7,000,000
Costof Goods Sold 5,000,000
LIFO Reserveon Jan.1 600,000
LIFO Reserveon Dec. 31 850,000
Mendotausesthe lastin, firstout (LIFO)inventorycostflow assumption. Thetax rateis 40%. If Mendotachangedfrom LIFO
tofirstin, firstout (FIFO), its grossprofitmargin would:
ᅞ B) ᅚ C)
Question #83 of 111
QuestionID: 462027ᅞ A) ᅞ B) ᅚ C)
Question #84 of 111
QuestionID: 414448increaseto 30.0%. increaseto 32.1%.
Explanation
Grossprofitmarginunder LIFO ((sales - costof goodssold) / sales)is (($7,000,000 − $5,000,000) / $7,000,000) = 28.6%. UnderFIFO, costof goodssoldisreducedbytheincreaseinthe LIFO reserve, andtheresulting FIFO grossprofitmarginis (($7,000,000 - ($5,000,000 - ($850,000 - $600,000)) / $7,000,000) = 32.1%. Notethatthetax rateonlyaffectsincometotals afterincometax expenseisshownanddoesnotaffectthe grossprofitmargin.
GranulatedCorp.usesthe lastin, firstout (LIFO)inventorycostflow assumption. Selectedinformationfrom Granulated's financial statementsfortheyearsended December 31, 20X3 and20X4 wasasfollows (in $):
20X3 20X4
Beginning Inventory 4,375,000 5,525,000
Purchases 10,200,000 11,300,000
Ending Inventory 5,525,000 6,100,000
Beginning LIFO Reserve 825,000 975,000
Ending LIFO Reserve 975,000 1,125,000
If Granulatedchangedfrom LIFO tofirstin, firstout (FIFO)for20X4, Granulated'scostof goodssold (COGS)in20X4 under
FIFO wouldbe:
$10,325,000. $11,850,000.
$10,575,000.
Explanation
Granulated's20X4 LIFO costof goodssold (beginning inventorypluspurchases lessending inventory) was ($5,525,000 + $11,300,000 − $6,100,000 =) $10,725,000.ToconverttoFIFO the LIFO costof goodssold wouldbereducedbytheincrease inthe LIFO reserveduring 20X4 ($1,125,000 − $975,000 =) $150,000.TheFIFO COGSin2001 was ($10,725,000 −
$150,000 =) $10,575,000.
Giventhefollowing inventorydataaboutafirm: Beginning inventory20 unitsat $50/unit Purchased10 unitsat $45/unit
Purchased 35 unitsat $55/unit Purchased20 unitsat $65/unit
ᅞ A) ᅚ B) ᅞ C)
Question #85 of 111
QuestionID: 462032ᅞ A) ᅞ B) ᅚ C)
Question #86 of 111
QuestionID: 462011ᅞ A) ᅚ B) ᅞ C)
Question #87 of 111
QuestionID: 462052Whatistheinventoryvalueattheendoftheperiodusing firstin, firstout (FIFO)?
$3,100. $1,575.
$3,475.
Explanation
Ending inventoryequals20 + 10 + 35 + 20 − 60 = 25 of lastunitspurchasedininventory.
(20 units)($65/unit) + (5 units)($55/unit) = $1,300 + $275 = $1,575
Premier Corp.'syear-endlastin, firstout (LIFO) reserve was $2,500,000 in2000 and $2,300,000 in2001.Premier's $200,000 declinein
the LIFO reserve couldbeexplainedbyeach ofthefollowing EXCEPT:
declining inventory prices. a LIFO liquidationoccurred.
the LIFO reserve wasbeing amortized.
Explanation
Adeclineinthe LIFO reserveoccurs whentheincreasing pricesthat createdthe reservebegindeclining or whentheinventoryis
liquidated (i.e.less unitsininventoryattheendoftheyear thanatthebeginning). LIFO reservesarenotamortized.
Inaperiodofrising prices, LIFO liquidationresultsin:
lower earnings. higherearnings. increaseininventory.
Explanation
Sinceolder layersofinventorythatare liquidated werepurchasedat lowerprices, thecostof goodssold will be lowerand earnings will be higher.
ᅞ A) ᅞ B) ᅚ C)
Question #88 of 111
QuestionID: 462022ᅚ A) ᅞ B) ᅞ C)
Question #89 of 111
QuestionID: 462021lower net income. lower working capital.
highercash flows.
Explanation
Intheabsenceoftaxes, thereisnodifferenceincash flow between LIFO andFIFO.Theotherstatementsaretrue.Forthe examination, memorizethefinancialimpactofrising andfalling pricesforthetwoinventorymethods.
Selectedinformationfrom Oldtown, Inc.'sfinancialstatementsfor theyear ended December 31, 2004 includedthefollowing (in $):
Cash 1,320,000 AccountsPayable 1,620,000
AccountsReceivable 2,430,000 DeferredTax Liability 715,000
Inventory 6,710,000 Long-term Debt 15,230,000
Property, Plant & Equip. 12,470,000 CommonStock 1,000,000 TotalAssets 22,930,000 Retained Earnings 4,365,000 Total Liabilities & Equity 22,930,000
Sales 15,000,000
NetIncome 3,000,000
LIFO Reserveat Jan.1 1,620,000 LIFO Reserveat Dec. 31 1,620,000
Oldtownusesthelastin, firstout (LIFO)inventorycostflow assumption. Thetax rate was 40%. If Oldtownchangedfrom LIFO tofirst
in, firstout (FIFO)for 2004, netprofitmargin would:
remain unchanged at 20.0%. decreasefrom20.0 to16.8%. decreasefrom20.0 to13.5%.
Explanation
Netprofitmarginunder LIFO (netincome / netsales) was ($3,000,000 / $15,000,000 =)20.0%.Under FIFO, netincomedoesnotchange in2004 becausethere wasnochangeinthe LIFO reservebalance, andnoadjustmentofnetincomeismade.
Giventhefollowing inventoryinformationabouttheBucknerCompany:
Year-endlastin, firstout (LIFO)inventoryof $6,500.
ᅞ A) ᅞ B) ᅚ C)
Question #90 of 111
Question ID: 462046ᅞ A)
ᅞ B) ᅚ C)
Question #91 of 111
Question ID: 462014ᅞ A) ᅚ B) ᅞ C)
Question #92 of 111
Question ID: 461999Thecurrentyear's LIFO costof goodssold (COGS)is $15,000. Aftertax incomeis $1,600.
Thepreviousyear's LIFO reserve was $2,000.
How much higher wouldthefirm'sretainedearningsbeonafirstin, firstout (FIFO)basisifthefirm'stax rateis 40%?
$2,100. $1,800.
$1,500.
Explanation
Adjustmenttoretainedearnings = LIFO reserve (1 − t) = $2,500(1 − 0.4) = $1,500
Thebest waytocomputeaninventoryturnoverratioistouse:
last in, first out (LIFO) for both cost of goods sold (COGS) and average inventory.
firstin, firstout (FIFO)forboth costof goodssold (COGS)andaverageinventory. lastin, firstout (LIFO)forcostof goodssold (COGS)andfirstin, firstout (FIFO)for averageinventory.
Explanation
Inventoryturnovermakesnosenseatallforfirmsusing LIFO duetothemismatching ofcosts (thenumeratoriscurrent while thedenominatoris historical).FIFO basedinventoryisrelativelyunaffectedbypricechangesandisa goodapproximationof actualturnover.Inthis way, currentcostsarematchedinthenumeratoranddenominator.
M J Inc reportedCOGSof $80,000 for theyear under the LIFO inventoryvaluationmethod. M J hadabeginning LIFO reserveof $8,000 andanending LIFO reserveof $11,000.TheCOGSunder theFIFO inventoryvaluationmethodis:
$83,000. $77,000.
$91,000.
Explanation
FIFO COGSis reduced whena LIFO reserveisincreased.So, COGS = 80,000 − (11,000 − 8,000) = 77,000.
ᅞ A) ᅞ B)
ᅚ C)
Question #93 of 111
Question ID: 462025ᅞ A) ᅚ B) ᅞ C)
Question #94 of 111
Question ID: 462047Beginning inventory wasreportedas $5,000. Costsof goodssold werereportedas $8,000.
Ending inventoryis $7,000 (theanalyst hasphysicallyverifiedthisamount).
Which ofthefollowing statementsismostaccurate?
Purchases must have been $6,000.
Iftheanalystdiscoveredthatbeginning inventory wasoverstatedby $1,000, thencost of goodssoldmust havebeenunderstatedby $1,000.
Iftheanalystdiscoveredthatbeginning inventory wasunderstatedby $2,000, then earningsbeforetaxesmust havebeenoverstatedby $2,000.
Explanation
IfinventoryisoverstatedthenCOGSmustalsobeoverstatedorpurchases wereunderstated, sinceyouaretoldthatending inventoryisok.
Theformulatoconvertcostof goodssold (COGS)fromlastin, firstout (LIFO)tofirstin, firstout (FIFO)is:
COGS FIFO= COGS LIFO+ beginningLIFO reserve.
COGSFIFO = COGS LIFO - changeinthe LIFO reserve. COGSFIFO = COGS LIFO + changeinthe LIFO reserve.
Explanation
Theformulaforconverting COGSfrom LIFO toFIFO isCOGS = COGS − (LIFO reserve − LIFO reserve )
Selectedinformationfrom Newcomb, Inc.'sfinancialstatementsfortheyearended December 31, 20X4 includedthefollowing (in $):
Cash 70,000 AccountsPayable 90,000
AccountsReceivable 140,000 DeferredTax Liability 100,000
Inventory 460,000 Long-term Debt 520,000
Property, Plant & Equip. 1,200,000 CommonStock 600,000 TotalAssets 1,870,000 Retained Earnings 360,000
Total Liabilities & Equity 1,870,000
EarningsBeforeInterestandTaxes 280,000
Interest Expense 60,000
ᅞ A) ᅞ B) ᅚ C)
Question #95 of 111
Question ID: 462042ᅞ A) ᅚ B) ᅞ C)
Question #96 of 111
Question ID: 462063IncomeTax Expense 75,000
NetIncome 145,000
LIFO Reserveat Jan.1 185,000 LIFO Reserveat Dec. 31 250,000
If Newcomb hadusedfirstin, firstout (FIFO)for20X4 and weassumethataveragetotalcapital was $1,700,000 forboth the LIFO andFIFO computations, thereturnontotalcapital would:
remain unchanged at 16.5%. decreasefrom16.5 to12.6%.
increasefrom16.5 to20.3%.
Explanation
Thereturnontotalcapitalunder LIFO (EBIT / averagetotalcapital) was $280,000 / $1,700,000 = 16.5%.UnderFIFO, EBITis
increasedbytheincreaseinthe LIFO reserveduring theyear.FIFO returnontotalcapitalis ($280,000 + ($250,000 − $185,000)) / $1,700,000 = 20.3%.
Inperiodsofrising pricesandstableorincreasing inventory quantities, using the LIFO methodforinventoryaccounting
comparedtoFIFO will have:
higher COGS, lower income, lower cash flows, and lower inventory. higherCOGS, lowerincome, highercash flows, andlowerinventory. lowerCOGS, higherincome, identicalcash flows, andlowerinventory.
Explanation
Inperiodsofrising pricesandstableorincreasing inventory quantities, the LIFO method - ascompared with FIFO - willresult in higherCOGS, lowertaxes, lowernetincome, lowerinventorybalances, lower working capital, and highercash flows.
JimBanaji, creditanalystsfor HEQ, afixedincomefund, isevaluating threebonds. Oneofthebonds, issuebyPrimeInc, a largeprinting andpackaging company, hassix yearsremaining tomaturityand haslimitedliquidityinthemarket. While evaluating thefinancialstatementsofPrime, Banajinoticesthefollowing:
Excerpts (Financialstatementsforyears20X9 and20X8)
($'000) 20X9 20X8
Sales 11300 10800
ROE 12% 11.6%
R&D expense 288 381
ᅚ A) ᅞ B) ᅞ C)
Question #97 of 111
Question ID: 462005ᅞ A) ᅚ B) ᅞ C)
Question #98 of 111
Question ID: 414456ᅞ A) ᅞ B) ᅚ C)
Finished goods 492 368
Raw Materials 329 324
Dividends 144 132
Basedontheinformation gathered, which ofthefollowing conclusionsaremostlikely?
Sales are expected to decrease in the future or grow at a slower pace.
Salesareexpectedto grow atamorerapidpaceinthefuture. Profitsareexpectedto grow atamorerapidpace.
Explanation
Salesareexpectedto grow ataslowerpace (ordecrease).Thisisevidencedby growth infinished goodsinventory accompanied with astableraw materialsinventory (asaproportionofsales).
GRCorporationusesthelast-in, firstout (LIFO)methodofaccounting for inventoryand $70,000 is reportedascostof goodssold (COGS) ontheir incomestatement. However, if GR hadusedfirst-in, first-out (FIFO), theCOGS would havebeen $60,000.Iftheending LIFO reserve (LR) reportedinthefinancialstatementsis $40,000, thebeginning LIFO reserveis:
$50,000. $30,000.
$20,000.
Explanation
Beginning LR + ΔLR = Ending LR
ΔLR = COGS(LIFO) - COGS(FIFO) = $70,000 - 60,000 = $10,000
Beginning LR = $40,000 - 10,000 = $30,000
Units Unit Price Beginning Inventory 709 $2.00
Purchases 556 $6.00
Sales 959 $13.00
Sales Expenses $2,649 per annum
Ignoring taxes, whatisprofitusing the weightedaveragemethod?
$5,676.00. $6,027.56.
$6,213.98.
Question #99 of 111
Question ID: 461973ᅚ A) ᅞ B) ᅞ C)
Question #100 of 111
Question ID: 461974weightedaveragecostperunit = (709 units)($2/unit) + (556 units)($6/unit) = $4,754 / 1,265units = $3.7581
weightedaverageCOGS = ($3.7581)(959 units) = $3,604.02 Sales = (959 units)($13/unit) = $12,467
Profit = Sales − COGS − Sales Expenses = 12,467 − 3,604.02 − 2,649 = $6,213.98
Whileattending alocaluniversity, CFAcandidateAnjolie Websteracceptsatemporaryposition with asmallmanufacturing
firm.Currently, thefirmuses LIFO toaccountforinventory, buttheowneris "justcurious" about how thefinancialresults
wouldlookifthecompanyusedFIFO.Theowner hands Websteraphotocopyoftheinventorydataforthecurrentperiod (summarizedbelow).
Beginning inventoryof1,000 unitsat $30 cost.
Ending inventoryof 800 units. Salesof1,100 units.
Threeinventorypurchases (listedfromearliestpurchasetolatestpurchase): 400 unitsat $27 each, 300 unitsat $25 each, andanunreadablenumberofunitsat $22each. (Unfortunately, whentheownercopiedtheoriginaldocument, helefta yellow stickynotecovering someoftheinventoryinformation.)
Currentassets (lessinventory)of $75,000. Currentliabilitiesof $65,000.
Using theinformationprovided, determine which ofthefollowing statementsisleastaccurate? Allelseequal, comparedto LIFO, using FIFO wouldresultin:
a current ratio of approximately 1.60. alower ending inventorybalance.
alower grossmargin.
Explanation
Tocalculatethecurrentratio (which includestheending inventorybalance)using FIFO, wefirstneedtodetermine how many units werepurchasedinthethirdillegiblepurchaseorder.
Ending inventory = beginning inventory + unitspurchased - unitssold, so
unitspurchased = unitssold + ending inventory - beginning inventory
= 1,100 + 800 - 1,000 = 900
Thirdpurchaseunits = 900 - 400 - 300 = 200
FIFO ending inventory = [(300 × 27) + (300 × 25) + (200 × 22)] = $20,000
FIFO currentratio (allelseequal) = (75,000 + 20,000) / 65,000 = approximately 1.46
ᅚ A) ᅞ B) ᅞ C)
Question #101 of 111
Question ID: 461975ᅞ A)
ᅚ B) ᅞ C)
Question #102 of 111
Question ID: 461996ᅞ A) ᅞ B) ᅚ C)
Which ofthefollowing isleastlikelypartofthebasicinventoryequation?
Beginning inventory − ending inventory − cost of goods sold = purchases.
Beginning inventory + purchases = ending inventory + costof goodssold. Purchases − ending inventory + beginning inventory = costof goodssold.
Explanation
Tosolveforpurchasesthebasicinventoryequation wouldthenbe:ending inventory + COGS − beginning inventory =
purchases.
Sweet MilkIncusesthelastin, firstout (LIFO)inventorymethodand had 5,000 unitsofbeginning inventoryon January1,
2002, that wasvaluedat $10.00 aunit.Thecompanypurchased 50,000 unitsat $12aunitandsold 52,000 unitsat $15 aunit. Sweet Milkisconsidering anadditionalpurchaseof10,000 unitsat $13 aunit.Thecompany willmakethepurchaseattheend of Decemberorintheearlypartofyear2003. Which statementabouttheeffectofthepurchasedecisiononnetincomeis mostaccurate?
Income for year 2002 will not be affected no matter when the inventory is purchased.
Postponing thepurchaseuntil January willincreaseincomefor2002by $14,000.
Making thepurchasein December willincreaseincomeby $16,000 inyear2002.
Explanation
Bypostponing thepurchaseuntil January, costof goodssold (COGS) wouldbe $620,000.Apurchasein December would increaseCOGSto $634,000.
COGSfor Januarypurchase = (50,000 × 12) + (2,000 × 10) = 620,000
COGSfor Decemberpurchase = (10,000 × 13) + (42,000 × 12) = 634,000
JeffersonCorp.decidedtochangeitsinventoryvaluationmethodfromfirstin, firstout (FIFO)tolastin, firstout (LIFO)ina periodofrising prices. What wastheresultofthechangefortheending inventoryandnetincome?
Ending
Inventory NetIncome
Increases Increases Decreases Increases
Decreases Decreases
Question #103 of 111
Question ID: 461988ᅞ A) ᅞ B) ᅚ C)
Question #104 of 111
Question ID: 461987ᅚ A) ᅞ B) ᅞ C)
Question #105 of 111
Question ID: 414466ᅞ A)
ᅚ B)
ᅞ C)
LIFO providesthelowestinventoryvaluesandthelowestnetincomeunderrising pricesbecausetheleastexpensive
purchasesareleftininventoryandthemoreexpensivepurchasesflow tocostof goodssold (COGS) which lowersnetincome.
During inflationaryperiods, which ofthefollowing statementsisCORRECT?
LIFOwill generate lower earnings, but lower after tax cash flows. LIFO will generate higher earnings, butlower after tax cash flows.
FIFO will generate higher earnings, butlower after tax cash flows.
Explanation
During inflation, FIFO will generate higher earningsbecausecostof goods willbelower thanif LIFO wasused. However, LIFO will
generate higher cash flowssincecash outflowsfor taxes willbelower for LIFO.
Which isthepreferredinventorymethodfor purposesofanalysisand which isthepreferredmethodfor reporting costof goodssold?
Inventory
Analysis COGS
FIFO LIFO
LIFO FIFO
LIFO LIFO
Explanation
FIFO isthepreferredinventorymethodforpurposesofanalysisand LIFO isthepreferredmethodforreporting costof goods sold.
During periodsofrising pricesandstableor growing inventories, themostinformativeinventoryaccounting methodforincome
statementpurposesis:
FIFO because it allocates historical prices to cost of good sold (COGS) and provides a better measure of current income.
LIFO becauseitallocatescurrentpricestocostof goodsold (COGS)andprovidesa bettermeasureofcurrentincome.
Question #106 of 111
Question ID: 461994ᅞ A) ᅚ B) ᅞ C)
Question #107 of 111
Question ID: 462033ᅚ A) ᅞ B) ᅞ C)
Question #108 of 111
Question ID: 462019ᅞ A) ᅚ B) ᅞ C) Explanation
LIFO isthemostinformativeinventoryaccounting methodforincomestatementpurposesinperiodsofrising pricesandstable or growing inventories.ItallocatesthemostrecentpurchasepricestoCOGS, andthusprovidesabettermeasureofcurrent incomeandfutureprofitability.
In2004, TorrenceCo. hadabeginning inventoryof $19,924 andmadepurchasesof $15,923.Iftheending inventorylevel
was $19,204, what wasthecostof goodssold (COGS)foryear2004?
$15,923. $16,643.
$15,203.
Explanation
Beginning Inventory + Purchases − Ending Inventory = COGS
$19,924 + $15,923 − $19,204 = $16,643
Moore Ltd.usesthe LIFO inventorycostflow assumption.Itscostof goodssoldin20X8 was $800.Afootnoteinitsfinancial statementsreads: "Using FIFO, inventories would havebeen $70 higherin20X8 and $80 higherin20X7." Moore'sCOGSif
FIFO inventorycosting wereusedin20X8 isclosestto: $810.
$790.
$730.
Explanation
Theending LIFO reserveis $70 andthebeginning LIFO reserveis $80.
FIFO COGS = LIFO COGS − (ending LIFO reserve − beginning LIFO reserve)
$800 − ($70 − $80) = $810
Afirmendedthelastperiod with inventoryof $3.0 millionandalastin, firstout (LIFO)reserveof $40,000. During theyear, it madepurchasesof $1millionandreportedsalesof $4 million with a grossmarginof 0.58.Attheendoftheyear, itreporteda LIFO reserveof $75,000. Whatisthevalueofthefirm'sending inventoryconvertedtoafirstin, firstout (FIFO)basis?
$2,360,000. $2,395,000.
