Reading 35: Analysis of Inventories - LOS c, (Part 2) ～ Q

答案和详解如下：

16.Assume that Hunter Round Restaurant Supply currently uses the LIFO method to account for inventory and that the business environment is one of rising prices and stable or growing inventory balances. In addition, Hunter Round has a tax rate of zero percent due to tax loss carrybacks. All else equal, which of the following statements is least likely valid? By using LIFO instead of FIFO, Hunter Round has

A)   lower net income.

B)   lower working capital.

C)   higher cash flows.

D)   higher cost of goods sold.

The correct answer was C)

In the absence of taxes, there is no difference in cash flow between LIFO and FIFO. The other statements are true. For the examination, memorize the financial impact of rising and falling prices for the two inventory methods.

17.Blocher Company is evaluating the following methods of accounting for depreciation of long-lived assets and inventory:  

      Depreciation:  straight-line; double-declining balance (DDB)

      Inventory:  first in, first out (FIFO); last in, first out (LIFO)

Assuming a deflationary environment (prices are falling), which of the following combinations will result in the highest net income in year 1?

A)   DDB; FIFO.

B)   DDB; LIFO.

C)   Straight-line; LIFO.

D)   Straight-line; FIFO.

The correct answer was C)

For year 1, straight-line depreciation will be lower than DDB. During deflationary periods, LIFO will result in lower cost of goods sold and hence higher income.

18.In an inflationary environment, a company’s:

A)   net income will be larger if it uses LIFO than if it uses FIFO.

B)   COGS sold will be lower if it uses LIFO as opposed to FIFO.

C)   net income (NI) will be the same under LIFO or FIFO.

D)   assets will be lower if it uses last in, first out (LIFO) as opposed to FIFO.

The correct answer was D)

In an inflationary period, assets will be lower under LIFO since the last, higher priced items are charged to the income statement.

19.In a period of rising prices and stable or increasing inventory quantities, use of the first in, first out (FIFO) inventory cost flow assumption results in all of the following EXCEPT:

A)   higher earnings before taxes than under last in, first out (LIFO).

B)   higher earnings after taxes than under last in, first out (LIFO).

C)   higher working capital than under last in, first out (LIFO).

D)   lower inventory balances than under last in, first out (LIFO).

The correct answer was D)

Ending Inventory under FIFO includes more recently purchased higher cost goods than under LIFO. The LIFO inventory consists of older, cheaper goods. Both before and after tax earnings under FIFO will be higher because less expensive goods are used for the cost of goods sold (COGS). Working capital, which is equal to current assets – current liabilities will also be higher under FIFO due the higher inventory balance causing a higher level of current assets.