土豆妮

The formula to convert cost of goods sold (COGS) from last in, first out (LIFO) to first in, first out (FIFO) is:

A) COGS FIFO = COGS LIFO – change in the LIFO reserve.

B) COGS FIFO = COGS LIFO + change in the LIFO reserve.

C) COGS FIFO = COGS LIFO + beginning LIFO reserve.

---

The formula for converting COGS from LIFO to FIFO is COGS_F = COGS_L ? (LIFO reserve_E ? LIFO reserve_B)

土豆妮

The year-end financial statements for a firm using last in first out (LIFO) acounting show an inventory level of $5,000, cost of goods sold (COGS) of $16,000, and inventory purchases of $14,500. If the LIFO reserve is $4,000 at year-end and was $1,500 at the beginning of the year, what would the COGS have been using FIFO accounting?

A) $13,500.

B) $12,000.

C) $18,500.

---

COGS from LIFO to FIFO:

COGS_F = COGS_L ? change in LIFO reserve
= COGS_L - (LIFO reserve_E ? LIFO reserve_B)
= $16,000 ? ($4,000 ? $1,500)
= $16,000 ? $2,500
= $13,500

土豆妮

The Orchard Supply Company uses last in, first out (LIFO) inventory valuation. Orchard Supply had a cost of goods sold (COGS) of $1 million for the period. The inventory at the beginning of the period was $500,000 and the inventory at the end of the period was $600,000. Orchard Supply's LIFO reserve was $100,000 at the end of the previous year and $200,000 at the end of the current year. What is Orchard Supply's COGS according to first in, first out (FIFO) inventory valuation?

A) $900,000.

B) $800,000.

C) $1.1 million.

---

FIFO COGS = LIFO COGS ? change in LIFO reserve

FIFO COGS = $1 million ? $100,000 = $900,000

土豆妮

A financial analyst could adjust the current ratio in which a company uses the LIFO inventory valuation method to the FIFO method by:

A) deducting the LIFO reserve from the current asset.

B) adding the LIFO reserve to the current assets.

C) adding the LIFO reserve to the current liabilities.

---

The LIFO reserve increases the inventory value under FIFO and inventory is included in the numerator in the current ratio.

土豆妮

Costiuk Ltd. uses the LIFO inventory cost flow assumption. Its inventory balance is $400 at the end of 20X8 and was $350 at the end of 20X7. A footnote in its financial statements reads: “Inventories would have been $70 higher in 20X8 and $80 higher in 20X7 using the FIFO cost flow assumption.”

Which of the following amounts represents the inventory balance under FIFO at the end of 20X8?

A) $410.

B) $390.

C) $470.

---

The $70 and $80 amounts represent the LIFO reserves which are differences between LIFO inventory and its value under FIFO.

FIFO inventory (20X8) = LIFO inventory (20X8) + LIFO reserve (20X8)

$400 + $70 = $470

土豆妮

Moore Ltd. uses the LIFO inventory cost flow assumption. Its cost of goods sold in 20X8 was $800. A footnote in its financial statements reads: “Using FIFO, inventories would have been $70 higher in 20X8 and $80 higher in 20X7.” Moore’s COGS if FIFO inventory costing were used in 20X8 is closest to:

A) $810.

B) $790.

C) $730.

---

The ending LIFO reserve is $70 and the beginning LIFO reserve is $80.

FIFO COGS = LIFO COGS ? (ending LIFO reserve ? beginning LIFO reserve)

$800 ? ($70 ? $80) = $810

土豆妮

Due to declining prices, Steffen Inc. has a LIFO reserve of –$20. Its income tax rate is 35%. If an analyst is converting Steffen’s financial statements to a FIFO basis, which of the following adjustments is most likely required?

A) Decrease liabilities by $7.

B) Increase assets by $20.

C) Increase shareholders’ equity by $13.

---

Declining prices (negative LIFO reserve) would result in FIFO inventory being less than LIFO inventory based on the following equation:

FIFO inventory = LIFO inventory + LIFO reserve

The balance sheet adjustment would decrease assets (inventory) by the $20 LIFO reserve. In addition, the analyst would decrease liabilities by $7 ($20 LIFO reserve × 35% tax rate). To bring the accounting equation into balance, the analyst would decrease shareholders’ equity by $13 [$20 LIFO reserve × (1 ? 35% tax rate)].

土豆妮

Premier Corp.’s year-end last in, first out (LIFO) reserve was $2,500,000 in 2000 and $2,300,000 in 2001. Premier’s $200,000 decline in the LIFO reserve could be explained by each of the following EXCEPT:

A) the LIFO reserve was being amortized.

B) a LIFO liquidation occurred.

C) declining inventory prices.

---

A decline in the LIFO reserve occurs when the increasing prices that created the reserve begin declining or when the inventory is liquidated (i.e. less units in inventory at the end of the year than at the beginning). LIFO reserves are not amortized.