CFA Level I:FSA : Inventories(Reading 29) 习题精选

cityboy

1. Company X uses FIFO for its inventory valuation and Company Y uses LIFO under U.S.GAAP, all other respects are identical. If the prices are rising, Company X is most likely to have a higher: A. Tax liability B. Inventory turnover C. CFO

Ans: A When prices are rising: Item/ratio FIFO LIFO Ending inventories Higher-the inventory reflects the prices of the most recently purchased items Lower-the inventory reflects the prices of items purchased at lower prices Shareholders’ equity Higher-earning and inventories are usually higher Lower- earning and inventories are usually higher Earnings Higher-cost of goods sold is based on previously purchased, lower-priced items Lower- cost of goods sold is based on most recently purchased, higher-priced items Pretax cash flow Same- pretax cash flow is not impacted by the inventory method used Same- pretax cash flow is not impacted by the inventory method used After-tax cash flow Lower- pretax cash flow is the same, but the earnings and income taxes are higher Higher- pretax cash flow is the same, but the earnings and income taxes are lower Profit margins Higher-earnings are higher Lower- earnings are lower Inventory (asset) turnover Lower- inventories are usually higher Higher- inventories are usually lower Current ratio Higher- inventories are usually higher Lower- inventories are usually lower Debt-to-equity ratio Lower-net worth is usually higher Lower- net worth is usually lower Return on asset and return on equity Higher-earnings are higher Lower- earnings are lower FIFO: The cost of the first item purchased is the cost of the first item sold. Ending inventory is based on the cost of the most recent purchases, thereby approximating current cost. LIFO: The cost of the last item purchased is the cost of the first item sold. Ending inventory is based on the cost of the earliest items purchased. So when prices are rising, FIFO results in a lower COGS. FIFO also results in lower inventory turnover (due to lower COGS and higher inventory balances), a higher tax liability (due to a higher pretax income) and a lower CFO (due to the higher tax payments). B. Company X uses FIFO so its inventory turnover should be lower due to lower COGS and higher inventory balances. C. Company X uses FIFO so its CFO should be lower due to the higher tax payments.

cityboy

2. Under U.s.GAAP, a LIFO liquidation occurs when the:

A. LIFO reserve value increases.

B. Firm changes from LIFO to FIFO

C. Quantity of goods sold is greater than the quantity produced.
   
Ans: C

Under U.S.GAAP, a LIFO inventory liquidation occurs when more products are sold than are purchased or produced, causing the firm to dip into older, lee expensive inventory.

B. Changing from LIFO to FIFO is made retrospectively. Under U.S.GAAP, the firm must explain why the change in cost flow method is preferable. But this change is not LIFO inventory liquidation.

cityboy

3. A company currently uses LIFO inventory valuation under U.S.GAAP. The company reported an increase in the LIFO reserve for the year. If the company used FIFO rather than LIFO:

A. COGS is lower and net income is lower.

B. CFGO is lower and net income is higher.

C. COGS is higher and net income is lower.

  
  Ans. B.

Under U.S.GAAP, a LIFO reserve increase indicates that the prices were increasing and the difference in inventory cost using LIFO and FIFO valuation methods increased over the period. During periods of rising prices, LIFO records a higher COGS than FIFO because the LIFO method uses the newer, more expensive inventory for COGS. If COGS are higher, net income will be lower. If the company used FIFO rather than LIFO, the effects will be reversed. Thus, COGS will be lower and the net income will be higher.

cityboy

4. Assuming flat year-over-year sales in a declining price environment under U.S.GAAP, a firm might expect cash flow from operations (CFO) and working capital (WC) under the LIFO (rather than FIFO) inventory method to be:

A. Lower for both CFO and WC.

B. Lower for CFO and higher for WC.

C. Higher for CFO and lower for WC.

  
  Ans. B.

Under U.S.GAAP, in a declining price environment, LIFO results in a lower COGS, a higher gross profit margin, and higher taxable income. Higher taxable income results in higher tax outflows and lower after-tax cash flows from operations (CFO). In the declining price environment, inventory balances and working capital reflect the higher cost of the earlier, lower priced inventory.

cityboy

5.  Which of the following inventory valuation methods best matches the actual historical cost of the inventory items to their physical flow?

A. FIFO.

B. LIFO.

C. Specific identification.

  
  Ans. C.

Specific identification best matches the physical flow of the inventory items because it tracks the actual units that are sold.

cityboy

6. The following information is available about a manufacturing company: $ million Cost of ending inventory computed using FIFO 4.3 Net realizable value 4.1 Current replacement cost 3.8 If the company is using International Financial Reporting Standards (IFRS), instead of U.S. GAAP, its cost of goods sold ($ millions) is most likely: A. the same. B. 0.3 lower. C. 0.3 higher.

Ans: A. Under IFRS, the inventory would be written down to its net realizable value ($4.1 million), whereas under U.S. GAAP, market is defined as current replacement cost and hence would be written down to its current replacement cost ($3.8 million). The smaller write down under IFRS will reduce the amount charged to the cost of goods sold, as compared with U.S. GAAP, and result in a lower cost of goods sold of $0.3 million.

cityboy

7. For which of the following assets is it most appropriate to test for impairment at least annually?

A. Land.

B. A patent with a legal life of 20 years.

C. A trademark with an expected indefinite life.

  
  Ans: C.

Intangible assets with indefinite lives need to be tested for impairment at least annually.

  

B and C are incorrect. PP&E (including land) and intangibles with finite lives are only tested if there has been a significant change or other indication of impairment.

cityboy

8. A company’s information from its first year of operation is as follows: 2011 Event Units NZ$/unit Opening inventory 0 0 Purchase #1 1,000 $22.50 Purchase #2 800 $25.00 Purchase #3 400 $25.50 Sales 1,700 $40.00 Using a periodic inventory system and the weighted average method, the ending inventory value is closest to: A. $11,975. B. $12,165. C. $12,700.

Ans: A. Ending Inventory Weighted Average Calculations Units NZ$/unit Total NZ$ Purchase #1 1,000 $22.50 $22,500 Purchase #2 800 $25.00 $20,000 Purchase #3 400 $25.50 $10,200 Total available 2,200 $52,700 Average cost 52,700 ÷ 2,200 $ 23.95 Ending inventory 2,200 – 1,700 = 500 units $ 11,975

cityboy

9. A company incurs the followings costs related to its inventory during the year: Cost ￥ millions Purchase price 100,000 Trade discounts 5,000 Import duties 20,000 Shipping of raw materials to manufacturing facility 10,000 Manufacturing conversion costs 50,000 Abnormal costs as a result of waste material 8,000 Storage cost prior to shipping to customers 2,000 The amount charged to inventory cost (in millions) is closest to: A. ￥175,000. B. ￥177,000. C. ￥185,000.

Ans: A. The costs to include in inventories are all costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition. Cost ￥ millions Purchase price 100,000 Less Trade discounts (5,000) Import duties 20,000 Shipping of raw materials to manufacturing facility 10,000 Manufacturing conversion costs 50,000 Total inventory costs 175,000

cityboy

10. Compared with using the FIFO method to account for inventory, during a period of rising prices, which of the following ratios is most likely higher for a company using LIFO?

A. Current ratio

B. Gross margin

C. Inventory turnover

  
  Ans: C.

During a period of rising prices, ending inventory under LIFO will be lower than that of FIFO and cost of goods sold higher; therefore, inventory turnover (CGS/average inventory) will be higher.

Reference: question No. 1.