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11. A company which prepares its financial statements using IFRS wrote down its inventory value by €20,000 in 2009. In 2010, prices increased and the same inventory was worth €30,000 more than its value at the end of 2009. Which of the following statements is most accurate? In 2010, the company’s cost of sales: A. was unaffected. B. decreased by €20,000. C. decreased by €30,000.

Ans: B. Under IFRS, inventory is reported on the balance sheet at the lower cost or net realizable value. Net realizable value is equal to the expected sales price less the estimated selling costs and completion costs. If net realizable value is less than the balance sheet value f inventory, the inventory is “write down” to net realizable value and the loss is recognized in the income statement. Is there is a subsequent recovery in value, the inventory can be “write up” and the gain is recognized in the income statement by reducing COGS by the amount of the recovery. Because inventory is valued at the lower of cost or net realizable value, inventory cannot be written up by more than it was previously written down. In this question, the recovery of previous write-down is limited to the amount of the original write-down (€20,000) and is reported as a decrease in the cost of sales.

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12. A U.S. pulp brokerage firm which prepares its financial statements according to U.S. GAAP and uses a periodic inventory system had the following transactions during the year: Date Activity Tons (000s) $ per Ton Beginning inventory 1 600 February Purchase 5 650 May Sale 2 700 August Purchase 3 680 November Sale 4 750 The cost of sales (in ‘000s) is closest to: A. $3,850 using FIFO. B. $4,080 using LIFO. C. $5,890 using weighted average.

Ans: A. COGS Weighted Average CGS FIFO CGS LIFO Available for sale Units (‘000s) Cost $ Total cost ($ 000s) Units sold Total cost ($ 000s) Units sold Total cost ($ 000s) 1 600 600 1 x 600 600 3 x 680 2,040 5 650 3,250 5 x 650 3,250 3 x 650 1,950 3 680 2,040 9 CGAS $5,890 Cost of sales $3,850 Cost of sales $3,990 Unit Cost $5,890/9 = $654.44 Cost of sale WA $654.44 x 6 = $3,926

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13. A review of a company’s inventory records for the year indicates that the following costs were incurred:

Fixed production overhead:                          $500,000

Direct material and direct labor:                    300,000

Storage costs incurred during production:     25,000

Abnormal waste costs:                                       30,000

If the company operated at full capacity during the year, the total capitalized inventory cost is closest to:

A. $800,000.

B. $825,000.

C. $855,000.

  

  
  Ans: B.

The total capitalized costs include fixed production costs, the direct conversion costs of material and labor, storage costs required as part of production but not abnormal waste costs. $500,000 + 300,000 + 25,000 = $825,000.

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14. In a period of rising prices, when compared to a company that uses weighted average cost for inventory, a company using FIFO will most likely report higher values for its:

  

A. return on sales.

B. debt-to-equity ratio.

C. inventory turnover.

  
  Ans: A.

In periods of rising prices FIFO results in a higher inventory value and a lower cost of goods sold and therefore a higher net income. The higher net income increases return on sales.

  

B is incorrect. The higher reported net income also increases retained earnings, and therefore results in a lower debt-to-equity ratio not a higher one.

  

C is incorrect. The combination of higher inventory and lower cost of goods sold decreases inventory turnover (CGS/inventory).

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15.  A company, which prepares its financial statements in accordance with IFRS is in the process of developing a more efficient production process for one of its primary products. The most appropriate accounting treatment for those costs incurred in the project is to:

A. expense them as incurred.

B. capitalize costs directly related to the development.

C. expense costs until technical feasibility has been established.

  
  Ans: C.

Under IFRS research and development costs are expensed until certain criteria are met, including that technical feasibility has been established and the company intends to use it.

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16. Due to global oversupply in the micro-chip industry a company wrote down its 2012 inventory by €4.0 million from €12.0 million. The following year, due to a change in competitive forces in the industry the market price of these chips rose sharply to 10% above their original 2012 value. If the company prepares its financial statements in accordance with International Financial Reporting Standards (IFRS), its 2013 inventory (in €-millions) will most likely be reported as:

A. 8.0.

B. 12.0.

C. 13.2.

  

  

  
  Ans: B.

Although IFRS does require write-downs, it also allows revaluations, but not to exceed the original value, i.e., 12. The exception to this, where gains are allowed, is in producers of agricultural, forest and resource products.

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17. During the past year, a company’s production facility was operating at 75% of capacity. The firm’s costs were as follows: $ millions Fixed production overhead costs 3 Raw materials costs 6 Labor costs 4 Freight-in costs for raw materials 1 Warehousing costs for finished goods 2 The firm ended the year with no remaining work-in-process inventory. The total capitalized inventory cost (in $ millions) for the year is closest to: A. 13.25. B. 15.25. C. 16.00.

Ans: A. $ millions Fixed Production Costs: 75% of capacity: 75% x $3 2.25 Raw materials 6.00 Labor Costs 4.00 Freight In 1.00 Total Capitalized Inventory Cost 13.25

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18. Is the reversal of an inventory write-down permitted under U.S. GAAP (generally accepted accounting principles) and International Financial Reporting Standards (IFRS)?

A. No, under both

B. Yes, under both

C. Yes under IFRS but not under U.S. GAAP

  
  Ans: C.

The reversal of an inventory write-down is permitted under IFRS but not under U.S. GAAP.

Under IFRS, inventory is reported on the balance sheet at the lower cost or net realizable value. Net realizable value is equal to the expected sales price less the estimated selling costs and completion costs. If net realizable value is less than the balance sheet value f inventory, the inventory is “write down” to net realizable value and the loss is recognized in the income statement. Is there is a subsequent recovery in value, the inventory can be “write up” and the gain is recognized in the income statement by reducing COGS by the amount of the recovery. Because inventory is valued at the lower of cost or net realizable value, inventory cannot be written up by more than it was previously written down.

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19. A retail company prepares its financial statements in accordance with U.S. GAAP (generally accepted accounting principles). Its purchases and sales of inventory for its first two years of operations are listed below. First Year Second Year Units Purchased 80,000 100,000 Unit Cost $8.43 $12.25 Units Sold 73,000 78,000 Unit Selling Price $15.00 $16.00 In its second year of operation, the company’s ending inventory is $348,003. Which of the following inventory cost flow assumptions is the company was most likely using? A. FIFO B. LIFO C. Weighted average cost

Ans: C. The company is accounting for its inventory using the weighted average cost method. In the 2nd year of operations, under Weighted Average Cost: Units available for sale include ending inventory from year 1 plus purchases for year 2: 7,000 + 100,000 = 107,000 Cost of Goods Available for Sale: 7,000 x $8.43 + 100,000 x $12.25 = $1,284,000 Unit Cost: $1,284,000/107,000 = $12.00 End Inventory = 107,000 –78,000 = 29,000 units. $12.00 x 19,000 = $348,003

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20. An analyst gathers the following information about a company ($ millions): 2012 2011 Sales 283.5 234.9 Year-end inventory (LIFO inventory method) 81.4 53.7 LIFO reserve 36.4 21.8 Cost of goods sold (LIFO) 203.9 167.3 If the company uses the FIFO inventory method instead of LIFO, the company’s 2012 gross profit margin is closest to: A. 22.9%. B. 29.8%. C. 33.2%.

Ans: C. Change in LIFO Reserve 36.4 - 21.8 = 14.6 COGS (FIFO) = COGS (LIFO) – Change in LIFO Reserve 203.9 – 14.6 = 189.3. Gross profit (FIFO) Sales – COGS (FIFO) 283.5 – 189.3 = 94.2 Gross Profit Margin (FIFO) Gross Profit / Sales 94.2 / 283.5 = 33.23%.