cityboy

31. During a period of declining prices, a company using LIFO inventory method instead of FIFO will most likely report:

A. lower current assets and higher gross income.

B. higher current assets and lower gross income.

C. higher current assets and higher gross income.
  Ans: C.

If prices were declining, using LIFO would match the lower (most recent) costs with current sales. Costs of goods sold would be lower with LIFO and gross profit (income) would be higher compared to using FIFO. Lower cost of goods sold means inventory balances, consisting of older higher priced items, would be higher using LIFO, increasing current assets relative to FIFO.

Reference: question 1.

cityboy

32. An adjustment to operating income for the effects of a change in LIFO reserve will most likely be required if the change in the LIFO reserve is the result of:

A. price declines.

B. a decrease in the number of unites held in inventory.

C. a increase in the number of unites held in inventory.

  
  Ans: C.

A liquidation of LIFO inventory produces unsustainable profit margins because old costs are being matched with current revenues.

cityboy

33. All else, will a company’s implementation of the accounting standard (SFAS 143) related to asset retirement obligations incurred because of environmental most likely:

A. increase return on assets but decrease net income.

B. decrease return on assets but increase net income.

C. decrease both return on assets and net income.

  
  Ans: C.

Implementation of SFAS 143 requires that companies record an asset and related liability for costs involved in the remedy of environmental damage. The increase in assets will decrease return on assets and the increase in depreciation and accretion expense will reduce net income.

cityboy

34. A company using LIFO reports the following:

·         COGS was $27,000.

·         Beginning inventory was $6,500, and ending inventory was $6,200.

·         The beginning LIFO reserve was $1,200.

·         The ending LIFO reserve was $1,400.

The best estimate of the company’s COGS on a FIFO basis would be:

A. $21,300.

B. $26,800.

C. $27,500.

  
  Ans: B.

COGS FIFO

= COGS LIFO – (ending LIFO reserve – beginning LIFO reserve)

=27,000-(1,400-1,200)=$26,800.

cityboy

34. A company using LIFO reports the following:

·         COGS was $27,000.

·         Beginning inventory was $6,500, and ending inventory was $6,200.

·         The beginning LIFO reserve was $1,200.

·         The ending LIFO reserve was $1,400.

The best estimate of the company’s COGS on a FIFO basis would be:

A. $21,300.

B. $26,800.

C. $27,500.

  
  Ans: B.

COGS FIFO

= COGS LIFO – (ending LIFO reserve – beginning LIFO reserve)

=27,000-(1,400-1,200)=$26,800.

cityboy

35. During period of rising prices:

A. LIFO COGS > Weighted Average COGS > FIFO COGS.

B. LIFO COGS > Weighted Average COGS < FIFO COGS.

C. LIFO COGS < Weighted Average COGS < FIFO COGS.

  
  Ans: A.

During period of rising prices, the last units purchased are more expensive than the existing units. Under LIFO, the cost of the last units purchased is assigned to COGS. This higher COGS results in lower income, as compared to the FIFO method. As the name suggests, the weighted average method is based on mathematical averages rather than timing of purchase/ use. Thus, COGS using this method falls between that of LIFO and FIFO.

cityboy

36. Which of the following accounting practices is most likely to decrease reported earnings in the current period?

A. Using the straight-line method of depreciation instead of an accelerated method.

B. Capitalizing advertising expenses rather than expensing them in the current period.

C. Using LIFO inventory cost methods during a period of rising prices.

  
  Ans: C.

LIFO will result in lower net income than FIFO in the current period, during a period of rising prices. The other choices will tend to increase current period earnings.

cityboy

36. In period of rising prices and stable or increasing inventory quantities, compared with companies that use LIFO inventory accounting, companies that use the FIFO method will have:

A. higher COGS and lower taxes.

B. higher net income and higher taxes.

C. lower inventory balances and lower working capital.

  
  Ans: B.

FIFO companies have higher net income and higher taxes.

References: question 1.

cityboy

37. Bao Corporation, which reports under IFRS, wrote down its inventory of electronic parts last period from its original cost of € 28,000 to net realizable value of €25,000. This period, inventory at net realizable value has increased to € 30,000. Bao should revalue this inventory to:

A. €30,000 and report a gain of €5,000 on the income statement.

B. €28,000 and report a gain of €3,000 on the income statement.

C. €30,000 but report a gain of €3,000 on the income statement

  
  Ans: B.

Under IFRS, inventory values are revalued upward only to the extent they were previously written down. In this case, that is from €25,000 back up to the original value of €28,000. The increase is reported as gain for the period and will increase COGS of units sold during the current period.

cityboy

38. Assuming stable inventory quantities, in a period of:

A. rising prices, LIFO results in higher ending inventory and FIFO results in higher gross profit.

B. falling prices, LIFO results in higher gross profit and FIFO results in lower COGS.

C. rising prices, LIFO results in higher COGS and FIFO results in higher working capital.

  
  Ans: C.

In a period of rising prices, LIFO results in higher COGS, lower inventory balances, and lower gross profit, as compared to FIFO. In a falling price environment, these effects are the opposite. Working capital (current assets minus current liabilities) is higher under FIFO in a rising price environment because inventories are higher.

Reference: Question 1.