标题: yet another Qbank question on inventory [打印本页] 作者: richer 时间: 2011-7-11 17:43 标题: yet another Qbank question on inventory
here is the question
Selected financial data from Krandall, Inc.’s balance sheet for the year ended December 31 was as follows (in $):
Total Assets 11,800,000
Inventory 2,400,000
Common Stock 1,000,000
Retained Earnings 1,500,000
LIFO Reserve at Jan. 1
600,000
LIFO Reserve at Dec. 31
900,000
Krandall uses the last in, first out (LIFO) inventory cost flow assumption. The tax rate is 40%. If Krandall used first in, first out (FIFO) instead of LIFO and paid any additional tax due, its assets-to-equity ratio would be closest to:
A) 3.73
B) 4.18
C) 4.06
Your answer: A was incorrect. The correct answer was C) 4.06
With FIFO instead of LIFO:
Inventory would be higher by $900,000, the amount of the ending LIFO reserve.
Cumulative pretax income would also be higher by $900,000, so taxes paid would be higher by 0.40($900,000) = $360,000. Therefore cash would be lower by $360,000.
Cumulative retained earnings would be higher by (0.60)($900,000) = $540,000.
So assets under FIFO would be $11,800,000 + $900,000 - $360,000 = $12,340,000 and equity would be $1,000,000 + $1,500,000 + $540,000 = $3,040,000. The assets-to-equity ratio would be $12,340,000 / $3,040,000 = 4.06.
Edited 1 time(s). Last edit at Monday, April 19, 2010 at 12:24PM by lzen5.作者: Benjiko 时间: 2011-7-11 17:43
the method given in the cirriculum is the change in equity equals to the after-tax rate of change in COGS. here, the answer seems to say that change in net income equals the LIFO reserve after tax. i am not sure which to use to calculate equity now. should I just remember as a fact now that LIFO reserve equals pretax income increase when converting LIFO to FIFO.
Am I reading the right Qbank?
Edited 1 time(s). Last edit at Monday, April 19, 2010 at 12:37PM by lzen5.作者: JGovender 时间: 2011-7-11 17:43
bump......作者: johnnyBuz 时间: 2011-7-11 17:43
Is this Lvl 1?作者: Ionutzakis 时间: 2011-7-11 17:43
LIFO Reserve represents profits not recognized and taxes that were not paid (because the higher costs were disguised).
1.) Add the LIFO reserve to the Inventory Balance
2.) (1-.4)(LIFO Reserve) = the profits made, but not recorded.
3.) (.4)(LIFO Reserve) = the tax liability
The numerator is as follow:
(Total Assets) + (LIFO Reserve) - (Tax Liability)
The denominator is as follows:
(Value of Common Stock) + (Retained Earnings) + (After-tax LIFO Reserve Profits)
$1,000,000 + $1,500,000 + $540,00= 3,040,000
They definitely gave too much information - Jan 31 LIFO Reserve and Inventory - to throw off the calculation, which never helps
"The change in equity equals to the after-tax rate of change COGS" is right and the same as the change in retained earnings. LIFO disguises COGS as to be higher, which results in a lower retained earnings. So a change in pre-tax COGS be the same as pre-tax retained earnings...
hopefully that helps some作者: amqata 时间: 2011-7-11 17:43
LIFO Reserve represents profits not recognized and taxes that were not paid (because the higher costs were disguised).
1.) Add the LIFO reserve to the Inventory Balance
2.) (1-.4)(LIFO Reserve) = the profits made, but not recorded.
3.) (.4)(LIFO Reserve) = the tax liability
The numerator is as follow:
(Total Assets) + (LIFO Reserve) - (Tax Liability)
The denominator is as follows:
(Value of Common Stock) + (Retained Earnings) + (After-tax LIFO Reserve Profits)
$1,000,000 + $1,500,000 + $540,00= 3,040,000
They definitely gave too much information - Jan 31 LIFO Reserve and Inventory - to throw off the calculation, which never helps
"The change in equity equals to the after-tax rate of change COGS" is right and the same as the change in retained earnings. LIFO disguises COGS as to be higher, which results in a lower retained earnings. So a change in pre-tax COGS be the same as pre-tax retained earnings...
