bapswarrior

During periods of declining prices, which inventory method would result in the highest net income?

A) Average Cost.

B) LIFO.

C) FIFO.

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When prices are declining and LIFO is used the COGS is smaller than if FIFO is used leading to a larger net income.

bapswarrior

In general, when analyzing profitability and costs, or when analyzing asset and equity ratios, which of the following should be used?

Profitability/Cost Ratios

Asset/Equity Ratios

A) FIFO FIFO

B) FIFO LIFO

C) LIFO FIFO

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In general, an analyst should use LIFO when examining profitability or cost ratios and FIFO when examining asset or equity ratios.

bapswarrior

Which of the following statements regarding inventory accounting methods is most accurate? In periods of:

A) rising prices and stable unit purchases, using the LIFO method results in a lower current ratio than the FIFO method.

B) declining prices FIFO results in higher net income than LIFO.

C) rising prices and stable unit purchases, using the FIFO method results in higher inventory turnover than the LIFO method.

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In periods of rising prices LIFO results in lower current assets because the ending inventory is based on inventory items that were purchased first at a lower price.

bapswarrior

During periods of rising prices:

A) LIFO Gross Profit Margin > FIFO Gross Profit Margin.

B) LIFO Inventory Turnover < FIFO Inventory Turnover.

C) LIFO Debt to Equity Ratio > FIFO Debt to Equity Ratio.

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FIFO inventory, and therefore FIFO assets and equity, will be higher by the LIFO reserve.

bapswarrior

Which of the following statements concerning a period of rising prices is least accurate?

A) Inventory turnover is less using the last in, first out (LIFO) inventory valuation method than using the first in, first out (FIFO) method.

B) The debt-to-equity ratio is greater using the last in, first out (LIFO) inventory valuation method than using the first in, first out (FIFO) method.

C) Gross profit using the last in, first out (LIFO) inventory valuation method is less than the gross profit using the first in, first out (FIFO) method.

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LIFO results in lower inventory and higher cost of goods sold (COGS) during a period of rising prices, hence a higher inventory turnover

bapswarrior

Assume that Hunter Round Restaurant Supply currently uses the last in, first out (LIFO) method to account for inventory and that the business environment is one of rising prices and stable or growing inventory balances. In addition, Hunter Round has an effective tax rate of zero percent due to tax loss carrybacks. All else equal, which of the following statements is least likely valid? By using LIFO instead of first in, first out (FIFO), Hunter Round has:

A) lower net income.

B) higher cash flows.

C) lower working capital.

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In the absence of taxes, there is no difference in cash flow between LIFO and FIFO. The other statements are true. For the examination, memorize the financial impact of rising and falling prices for the two inventory methods.

bapswarrior

Assuming high inflation in the short run and lower levels of inflation in the long run, the current ratio of a company using last in, first out (LIFO) relative to a firm using first in, first out (FIFO), will be:

A) lower, and the difference between the two firms' current ratios will decrease as inflation decreases.

B) lower, and the difference between the two firms' current ratios will increase as inflation decreases.

C) higher, and the difference between the two firms' current ratios will decrease as inflation decreases.

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The LIFO firm's current ratio will be lower and the difference between the two firms' current ratios will increase as inflation decreases. For example, assume purchases equal sales so the quantity of inventory is constant. Inventory value under LIFO will also remain constant as inflation decreases, whereas FIFO inventory value will increase even as the inflation rate decreases. As long as inflation remains positive, the FIFO inventory value and the difference between LIFO and FIFO inventory values will increase, as will the difference between the LIFO and FIFO firms' current ratios.

bapswarrior

Tim Rogers is senior equity analyst with White Capital LLP. While analyzing the financial statements of Drako Toys Inc., a toy manufacturer based in Cleveland, Ohio, Tim concludes that Drako is expected to see above-average sales growth over the next three years. Which of the following conditions most likely support Tim’s conclusion?

A) Finished goods inventory growing faster than sales in the last two years.

B) Increase in raw-materials and work-in-progress inventory and corresponding decline in finished goods inventory over the last two years.

C) Increase in finished goods inventory and corresponding decline in raw-materials and work-in-progress inventory over the last two years.

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An increase in raw materials and/or work-in-process inventory is probably an indication of an expected increase in demand. Conversely, an increase in finished goods inventory, while raw materials and work-in-process are decreasing, may be an indication of decreasing demand. Finished goods inventory that is growing faster than sales may be an indication of declining demand.

bapswarrior

Jim Banaji, credit analysts for HEQ, a fixed income fund, is evaluating three bonds. One of the bonds, issue by Prime Inc, a large printing and packaging company, has six years remaining to maturity and has limited liquidity in the market. While evaluating the financial statements of Prime, Banaji notices the following:
Excerpts (Financial statements for years 20X9 and 20X8)

($'000)	20X9	20X8
Sales	11300	10800
ROE	12%	11.6%
R&D expense	288	381
Inventory:
Finished goods	492	368
Raw Materials	329	324
Dividends	144	132

Based on the information gathered, which of the following conclusions are most likely?

A) Sales are expected to decrease in the future or grow at a slower pace.

B) Sales are expected to grow at a more rapid pace in the future.

C) Profits are expected to grow at a more rapid pace.

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Sales are expected to grow at a slower pace (or decrease). This is evidenced by growth in finished goods inventory accompanied with a stable raw materials inventory (as a proportion of sales).

bun789

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