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

45. A company began the most recent reporting period with 145,670 units in inventory, which were acquired at a cost of $7.5- per unit. During the year, a total of 1,550,000 units were sold. Inventory purchases by quarter were: Purchases Units Unit cost Q1 534,520 $7.95 Q2 341,233 $8.60 Q3 498,664 $9.45 Q4 297,808 $9.70 Ending inventory value using the average cost method is closest to: A. $2,064,200. B. $2,338,700. C. $2,598,600.

Ans: B. The ending inventory of 267,895 units has an average cost value of $2,338,723, determined as follows: Beginning inventory 1,092,525 (145,670 x $7.50) Q1 purchases 4,249,434 (534,520 x $7.95) Q2 purchases 2,934,604 (341,233 x $8.60) Q3 purchases 4.712,375 (498,664 x $9.45) Q4 purchases 2,888,738 (297,808 x $9.70) Total value $15,877,676 (1,817,895 units) = $8.73 average cost Ending inventory = 1,817,895 – 1,550,000 units sold = 267,895 units x $8.73 = $2,338,723

cityboy

44. During a period of falling costs of manufacturing, which of the following inventory cost formulas would result in the greatest reported net income? A. LIFO. B. FIFO. C. Average cost.

Ans: A. With LIFO, more recent, lower costs would be used for COGS. A reduction is COGS will increase gross profit and net income, other things equal.

cityboy

43. A company that reports under U.S.GAAP and changes its inventory cost assumption from weighted average cost to LIFO is required to apply this change in accounting principle: A. retrospectively, and disclose the new cost flow method being used. B. prospectively, and explain the reasons for the change in the financial statement disclosures. C. retrospectively, and explain the reasons for the change in the financial statement disclosures.

Ans: B. Under U.S.GAAP, a change to LIFO from another inventory cost method is an exception to the requirement of retrospective application of changes in an accounting principle. Instead of restating prior years’ data, the firm uses the carrying value of inventory at the time of the change as the firm LIFO layer. U.S.GAAP requires a company that is changing its inventory cost assumption to explain, in its financial statement disclosures, why the new method is preferable to the old method.

cityboy

42. During an accounting period, a company has the following sequence of transactions with a beginning inventory of zero: Purchases Sales 100 units at $210 80 units at $240 90 units at $225 90 units at $250 The company’s COGS using FIFO for inventory accounting, and its ending inventory using LIFO, are closest to: FIFO COGS LIFO ending inventory A. $36,750 $4,200 B. $37,050 $4,200 C. $37,050 $4,500

Ans: A. FIFO COGS: 100@$210 =$21,000 70@$225 =$15,750 $36,750 LIFO ending inventory: Purchases 190 Sales 170 balance   20@$210=$4,200

cityboy

41. From the point of view of a financial analyst, when evaluating companies that use different inventory cost assumptions, in a period of:

A. stable prices, LIFO inventory is preferred to FIFO inventory.

B. decreasing prices, FIFO inventory is preferred to LIFO inventory.

C. increasing prices, FIFO cost of sales is preferred to LIFO cost of sales.

  
  Ans: B.

The most useful estimates of inventory and cost of sales are those that best approximate current cost. Whether prices are increasing or decreasing, FIFO provides a better estimate of inventory values, and LIFO produces a better estimate of cost of sales. If prices are table, there is no difference between LIFO and FIFO estimates of inventory or cost of sales.

cityboy

40. Bao Inc. currently uses the FIFO method to account for inventory. Due to significant tax-loss carryforwards, the company has an effective tax rate of zero. Prices are rising and inventory quantities are stable. If the company were to use LIFO instead of FIFO:

A. net income would be lower, and cash flows would be higher.

B. cash flow would remain the same, and working capital would decrease.

C. gross margin would increase, and average stockholder’s equity would decrease.

  
  Ans: B.

In the absence of taxes, there is no difference in cash flow between LIFO and FIFO. In addition, using LIFO would result in lower working capital (inventory is lower). Using LIFO would result in lower net income because of a lower gross margin (COGS is higher).

cityboy

39. A firm uses the FIFO cost flow assumption. Compared to gross profit with a periodic inventory system, the firm’s gross profit with a perpetual inventory system would be:

A. lower.

B. higher.

C. the same.

  
  Ans: C.

For a firm using FIFO, gross profit is the same whether the firm uses a periodic or perpetual inventory system. For a firm using LIFO or average cost, gross profit can be different depending on the choice of inventory system.

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.

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.