Reading 21:Inventories: Implications for Financial Statement method, center, reserve, statements, 2011

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Session 5: Financial Reporting and Analysis: Inventories and Long-lived Assets
Reading 21: Inventories: Implications for Financial Statements and Ratios

LOS b: Discuss LIFO reserve and LIFO liquidation and their effects on financial statements and ratios.

 

 

Brigham Corporation uses the last-in, first-out (LIFO) method of accounting for inventory.  For the year 2005, the following is provided:

• Cost of goods sold (COGS): $24,000
• Beginning inventory: $6,000
• Ending inventory: $7,500
• The notes accompanying the financial statements indicate that the LIFO reserve at the beginning of the year was $2,250 and at the end of the year was $6,000

 

If Brigham had used first-in, first-out (FIFO), the COGS for 2005 would be:

A) $3,750.

B) $29,250.

C) $20,250.

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FIFO COGS = LIFO COGS ? change in LIFO reserve. Therefore, $24,000 ? ($6,000 ? 2,250) = $20,250.

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Pischke Motors provided you with the following financials:

• Beginning LIFO reserve $2,484.
• Cost of goods sold (COGS) using LIFO $3,988.
• COGS using FIFO $2,004.

What is the ending LIFO reserve?

A) $1,984.

B) $4,468.

C) $500.

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Ending LIFO reserve = (LIFO COGS ? FIFO COGS) + Beginning LIFO reserve
= ($3,988 ? $2,004) + $2,484
= $4,468

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If a firm has a first in, first out (FIFO) inventory of 9,000 and a last in, first out (LIFO) inventory of 6,500, what is the value of the LIFO reserve assuming a 40% tax rate?

A) $2,500.

B) $1,500.

C) $1,000

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LIFO reserve = FIFO inventory ? LIFO inventory = 9,000 ? 6,500 = 2,500

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M J Inc reported COGS of $80,000 for the year under the LIFO inventory valuation method. M J had a beginning LIFO reserve of $8,000 and an ending LIFO reserve of $11,000. The COGS under the FIFO inventory valuation method is:

A) $77,000.

B) $83,000.

C) $91,000.

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FIFO COGS is reduced when a LIFO reserve is increased. So, COGS = 80,000 ? (11,000 ? 8,000) = 77,000.

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In a period of rising prices, LIFO liquidation results in:

A) increase in inventory.

B) lower earnings.

C) higher earnings.

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Since older layers of inventory that are liquidated were purchased at lower prices, the cost of goods sold will be lower and earnings will be higher.

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In case of a decline in LIFO reserve, to obtain a better analysis an analyst should:

A) not make any adjustments.

B) adjust the income statement, regardless of the reasons for the decline.

C) adjust the income statement, only if such a decline is due to LIFO liquidation.

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A decline in LIFO reserve is due to either falling prices or LIFO liquidations. In the case of LIFO liquidation, the income statement does not reflect the current costs and should be adjusted. In the case of falling prices, the LIFO income statement amounts are current and do not need adjustment.

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LIFO liquidation may result when:

A) purchases are less than goods sold.

B) purchases are more than goods sold.

C) cost of goods sold is less than the available inventory.

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For LIFO companies, when more goods are sold than are purchased during a period, the goods held in opening inventory are in included in COGS. This will result in LIFO liquidation.

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First in, first out (FIFO) inventory equals:

A) LIFO cost of goods sold ? changes in LIFO reserve.

B) the change in LIFO reserve ? LIFO ending reserve.

C) LIFO inventory + LIFO reserve.

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To convert LIFO inventory balances to a FIFO basis, simply add the LIFO reserve to the LIFO inventory:

INV_F = INV_L + LIFO Reserve

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Given the following data:

• Beginning LIFO Reserve $2,300
• Cost of Goods Sold (COGS) using LIFO $6,100
• COGS using FIFO of $4,300

What is the Ending LIFO reserve?

A) $500.

B) $2,800.

C) $4,100.

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Ending LIFO Reserve = (LIFO COGS ? FIFO COGS) + Beginning LIFO Reserve = (6,100 ? 4,300) + 2,300 = $4,100.

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The following information has been gathered about a firm:

• LIFO inventory = $10,000
• Beginning LIFO reserve = $2,500
• Ending LIFO reserve = $4,000
• LIFO cost of goods sold = $15,000
• LIFO net income = $1,500
• Tax rate is 40%

What is the FIFO COGS?

A) $16,500.

B) $11,000.

C) $13,500.

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FIFO COGS = LIFO COGS – change in LIFO reserve

= $15,000 – (4,000 ? 2,500) = $13,500