honeycfa

If all else holds constant in periods of rising prices and inventory levels:

A) FIFO firms have higher debt to equity ratios than LIFO firms do.

B) LIFO firms have higher gross profit margins than FIFO firms do.

C) FIFO firms will have greater stockholder's equity than LIFO firms do.

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The FIFO method of inventory accounting assigns the cost of the earliest units acquired to goods transferred out and the cost of most recent acquisitions to ending inventory. When prices are rising, the cheaper goods in beginning inventory reflecting earlier purchases are assigned to COGS (hence, higher income and higher shareholder's equity through retained earnings.)

Explanations for other choices:

In periods of rising prices and inventory levels (all else constant):

• FIFO firms have lower debt to equity ratios than LIFO firms do because stockholder's equity is higher and debt is constant.
• LIFO firms have lower gross profit margins ((Sales-COGS)/Sales) because the more expensive last purchases are assigned to COGS, lowering the numerator.

honeycfa

Jefferson Corp. decided to change its inventory valuation method from first in, first out (FIFO) to last in, first out (LIFO) in a period of rising prices. What was the result of the change for the ending inventory and net income?

Ending Inventory

Net Income

A) Increases Increases

B) Decreases Increases

C) Decreases Decreases

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LIFO provides the lowest inventory values and the lowest net income under rising prices because the least expensive purchases are left in inventory and the more expensive purchases flow to cost of goods sold (COGS) which lowers net income.

honeycfa

Which of the following statements is least accurate?

A) In a period of rising prices, LIFO gives the best COGS, whereas FIFO gives the best inventory balance on the balance sheet.

B) LIFO produces a tax benefit in a period of rising prices, therefore results in higher cash flows than FIFO.

C) In a period of rising prices, FIFO gives the best COGS, whereas LIFO gives the best inventory balance on the balance sheet.

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If prices are rising steadily, FIFO inventory is valued at the more recent purchase prices which are higher and provide a better estimate of the replacement value of the inventory. LIFO costing will produce a cost of goods sold much closer to replacement cost which provides a better estimate than using FIFO.

honeycfa

Which inventory method will provide a larger net income during periods of falling prices?

A) Specific Items.

B) LIFO.

C) FIFO.

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During periods of falling prices last in, first out (LIFO) provides a higher net income than first in, first out (FIFO) or the average cost methods because the items most recently purchased are the ones being sold first and these costs are continually falling increasing net income. Using FIFO during periods of falling prices would cause net income to be lower than LIFO or average cost methods because the first inventory purchased is the first sold but during periods of falling prices this is the most expensive inventory causing net income to be lower.

honeycfa

Which of the following is least likely to be a result of using last in, first out (LIFO) as the inventory method during periods of decreasing prices compared to using first in, first out (FIFO)?

A) Higher taxes.

B) Higher cash flows.

C) Lower COGS.

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Using LIFO during periods of declining prices will result in lower cash flows because net income will be higher than if FIFO is used leading to more taxes being paid out.

honeycfa

Arlington, Inc. uses the first in, first out (FIFO) inventory cost flow assumption. Beginning inventory and purchases of refrigerated containers for Arlington were as follows:

	Units	Unit Cost	Total Cost
Beginning Inventory	20	$10,000	$200,000
Purchases, April	10	12,000	120,000
Purchases, July	10	12,500	125,000
Purchases, October	20	15,000	300,000

In November, Arlington sold 35 refrigerated containers to Johnson Company. What is the cost of goods sold assigned to the 35 sold containers?

A) $382,500.

B) $485,000.

C) $434,583.

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Under FIFO, cost of goods sold is the value of the first units purchased. The 35 units sold consist of the 20 units in beginning inventory, the 10 units purchased in April, and 5 of the units purchased in July. COGS = $200,000 + $120,000 + (5 × $12,500) = $382,500.

honeycfa

	Units	Unit Price
Beginning Inventory	709	$2.00
Purchases	556	$6.00
Sales	959	$13.00
SGA Expenses	$2,649 per annum

What is the cost of goods sold using the average cost method and using the first in first out (FIFO) method?

Average Cost

FIFO

A) $4,142.02 $2,918.00

B) $3,604.02 $2,918.00

C) $3,604.02 $3,423.82

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Average cost = cost of goods available/total units available. COGS = Units sold × avg. cost = 959 × 3.7381 = $3,604.02.

FIFO COGS = (709 × 2) + (250 × 6) = $2,918.00

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What is the ending inventory level in dollars using the FIFO Method?

A) $1,744.20.

B) $1,836.00.

C) $3,604.02.

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Ending Inventory = 306 × 6 = $1,836.00.

honeycfa

An analyst provided the following information about a company:

• Purchases throughout the year         $55,000

• COGS                                            $60,000

•  Ending inventory                             $35,000

The beginning inventory was:

A) $40,000.

B) $45,000.

C) $55,000.

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COGS of $60,000 + ending inventory of $35,000, less purchases of $55,000.

honeycfa

	Units	Unit Price
Beginning Inventory	699	$5.00
Purchases	710	$8.00
Sales	806	$15.00
SGA Expenses	$3,141 per annum

Determine the cost of goods sold using the weighted average method and also using the first in, first out (FIFO) method.

Weighted Average

FIFO

A) $5,248.44 $4,351.00

B) $4,986.02 $4,133.45

C) $4,351.00 $5,248.44

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Weighted average = cost of goods available / total units available. COGS = Units sold × wt. ave = 806 × 6.51171 = $5,248.44.

FIFO COGS = (699 × 5) + (107 × 8) = $4,351.00.

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What is the ending inventory level in dollars using the FIFO method?

A) $4,824.00.

B) $6,160.00.

C) $4,582.80.

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Ending Inventory = 603 × 8 = $4,824.00.

honeycfa

Given the following inventory data about a firm:

• Beginning inventory 20 units at $50/unit
• Purchased 10 units at $45/unit
• Purchased 35 units at $55/unit
• Purchased 20 units at $65/unit
• Sold 60 units at $80/unit

What is the inventory value at the end of the period using LIFO?

A) $1,575.

B) $1,225.

C) $3,450.

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Ending inventory equals 20 + 10 + 35 + 20 ? 60 = 25 of the first units purchased equals:

(20 units)($50/unit) + (5 units)($45/unit) =

$1,000 + $225 = $1,225