Reading 36: Inventori LOS f习题精选 2010, describe, activity, relative, company

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LOS f: Compute and describe the effects of the choice of inventory method on profitability, liquidity, activity, and solvency ratios.

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 increase as inflation decreases.

B) lower, and the difference between the two firms' current ratios will decrease 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

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

What are the earnings before taxes using the FIFO method and LIFO method?

FIFO

LIFO

A) $6,900 $5,676

B) $6,900 $5,506

C) $6,213 $5,676

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FIFO COGS = (709 units)($2/unit) + (959 ? 709)($6/unit) = $1,418 + $1,500 = $2,918

Sales = (959 units)($13/unit) = $12,467

EBIT = Sales ? COGS ? Expenses

= 12,467 ? 2,918 ? 2,649 = $6,900

LIFO COGS = (556 units)($6/unit) + (959 ? 556)($2/unit) = $3,336 + $806 = $4,142

Sales = (959 units)($13/unit) = $12,467

EBIT = Sales ? COGS ? Expenses = 12,467 ? 4,142 ? 2,649 = $5,676

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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) LIFO FIFO

B) FIFO FIFO

C) FIFO LIFO

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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.

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When analyzing profitability ratios, which inventory accounting method is preferred?

A) Last in, first out (LIFO).

B) Weighted average.

C) First in, first out (FIFO).

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Using LIFO cost of goods sold (COGS) gives a more accurate measure of future earnings because the LIFO COGS is more representative of the current cost of product sold as compared to using FIFO therefore net income will be more accurately represented.

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The best way to compute an inventory turnover ratio is to use:

A) last in, first out (LIFO) for both cost of goods sold (COGS) and average inventory.

B) last in, first out (LIFO) for cost of goods sold (COGS) and first in, first out (FIFO) for average inventory.

C) first in, first out (FIFO) for both cost of goods sold (COGS) and average inventory.

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Inventory turnover makes no sense at all for firms using LIFO due to the mismatching of costs (the numerator is current while the denominator is historical). FIFO based inventory is relatively unaffected by price changes and is a good approximation of actual turnover. In this way, current costs are matched in the numerator and denominator.

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Selected information from Mendota, Inc.’s financial statements for the year ended December 31 includes the following (in $):

Sales	7,000,000
Cost of Goods Sold	5,000,000
LIFO Reserve on Jan. 1	600,000
LIFO Reserve on Dec. 31	850,000

Mendota uses the last in, first out (LIFO) inventory cost flow assumption.  The tax rate is 40%.  If Mendota changed from LIFO to first in, first out (FIFO), its gross profit margin would:

A) increase to 40.1%.

B) increase to 32.1%.

C) increase to 30.0%.

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Gross profit margin under LIFO ((sales – cost of goods sold) / sales) is (($7,000,000 ? $5,000,000) / $7,000,000) = 28.6%. Under FIFO, cost of goods sold is reduced by the increase in the LIFO reserve, and the resulting FIFO gross profit margin is (($7,000,000 – ($5,000,000 – ($850,000 - $600,000)) / $7,000,000) = 32.1%. Note that the tax rate only affects income totals after income tax expense is shown and does not affect the gross profit margin.

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Selected information from Oldtown, Inc.’s financial statements for the year ended December 31, 2004 included the following (in $):

Cash	1,320,000		Accounts Payable	1,620,000
Accounts Receivable	2,430,000		Deferred Tax Liability	715,000
Inventory	6,710,000		Long-term Debt	15,230,000
Property, Plant & Equip.	12,470,000		Common Stock	1,000,000
Total Assets	22,930,000		Retained Earnings	4,365,000
			Total Liabilities & Equity	22,930,000
Sales	15,000,000
Net Income	3,000,000
LIFO Reserve at Jan. 1	1,620,000
LIFO Reserve at Dec. 31	1,620,000

Oldtown uses the last in, first out (LIFO) inventory cost flow assumption.  The tax rate was 40%.  If Oldtown changed from LIFO to first in, first out (FIFO) for 2004, net profit margin would:

A) decrease from 20.0 to 13.5%.

B) decrease from 20.0 to 16.8%.

C) remain unchanged at 20.0%.

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Net profit margin under LIFO (net income / net sales) was ($3,000,000 / $15,000,000 =) 20.0%. Under FIFO, net income does not change in 2004 because there was no change in the LIFO reserve balance, and no adjustment of net income is made.

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Selected information from Jenner, Inc.’s financial statements for the year ended December 31 included the following (in $):

Cash	$200,000	Accounts Payable	$300,000
Accounts Receivable	300,000	Deferred Tax Liability	600,000
Inventory	1,500,000	Long-term Debt	8,100,000
Property, Plant & Equip.	11,000,000	Common Stock	2,200,000
Total Assets	13,000,000	Retained Earnings	1,800,000
LIFO Reserve at Jan. 1	400,000	Total Liabilities & Equity	$13,000,000
LIFO Reserve at Dec. 31	600,000
Net Income
(after 40% tax rate)	800,000

Jenner uses the last in, first out (LIFO) inventory cost flow assumption. If Jenner changed from LIFO to first in, first out (FIFO) in 2001, return on total equity would:

A) increase from 20.0 to 21.1%.

B) increase from 20.0 to 23.0%.

C) decrease from 20.0 to 18.3%.

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Return on total equity (net income / total equity) was ($800,000 / ($2,200,000 + $1,800,000) =) 20%. Under FIFO, net income increases by the increase in the LIFO reserve multiplied by (1 – tax rate). FIFO net income for 2001 was ($800,000 + ($600,000 – $400,000) (1 – 0.40) = ) $920,000. Total equity increases by the amount of accumulated FIFO profits that are added to retained earnings which is calculated by multiplying the amount of the ending LIFO reserve by (1 – tax rate) for an increase of (($600,000) * (1 – 0.40) =) $360,000. Total equity is ($2,200,000 + $1,800,000 + $360,000 =) $4,360,000. FIFO return on total equity is ($920,000 / $4,360,000 =) 21.1%.

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Given the following information and assuming beginning inventory was zero what is the gross profit at the end of the period using the FIFO, LIFO, and average cost methods?

Purchases	Sales
20 units at $50	15 units at $60
35 units at $40	35 units at $45
85 units at $30	85 units at $35

FIFO

LIFO

Cost Average

A) $650 $750 $990

B) $650 $750 $677

C) $677 $650 $677

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FIFO: $5,450 ? 4,800 = $650

LIFO: $5,450 ? $4,700 = $750

Cost Average: $5,450 ? $4,773.21 = $676.79

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Given the following information and assuming beginning inventory was zero what is the gross profit at the end of the period using the FIFO, LIFO, and average cost methods?

Purchases	Sales
20 units at $50	15 units at $60
35 units at $40	35 units at $45
85 units at $30	85 units at $35

FIFO

LIFO

Cost Average

A) $650 $750 $990

B) $650 $750 $677

C) $677 $650 $677

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FIFO: $5,450 ? 4,800 = $650

LIFO: $5,450 ? $4,700 = $750

Cost Average: $5,450 ? $4,773.21 = $676.79