honeycfa

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.

honeycfa

During periods of rising prices:

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

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

C) LIFO Inventory Turnover < FIFO Inventory Turnover.

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

honeycfa

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

A) 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.

B) Inventory turnover is less 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.

honeycfa

Selected information from Newcomb, Inc.’s financial statements for the year ended December 31, 20X4 included the following (in $):

Cash	70,000		Accounts Payable	90,000
Accounts Receivable	140,000		Deferred Tax Liability	100,000
Inventory	460,000		Long-term Debt	520,000
Property, Plant & Equip.	1,200,000		Common Stock	600,000
Total Assets	1,870,000		Retained Earnings	360,000
			Total Liabilities & Equity	1,870,000
Earnings Before Interest and Taxes	280,000
Interest Expense	60,000
Income Tax Expense	75,000
Net Income	145,000
LIFO Reserve at Jan. 1	185,000
LIFO Reserve at Dec. 31	250,000

If Newcomb had used first in, first out (FIFO) for 20X4 and we assume that average total capital was $1,700,000 for both the LIFO and FIFO computations, the return on total capital would:

A) decrease from 16.5 to 12.6%.

B) remain unchanged at 16.5%.

C) increase from 16.5 to 20.3%.

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The return on total capital under LIFO (EBIT / average total capital) was $280,000 / $1,700,000 = 16.5%. Under FIFO, EBIT is increased by the increase in the LIFO reserve during the year. FIFO return on total capital is ($280,000 + ($250,000 ? $185,000)) / $1,700,000 = 20.3%.

honeycfa

 

Selected financial data from Krandall, Inc.’s balance sheet for the year ended December 31 was as follows (in $):

Cash	$1,100,000	Accounts Payable	$400,000
Accounts Receivable	300,000	Deferred Tax Liability	700,000
Inventory	2,400,000	Long-term Debt	8,200,000
Property, Plant & Eq.	8,000,000	Common Stock	1,000,000
Total Assets	11,800,000	Retained Earnings	1,500,000
LIFO Reserve at Jan. 1	600,000	Total Liabilities & Equity	11,800,000
LIFO Reserve at Dec. 31	900,000

Krandall uses the last in, first out (LIFO) inventory cost flow assumption. The tax rate is 40%. If Krandall used first in, first out (FIFO) instead of LIFO and paid any additional tax due, its assets-to-equity ratio would be closest to:

A) 3.73

B) 4.18

C) 4.06

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With FIFO instead of LIFO:

• Inventory would be higher by $900,000, the amount of the ending LIFO reserve.
• Cumulative pretax income would also be higher by $900,000, so taxes paid would be higher by 0.40($900,000) = $360,000. Therefore cash would be lower by $360,000.
• Cumulative retained earnings would be higher by (1 ? 0.40)($900,000) = $540,000.

So assets under FIFO would be $11,800,000 + $900,000 - $360,000 = $12,340,000 and equity would be $1,000,000 + $1,500,000 + $540,000 = $3,040,000. The assets-to-equity ratio would be $12,340,000 / $3,040,000 = 4.06.