honeycfa

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) $13,500.

C) $11,000.

---

FIFO COGS = LIFO COGS – change in LIFO reserve

= $15,000 – (4,000 ? 2,500) = $13,500

honeycfa

The formula to convert an ending inventory value from the LIFO to the FIFO method is to:

A) FIFO inventory = LIFO inventory ? LIFO reserve.

B) FIFO inventory = LIFO inventory × LIFO reserve.

C) FIFO inventory = LIFO inventory + LIFO reserve.

---

The formula to convert an ending inventory value from the LIFO to the FIFO method is to FIFO inventory = LIFO inventory + LIFO reserve.

honeycfa

The Baker Company uses the last in, first out (LIFO) inventory valuation method and reported its inventory at $200,000 and its cost of goods sold (COGS) at $500,000. The company’s LIFO reserve increased from $5,000 to $30,000 during the year. What amounts would the company report for ending inventory and cost of goods sold if it were to use the first in, first out (FIFO) method?

Ending Inventory

COGS

A) $230,000 $475,000

B) $230,000 $525,000

C) $170,000 $525,000

Ending inventory under FIFO is equal to LIFO ending inventory + LIFO reserve

= 200,000 + 30,000 = 230,000

COGS under FIFO equals LIFO COGS ? (ending LIFO reserve ? beginning LIFO reserve)

= 500,000 ? (30,000 ? 5,000) = 475,000.

honeycfa

Given the following inventory information about the Buckner Company:

• Year-end last in, first out (LIFO) inventory of $6,500.
• Year-end LIFO reserve of $2,500.
• The current year's LIFO cost of goods sold (COGS) is $15,000.
• After tax income is $1,600.
• The previous year's LIFO reserve was $2,000.

How much higher would the firm's retained earnings be on a first in, first out (FIFO) basis if the firm's tax rate is 40%?

A) $1,500.

B) $2,100.

C) $1,800.

---

Adjustment to retained earnings = LIFO reserve (1 ? t) = $2,500(1 ? 0.4) = $1,500

honeycfa

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

---

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

honeycfa

The Orchard Supply Company uses last in, first out (LIFO) inventory valuation. Orchard Supply had a cost of goods sold (COGS) of $1 million for the period. The inventory at the beginning of the period was $500,000 and the inventory at the end of the period was $600,000. Orchard Supply's LIFO reserve was $100,000 at the end of the previous year and $200,000 at the end of the current year. What is Orchard Supply's COGS according to first in, first out (FIFO) inventory valuation?

A) $800,000.

B) $1.1 million.

C) $900,000.

---

FIFO COGS = LIFO COGS ? change in LIFO reserve

FIFO COGS = $1 million ? $100,000 = $900,000

honeycfa

A financial analyst could adjust the current ratio in which a company uses the LIFO inventory valuation method to the FIFO method by:

A) deducting the LIFO reserve from the current asset.

B) adding the LIFO reserve to the current liabilities.

C) adding the LIFO reserve to the current assets.

---

The LIFO reserve increases the inventory value under FIFO and inventory is included in the numerator in the current ratio.

honeycfa

Granulated Corp. uses the last in, first out (LIFO) inventory cost flow assumption.  Selected information from Granulated’s financial statements for the years ended December 31, 20X3 and 20X4 was as follows (in $):

	20X3	20X4
Beginning Inventory	4,375,000	5,525,000
Purchases	10,200,000	11,300,000
Ending Inventory	5,525,000	6,100,000
Beginning LIFO Reserve	825,000	975,000
Ending LIFO Reserve	975,000	1,125,000

If Granulated changed from LIFO to first in, first out (FIFO) for 20X4, Granulated’s cost of goods sold (COGS) in 20X4 under FIFO would be:

A) $10,575,000.

B) $10,325,000.

C) $11,850,000.

---

Granulated’s 20X4 LIFO cost of goods sold (beginning inventory plus purchases less ending inventory) was ($5,525,000 + $11,300,000 ? $6,100,000 =) $10,725,000. To convert to FIFO the LIFO cost of goods sold would be reduced by the increase in the LIFO reserve during 20X4 ($1,125,000 ? $975,000 =) $150,000. The FIFO COGS in 2001 was ($10,725,000 ? $150,000 =) $10,575,000.

honeycfa

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) $83,000.

B) $77,000.

C) $91,000.

---

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

honeycfa

Costiuk Ltd. uses the LIFO inventory cost flow assumption. Its inventory balance is $400 at the end of 20X8 and was $350 at the end of 20X7. A footnote in its financial statements reads: “Inventories would have been $70 higher in 20X8 and $80 higher in 20X7 using the FIFO cost flow assumption.”

Which of the following amounts represents the inventory balance under FIFO at the end of 20X8?

A) $470.

B) $410.

C) $390.

---

The $70 and $80 amounts represent the LIFO reserves which are differences between LIFO inventory and its value under FIFO.

FIFO inventory (20X8) = LIFO inventory (20X8) + LIFO reserve (20X8)

$400 + $70 = $470