RobertA

Given the following data and assuming a periodic inventory system, what is the ending inventory value using the FIFO method?

Purchases	Sales
50 units at $50/unit	25 units at $55/unit
60 units at $45/unit	30 units at $50/unit
70 units at $40/unit	45 units at $45/unit

A) $3,200.

B) $3,600.

C) $3,250.

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Purchased 50 + 60 + 70 = 180 units. Sold 25 + 30 + 45 = 100.
Ending inventory = 180 – 100 = 80 of the last units purchased.
(70 units)($40/unit) + (10 units)($45/unit) = $2,800 + $450 = $3,250.

RobertA

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

What is gross profit 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
Gross profit = Sales − COGS − Sales 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
Gross profit = Sales − COGS − Sales Expenses = 12,467 − 4,142 − 2,649 = $5,676

RobertA

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

Ignoring taxes, what is profit using the weighted average method?

A) $5,676.00.

B) $6,213.98.

C) $6,027.56.

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weighted average cost per unit = (709 units)($2/unit) + (556 units)($6/unit) = $4,754 / 1,265units = $3.7581
weighted average COGS = ($3.7581)(959 units) = $3,604.02
Sales = (959 units)($13/unit) = $12,467
Profit = Sales − COGS − Sales Expenses = 12,467 − 3,604.02 − 2,649 = $6,213.98

RobertA

During periods of decreasing prices, a firm using a periodic inventory system will report higher gross profit if its inventory cost assumption is:

A) FIFO because during periods of decreasing prices, COGS will be higher, resulting in a higher gross profit.

B) LIFO because during periods of decreasing prices, COGS will be lower, resulting in a higher gross profit.

C) FIFO because during periods of decreasing prices, COGS will be lower, resulting in a higher gross profit.

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In periods of falling prices, LIFO results in lower COGS, and therefore higher gross profit than FIFO, because LIFO assumes the most recently purchased (lower cost) goods are sold first.

RobertA

The cost flow assumption of LIFO vs. FIFO would have several implications while analyzing financial statements, especially when comparing companies using different methods.
Suppose we are comparing: Alpha (uses LIFO) and Beta (uses FIFO).In an inflationary scenario, with rising inventory levels, which company would most likely report COGS reflecting current prices?

A) Beta.

B) Both of these.

C) Alpha.

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The LIFO cost flow assumption transfers the most recent purchases to COGS and hence would reflect current prices. Alpha with the LIFO cost flow assumption would therefore report current prices in their COGS.

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In a deflationary scenario, with rising inventory levels, which company would most likely report COGS reflecting current prices?

A) Beta.

B) Both of these.

C) Alpha.

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The LIFO cost flow assumption transfers the most recent purchases to COGS and hence would reflect current prices. This holds true whether prices are rising or falling. Alpha with the LIFO cost flow assumption would therefore report current prices in their COGS.

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For this question only, suppose there is a third company Gamma. Like Alpha, Gamma also uses LIFO cost flow assumption. However, unlike Alpha, Gamma’s LIFO reserve has been decreasing over the years. In an inflationary scenario, which company would most likely report COGS reflecting current prices?

A) Alpha.

B) Beta.

C) Gamma.

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Both Alpha and Gamma would reflect more current prices in COGS as compared to Beta. However, since Gamma has a LIFO liquidation as compared to Alpha, Gamma’s COGS includes some older price inventory. Alpha’s inventory levels are increasing and therefore its COGS would be most current.

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Suppose Beta was considering an inventory write-down. Which group of ratios would most likely look worse due to such a move?

A) Profitability and Turnover.

B) Turnover and Leverage.

C) Profitability and Leverage.

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Inventory write-down would lower inventory values and the current period’s reported profits. Profitability ratios would suffer. The turnover ratio would be favorable due to lower asset (inventory) values. Leverage ratios would also suffer due to lower equity (via retained earnings).

RobertA

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) $20,250.

C) $29,250.

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

AndyNZ

GR Corporation uses the last-in, first out (LIFO) method of accounting for inventory and $70,000 is reported as cost of goods sold (COGS) on their income statement. However, if GR had used first-in, first-out (FIFO), the COGS would have been $60,000. If the ending LIFO reserve (LR) reported in the financial statements is $40,000, the beginning LIFO reserve is:

A) $50,000.

B) $20,000.

C) $30,000.

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Beginning LR + ΔLR = Ending LR

ΔLR = COGS(LIFO) – COGS(FIFO) = $70,000 – 60,000 = $10,000

Beginning LR = $40,000 – 10,000 = $30,000

AndyNZ

An analyst gathers the following information about a firm:

• Last in, first out (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%

To convert the financial statements to a FIFO basis, the amount the analyst should add to the stockholders' equity is closest to:

A) $2,800.

B) $4,000.

C) $2,400.

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If the firm had used FIFO inventory cost, tax liability would be higher by (LIFO reserve × tax rate) and retained earnings would be higher by [LIFO reserve × (1 − tax rate)].
(LIFO reserve)(1 − t) = $4,000(1 − 0.4) = $2,400

AndyNZ

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

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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.

AndyNZ

Which of the following is least likely to happen after a last in, first out (LIFO) liquidation in an environment of rising prices?

A) Increase cost of goods sold (COGS).

B) Increase gross income.

C) Increase taxable income.

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In a LIFO liquidation, a firm allows inventory to decrease so that it is using lower-cost materials (purchased in the past). This will lower the COGS and increase income and profit. This is one of the ways that a firm’s management can manipulate earnings.