AndyNZ

Pischke Motors provided you with the following financials:

• Beginning LIFO reserve $2,484.
• Cost of goods sold (COGS) using LIFO $3,988.
• COGS using FIFO $2,004.

What is the ending LIFO reserve?

A) $1,984.

B) $500.

C) $4,468.

---

Ending LIFO reserve = (LIFO COGS − FIFO COGS) + Beginning LIFO reserve
= ($3,988 − $2,004) + $2,484
= $4,468

AndyNZ

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) $2,100.

B) $1,500.

C) $1,800.

---

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

AndyNZ

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) $10,325,000.

B) $11,850,000.

C) $10,575,000.

---

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.

AndyNZ

A firm ended the last period with inventory of $4.0 million and a last in, first out (LIFO) reserve of $175,000. During the year, it made purchases of $2.0 million and reported sales of $5.5 million with a gross margin of 0.32. At the end of the year, it reported a LIFO reserve of $75,000. What is the value of the firm’s cost of goods sold (COGS) on a first in, first out (FIFO) basis?

A) $3,640,000.

B) $3,840,000.

C) $3,740,000.

---

With sales of $5.5 million and a gross margin of 0.32, the COGS (on a LIFO basis) is $3.74 million. In order to convert COGS to a FIFO basis, we need to subtract the change in LIFO reserve during the year: $3,740,000 − ($75,000 − $175,000) = $3,840,000.

AndyNZ

A firm ended the last period with inventory of $3.0 million and a last in, first out (LIFO) reserve of $40,000. During the year, it made purchases of $1 million and reported sales of $4 million with a gross margin of 0.58. At the end of the year, it reported a LIFO reserve of $75,000. What is the value of the firm’s ending inventory converted to a first in, first out (FIFO) basis?

A) $2,395,000.

B) $2,360,000.

C) $2,320,000.

---

With sales of $4 million and a gross margin of 0.58, the COGS (on a LIFO basis) is 1.68 million. This would leave an ending inventory of 3 million + 1 million − 1.68 million = $2.32 million on a LIFO basis. In order to adjust this to FIFO, we would add the ending LIFO reserve of $75,000 to arrive at $2.395 million.

AndyNZ

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) remain unchanged at 20.0%.

C) decrease from 20.0 to 16.8%.

---

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.

torontoanalyst

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

---

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.

torontoanalyst

The Orchard Supply Company uses LIFO inventory valuation. Orchard Supply had a cost of goods sold of $1 million for the period. The inventory at the beginning of the period was $0.5 million, and the inventory at the end of the period was $0.6 million. Orchard Supply's LIFO reserve was $0.1 million for the previous year and $0.2 million for the current year. What is Orchard Supply's ending inventory according to FIFO inventory valuation?

A) $0.7 million.

B) $0.5 million.

C) $0.8 million.

---

FIFO Inventory = $0.6 + 0.2 = $0.8 million.

torontoanalyst

Wallace Lumber uses LIFO and had the following note in its last financial statement: "Wallace Lumber showed a LIFO reserve of $90,000 in 2003 and $86,000 in 2004." Wallace's marginal tax rate is 31%.If Wallace's year-end LIFO inventory balance was $400,000, their inventory based on FIFO would be:

A) $490,000.

B) $314,000.

C) $486,000.

---

INVF = INVL + LIFO reserve
        =$400,000 + $86,000
        = $486,000

---

If Wallace's LIFO COGS were $70,000, their FIFO COGS would be:

A) $74,000.

B) $66,000.

C) $64,000.

---

COGSF = COGSL - (LIFO reserveE - LIFO reserveB)
            = $70,000 - ($86,000 - $90,000)
            = $74,000

torontoanalyst

If a company using last in, first out (LIFO) reports an inventory balance of $22,000 and a LIFO reserve of $4,000 (assume a 40% effective tax rate), the estimated value for the inventory on a first in, first out (FIFO) basis would be:

A) $26,000.

B) $24,400.

C) $18,000.

---

FIFO INV = LIFO INV + LIFO Reserve
X = 22,000 + 4,000
X = 26,000
The effective tax rate is not used in this calculation.