Reading 36: Inventories LOS f习题精选 2010, 靠枕, describe, activity, relative

honeycfa

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 decrease as inflation decreases.

B) lower, and the difference between the two firms' current ratios will increase 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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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) 4.06

C) 4.18

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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.

honeycfa

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

A) Inventory turnover is less using the last in, first out (LIFO) inventory valuation method than using the first in, first out (FIFO) method.

B) 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.

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) increase from 16.5 to 20.3%.

C) remain unchanged at 16.5%.

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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

During periods of decreasing prices, a firm will report higher net income if its inventory cost assumption is:

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

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

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

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

honeycfa

Which of the following statements regarding inventory accounting methods is most accurate? In periods of:

A) declining prices FIFO results in higher net income than LIFO.

B) rising prices and stable unit purchases, using the FIFO method results in higher inventory turnover than the LIFO method.

C) rising prices and stable unit purchases, using the LIFO method results in a lower current ratio than the FIFO 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

 

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%.

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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.