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Reading 36: Inventories LOS f习题精选

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.



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.

 

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

What are the earnings before taxes using the FIFO method and LIFO method?

FIFO LIFO

A)
$6,900 $5,506
B)
$6,900 $5,676
C)
$6,213 $5,676



FIFO COGS = (709 units)($2/unit) + (959 ? 709)($6/unit) = $1,418 + $1,500 = $2,918

Sales = (959 units)($13/unit) = $12,467

EBIT = Sales ? COGS ? 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

EBIT = Sales ? COGS ? Expenses = 12,467 ? 4,142 ? 2,649 = $5,676

TOP

In general, when analyzing profitability and costs, or when analyzing asset and equity ratios, which of the following should be used?

Profitability/Cost Ratios Asset/Equity Ratios

A)
FIFO FIFO
B)
LIFO FIFO
C)
FIFO LIFO



In general, an analyst should use LIFO when examining profitability or cost ratios and FIFO when examining asset or equity ratios.

TOP

When analyzing profitability ratios, which inventory accounting method is preferred?

A)
Weighted average.
B)
First in, first out (FIFO).
C)
Last in, first out (LIFO).



Using LIFO cost of goods sold (COGS) gives a more accurate measure of future earnings because the LIFO COGS is more representative of the current cost of product sold as compared to using FIFO therefore net income will be more accurately represented.

TOP

The best way to compute an inventory turnover ratio is to use:

A)
last in, first out (LIFO) for both cost of goods sold (COGS) and average inventory.
B)
last in, first out (LIFO) for cost of goods sold (COGS) and first in, first out (FIFO) for average inventory.
C)
first in, first out (FIFO) for both cost of goods sold (COGS) and average inventory.



Inventory turnover makes no sense at all for firms using LIFO due to the mismatching of costs (the numerator is current while the denominator is historical). FIFO based inventory is relatively unaffected by price changes and is a good approximation of actual turnover. In this way, current costs are matched in the numerator and denominator.

TOP

Selected information from Mendota, Inc.’s financial statements for the year ended December 31 includes the following (in $):

Sales

7,000,000

Cost of Goods Sold

5,000,000

LIFO Reserve on Jan. 1 

600,000

LIFO Reserve on Dec. 31

850,000

Mendota uses the last in, first out (LIFO) inventory cost flow assumption.  The tax rate is 40%.  If Mendota changed from LIFO to first in, first out (FIFO), its gross profit margin would:

A)
increase to 40.1%.
B)
increase to 32.1%.
C)
increase to 30.0%.



Gross profit margin under LIFO ((sales – cost of goods sold) / sales) is (($7,000,000 ? $5,000,000) / $7,000,000) = 28.6%. Under FIFO, cost of goods sold is reduced by the increase in the LIFO reserve, and the resulting FIFO gross profit margin is (($7,000,000 – ($5,000,000 – ($850,000 - $600,000)) / $7,000,000) = 32.1%. Note that the tax rate only affects income totals after income tax expense is shown and does not affect the gross profit margin.

TOP

 

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.

TOP

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

Cash

$200,000

Accounts Payable

$300,000

Accounts Receivable

300,000

Deferred Tax Liability

600,000

Inventory

1,500,000

Long-term Debt

8,100,000

Property, Plant & Equip.

11,000,000

Common Stock

2,200,000

Total Assets

13,000,000

Retained Earnings

1,800,000

LIFO Reserve at Jan. 1

400,000

Total Liabilities & Equity

$13,000,000

LIFO Reserve at Dec. 31

600,000

Net Income

(after 40% tax rate)

800,000

Jenner uses the last in, first out (LIFO) inventory cost flow assumption. If Jenner changed from LIFO to first in, first out (FIFO) in 2001, return on total equity would:

A)
increase from 20.0 to 23.0%.
B)
decrease from 20.0 to 18.3%.
C)
increase from 20.0 to 21.1%.



Return on total equity (net income / total equity) was ($800,000 / ($2,200,000 + $1,800,000) =) 20%. Under FIFO, net income increases by the increase in the LIFO reserve multiplied by (1 – tax rate). FIFO net income for 2001 was ($800,000 + ($600,000 – $400,000) (1 – 0.40) = ) $920,000. Total equity increases by the amount of accumulated FIFO profits that are added to retained earnings which is calculated by multiplying the amount of the ending LIFO reserve by (1 – tax rate) for an increase of (($600,000) * (1 – 0.40) =) $360,000. Total equity is ($2,200,000 + $1,800,000 + $360,000 =) $4,360,000. FIFO return on total equity is ($920,000 / $4,360,000 =) 21.1%.

TOP

Given the following information and assuming beginning inventory was zero what is the gross profit at the end of the period using the FIFO, LIFO, and average cost methods?

Purchases

Sales
20 units at $50 15 units at $60
35 units at $40 35 units at $45
85 units at $30 85 units at $35
FIFO LIFO Cost Average

A)
$650 $750 $677
B)
$650 $750 $990
C)
$677 $650 $677



FIFO: $5,450 ? 4,800 = $650

LIFO: $5,450 ? $4,700 = $750

Cost Average: $5,450 ? $4,773.21 = $676.79

TOP

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.


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.

TOP

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