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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

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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

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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.

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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.

TOP

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.

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 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.

TOP

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.

TOP

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

TOP

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.

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