torontoanalyst

The formula to convert cost of goods sold (COGS) from last in, first out (LIFO) to first in, first out (FIFO) is:

A) COGS FIFO = COGS LIFO – change in the LIFO reserve.

B) COGS FIFO = COGS LIFO + change in the LIFO reserve.

C) COGS FIFO = COGS LIFO + beginning LIFO reserve.

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The formula for converting COGS from LIFO to FIFO is COGSF = COGSL − (LIFO reserveE − LIFO reserveB)

torontoanalyst

The year-end financial statements for a firm using last in first out (LIFO) acounting show an inventory level of $5,000, cost of goods sold (COGS) of $16,000, and inventory purchases of $14,500. If the LIFO reserve is $4,000 at year-end and was $1,500 at the beginning of the year, what would the COGS have been using FIFO accounting?

A) $12,000.

B) $13,500.

C) $18,500.

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COGS from LIFO to FIFO:
COGSF = COGSL − change in LIFO reserve
= COGSL - (LIFO reserveE − LIFO reserveB)
= $16,000 − ($4,000 − $1,500)
= $16,000 − $2,500
= $13,500

torontoanalyst

The Orchard Supply Company uses last in, first out (LIFO) inventory valuation. Orchard Supply had a cost of goods sold (COGS) of $1 million for the period. The inventory at the beginning of the period was $500,000 and the inventory at the end of the period was $600,000. Orchard Supply's LIFO reserve was $100,000 at the end of the previous year and $200,000 at the end of the current year. What is Orchard Supply's COGS according to first in, first out (FIFO) inventory valuation?

A) $900,000.

B) $800,000.

C) $1.1 million.

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FIFO COGS = LIFO COGS − change in LIFO reserve
FIFO COGS = $1 million − $100,000 = $900,000

torontoanalyst

A financial analyst could adjust the current ratio in which a company uses the LIFO inventory valuation method to the FIFO method by:

A) deducting the LIFO reserve from the current asset.

B) adding the LIFO reserve to the current assets.

C) adding the LIFO reserve to the current liabilities.

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The LIFO reserve increases the inventory value under FIFO and inventory is included in the numerator in the current ratio.

bapswarrior

Costiuk Ltd. uses the LIFO inventory cost flow assumption. Its inventory balance is $400 at the end of 20X8 and was $350 at the end of 20X7. A footnote in its financial statements reads: “Inventories would have been $70 higher in 20X8 and $80 higher in 20X7 using the FIFO cost flow assumption.”
Which of the following amounts represents the inventory balance under FIFO at the end of 20X8?

A) $410.

B) $470.

C) $390.

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The $70 and $80 amounts represent the LIFO reserves which are differences between LIFO inventory and its value under FIFO.
FIFO inventory (20X8) = LIFO inventory (20X8) + LIFO reserve (20X8)
$400 + $70 = $470

bapswarrior

Moore Ltd. uses the LIFO inventory cost flow assumption. Its cost of goods sold in 20X8 was $800. A footnote in its financial statements reads: “Using FIFO, inventories would have been $70 higher in 20X8 and $80 higher in 20X7.” Moore’s COGS if FIFO inventory costing were used in 20X8 is closest to:

A) $810.

B) $790.

C) $730.

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The ending LIFO reserve is $70 and the beginning LIFO reserve is $80.
FIFO COGS = LIFO COGS − (ending LIFO reserve − beginning LIFO reserve)
$800 − ($70 − $80) = $810

bapswarrior

Due to declining prices, Steffen Inc. has a LIFO reserve of –$20. Its income tax rate is 35%. If an analyst is converting Steffen’s financial statements to a FIFO basis, which of the following adjustments is most likely required?

A) Decrease liabilities by $7.

B) Increase assets by $20.

C) Increase shareholders’ equity by $13.

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Declining prices (negative LIFO reserve) would result in FIFO inventory being less than LIFO inventory based on the following equation:
FIFO inventory = LIFO inventory + LIFO reserve
The balance sheet adjustment would decrease assets (inventory) by the $20 LIFO reserve. In addition, the analyst would decrease liabilities by $7 ($20 LIFO reserve × 35% tax rate). To bring the accounting equation into balance, the analyst would decrease shareholders’ equity by $13 [$20 LIFO reserve × (1 − 35% tax rate)].

bapswarrior

Premier Corp.’s year-end last in, first out (LIFO) reserve was $2,500,000 in 2000 and $2,300,000 in 2001. Premier’s $200,000 decline in the LIFO reserve could be explained by each of the following EXCEPT:

A) the LIFO reserve was being amortized.

B) a LIFO liquidation occurred.

C) declining inventory prices.

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A decline in the LIFO reserve occurs when the increasing prices that created the reserve begin declining or when the inventory is liquidated (i.e. less units in inventory at the end of the year than at the beginning). LIFO reserves are not amortized.

bapswarrior

Barber Inc. sells DVD recorders. On October 14, it purchased a large number of recorders at a cost of $90 each. Due to an oversupply of recorders remaining in the marketplace due to lower than anticipated demand during the Christmas season, the selling price at December 31 is $80 and the replacement cost is $73. The normal profit margin is 5 percent of the selling price and the selling costs are $2 per recorder.

Under U.S. GAAP, what is the value of the recorders on December 31?

A) $74.

B) $73.

C) $78.

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Under U.S. GAAP, market is equal to the replacement cost subject to replacement cost being within a specific range. The upper bound is net realizable value (NRV), which is equal to selling price ($80) less selling costs ($2) for an NRV of $78. The lower bound is NRV ($78) less normal profit (5% of selling price = $4) for a net amount of $74. Since replacement cost ($73) is less than NRV minus normal profit ($74), then market equals NRV minus normal profit ($74). As well, we have to use the lower of cost ($90) or market ($74) principle so the recorders should be recorded at the lower amount of $74.

bapswarrior

Using the lower of cost or market principle under U.S. GAAP, if the market value of inventory falls below its historical cost, the minimum value at which the inventory can be reported in the financial statements is the:

A) net realizable value.

B) market price minus selling costs minus normal profit margin.

C) net realizable value minus selling costs.

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When inventory is written down to market, the replacement cost of the inventory is its market value, but the “market value” must fall between net realizable value (NRV) and NRV less normal profit margin. NRV is the market price of the inventory less selling costs. Therefore the minimum value is the market price minus selling costs minus normal profit margin.