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

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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.

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.

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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.

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

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

A) $74,000.

B) $66,000.

C) $64,000.

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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.

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

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.