AndyNZ

M J Inc reported COGS of $80,000 for the year under the LIFO inventory valuation method. M J had a beginning LIFO reserve of $8,000 and an ending LIFO reserve of $11,000. The COGS under the FIFO inventory valuation method is:

A) $83,000.

B) $77,000.

C) $91,000.

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FIFO COGS is reduced when a LIFO reserve is increased. So, COGS = 80,000 − (11,000 − 8,000) = 77,000.

AndyNZ

In a period of rising prices, LIFO liquidation results in:

A) increase in inventory.

B) lower earnings.

C) higher earnings.

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Since older layers of inventory that are liquidated were purchased at lower prices, the cost of goods sold will be lower and earnings will be higher.

AndyNZ

In case of a decline in LIFO reserve, to obtain a better analysis an analyst should:

A) not make any adjustments.

B) adjust the income statement, regardless of the reasons for the decline.

C) adjust the income statement, only if such a decline is due to LIFO liquidation.

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A decline in LIFO reserve is due to either falling prices or LIFO liquidations. In the case of LIFO liquidation, the income statement does not reflect the current costs and should be adjusted. In the case of falling prices, the LIFO income statement amounts are current and do not need adjustment.

AndyNZ

LIFO liquidation may result when:

A) purchases are less than goods sold.

B) purchases are more than goods sold.

C) cost of goods sold is less than the available inventory.

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For LIFO companies, when more goods are sold than are purchased during a period, the goods held in opening inventory are in included in COGS. This will result in LIFO liquidation.

AndyNZ

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.

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Ending LIFO reserve = (LIFO COGS − FIFO COGS) + Beginning LIFO reserve
= ($3,988 − $2,004) + $2,484
= $4,468

AndyNZ

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.

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Adjustment to retained earnings = LIFO reserve (1 − t) = $2,500(1 − 0.4) = $1,500

AndyNZ

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.

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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.

AndyNZ

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.

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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.

AndyNZ

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.

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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.

AndyNZ

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.