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标题: Reading 21:Inventories: Implications for Financial Statement [打印本页]

作者: 土豆妮 时间: 2011-3-7 14:46 标题: [2011]Session 5-Reading 21: Inventories: Implications for Financial Statement

Session 5: Financial Reporting and Analysis: Inventories and Long-lived Assets
Reading 21: Inventories: Implications for Financial Statements and Ratios

LOS c: Demonstrate how to adjust a company's reported financial statements from LIFO to FIFO for purposes of comparison

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)
$1,800.

C)
$1,500.

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

作者: 土豆妮 时间: 2011-3-7 14:47

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)
$10,575,000.

B)
$10,325,000.

C)
$11,850,000.

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.

作者: 土豆妮 时间: 2011-3-7 14:47

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.

作者: 土豆妮 时间: 2011-3-7 14:47

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)
$2,360,000.

B)
$2,320,000.

C)
$2,395,000.

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.

作者: 土豆妮 时间: 2011-3-7 14:47

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.

作者: 土豆妮 时间: 2011-3-7 14:48

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)
increase from 20.0 to 21.1%.

C)
decrease from 20.0 to 18.3%.

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%.

作者: 土豆妮 时间: 2011-3-7 14:48

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)
4.06

C)
4.18

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.

作者: 土豆妮 时间: 2011-3-7 14:48

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.

作者: 土豆妮 时间: 2011-3-7 14:48

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)
$486,000.

C)
$314,000.

INV_F = INV_L + LIFO reserve

=$400,000 + $86,000

= $486,000

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

A)
$66,000.

B)
$64,000.

C)
$74,000.

COGS_F = COGS_L - (LIFO reserve_E - LIFO reserve_B)

= $70,000 - ($86,000 - $90,000)

= $74,000

作者: 土豆妮 时间: 2011-3-7 14:49

If a company using last in, first out (LIFO) reports an inventory balance of $22,000 and a LIFO reserve of $4,000, the estimated value for the inventory on a first in, first out (FIFO) basis would be:

A)
$26,000.

B)
$13,000.

C)
$18,000.

FIFO INV = LIFO INV + LIFO Reserve
X = 22,000 + 4,000
X = 26,000

作者: 土豆妮 时间: 2011-3-7 14:49

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.

The formula for converting COGS from LIFO to FIFO is COGS_F = COGS_L ? (LIFO reserve_E? LIFO reserve_B)

作者: 土豆妮 时间: 2011-3-7 14:49

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)
$13,500.

B)
$12,000.

C)
$18,500.

COGS from LIFO to FIFO:

COGS_F = COGS_L ? change in LIFO reserve
= COGS_L - (LIFO reserve_E ? LIFO reserve_B)
= $16,000 ? ($4,000 ? $1,500)
= $16,000 ? $2,500
= $13,500

作者: 土豆妮 时间: 2011-3-7 14:54

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.

FIFO COGS = LIFO COGS ? change in LIFO reserve

FIFO COGS = $1 million ? $100,000 = $900,000

作者: 土豆妮 时间: 2011-3-7 14:54

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.

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

作者: 土豆妮 时间: 2011-3-7 14:55

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)
$390.

C)
$470.

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

作者: 土豆妮 时间: 2011-3-7 14:56

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.

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

作者: 土豆妮 时间: 2011-3-7 14:56

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.

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)].

作者: 土豆妮 时间: 2011-3-7 14:56

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.

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.

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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

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