Q1. Which inventory method will provide a larger net income during periods of falling prices?

A)   Specific Items.

B)   LIFO.

C)   FIFO.

Q2. Which of the following is least likely to be a result of using last in, first out (LIFO) as the inventory method during periods of decreasing prices compared to using first in, first out (FIFO)?

A)   Higher taxes.

B)   Lower COGS.

C)   Higher cash flows.

Q3. Which of the following statements regarding the different inventory methods is FALSE?

A)   FIFO is more accurate for income statement purposes.

B)   FIFO is preferable for tax purposes when prices are falling.

C)   The weighted average method is not sensitive to price changes

Q4. If all else holds constant in periods of rising prices and inventory levels:

A)   FIFO firms will have greater stockholder's equity than LIFO firms do.

B)   FIFO firms have higher debt to equity ratios than LIFO firms do.

C)   LIFO firms have higher gross profit margins than FIFO firms do.

Q5. Jefferson Corp. decided to change its inventory valuation method from first in, first out (FIFO) to last in, first out (LIFO) in a period of rising prices. What was the result of the change for the ending inventory and net income?

        Ending Inventory                    Net Income

A)  Decreases                              Decreases

B)  Increases                                Increases

C)  Decreases                              Increases

答案和详解如下：

Q1. Which inventory method will provide a larger net income during periods of falling prices?

A)   Specific Items.

B)   LIFO.

C)   FIFO.

Correct answer is B)

During periods of falling prices last in, first out (LIFO) provides a higher net income than first in, first out (FIFO) or the average cost methods because the items most recently purchased are the ones being sold first and these costs are continually falling increasing net income. Using FIFO during periods of falling prices would cause net income to be lower than LIFO or average cost methods because the first inventory purchased is the first sold but during periods of falling prices this is the most expensive inventory causing net income to be lower.

Q2. Which of the following is least likely to be a result of using last in, first out (LIFO) as the inventory method during periods of decreasing prices compared to using first in, first out (FIFO)?

A)   Higher taxes.

B)   Lower COGS.

C)   Higher cash flows.

Correct answer is C)

Using LIFO during periods of declining prices will result in lower cash flows because net income will be higher than if FIFO is used leading to more taxes being paid out.

Q3. Which of the following statements regarding the different inventory methods is FALSE?

A)   FIFO is more accurate for income statement purposes.

B)   FIFO is preferable for tax purposes when prices are falling.

C)   The weighted average method is not sensitive to price changes

Correct answer is A)

LIFO is more accurate for income statement purposes because LIFO's COGS more closely reflects current costs and therefore provides a better measure of current income.

Q4. If all else holds constant in periods of rising prices and inventory levels:

A)   FIFO firms will have greater stockholder's equity than LIFO firms do.

B)   FIFO firms have higher debt to equity ratios than LIFO firms do.

C)   LIFO firms have higher gross profit margins than FIFO firms do.

Correct answer is A)

The FIFO method of inventory accounting assigns the cost of the earliest units acquired to goods transferred out and the cost of most recent acquisitions to ending inventory. When prices are rising, the cheaper goods in beginning inventory reflecting earlier purchases are assigned to COGS (hence, higher income and higher shareholder's equity through retained earnings.)

Explanations for other choices:

In periods of rising prices and inventory levels (all else constant):

§   FIFO firms have lower debt to equity ratios than LIFO firms do because stockholder's equity is higher and debt is constant.

§   LIFO firms have lower gross profit margins ((Sales-COGS)/Sales) because the more expensive last purchases are assigned to COGS, lowering the numerator.

Q5. Jefferson Corp. decided to change its inventory valuation method from first in, first out (FIFO) to last in, first out (LIFO) in a period of rising prices. What was the result of the change for the ending inventory and net income?

        Ending Inventory                    Net Income

A)  Decreases                              Decreases

B)  Increases                                Increases

C)  Decreases                              Increases

Correct answer is A)

LIFO provides the lowest inventory values and the lowest net income under rising prices because the least expensive purchases are left in inventory and the more expensive purchases flow to cost of goods sold (COGS) which lowers net income.

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