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.

---

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.

---

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.

---

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.

---

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.

---

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.

---

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.

bapswarrior

During periods of rising prices, which of the following is most likely to occur?

A) LIFO COGS > FIFO COGS, therefore LIFO net income > FIFO net income.

B) LIFO COGS < FIFO COGS, therefore LIFO net income < FIFO net income.

C) LIFO COGS > FIFO COGS, therefore LIFO net income < FIFO net income.

---

Under the assumptions of this question and using LIFO, the most expensive units go to COGS, resulting in lower net income.

bapswarrior

During a period of rising prices, the financial statements of a firm using first in, first out (FIFO) reporting, instead of last in, first out (LIFO) reporting would show:

A) lower total assets and higher net income.

B) higher total assets and higher net income.

C) lower total assets and lower net income.

---

When the FIFO method is used when prices are rising, the cheaper goods in beginning inventory, reflecting earlier purchases, are assigned to COGS (hence, higher income) and the more expensive units (last purchases) are assigned to ending inventory (greater current assets). When the LIFO method is used during a period when prices are rising, the more expensive last purchases are assigned to COGS (hence, lower income) and the cheaper units in beginning inventory and earlier purchases are assigned to ending inventory.

bapswarrior

When analyzing profitability ratios, which inventory accounting method is preferred?

A) Weighted average.

B) Last in, first out (LIFO).

C) First in, first out (FIFO).

---

Using LIFO cost of goods sold (COGS) gives a more accurate measure of future earnings because the LIFO COGS is more representative of the current cost of product sold as compared to using FIFO therefore net income will be more accurately represented

bapswarrior

The best way to compute an inventory turnover ratio is to use:

A) last in, first out (LIFO) for cost of goods sold (COGS) and first in, first out (FIFO) for average inventory.

B) last in, first out (LIFO) for both cost of goods sold (COGS) and average inventory.

C) first in, first out (FIFO) for both cost of goods sold (COGS) and average inventory.

---

Inventory turnover makes no sense at all for firms using LIFO due to the mismatching of costs (the numerator is current while the denominator is historical). FIFO based inventory is relatively unaffected by price changes and is a good approximation of actual turnover. In this way, current costs are matched in the numerator and denominator.