RobertA

During periods of rising prices and stable or growing inventories, the most informative inventory accounting method for income statement purposes is:

A) weighted average because it allocates average prices to cost of good sold (COGS) and provides a better measure of current income.

B) FIFO because it allocates historical prices to cost of good sold (COGS) and provides a better measure of current income.

C) LIFO because it allocates current prices to cost of good sold (COGS) and provides a better measure of current income.

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LIFO is the most informative inventory accounting method for income statement purposes in periods of rising prices and stable or growing inventories. It allocates the most recent purchase prices to COGS, and thus provides a better measure of current income and future profitability.

RobertA

Which is the preferred inventory method for purposes of analysis and which is the preferred method for reporting cost of goods sold?

Inventory Analysis

COGS

A) LIFO FIFO

B) FIFO LIFO

C) LIFO LIFO

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FIFO is the preferred inventory method for purposes of analysis and LIFO is the preferred method for reporting cost of goods sold.

RobertA

During inflationary periods, which of the following statements is CORRECT?

A) LIFO will generate higher earnings, but lower after tax cash flows.

B) LIFO will generate lower earnings, but lower after tax cash flows.

C) FIFO will generate higher earnings, but lower after tax cash flows.

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During inflation, FIFO will generate higher earnings because cost of goods will be lower than if LIFO was used. However, LIFO will generate higher cash flows since cash outflows for taxes will be lower for LIFO.

RobertA

Assuming inventory levels remain constant during the year and prices have been stable over time, COGS would be:

A) the same for both LIFO and FIFO.

B) higher under LIFO than FIFO or average cost.

C) higher under the average cost than LIFO or FIFO.

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During stable prices inventory levels are the same for both LIFO and FIFO.

RobertA

Which of the following statements is least accurate?

A) In a period of rising prices, LIFO gives the best COGS, whereas FIFO gives the best inventory balance on the balance sheet.

B) LIFO produces a tax benefit in a period of rising prices, therefore results in higher cash flows than FIFO.

C) In a period of rising prices, FIFO gives the best COGS, whereas LIFO gives the best inventory balance on the balance sheet.

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If prices are rising steadily, FIFO inventory is valued at the more recent purchase prices which are higher and provide a better estimate of the replacement value of the inventory. LIFO costing will produce a cost of goods sold much closer to replacement cost which provides a better estimate than using FIFO.

RobertA

In a period of rising prices and stable or increasing inventory quantities, use of the first in, first out (FIFO) inventory cost flow assumption results in all of the following EXCEPT:

A) higher earnings after taxes than under last in, first out (LIFO).

B) lower inventory balances than under last in, first out (LIFO).

C) higher earnings before taxes than under last in, first out (LIFO).

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Ending Inventory under FIFO includes more recently purchased higher cost goods than under LIFO. The LIFO inventory consists of older, cheaper goods. Both before and after tax earnings under FIFO will be higher because less expensive goods are used for the cost of goods sold (COGS). Working capital, which is equal to current assets – current liabilities will also be higher under FIFO due the higher inventory balance causing a higher level of current assets.

RobertA

In an inflationary environment, a company’s:

A) assets will be lower if it uses last in, first out (LIFO) as opposed to FIFO.

B) net income will be larger if it uses LIFO than if it uses FIFO.

C) COGS sold will be lower if it uses LIFO as opposed to FIFO.

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In an inflationary period, assets will be lower under LIFO since the last, higher priced items are charged to the income statement

RobertA

Which of the following statements regarding inventory methods used during periods of rising prices is least accurate?

A) FIFO results in higher inventory balances than LIFO.

B) FIFO results in higher taxes than LIFO.

C) LIFO results in lower cost of goods sold than FIFO.

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LIFO results in higher cost of goods sold during periods of rising prices because the last items bought, which are the most expensive, are the first items sold resulting in a higher cost of goods sold.

RobertA

An analyst acquires the following information regarding a company:

	Units	Unit Price
Beginning Inventory	559	$1.00
Purchases	785	$5.00
Sales	848	$15.00
SGA Expenses	$3,191 per annum

What are the Earnings Before taxes using the Weighted Average Method?

A) $6,700.

B) $5,500.

C) $6,200.

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EBT = Sales − (COGS + SGA)COGS = Beginning inventory + Purchases − Ending inventory Ending inventory in units = 559 + 785 − 848 = 496 units
Average cost = (559 × $1 + $785 × $5) / (559 + 785)
= ($559 + $3,925) / 1,344 = $3.3363
Ending inventory = 496 × $3.3363 = $1,654.81 COGS = $559 + $3,925 − $1,654.81 = $2,829.19
EBT = 12,720 − (2,829.19 + 3,191) = $6,699.81.

RobertA

Given the following information and assuming beginning inventory was zero and a periodic inventory system was used, what is the gross profit at the end of the period using the FIFO, LIFO, and average cost methods?

Purchases	Sales
20 units at $50	15 units at $60
35 units at $40	35 units at $45
85 units at $30	85 units at $35

FIFO

LIFO

Cost Average

A) $650 $750 $677

B) $650 $750 $990

C) $677 $650 $677

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Sales = (15 * 60) + (35 * 45) + (85 * 35) = 5,450
COGSFIFO = (20 * 50) + (35 * 40) + (80 * 30) = 4,800
GMFIFO: $5,450 − 4,800 = $650
COGSLIFO = (15 * 50) + (35 * 40) + (85 * 30) = 4,700
GMLIFO: $5,450 − $4,700 = $750
COGSAverage = (20 * 50) + (35 * 40) + (85 * 30) = 4,950
4,950*135 / 140 = 4,773.21
GMCost Average: $5,450 − $4,773.21 = $676.79