AndyNZ

Under last in first out (LIFO) accounting during periods of inflation, when a firm sells a greater quantity of its inventory than it produces or acquires, the result is:

A) an understatement of the cost of goods sold (COGS).

B) an increase in the LIFO reserve.

C) lower earnings.

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This is a LIFO liquidation which refers to a declining inventory balance (the units available for sale are declining). In this case the prices for goods that are being sold are no longer recent prices and can be many years out of date.  This would make COGS appear to be very low and gross and net profits to be artificially high.

AndyNZ

First in, first out (FIFO) inventory equals:

A) LIFO cost of goods sold − changes in LIFO reserve.

B) LIFO inventory + LIFO reserve.

C) the change in LIFO reserve − LIFO ending reserve.

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To convert LIFO inventory balances to a FIFO basis, simply add the LIFO reserve to the LIFO inventory:
INVF = INVL + LIFO Reserve

AndyNZ

Given the following data:

• Beginning LIFO Reserve $2,300
• Cost of Goods Sold (COGS) using LIFO $6,100
• COGS using FIFO of $4,300

What is the Ending LIFO reserve?

A) $4,100.

B) $500.

C) $2,800.

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Ending LIFO Reserve = (LIFO COGS − FIFO COGS) + Beginning LIFO Reserve = (6,100 − 4,300) + 2,300 = $4,100.

AndyNZ

The following information has been gathered about a firm:

• LIFO inventory = $10,000
• Beginning LIFO reserve = $2,500
• Ending LIFO reserve = $4,000
• LIFO cost of goods sold = $15,000
• LIFO net income = $1,500
• Tax rate is 40%

What is the FIFO COGS?

A) $13,500.

B) $16,500.

C) $11,000.

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FIFO COGS = LIFO COGS – change in LIFO reserve
= $15,000 – (4,000 − 2,500) = $13,500

AndyNZ

The formula to convert an ending inventory value from the LIFO to the FIFO method is to:

A) FIFO inventory = LIFO inventory + LIFO reserve.

B) FIFO inventory = LIFO inventory − LIFO reserve.

C) FIFO inventory = LIFO inventory × LIFO reserve.

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The formula to convert an ending inventory value from the LIFO to the FIFO method is to FIFO inventory = LIFO inventory + LIFO reserve.

AndyNZ

If a firm has a first in, first out (FIFO) inventory of 9,000 and a last in, first out (LIFO) inventory of 6,500, what is the value of the LIFO reserve assuming a 40% tax rate?

A) $1,500.

B) $2,500.

C) $1,000

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LIFO reserve = FIFO inventory − LIFO inventory = 9,000 − 6,500 = 2,500

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.