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Reading 35: Inventories - LOS e, (Part 2) ~ Q1-5

Q1. Assuming high inflation in the short run and lower levels of inflation in the long run, the current ratio of a company using last in, first out (LIFO) relative to a firm using first in, first out (FIFO), will be:

A)   lower, and the difference between the two firms' current ratios will decrease as inflation decreases.

B)   lower, and the difference between the two firms' current ratios will increase as inflation decreases.

C)   higher, and the difference between the two firms' current ratios will decrease as inflation decreases.

Q2. What are the earnings before taxes using the FIFO method and LIFO method?

          FIFO                                           LIFO

 

A)  $6,900                                     $5,676

B)  $6,900                                     $5,506

C)  $6,213                                     $5,676

Q3. In general, when analyzing profitability and costs, or when analyzing asset and equity ratios, which of the following should be used?

          Profitability/Cost Ratios               Asset/Equity Ratios

 

A)      FIFO                                              FIFO

B)      LIFO                                              FIFO

C)      FIFO                                              LIFO

Q4. First in, first out (FIFO) provides the more useful estimate of inventory and balance sheet information. When analyzing a company using LIFO, a restatement of the inventory account (using the LIFO reserve) is required. Which of the following accounts will NOT require restatement following the restatement of the inventory account?

A)   Total assets.

B)   Current liabilities.

C)   Shareholder’s equity.

Q5. When analyzing profitability ratios, which inventory accounting method is preferred?

A)   Weighted average.

B)   First in, first out (FIFO).

C)   Last in, first out (LIFO).

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