honeycfa

Given the following information and assuming beginning inventory was zero 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 $990

B) $650 $750 $677

C) $677 $650 $677

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FIFO: $5,450 ? 4,800 = $650

LIFO: $5,450 ? $4,700 = $750

Cost Average: $5,450 ? $4,773.21 = $676.79

honeycfa

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

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

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

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

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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.

honeycfa

	Units	Unit Price
Beginning Inventory	709	$2.00
Purchases	556	$6.00
Sales	959	$13.00
SGA Expenses	$2,649 per annum

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

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FIFO COGS = (709 units)($2/unit) + (959 ? 709)($6/unit) = $1,418 + $1,500 = $2,918

Sales = (959 units)($13/unit) = $12,467

EBIT = Sales ? COGS ? Expenses

= 12,467 ? 2,918 ? 2,649 = $6,900

LIFO COGS = (556 units)($6/unit) + (959 ? 556)($2/unit) = $3,336 + $806 = $4,142

Sales = (959 units)($13/unit) = $12,467

EBIT = Sales ? COGS ? Expenses = 12,467 ? 4,142 ? 2,649 = $5,676

honeycfa

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) LIFO FIFO

B) FIFO FIFO

C) FIFO LIFO

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In general, an analyst should use LIFO when examining profitability or cost ratios and FIFO when examining asset or equity ratios.

honeycfa

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

A) Last in, first out (LIFO).

B) Weighted average.

C) First in, first out (FIFO).

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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.