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36. In period of rising prices and stable or increasing inventory quantities, compared with companies that use LIFO inventory accounting, companies that use the FIFO method will have:

A. higher COGS and lower taxes.

B. higher net income and higher taxes.

C. lower inventory balances and lower working capital.

  
  Ans: B.

FIFO companies have higher net income and higher taxes.

References: question 1.

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36. Which of the following accounting practices is most likely to decrease reported earnings in the current period?

A. Using the straight-line method of depreciation instead of an accelerated method.

B. Capitalizing advertising expenses rather than expensing them in the current period.

C. Using LIFO inventory cost methods during a period of rising prices.

  
  Ans: C.

LIFO will result in lower net income than FIFO in the current period, during a period of rising prices. The other choices will tend to increase current period earnings.

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35. During period of rising prices:

A. LIFO COGS > Weighted Average COGS > FIFO COGS.

B. LIFO COGS > Weighted Average COGS < FIFO COGS.

C. LIFO COGS < Weighted Average COGS < FIFO COGS.

  
  Ans: A.

During period of rising prices, the last units purchased are more expensive than the existing units. Under LIFO, the cost of the last units purchased is assigned to COGS. This higher COGS results in lower income, as compared to the FIFO method. As the name suggests, the weighted average method is based on mathematical averages rather than timing of purchase/ use. Thus, COGS using this method falls between that of LIFO and FIFO.

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34. A company using LIFO reports the following:

·         COGS was $27,000.

·         Beginning inventory was $6,500, and ending inventory was $6,200.

·         The beginning LIFO reserve was $1,200.

·         The ending LIFO reserve was $1,400.

The best estimate of the company’s COGS on a FIFO basis would be:

A. $21,300.

B. $26,800.

C. $27,500.

  
  Ans: B.

COGS FIFO

= COGS LIFO – (ending LIFO reserve – beginning LIFO reserve)

=27,000-(1,400-1,200)=$26,800.

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34. A company using LIFO reports the following:

·         COGS was $27,000.

·         Beginning inventory was $6,500, and ending inventory was $6,200.

·         The beginning LIFO reserve was $1,200.

·         The ending LIFO reserve was $1,400.

The best estimate of the company’s COGS on a FIFO basis would be:

A. $21,300.

B. $26,800.

C. $27,500.

  
  Ans: B.

COGS FIFO

= COGS LIFO – (ending LIFO reserve – beginning LIFO reserve)

=27,000-(1,400-1,200)=$26,800.

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33. All else, will a company’s implementation of the accounting standard (SFAS 143) related to asset retirement obligations incurred because of environmental most likely:

A. increase return on assets but decrease net income.

B. decrease return on assets but increase net income.

C. decrease both return on assets and net income.

  
  Ans: C.

Implementation of SFAS 143 requires that companies record an asset and related liability for costs involved in the remedy of environmental damage. The increase in assets will decrease return on assets and the increase in depreciation and accretion expense will reduce net income.

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32. An adjustment to operating income for the effects of a change in LIFO reserve will most likely be required if the change in the LIFO reserve is the result of:

A. price declines.

B. a decrease in the number of unites held in inventory.

C. a increase in the number of unites held in inventory.

  
  Ans: C.

A liquidation of LIFO inventory produces unsustainable profit margins because old costs are being matched with current revenues.

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31. During a period of declining prices, a company using LIFO inventory method instead of FIFO will most likely report:

A. lower current assets and higher gross income.

B. higher current assets and lower gross income.

C. higher current assets and higher gross income.
  Ans: C.

If prices were declining, using LIFO would match the lower (most recent) costs with current sales. Costs of goods sold would be lower with LIFO and gross profit (income) would be higher compared to using FIFO. Lower cost of goods sold means inventory balances, consisting of older higher priced items, would be higher using LIFO, increasing current assets relative to FIFO.

Reference: question 1.

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30. An analyst can most accurately identify a LIFO liquidation by observing a(n):

A. increase in gross margin.

B. decrease in the LIFO reserve.

C. change in inventory out of line with change in sales.
  Ans: B.

The most appropriate way to identify a LIFO liquidation is by reviewing the inventory footnotes for a decrease in the LIFO reserve.

  

A and C are incorrect. Although a LIFO liquidation may result in an increase in gross margin or changes in inventory out of line with changes in sales, there are other factors that could explain those changes.

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29. Select information from a company that uses FIFO inventory method is provided below.

Event

units

$/unit

Total ($)


Opening inventory

1,000

7.5

7,500


Purchases

250

7.6

1,900


Sales

550

12.00

6,600


Purchases

300

7.70

2,310


Sales

600

12.00

7,200


Ending inventory

400




If the company uses the perpetual inventory system versus the periodic inventory system, the gross margin would most likely be:
A. Lower.
B. Higher.
C The same.


Ans: C.
When using the FIFO inventory method the ending inventory, the cost of goods sold and the gross margin are the same under either the perpetual or periodic methods.

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