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28. Which of the following would be the most useful ratio from a financial analysis perspective, rather than from an accounting perspective, assuming a rising price environment? A. Calculating the current ratio by using the current assets determined with LIFO. B. Determining the inventory turnover by using cost of goods sold prepared on a FIFO basis and average inventory prepared on a LIFO basis. C. Determining the return on assets by using net income prepared on a LIFO basis and average total assets prepared on a FIFO basis.

Ans: C. In a rising environment, the most useful ratio from a financial analysis perspective would be to calculate the return on assets by using the lower more conservative net income prepared on a LIFO basis and average assets (inventory) prepared on a FIFO basis (to include more current cost data in the inventory). A is incorrect. Calculating the current ratio with current assets determined with FIFO, not LIFO, would be most useful to a financial analyst. B is incorrect. The best measure to obtain an adjustment inventory turnover ratio would be to use cost of goods sold prepared on a LIFO basis and average inventory prepared on a FIFO basis (highest inventory). This choice is reversed.

cityboy

27. First-In Limited (FIL), which reports under IFRS, recognized revenue of $2.2 million during the most recent fiscal year on unit sales of 152. The company had beginning inventory of 27 units (16 units at a cost of $7,500 each ad 11 units at a cost of $8,100) and acquired 164 unites during the year (the purchases are listed in chronological order below). The per unit net realizable value (NRV) of the inventory was $9,300, while the replacement cost and NRV less the normal profit margin were $9,100. Quantity Unit cost 31 units $8,100 25 units 8,700 76 units 9,000 32 units 9,600 Assuming that FIL uses the FIFO method for inventory costing, the amount of inventory that will be reported on the company’s balance sheet at fiscal year-end is closest to: A. $354,900. B. $362,700 C. $370,000.

Ans: B. The first step in solving this question is to calculate the ending inventory under FIFO. Ending inventory = beginning inventory + purchase – sales                              =27+164-152                              =39 units FIFO inventory = (32 units x $9,600) + (7 units x $9,000)                           = $370,200 Note that under IFRS, inventory is calculated at the lower of cost or net realizable value (NRV). In this problem, the NRV per unit is $9,300, so the total net realizable of the inventory is: Net realizable value = NRV per unit x ending inventory                                  = $9,300 x 39 units                                  =$362,700 The net realizable value of $362,700 is less than the FIFO cost of $370,200, so the inventory will be reported at $362,700. A is incorrect. This is the amount that would be reported as inventory under U.S.GAAP. Under U.S.GAAP, inventory is valued at the lower of cost or market, where “market” is based on the median value among the NRV, replacement cost, and NRV less a normal profit margin. In this problem, the replacement cost and NRV less a profit margin of $9,100 are less than the NRV “ceiling” of $9,300, so the market value of the inventory is: Market value = replacement cost x ending inventory                       = $9,100 x 39 units= $354,900 The market value of $354,900 would be reported on the balance sheet because it is less than the FIFO cost of $370,200. C is incorrect. The ending inventory balance using FIFO is $370,200. However, the NRV of the remaining 39 units should be reported on the balance sheet under IFRS, as it is lower than the FIFO cost.

cityboy

26. Greene Corporation uses the LIFO inventory method, but most of other companies in Greene’s industry use FIFO. Which of the following best describe one of the adjustments that would be made to Greene’s financial statements to compare that company with other companies in the industry? To adjust Greene’s inventory to the FIFO method, the amount reported for Greene’s ending inventory should be: A. increase by the ending balance in Greene’s LIFO reserve. B. decrease by the ending balance in Greene’s LIFO reserve. C. increase by the change in Greene’s LIFO reserve for that period.

Ans:A. Adding the ending balance in the LIFO reserve to the FIFO inventory would equal the ending balance for inventory on a FIFO basis. (LIFO Reserve = FIFO Inventory – LIFO Inventory )

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25. An analyst gathered the following information about a company that uses the LIFO method: LIFO reserve as of 12/31/2011 $420,000 LIFO reserve as of 12/31/2012 $450,000 Marginal tax rate 30% If the company had used the FIFO method instead of LIFO, the company’s 2012 net income would most likely have been: A. $21,000lower B. $9,000 lower C. $21,000higher

Ans: C. The LIFO reverse increased by $30,000 (=450,000-420,000). If an increase in the LIFO reserve occurs, LIFO COGS will be higher than FIFO by the amount of the increase. FIFO COGS = LIFO COGS – Change in LIFO reserve Net income would be lower than FIFO by $30,000(1-0.30)=$21,000. After-tax FIFO net income would be $21,000 higher.

cityboy

24. Which inventory method best matches the actual historical cost of the inventory sold with their physical flow if a company is using a perpetual inventory system?

A. FIFO.

B. LIFO.

C. specific identification.

  
  Ans: C.

Specific identification matches the actual historical costs of the specific inventory items to their physical flow: the cost remain in inventory until the actual  identifiable inventory is sold.

cityboy

23. The year-end balances in a company’s LIFO reserve are $56.8 million in the company’s financial statements for both 2007 and 2008. For 2008, the measure that will most likely be the same regardless of whether the company uses the LIFO or FIFO inventory method is the:

A. inventory turnover.

B. gross profit margin.

C. amount of working capital.
  Ans: B.

The LIFO reserve did not change from 2007 to 2008. Without a change in the LIFO reserve, cost of goods sold would be the same under both methods. Sales are always the same for both; so gross profit margin would be the same in 2008.

  

A is incorrect. The FIFO inventory would be higher because the LIFO inventory and LIFO reserve are added to compute FIFO inventory.

FIFO inventory = LIFO inventory + LIFO reserve

Because the inventory balances would be different under FIFO, inventory turnover (COGS/ Ave. inventory) would also be different under FIFO.

  

C is incorrect.

Working capital= CA-CL

Because the FIFO inventory would be higher, the amount of working capital under FIFO would also be higher.

cityboy

22. A company using the LIFO inventory method reports a LIFO reserve at year-end of $85,000, which is $20,000 lower than the prior year. If the company had used FIFO instead of LIFO in that year, the company’s financial statements would have reported:

A. a lower cost of goods sold, but a higher inventory balance.

B. a higher cost of goods sold, but a lower inventory balance.

C. both a higher cost of goods sold and a higher inventory balance.

  
  Ans: C.

The negative change in the LIFO reserve would increase the cost of goods sold under FIFO compared to LIFO.

FIFO COGS = LIFO COGS – Change in LIFO reserve.

The LIFO reserve has a positive balance so that FIFO inventory would be higher than LIFO inventory.

FIFO inventory = LIFO inventory + LIFO reserve.

cityboy

21. A company uses the LIFO inventory method, but most of the other companies in the same industry use FIFO. Which of the following best describes one of the adjustments that would be made to the company’s financial statements to compare it with other companies in the industry? The amount reported for the company’s ending inventory should be:

A. increased by the ending balance in its LIFO reserve.

B. decreased by the ending balance in its LIFO reserve.

C. increased by the change in its LIFO reserve for that period.

  
  Ans: A.

LIFO Reserve = FIFO Inventory – LIFO Inventory

Adding the ending balance in the LIFO reserve to the LIFO inventory would equal the ending balance for inventory on a FIFO basis.

cityboy

20. An analyst gathers the following information about a company ($ millions): 2012 2011 Sales 283.5 234.9 Year-end inventory (LIFO inventory method) 81.4 53.7 LIFO reserve 36.4 21.8 Cost of goods sold (LIFO) 203.9 167.3 If the company uses the FIFO inventory method instead of LIFO, the company’s 2012 gross profit margin is closest to: A. 22.9%. B. 29.8%. C. 33.2%.

Ans: C. Change in LIFO Reserve 36.4 - 21.8 = 14.6 COGS (FIFO) = COGS (LIFO) – Change in LIFO Reserve 203.9 – 14.6 = 189.3. Gross profit (FIFO) Sales – COGS (FIFO) 283.5 – 189.3 = 94.2 Gross Profit Margin (FIFO) Gross Profit / Sales 94.2 / 283.5 = 33.23%.

cityboy

19. A retail company prepares its financial statements in accordance with U.S. GAAP (generally accepted accounting principles). Its purchases and sales of inventory for its first two years of operations are listed below. First Year Second Year Units Purchased 80,000 100,000 Unit Cost $8.43 $12.25 Units Sold 73,000 78,000 Unit Selling Price $15.00 $16.00 In its second year of operation, the company’s ending inventory is $348,003. Which of the following inventory cost flow assumptions is the company was most likely using? A. FIFO B. LIFO C. Weighted average cost

Ans: C. The company is accounting for its inventory using the weighted average cost method. In the 2nd year of operations, under Weighted Average Cost: Units available for sale include ending inventory from year 1 plus purchases for year 2: 7,000 + 100,000 = 107,000 Cost of Goods Available for Sale: 7,000 x $8.43 + 100,000 x $12.25 = $1,284,000 Unit Cost: $1,284,000/107,000 = $12.00 End Inventory = 107,000 –78,000 = 29,000 units. $12.00 x 19,000 = $348,003