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8. A company’s information from its first year of operation is as follows:

2011

Event

Units

NZ$/unit

Opening inventory

0

0

Purchase #1

1,000

$22.50

Purchase #2

800

$25.00

Purchase #3

400

$25.50

Sales

1,700

$40.00


Using a periodic inventory system and the weighted average method, the ending inventory value is closest to:
A. $11,975.
B. $12,165.
C. $12,700.




Ans: A.

Ending Inventory Weighted Average Calculations

Units

NZ$/unit

Total NZ$

Purchase #1

1,000

$22.50

$22,500

Purchase #2

800

$25.00

$20,000

Purchase #3

400

$25.50

$10,200


Total available

2,200


$52,700


Average cost

52,700 ÷ 2,200

$ 23.95


Ending inventory

2,200 – 1,700 = 500 units

$ 11,975

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7. For which of the following assets is it most appropriate to test for impairment at least annually?

A. Land.

B. A patent with a legal life of 20 years.

C. A trademark with an expected indefinite life.

  
  Ans: C.

Intangible assets with indefinite lives need to be tested for impairment at least annually.

  

B and C are incorrect. PP&E (including land) and intangibles with finite lives are only tested if there has been a significant change or other indication of impairment.

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6. The following information is available about a manufacturing company:

$ million

Cost of ending inventory computed using FIFO

4.3

Net realizable value

4.1

Current replacement cost

3.8

If the company is using International Financial Reporting Standards (IFRS), instead of U.S. GAAP, its cost of goods sold ($ millions) is most likely:
A. the same.
B. 0.3 lower.
C. 0.3 higher.


Ans: A.
Under IFRS, the inventory would be written down to its net realizable value ($4.1 million), whereas under U.S. GAAP, market is defined as current replacement cost and hence would be written down to its current replacement cost ($3.8 million). The smaller write down under IFRS will reduce the amount charged to the cost of goods sold, as compared with U.S. GAAP, and result in a lower cost of goods sold of $0.3 million.

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5.  Which of the following inventory valuation methods best matches the actual historical cost of the inventory items to their physical flow?

A. FIFO.

B. LIFO.

C. Specific identification.

  
  Ans. C.

Specific identification best matches the physical flow of the inventory items because it tracks the actual units that are sold.

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4. Assuming flat year-over-year sales in a declining price environment under U.S.GAAP, a firm might expect cash flow from operations (CFO) and working capital (WC) under the LIFO (rather than FIFO) inventory method to be:

A. Lower for both CFO and WC.

B. Lower for CFO and higher for WC.

C. Higher for CFO and lower for WC.

  
  Ans. B.

Under U.S.GAAP, in a declining price environment, LIFO results in a lower COGS, a higher gross profit margin, and higher taxable income. Higher taxable income results in higher tax outflows and lower after-tax cash flows from operations (CFO). In the declining price environment, inventory balances and working capital reflect the higher cost of the earlier, lower priced inventory.

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3. A company currently uses LIFO inventory valuation under U.S.GAAP. The company reported an increase in the LIFO reserve for the year. If the company used FIFO rather than LIFO:

A. COGS is lower and net income is lower.

B. CFGO is lower and net income is higher.

C. COGS is higher and net income is lower.

  
  Ans. B.

Under U.S.GAAP, a LIFO reserve increase indicates that the prices were increasing and the difference in inventory cost using LIFO and FIFO valuation methods increased over the period. During periods of rising prices, LIFO records a higher COGS than FIFO because the LIFO method uses the newer, more expensive inventory for COGS. If COGS are higher, net income will be lower. If the company used FIFO rather than LIFO, the effects will be reversed. Thus, COGS will be lower and the net income will be higher.

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2. Under U.s.GAAP, a LIFO liquidation occurs when the:

A. LIFO reserve value increases.

B. Firm changes from LIFO to FIFO

C. Quantity of goods sold is greater than the quantity produced.
   
Ans: C

Under U.S.GAAP, a LIFO inventory liquidation occurs when more products are sold than are purchased or produced, causing the firm to dip into older, lee expensive inventory.

B. Changing from LIFO to FIFO is made retrospectively. Under U.S.GAAP, the firm must explain why the change in cost flow method is preferable. But this change is not LIFO inventory liquidation.

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