Reading 36: Inventories LOS e习题精选 2010, accounting, statements, different, companies

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LOS e: Analyze the financial statements of companies using different inventory accounting methods by comparing and describing the effect of the different methods on cost of goods sold, inventory balances, and other financial statement items.

In periods of rising prices and stable or increasing inventory quantities, using the LIFO method for inventory accounting compared to FIFO will have:

A) higher COGS, lower income, higher cash flows, and lower inventory.

B) higher COGS, lower income, lower cash flows, and lower inventory.

C) lower COGS, higher income, identical cash flows, and lower inventory.

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In periods of rising prices and stable or increasing inventory quantities, the LIFO method – as compared with FIFO – will result in higher COGS, lower taxes, lower net income, lower inventory balances, lower working capital, and higher cash flows.

 

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Assume that Hunter Round Restaurant Supply currently uses the last in, first out (LIFO) method to account for inventory and that the business environment is one of rising prices and stable or growing inventory balances. In addition, Hunter Round has an effective tax rate of zero percent due to tax loss carrybacks. All else equal, which of the following statements is least likely valid? By using LIFO instead of first in, first out (FIFO), Hunter Round has:

A) higher cash flows.

B) lower net income.

C) lower working capital.

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In the absence of taxes, there is no difference in cash flow between LIFO and FIFO. The other statements are true. For the examination, memorize the financial impact of rising and falling prices for the two inventory methods.

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In periods of rising prices and stable or increasing inventory quantities, a company using LIFO rather than FIFO will report cost of goods sold and cash flows which are, respectively:

COGS

Cash Flows

A) Lower Lower

B) Higher Lower

C) Higher Higher

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In this situation, LIFO results in higher cost of goods sold because it uses the more recent and higher costs than FIFO. LIFO results in higher cash flows because with lower reported income, income tax will be lower.

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During periods of rising prices, which of the following is most likely to occur?

A) LIFO COGS > FIFO COGS, therefore LIFO net income > FIFO net income.

B) LIFO COGS < FIFO COGS, therefore LIFO net income < FIFO net income.

C) LIFO COGS > FIFO COGS, therefore LIFO net income < FIFO net income.

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Under the assumptions of this question and using LIFO, the most expensive units go to COGS, resulting in lower net income.

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In a period of rising prices and stable or increasing inventory quantities, use of the first in, first out (FIFO) inventory cost flow assumption results in all of the following EXCEPT:

A) higher earnings after taxes than under last in, first out (LIFO).

B) higher earnings before taxes than under last in, first out (LIFO).

C) lower inventory balances than under last in, first out (LIFO).

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Ending Inventory under FIFO includes more recently purchased higher cost goods than under LIFO. The LIFO inventory consists of older, cheaper goods. Both before and after tax earnings under FIFO will be higher because less expensive goods are used for the cost of goods sold (COGS). Working capital, which is equal to current assets – current liabilities will also be higher under FIFO due the higher inventory balance causing a higher level of current assets.

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In an inflationary environment, a company’s:

A) net income will be larger if it uses LIFO than if it uses FIFO.

B) assets will be lower if it uses last in, first out (LIFO) as opposed to FIFO.

C) COGS sold will be lower if it uses LIFO as opposed to FIFO.

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In an inflationary period, assets will be lower under LIFO since the last, higher priced items are charged to the income statement.

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During a period of rising prices, the financial statements of a firm using first in, first out (FIFO) reporting, instead of last in, first out (LIFO) reporting would show:

A) higher total assets and higher net income.

B) lower total assets and higher net income.

C) lower total assets and lower net income.

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When the FIFO method is used when prices are rising, the cheaper goods in beginning inventory, reflecting earlier purchases, are assigned to COGS (hence, higher income) and the more expensive units (last purchases) are assigned to ending inventory (greater current assets). When the LIFO method is used during a period when prices are rising, the more expensive last purchases are assigned to COGS (hence, lower income) and the cheaper units in beginning inventory and earlier purchases are assigned to ending inventory.

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A firm ended the last period with inventory of $4.0 million and a last in, first out (LIFO) reserve of $175,000. During the year, it made purchases of $2.0 million and reported sales of $5.5 million with a gross margin of 0.32. At the end of the year, it reported a LIFO reserve of $75,000. What is the value of the firm’s cost of goods sold (COGS) on a first in, first out (FIFO) basis?

A) $3,840,000.

B) $3,640,000.

C) $3,740,000.

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With sales of $5.5 million and a gross margin of 0.32, the COGS (on a LIFO basis) is $3.74 million. In order to convert COGS to a FIFO basis, we need to subtract the change in LIFO reserve during the year: $3,740,000 ? ($75,000 ? $175,000) = $3,840,000.

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A firm ended the last period with inventory of $3.0 million and a last in, first out (LIFO) reserve of $40,000. During the year, it made purchases of $1 million and reported sales of $4 million with a gross margin of 0.58. At the end of the year, it reported a LIFO reserve of $75,000. What is the value of the firm’s ending inventory converted to a first in, first out (FIFO) basis?

A) $2,360,000.

B) $2,320,000.

C) $2,395,000.

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With sales of $4 million and a gross margin of 0.58, the COGS (on a LIFO basis) is 1.68 million. This would leave an ending inventory of 3 million + 1 million ? 1.68 million = $2.32 million on a LIFO basis. In order to adjust this to FIFO, we would add the ending LIFO reserve of $75,000 to arrive at $2.395 million.

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During periods of declining prices, which inventory method would result in the highest net income?

A) LIFO.

B) Average Cost.

C) FIFO.

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When prices are declining and LIFO is used the COGS is smaller than if FIFO is used leading to a larger net income.