RobertA

In periods of falling prices, which of the following statements is CORRECT? Compared to FIFO, LIFO results in:

A) lower COGS, lower taxes and higher net income.

B) higher inventory balances and higher working capital.

C) higher inventory balances and lower working capital.

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In periods of falling prices, LIFO results in lower COGS, higher taxes, higher net income, higher inventory balances, higher working capital, and lower cash flows compared to FIFO.

RobertA

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

What is the cost of goods sold using the weighted average method?

A) $3,604.02.

B) $3,423.82.

C) $2,918.00.

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Weighted average = cost of goods available / total units available. COGS = Units sold × weighted average = 959 × 3.7581 = $3,604.02.

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What is the cost of goods sold using the first in, first out (FIFO) method?

A) $2,918.00.

B) $8,325.00.

C) $2,772.10.

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COGS = (709 × 2) + (250 × 6) = $2,918.00.

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What is the ending inventory level in dollars using the FIFO method?

A) $4,142.00.

B) $1,744.20.

C) $1,836.00.

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Ending Inventory = 306 × 6 = $1,836.00.

RobertA

Which of the following is least likely part of the basic inventory equation?

A) Beginning inventory + purchases = ending inventory + cost of goods sold.

B) Beginning inventory − ending inventory − cost of goods sold = purchases.

C) Purchases − ending inventory + beginning inventory = cost of goods sold.

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To solve for purchases the basic inventory equation would then be: ending inventory + COGS − beginning inventory = purchases.

RobertA

	Units	Unit Price
Beginning Inventory	699	$5.00
Purchases	710	$8.00
Sales	806	$15.00
SGA Expenses	$3,141 per annum

Determine the cost of goods sold using the weighted average method and also using the first in, first out (FIFO) method.

Weighted Average

FIFO

A) $4,986.02 $4,133.45

B) $4,351.00 $5,248.44

C) $5,248.44 $4,351.00

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Weighted average = cost of goods available / total units available.
[(699 x 5) + (710 x 8)] / (699 + 710) = 6.51171
COGS = Units sold × Weighted average = 806 × 6.51171 = $5,248.44.
FIFO COGS = (699 × 5) + (107 × 8) = $4,351.00

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What is the ending inventory level in dollars using the FIFO method?

A) $6,160.00.

B) $4,824.00.

C) $4,582.80.

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There are (699 + 710 – 806) = 603 items left in inventory. Ending Inventory = 603 × 8 = $4,824.00.

RobertA

Given the following data and assuming a periodic inventory system, what is the ending inventory value using the FIFO method?

Purchases	Sales
50 units at $50/unit	25 units at $55/unit
60 units at $45/unit	30 units at $50/unit
70 units at $40/unit	45 units at $45/unit

A) $3,200.

B) $3,600.

C) $3,250.

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Purchased 50 + 60 + 70 = 180 units. Sold 25 + 30 + 45 = 100.
Ending inventory = 180 – 100 = 80 of the last units purchased.
(70 units)($40/unit) + (10 units)($45/unit) = $2,800 + $450 = $3,250.

RobertA

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

What is gross profit 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
Gross profit = Sales − COGS − Sales 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
Gross profit = Sales − COGS − Sales Expenses = 12,467 − 4,142 − 2,649 = $5,676

RobertA

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

Ignoring taxes, what is profit using the weighted average method?

A) $5,676.00.

B) $6,213.98.

C) $6,027.56.

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weighted average cost per unit = (709 units)($2/unit) + (556 units)($6/unit) = $4,754 / 1,265units = $3.7581
weighted average COGS = ($3.7581)(959 units) = $3,604.02
Sales = (959 units)($13/unit) = $12,467
Profit = Sales − COGS − Sales Expenses = 12,467 − 3,604.02 − 2,649 = $6,213.98

RobertA

During periods of decreasing prices, a firm using a periodic inventory system will report higher gross profit if its inventory cost assumption is:

A) FIFO because during periods of decreasing prices, COGS will be higher, resulting in a higher gross profit.

B) LIFO because during periods of decreasing prices, COGS will be lower, resulting in a higher gross profit.

C) FIFO because during periods of decreasing prices, COGS will be lower, resulting in a higher gross profit.

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In periods of falling prices, LIFO results in lower COGS, and therefore higher gross profit than FIFO, because LIFO assumes the most recently purchased (lower cost) goods are sold first.

RobertA

The cost flow assumption of LIFO vs. FIFO would have several implications while analyzing financial statements, especially when comparing companies using different methods.
Suppose we are comparing: Alpha (uses LIFO) and Beta (uses FIFO).In an inflationary scenario, with rising inventory levels, which company would most likely report COGS reflecting current prices?

A) Beta.

B) Both of these.

C) Alpha.

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The LIFO cost flow assumption transfers the most recent purchases to COGS and hence would reflect current prices. Alpha with the LIFO cost flow assumption would therefore report current prices in their COGS.

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In a deflationary scenario, with rising inventory levels, which company would most likely report COGS reflecting current prices?

A) Beta.

B) Both of these.

C) Alpha.

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The LIFO cost flow assumption transfers the most recent purchases to COGS and hence would reflect current prices. This holds true whether prices are rising or falling. Alpha with the LIFO cost flow assumption would therefore report current prices in their COGS.

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For this question only, suppose there is a third company Gamma. Like Alpha, Gamma also uses LIFO cost flow assumption. However, unlike Alpha, Gamma’s LIFO reserve has been decreasing over the years. In an inflationary scenario, which company would most likely report COGS reflecting current prices?

A) Alpha.

B) Beta.

C) Gamma.

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Both Alpha and Gamma would reflect more current prices in COGS as compared to Beta. However, since Gamma has a LIFO liquidation as compared to Alpha, Gamma’s COGS includes some older price inventory. Alpha’s inventory levels are increasing and therefore its COGS would be most current.

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Suppose Beta was considering an inventory write-down. Which group of ratios would most likely look worse due to such a move?

A) Profitability and Turnover.

B) Turnover and Leverage.

C) Profitability and Leverage.

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Inventory write-down would lower inventory values and the current period’s reported profits. Profitability ratios would suffer. The turnover ratio would be favorable due to lower asset (inventory) values. Leverage ratios would also suffer due to lower equity (via retained earnings).

RobertA

Brigham Corporation uses the last-in, first-out (LIFO) method of accounting for inventory.  For the year 2005, the following is provided:

• Cost of goods sold (COGS): $24,000
• Beginning inventory: $6,000
• Ending inventory: $7,500
• The notes accompanying the financial statements indicate that the LIFO reserve at the beginning of the year was $2,250 and at the end of the year was $6,000

If Brigham had used first-in, first-out (FIFO), the COGS for 2005 would be:

A) $3,750.

B) $20,250.

C) $29,250.

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FIFO COGS = LIFO COGS − change in LIFO reserve. Therefore, $24,000 − ($6,000 − 2,250) = $20,250.