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inventories(Reading
29)

Exercise Problems:

1.
Company X uses FIFO for its inventory   Ans: A
valuation and Company Y uses LIFO under
U.S.GAAP, all other respects are identical. If When prices are rising:
the prices are rising, Company
X is most
likely to have a higher: Item/ratio FIFO LIFO

A.
Tax liability Ending Higher-the Lower-the
inventories inventory reflects inventory reflects
B.
Inventory turnover the prices of the the prices of
most recently items purchased
C.
CFO purchased items at lower prices

Shareholders’ Higher-earning Lower- earning

equity and inventories and inventories
are usually are usually
higher higher

Earnings Higher-cost of Lower- cost of

goods sold is goods sold is
based on based on most
previously recently
purchased, purchased,
lower-priced higher-priced
items items


 Pretax cash Same- pretax Same- pretax
flow cash flow is not cash flow is not
impacted by the impacted by the
inventory inventory method
 method used used

After-tax Lower- pretax Higher- pretax

cash
flow cash flow is the cash flow is the
same, but the same, but the
earnings and earnings and
income taxes are income taxes are
higher lower

Profit Higher-earnings Lower-

earnings
margins are higher are lower

Inventory Lower- Higher-

(asset) inventories are inventories are
turnover usually higher usually lower

Current ratio Higher- Lower-

inventories are inventories are
usually higher usually lower

Debt-to- Lower-net
worth Lower- net
worth
equity
ratio is usually higher is usually lower

Return on Higher-earnings Lower-

earnings
asset and are higher are lower
return on
equity

FIFO: The cost

of the first item purchased is the
cost of the first item sold. Ending
inventory is
based on the cost of the most recent purchases,
thereby
approximating current cost.

LIFO: The cost

of the last item purchased is the
cost of the first item sold. Ending
inventory is
based on the cost of the earliest items
purchased.

So when prices
are rising, FIFO results in a lower
COGS. FIFO also results in lower
inventory
turnover (due to lower COGS and higher
inventory balances), a
higher tax liability (due to
a higher pretax income) and a lower CFO (due to

the higher tax payments).
  

B. Company X
uses FIFO so its inventory
turnover should be lower due to lower COGS and
 higher inventory balances.

C. Company X
uses FIFO so its CFO should be
lower due to the higher tax payments.

2.
Under U.s.GAAP, a LIFO liquidation occurs   Ans: C
when the:
Under
U.S.GAAP, a LIFO inventory liquidation
A.
LIFO reserve value increases. occurs when more products are sold
than are
purchased or produced, causing the firm to dip
B.
Firm changes from LIFO to FIFO into older, lee
expensive inventory.

C.
Quantity of goods sold is greater than the B. Changing
from LIFO to FIFO is made
quantity produced. 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.

3.
A company currently uses LIFO inventory Ans. B.
valuation under U.S.GAAP. The company
reported an increase in the LIFO reserve for Under
U.S.GAAP, a LIFO reserve increase
the year. If the company used
FIFO rather indicates that the prices were increasing
and the
than LIFO: difference in inventory cost using LIFO and FIFO
valuation methods
increased over the period.
A.
COGS is lower and net income is lower. During periods of rising prices, LIFO records a
higher COGS than FIFO because the LIFO
B.
CFGO is lower and net income is higher. method uses the newer, more expensive
inventory for COGS. If COGS are higher, net
C.
COGS is higher and net income is lower. 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.


4.
Assuming flat year-over-year sales in a Ans. B.
declining price environment under
U.S.GAAP,
a firm might expect cash flow from operations Under
U.S.GAAP, in a declining price
(CFO) and working
capital (WC) under the environment, LIFO results in a lower COGS, a

LIFO (rather than FIFO) inventory method to higher gross profit margin, and higher taxable
be: income. Higher taxable income
results in higher
tax outflows and lower after-tax cash flows from
A.
Lower for both CFO and WC. operations
(CFO). In the declining price
environment, inventory balances and working
B.
Lower for CFO and higher for WC. capital reflect the higher cost of the earlier, lower
priced inventory.
C. Higher for CFO and lower for WC.

5. 
Which of the following inventory valuation Ans. C.
methods best matches the
actual historical
cost of the inventory items to their physical Specific
identification best matches the physical
flow? flow of the inventory items because
it tracks the
actual units that are sold.
A. FIFO.

B. LIFO.

C. Specific
identification.


6.
The following information is available about Ans: A.
a manufacturing company:
Under IFRS,
the inventory would be written down
$
million to its net realizable value ($4.1
million), whereas
 under U.S. GAAP, market is defined as current
Cost
of ending inventory computed 4.3 replacement
cost and hence would be written
using FIFO down to its current replacement cost ($3.8
million). The smaller write down under IFRS will
Net
realizable value 4.1 reduce the amount charged to
the cost of goods
sold, as compared with U.S. GAAP, and result in
Current
replacement cost 3.8 a lower
cost of goods sold of $0.3 million.

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.

   

7.
For which of the following assets is it most Ans: C.
appropriate to test for
impairment at least
annually? Intangible
assets with indefinite lives need to be
tested for impairment at least
annually.
A.
Land.
 
B.
A patent with a legal life of 20 years.
B and C are
incorrect. PP&E (including land) and
C.
A trademark with an expected indefinite intangibles with finite lives are only
tested if
life. there has been a significant change or other
indication of
impairment.
 
 


8.
A company’s information from its first year Ans: A.
of operation is as follows:
Ending Inventory Weighted Average
2011 Calculations

Event Units NZ$/unit Units NZ$/unit Total NZ$

Opening 0 0 Purchase #1 1,000 $22.50 $22,500

inventory
Purchase #2 800 $25.00 $20,000
Purchase #1 1,000 $22.50
Purchase #3 400 $25.50 $10,200
Purchase #2 800 $25.00
Total available 2,200   $52,700
Purchase #3 400 $25.50
Average cost 52,700 ÷ 2,200 $ 23.95

Sales 1,700 $40.00

Ending 2,200 – 1,700 = $ 11,975
inventory 500 units
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.


9.
A company incurs the followings costs Ans: A.
related to its inventory during the
year:
The costs to
include in inventories are all costs of
Cost ￥ millions purchase, costs of conversion, and
other costs
 incurred in bringing the inventories to their
Purchase price 100,000 present location
and condition.

Trade discounts 5,000 Cost ￥ millions

Import duties 20,000 Purchase price 100,000

Shipping of raw
materials to 10,000 Less Trade
discounts (5,000)
manufacturing facility
Import duties 20,000
Manufacturing
conversion 50,000
costs Shipping of raw
materials to 10,000
manufacturing facility
Abnormal costs
as a result of 8,000
waste material Manufacturing
conversion 50,000
costs
Storage cost
prior to shipping 2,000
to customers Total inventory
costs 175,000

The
amount charged to inventory cost (in
millions) is closest to:

A.
￥175,000.

B.
￥177,000.

C.
￥185,000.

10.
Compared with using the FIFO method to Ans: C.
account for inventory, during a period
of
rising prices, which of the following ratios is During a
period of rising prices, ending inventory
most likely higher for a
company using LIFO? under LIFO will be lower than that
of FIFO and
cost of goods sold higher; therefore, inventory
A.
Current ratio turnover
(CGS/average inventory) will be higher.

B.
Gross margin Reference:
question No. 1.

C. Inventory turnover


11.
A company which prepares its financial Ans: B.
statements using IFRS wrote down its
inventory value by €20,000 in 2009. In 2010, Under IFRS,
inventory is reported on the balance
prices increased and the same
inventory was sheet at the lower cost or net realizable
value.

worth €30,000 more than its value at the end Net realizable value is equal to the expected
of 2009. Which of
the following statements is sales price less the
estimated selling costs and
most accurate? In 2010, the company’s cost completion costs. If net realizable value is less
of
sales: than the balance sheet value f inventory, the
inventory is “write down” to
net realizable value
A.
was unaffected. and the loss is recognized in the income
statement. Is
there is a subsequent recovery in
B.
decreased by €20,000. value, the inventory can be “write up” and
the
gain is recognized in the income statement by
C.
decreased by €30,000. reducing COGS by the amount
of the recovery.
Because inventory is valued at the lower of cost
  or net
realizable value, inventory cannot be
written up by more than it was
previously written
down.

In this
question, the recovery of previous write-
down is limited to the amount of the
original
write-down (€20,000) and is reported as a
decrease in the cost of
sales.


12.
A U.S. pulp brokerage firm which Ans: A.
prepares its financial statements according
to
U.S. GAAP and uses a periodic inventory COGS
system had the following
transactions during

the year: Weighted Average CGS FIFO CGS LIFO

Date Activity Tons $ per Available for sale

Ton
  (000s) Units Cost Total Units Total Units Total
$ cost sold cost sold cost
  Beginning 1 600 (‘000s)
inventory   ($ ($ ($
000s) 000s) 000s)
February Purchase 5 650
1 600 600 1 x 600 3x 2,040
May Sale 2 700 600 680

August Purchase 3 680 5 650 3,250 5 x 3,250 3x 1,950

650 650
November Sale 4 750
3 680 2,040        
The
cost of sales (in ‘000s) is closest to:
9 CGAS$5,890 Cost $3,850 Cost $3,990
A.
$3,850 using FIFO. of of
sales sales
B.
$4,080 using LIFO.
Unit $5,890/9 =        
C.
$5,890 using weighted average. Cost $654.44

  Cost of $654.44 x 6        
sale =
$3,926
  WA


13.
A review of a company’s inventory Ans: B.
records for the year indicates that the
following costs were incurred: The total
capitalized costs include fixed
production costs, the direct conversion costs
of

Fixed production
overhead:                          material and labor, storage costs required as part
$500,000 of production but not
abnormal waste costs.
$500,000 + 300,000 + 25,000 = $825,000.
Direct material
and direct
labor:                   
300,000

Storage costs
incurred during production:    
25,000

Abnormal waste
costs:                                      
30,000

If
the company operated at full capacity
during the year, the total capitalized
inventory cost is closest to:

A.
$800,000.

B.
$825,000.

C.
$855,000.


14.
In a period of rising prices, when Ans: A.
compared to a company that uses weighted
average cost for inventory, a company using In periods of rising
prices FIFO results in a higher
FIFO will most likely report
higher values for inventory value and a lower cost of goods
sold

its: and therefore a higher net income. The higher
net income increases
return on sales.
 
 
A.
return on sales.
B is
incorrect. The higher reported net income
B.
debt-to-equity ratio. also increases retained earnings,
and therefore
results in a lower debt-to-equity ratio not a
C.
inventory turnover. higher one.

   

C is
incorrect. The combination of higher
inventory and lower cost of goods sold
decreases
inventory turnover (CGS/inventory).

15. 
A company, which prepares its financial Ans: C.
statements in accordance with IFRS is
in the
process of developing a more efficient Under IFRS
research and development costs are
production process for one of
its primary expensed until certain criteria are met,
including
products. The most appropriate accounting that technical feasibility has been established
treatment for
those costs incurred in the and the company
intends to use it.
project is to:

A.
expense them as incurred.

B.
capitalize costs directly related to the
development.

C.
expense costs until technical feasibility has
been established.


16.
Due to global oversupply in the micro- Ans: B.
chip industry a company wrote down its
2012
inventory by €4.0 million from €12.0 million. Although IFRS
does require write-downs, it also
The following year, due to
a change in allows revaluations, but not to exceed the

competitive forces in the industry the market original value, i.e., 12. The exception to this,
price of these
chips rose sharply to 10% where gains are allowed, is
in producers of
above their original 2012 value. If the agricultural, forest and resource products.
company
prepares its financial statements in
accordance with International Financial
Reporting Standards (IFRS), its 2013
inventory (in €-millions) will most
likely be
reported as:

A. 8.0.

B. 12.0.

C. 13.2.


17.
During the past year, a company’s Ans: A.
production facility was operating at 75% of
capacity. The firm’s costs were as follows: $ millions

$ millions Fixed Production

Costs: 75% of capacity: 2.25
75% x $3
Fixed production
overhead costs 3
Raw materials 6.00
Raw materials
costs 6
Labor Costs 4.00
Labor costs 4
Freight In 1.00
Freight-in costs
for raw materials 1
Total Capitalized
Inventory Cost 13.25
Warehousing
costs for finished 2
goods

The firm ended the year

with no remaining
work-in-process inventory. The total
capitalized inventory
cost (in $ millions) for
the year is closest to:

A. 13.25.

B. 15.25.

C. 16.00.


18. Is the reversal of an
inventory write-down Ans: C.
permitted under U.S. GAAP (generally
accepted accounting
principles) and The reversal
of an inventory write-down is
International Financial Reporting Standards permitted under IFRS but not under U.S. GAAP.

(IFRS)?
Under IFRS,
inventory is reported on the balance
A. No, under both sheet at the lower cost or net
realizable value.
Net realizable value is equal to the expected
B. Yes, under both sales price less
the estimated selling costs and
completion costs. If net realizable value is
less
C. Yes under IFRS but not
under U.S. GAAP than the balance sheet value f inventory, the
inventory is “write down”
to net realizable value
  and the loss is recognized in the income
statement.
Is there is a subsequent recovery in
value, the inventory can be “write up”
and the
gain is recognized in the income statement by
reducing COGS by the
amount of the recovery.
Because inventory is valued at the lower of cost
or
net realizable value, inventory cannot be
written up by more than it was
previously written
down.


19. A retail company
prepares its financial Ans: C.
statements in accordance with U.S. GAAP
(generally
accepted accounting principles). The company is accounting
for its inventory
Its purchases and sales of inventory for its using the weighted average cost method.

first two years of operations are listed below.
In the 2nd year of
operations, under Weighted
  First Second Average Cost:
Year Year
Units available for sale
include ending inventory
Units Purchased 80,000 100,000 from year 1 plus purchases for year 2:

Unit Cost $8.43 $12.25 7,000 + 100,000 = 107,000

Units Sold 73,000 78,000 Cost of Goods Available

for Sale: 7,000 x $8.43
+ 100,000 x $12.25 = $1,284,000
Unit Selling
Price $15.00 $16.00
Unit Cost:
$1,284,000/107,000 = $12.00
In its second year of
operation, the
End
Inventory = 107,000 –78,000 = 29,000
company’s ending inventory is $348,003.
units. $12.00 x 19,000 = $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


20. An analyst gathers the
following Ans: C.
information about a company ($ millions):
Change in LIFO 36.4
- 21.8 = 14.6
  2012 2011 Reserve

Sales 283.5 234.9 COGS (FIFO) = COGS
(LIFO) – Change in
LIFO Reserve
Year-end
inventory (LIFO 81.4 53.7
inventory method) 203.9
– 14.6 = 189.3.

LIFO reserve 36.4 21.8 Gross profit Sales

– COGS (FIFO)
(FIFO)
Cost of goods
sold (LIFO) 203.9 167.3
283.5
– 189.3 = 94.2
If the company uses the
FIFO inventory
method instead of LIFO, the company’s 2012 Gross Profit Gross
Profit / Sales
gross profit margin
is closest to: Margin (FIFO)

A. 22.9%. 94.2
/ 283.5 = 33.23%.

B. 29.8%.  

C. 33.2%.  

   

                                    


21. A company uses the
LIFO inventory Ans: A.
method, but most of the other companies in
the same industry
use FIFO. Which of the LIFO Reserve =
FIFO Inventory – LIFO Inventory
following best describes one of the

adjustments that
would be made to the Adding the
ending balance in the LIFO reserve to
company’s financial statements to compare it the LIFO inventory would equal the
ending
with other
companies in the industry? The balance for inventory on a FIFO basis.
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.

22. A company using the

LIFO inventory Ans: C.
method reports a LIFO reserve at year-end of
$85,000, which is
$20,000 lower than the The negative change in the LIFO
reserve would
prior year. If the company had used FIFO increase the cost of goods sold under FIFO
instead of
LIFO in that year, the company’s compared to LIFO.
financial statements would have reported:
FIFO COGS = LIFO COGS – Change in LIFO
A. a lower cost of goods
sold, but a higher reserve.
inventory balance.
The LIFO reserve has a positive
balance so that
B. a higher cost of goods
sold, but a lower FIFO inventory would be higher than LIFO
inventory balance. inventory.

C.
both a higher cost of goods sold and a FIFO inventory = LIFO inventory + LIFO reserve.
higher inventory balance.
 
 


23. The year-end balances
in a company’s Ans: B.
LIFO reserve are $56.8 million in the
company’s financial
statements for both 2007 The LIFO reserve did not change from
2007 to
and 2008. For 2008, the measure that will 2008. Without a change in the LIFO reserve, cost

most
likely be the same regardless of of goods sold would
be the same under both
whether the company uses the LIFO or FIFO methods. Sales are always the same for both; so
inventory method is the: gross
profit margin would be the same in 2008.

A. inventory turnover.  

B. gross profit margin. A is incorrect. The FIFO inventory

would be
higher because the LIFO inventory and LIFO
C.
amount of working capital. 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.

24. Which inventory method

best matches Ans: C.
the actual historical cost of the inventory sold
with their
physical flow if a company is using Specific
identification matches the actual
a perpetual inventory system? historical costs of the specific inventory
items to
their physical flow: the cost remain in inventory
A. FIFO. until the
actual  identifiable inventory is sold.

B. LIFO.

C. specific
identification.


25. An analyst
gathered the following Ans: C.
information about a company that uses the
LIFO method: The LIFO
reverse increased by $30,000
(=450,000-420,000). If an increase in the LIFO
LIFO
reserve as of 12/31/2011 $420,000 reserve occurs, LIFO COGS will be higher than
FIFO by the amount of the
increase.
LIFO
reserve as of 12/31/2012 $450,000
FIFO COGS =
LIFO COGS – Change in LIFO
Marginal
tax rate 30% reserve

If the company
had used the FIFO method  Net
income would be lower than FIFO by
instead of LIFO, the company’s 2012 net $30,000(1-0.30)=$21,000. After-tax FIFO
net
income would most likely have been: income would be $21,000 higher.

A.    $21,000lower

B.     $9,000
lower

C.     $21,000higher

26. Greene
Corporation uses the LIFO Ans:A.
inventory method, but most of other
companies in
Greene’s industry use FIFO. Adding the
ending balance in the LIFO reserve to
Which of the following best describe one of the FIFO inventory would equal the
ending
the
adjustments that would be made to balance for inventory on a FIFO basis.
Greene’s financial statements to compare
that company with other companies in the (LIFO Reserve
= FIFO Inventory – LIFO
industry? To adjust Greene’s
inventory to the Inventory )
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.

27. First-In
Limited (FIL), which reports Ans: B.
under IFRS, recognized revenue of $2.2
million
during the most recent fiscal year on The first step
in solving this question is to
unit sales of 152. The company had calculate the ending inventory under FIFO.
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 Ending
inventory = beginning inventory +
year (the
purchases are listed in chronological purchase – sales
order below). The per unit net
realizable
value (NRV) of the inventory was $9,300,                             
=27+164-152

while the replacement
cost and NRV less the
normal profit margin were $9,100.                             
=39 units

Quantity Unit
cost FIFO inventory
= (32 units x $9,600) + (7 units
x $9,000)
31
units $8,100
                          =
$370,200
25
units 8,700
Note that
under IFRS, inventory is calculated at
76
units 9,000 the lower of cost or net realizable
value (NRV).
In this problem, the NRV per unit is $9,300, so
32
units 9,600 the total net
realizable of the inventory is:

Assuming that
FIL uses the FIFO method for Net realizable
value = NRV per unit x ending
inventory costing, the amount of inventory inventory
that
will be reported on the company’s
                                
= $9,300 x 39 units
balance sheet at fiscal year-end is closest to:

                                
=$362,700
A. $354,900.

The net
realizable value of $362,700 is less than
B. $362,700
the FIFO cost of $370,200, so the
inventory will
C. $370,000. 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.

28. Which of
the following would be the most Ans: C.
useful ratio from a financial analysis
perspective, rather than from an accounting In a rising environment, the most useful
ratio
perspective, assuming a rising
price from a financial analysis perspective would be to
environment? calculate the return
on assets by using the lower
more conservative net income prepared on a
A. Calculating
the current ratio by using the LIFO
basis and average assets (inventory)
current assets determined with LIFO. prepared on a FIFO basis (to include
more
current cost data in the inventory).
B. Determining
the inventory turnover by
using cost of goods sold prepared on a FIFO  
basis
and average inventory prepared on a
LIFO basis. A
is incorrect. Calculating the current ratio with
current assets determined
with FIFO, not LIFO,
C. Determining
the return on assets by using would be most useful to a financial analyst.
net income prepared on a LIFO basis and
average
total assets prepared on a FIFO  
basis.
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.


29. Select
information from a company that Ans: C.
uses FIFO inventory method is provided
below. When using the FIFO inventory
method the
ending inventory, the cost of goods sold and the
Event units $/unit Total ($) gross margin are
the same under either the
perpetual or periodic methods.
Opening 1,000 7.5 7,500
inventory  

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.

30. An analyst
can most accurately identify a Ans: B.
LIFO liquidation by observing a(n):
The most appropriate way to
identify a LIFO
A. increase in
gross margin. liquidation is by reviewing the inventory
footnotes for a
decrease in the LIFO reserve.
B. decrease in
the LIFO reserve.
 
C. change in
inventory out of line with change
in sales. 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.


31. During a
period of declining prices, a Ans: C.
company using LIFO inventory method
instead of
FIFO will most likely report: If prices were
declining, using LIFO would match
the lower (most recent) costs with current
sales.

A. lower
current assets and higher gross Costs of goods sold would be lower with LIFO
income. and gross profit (income)
would be higher
compared to using FIFO. Lower cost of goods
B. higher
current assets and lower gross sold means
inventory balances, consisting of
income. older higher priced items, would be higher
using
LIFO, increasing current assets relative to FIFO.
C. higher
current assets and higher gross
income. Reference:
question 1.

32. An
adjustment to operating income for Ans: C.
the effects of a change in LIFO reserve
will
most likely be required if the change in the A liquidation
of LIFO inventory produces
LIFO reserve is the result
of: unsustainable profit margins because old costs
are
being matched with current revenues.
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.

33. All else,

will a company’s implementation Ans: C.
of the accounting standard (SFAS 143)
related
to asset retirement obligations Implementation
of SFAS 143 requires that
incurred because of environmental most companies record an asset and related liability
likely: for
costs involved in the remedy of
environmental damage. The increase in assets
A. increase
return on assets but decrease net will decrease return on assets and the increase in
income. depreciation and accretion
expense will reduce
net income.
B. decrease
return on assets but increase net
income.

C. decrease
both return on assets and net
income.


34. A company
using LIFO reports the Ans: B.
following:
COGS FIFO
·         COGS
was $27,000.
 = COGS LIFO –
(ending LIFO reserve –
·         Beginning
inventory was $6,500, and beginning LIFO reserve)
ending inventory was $6,200.
=27,000-(1,400-1,200)=$26,800.
·         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.

35. During
period of rising prices: Ans: A.

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


36. Which of
the following accounting Ans: C.
practices is most likely to decrease reported
earnings in the current period? LIFO will
result in lower net income than FIFO in
the current period, during a period
of rising

A. Using the
straight-line method of prices. The other choices will tend to increase
depreciation instead of an accelerated current period
earnings.
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.

36. In period
of rising prices and stable or Ans: B.
increasing inventory quantities, compared
with
companies that use LIFO inventory FIFO companies
have higher net income and
accounting, companies that use the FIFO higher taxes.
method will have:
References:
question 1.
A. higher COGS
and lower taxes.

B. higher net
income and higher taxes.

C. lower
inventory balances and lower
working capital.

37. Bao
Corporation, which reports under Ans: B.
IFRS, wrote down its inventory of electronic
parts last period from its original cost of € Under IFRS,
inventory values are revalued
28,000 to net realizable value
of €25,000. upward only to the extent they were previously
This period, inventory at net realizable value written down. In this case, that is from €25,000
has increased to €
30,000. Bao should back up to the original
value of €28,000. The
revalue this inventory to: increase is reported as gain for the period and
will
increase COGS of units sold during the
A. €30,000 and
report a gain of €5,000 on current period.
the income statement.

B. €28,000 and
report a gain of €3,000 on
the income statement.

C. €30,000 but
report a gain of €3,000 on the
income statement

 

38. Assuming
stable inventory quantities, in a Ans: C.
period of:
In a period of
rising prices, LIFO results in higher
A. rising
prices, LIFO results in higher ending COGS, lower inventory balances, and
lower gross

inventory and FIFO results in higher
gross profit, as compared to FIFO. In a falling price
profit. environment,
these effects are the opposite.
Working capital (current assets minus current
B. falling
prices, LIFO results in higher gross liabilities) is higher under FIFO in a rising price
profit and FIFO results in lower COGS. environment because
inventories are higher.

C. rising
prices, LIFO results in higher COGS Reference:
Question 1.
and FIFO results in higher working
capital.

39. A firm
uses the FIFO cost flow Ans: C.
assumption. Compared to gross profit with a
periodic
inventory system, the firm’s gross For a firm using
FIFO, gross profit is the same
profit with a perpetual inventory system whether the firm uses a periodic or perpetual
would be: inventory system. For a firm using LIFO or
average cost, gross profit can be
different
A. lower. depending on the choice of inventory system.

B. higher.

C. the same.

40. Bao Inc.

currently uses the FIFO method Ans: B.
to account for inventory. Due to significant
tax-loss carryforwards, the company has an In the absence
of taxes, there is no difference in
effective tax rate of zero. Prices
are rising cash flow between LIFO and FIFO. In
addition,
and inventory quantities are stable. If the using LIFO would result in lower working capital
company were to use
LIFO instead of FIFO: (inventory is
lower). Using LIFO would result in
lower net income because of a lower gross
A. net income
would be lower, and cash flows margin (COGS is higher).
would be higher.

B. cash flow
would remain the same, and
working capital would decrease.

C. gross
margin would increase, and average
stockholder’s equity would decrease.


41. From the
point of view of a financial Ans: B.
analyst, when evaluating companies that use
different inventory cost assumptions, in a The most
useful estimates of inventory and cost
period of: of sales are those that best
approximate current
 cost. Whether prices are increasing or
A. stable
prices, LIFO inventory is preferred decreasing, FIFO
provides a better estimate of
to FIFO inventory. inventory values, and LIFO produces a better
estimate of cost of sales. If prices are table,
B. decreasing
prices, FIFO inventory is there is no difference
between LIFO and FIFO
preferred to LIFO inventory. estimates of inventory or cost of sales.

C. increasing
prices, FIFO cost of sales is
preferred to LIFO cost of sales.

42. During an
accounting period, a company Ans: A.
has the following sequence of transactions
with
a beginning inventory of zero: FIFO COGS:

Purchases Sales 100@$210 =$21,000

100
units at $210 80
units at $240 70@$225 =$15,750

90
units at $225 90
units at $250   $36,750

The company’s
COGS using FIFO for LIFO ending
inventory:
inventory accounting, and its ending
inventory using
LIFO, are closest to: Purchases 190

  FIFO
COGS LIFO
ending inventory Sales 170

A. $36,750 $4,200 balance  

20@$210=$4,200
B. $37,050 $4,200

C. $37,050 $4,500


43. A company
that reports under U.S.GAAP Ans: B.
and changes its inventory cost assumption
from
weighted average cost to LIFO is Under
U.S.GAAP, a change to LIFO from another
required to apply this change in accounting inventory cost method is an exception
to the

principle: requirement of retrospective application of
changes in an accounting
principle. Instead of
A.
retrospectively, and disclose the new cost restating prior years’ data, the firm uses the
flow method being used. carrying
value of inventory at the time of the
change as the firm LIFO layer. U.S.GAAP
requires
B.
prospectively, and explain the reasons for a company that is changing its inventory cost
the change in the financial
statement assumption to explain,
in its financial statement
disclosures. disclosures, why the new method is preferable to
the old method.
C.
retrospectively, and explain the reasons for
the change in the financial
statement
disclosures.

44. During a
period of falling costs of Ans: A.
manufacturing, which of the following
inventory
cost formulas would result in the With LIFO,
more recent, lower costs would be
greatest reported net income? used for COGS. A reduction is COGS will
increase
gross profit and net income, other things equal.
A. LIFO.

B. FIFO.

C. Average
cost.


45.
A company began the most recent Ans:
B.
reporting period with 145,670 units in
inventory, which were acquired at a cost of The
ending inventory of 267,895 units has an
$7.5- per unit. During the year,
a total of average cost value of $2,338,723,
determined as

1,550,000 units were sold. Inventory follows:
purchases by quarter were:
Beginning inventory 1,092,525 (145,670 x
Purchases Units Unit cost $7.50)

Q1 534,520 $7.95 Q1 purchases 4,249,434 (534,520 x

$7.95)
Q2 341,233 $8.60
Q2 purchases 2,934,604 (341,233 x
Q3 498,664 $9.45 $8.60)

Q4 297,808 $9.70 Q3 purchases 4.712,375 (498,664 x

$9.45)
Ending
inventory value using the average cost
method is closest to: Q4 purchases 2,888,738 (297,808 x
$9.70)
A.
$2,064,200.
Total value $15,877,676 (1,817,895
units) =
B.
$2,338,700. $8.73 average cost

C.
$2,598,600. Ending inventory = 1,817,895 –
1,550,000 units
sold = 267,895 units x $8.73 = $2,338,723
 

   

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