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There are two simple issues of inventory accounting:
Determine the cost of goods obtainable for sale: start Inventory + Purchases.Allocate the expense of full inventory expenses (cost that goods accessible for sale) between two components: COGS on the revenue statement and also the ending inventory top top the balance sheet. Keep in mind that COGS = (Beginning perform + Purchases) - ending Inventory.
There space two perform systems:
Perpetual list system updates inventory accounts after each acquisition or sale. Inventory quantities are updated continuously. Once there is a sale, inventory is reduced and COGS is calculated.Periodic inventory system documents inventory purchase or revenue in "Purchases" account. "Inventory" account is update on a regular basis, in ~ the finish of each accounting duration (e.g., monthly, quarterly). Expense of items sold or expense of revenue is computed indigenous the finishing inventory figure.
In some cases, it"s possible to specifically recognize which list items have actually been sold and which remain. By the specific to know method, the actual expenses of the particular units marketed are transferred from inventory come the cost of goods sold. This method achieves the proper matching of sales revenue and also cost of products sold when the individual devices in the inventory are unique. However, in most cases companies may be unable to determine specifically which items room sold and which items stay in ending inventory.
The remaining three methods are flow assumptions, which must be used only come an list of homogeneous items. The price flow assumption may or may not reflect the physical circulation of inventory.
Weighted typical Cost
The average price of all systems in the list is computed and also used in recording the price of products sold. This is the only method in which all units are assigned the exact same (average) per-unit cost.
Average expense = (beginning perform + purchases) / units accessible for sale.Ending list = Average price x systems of ending inventory.COGS = price of goods obtainable for sale - finishing inventory.
FIFO is the assumption that the first units purchased are the an initial units sold. Thus inventory is assumed to consist that the most recently purchased units. FIFO assigns current costs to inventory but older (and often lower) prices to the expense of items sold.
LIFO is the presumption that the many recently got goods are sold first. This method matches sales revenue with fairly current costs. In a period of inflation, LIFO usually outcomes in lower reported profits and also lower income taxes than the other methods. However, the oldest purchase expenses are assigned come inventory, i m sorry may an outcome in inventory ending up being grossly understated in state of present replacement costs.
LIFO is not allowed under IFRS. In the U.S., however, LIFO is provided by approximately 30 percent that U.S. Companies due to the fact that of potential earnings tax savings.
The end result under perpetual FIFO is the same as under routine FIFO. In other words, the an initial costs are the exact same whether you relocate the price out of inventory v each sale (perpetual) or even if it is you wait until the year is over (periodic). This is additionally true is the particular identification technique is used.
Using the LIFO/weighted average cost methods the two equipment will generally an outcome in different allocations to expense of sales and ending inventory.
Comparison that Inventory audit Methods
Inventory data is useful if it reflects the current price of replacing the inventory. COGS data is advantageous if it reflects the current cost of replacing the inventory item to continue operations.
During periods of steady prices, all 4 methods will generate the same results for inventory, COGS and earnings.
During durations of rising prices and also stable or growing inventories, FIFO steps assets far better (the most useful inventory data), yet LIFO measures income better.
Under LIFO, the cost of ending inventory is based upon the earliest purchase prices, and also thus is well below current instead of cost. For countless firms making use of LIFO, their expense of inventory may be years old and almost useless for evaluation purposes. However, expense of goods sold is based upon the most recent purchase prices, and also thus carefully reflects current replacement cost. As a result, LIFO offers a much better measurement of present income and also future profitability.
Under FIFO, the price of ending inventory is based upon the most recent acquisition prices, and thus very closely reflects existing replacement cost. However, prices of items sold are based on the earliest acquisition prices, and this is well below the present replacement cost. The acquire is actually holding gain or perform profit. It is debatable even if it is it need to be taken into consideration income, or at least experts can speak the underestimated COGS leads to inflated net income.
In an setting of decreasing inventory unit costs and consistent or boosting inventory amounts the opposite is true.
The usefulness of perform data reported using the average-cost technique lies in between LIFO and FIFO.
Practice concern 1What walk the FIFO inventory method assume about the an initial units purchased?A. They are the an initial units sold.B. They room the units that remain in ending inventory.C. They are the only units supplied in computer average cost.Correct Answer: A
FIFO treats the first units purchased as though they space the very first unit sold.
Practice inquiry 2When calculating finishing inventory using the average price method, i beg your pardon of the complying with is CORRECT?A. The numerator is the start inventory balance add to purchases.B. The denominator is the variety of units remaining.C. The denominator is the number of units purchased.Correct Answer: A
The average price is calculate by taking the start inventory balance to add purchases separated by the total variety of units in inventory, i m sorry is the number in the start balance add to the number purchased.
A. $530.B. $640.C. $595.Correct Answer: B
10 x $20 + 20 x $22 = $640.
Practice question 4Which of the complying with results from making use of the LIFO method of inventory price flows during a period of inflation?A. Understated expense of products sold.B. Overvalued inventory.C. Right now valued cost of goods sold.D. Right now valued inventory.Correct Answer: C
LIFO matches current costs with present revenues. During a period of inflation, LIFO results in at this time valued expense of goods sold.
Practice question 5Which inventory technique generally outcomes in expenses allocated to finishing inventory that will certainly approximate present costs?A. LIFOB. FIFOC. Average price methodCorrect Answer: B
FIFO allocates the many recent costs to inventory.
Practice inquiry 6Under U.S. GAAP, a agency that supplies the LIFO technique to compute taxable income must usage the ______ an approach for gaue won reporting.A. FIFOB. Average costC. LIFOCorrect Answer: C
The tax law requires a company that provides LIFO for tax purposes additionally use LIFO because that financial report purposes.
Practice inquiry 7Under which price flow assumption is the finishing inventory composed of the earliest purchased merchandise?A. FIFOB. LIFOC. Average CostCorrect Answer: B
Under the LIFO (Last-In, First-Out) expense flow assumption, inventory is offered from the most recent purchases, leaving the more quickly purchased perform on hand.
Practice inquiry 8If inventory expenses remain relatively consistent from duration to period, i m sorry inventory method is the most appropriate one in the allocation of price flow in between COGS and inventory carrying value?I. Specific identification method.II. FIFO.III. Weighted mean method.IV. LIFO.Correct Answer: every one of them
Given relatively constant prices, the allocation that costs between COGS and also ending inventory would be very similar under every of the 4 methods.
Practice inquiry 9Which techniques are based on cost flow assumptions?I. Particular identification.II. FIFO.III. LIFO.IV. Weighted median Cost.Correct Answer: II, III and IV
I is based on physical flow. The circulation of prices does not have to correspond through the physical flow of units. The expenses can flow in different way than the goods. In other words, if a firm offers LIFO, it might sell the earliest (first) item come a customer, however can report the cost of goods sold the the price that the last purchase.
Practice question 10Which perform valuation method is not permitted under IFRS?A. LIFO.B. FIFO.C. Details Identification.Correct Answer: A
LIFO is permitted just under U.S. GAAP.
$7 per unitSecond revenue 20 units What is the value of the ending inventory, using a perpetual perform system and a FIFO expense flow assumption?
A. $26B. $36C. $56Correct Answer: C
Only 8 units remain after the 2nd sale. On a FIFO perpetual basis, the 8 units will it is in assigned the most recent acquisition price the $7 ($7 x 8 = $56).
$13 every unit If 83 units space sold, what is the worth of the finishing inventory under a routine inventory system and also a FIFO cost flow assumption?
A. $219B. $905C. $177Correct Answer: A
The ending inventory (17 units) would be composed of the many recent to buy (newest layers) the 15 X $13 plus 2 X $12, or $195 + $24.
Practice question 13Which inventory cost flow assumption normally will yield the highest cost of items sold throughout a period of decreasing prices?A. Load averageB. FIFOC. LIFOCorrect Answer: B
The older, higher inventory purchases will certainly be the costs that go into expense of goods sold under FIFO.
Practice concern 14Zealous Ltd. And Eager Ltd. Are identical companies in every respect except that Zealous supplies the LIFO an approach for perform costing while Eager supplies FIFO costing. The companies run in an market in which prices have been increasing over the previous several years. Contrasted to Zealous, i beg your pardon of the following can be said about Eager?A. Eager has actually a lower revenue per share.B. Eager has actually a higher cost of goods sold.C. Eager has a lower ending inventory.D. Passionate has greater total assets.Correct Answer: D
If prices room increasing, FIFO would certainly provide higher ending inventory, due to the fact that the products on hand would certainly be taped at the most recent purchase prices.
Practice question 15Which of the following is an benefit of LIFO list valuation over FIFO throughout periods the falling price (assuming not all inventory is sold)?A. Finishing inventory ~ above the balance paper is reported at its existing replacement cost.B. Taxation savings linked with reduced reported earningsC. It an ext closely adheres come the equivalent principle.D. It much more closely parallels the physical circulation of items sold.Correct Answer: C
LIFO costing offers the most recent prices to compute cost of items sold. Assuming expenses are changing, these costs an ext closely enhance a firm"s revenue, i beg your pardon is usually matching the tendency of expense changes.
Practice inquiry 16In a duration of declining prices, i m sorry of the adhering to statements would be true?A. LIFO would certainly produce greater gross profit margin percentages 보다 would typical costs.B. FIFO would certainly produce higher gross profit margin percentages than would LIFO.C. Average expenses would produce greater gross benefit margin percentages than would certainly LIFO.D. FIFO would certainly produce greater gross benefit margin percentages 보다 would average costs.Correct Answer: A
If prices room declining, LIFO would administer lower expense of items sold, because lower prices would it is in allocated come the items sold.
Practice question 17Prices have actually been rising during the past couple of years. Companies Ashley and Taylor space in the exact same industry and use the same accounting methods other than for inventory valuation. Ashley offers FIFO, and Taylor uses LIFO. I beg your pardon of the following statements is true?A. The inventory on Taylor"s books closely approximates present market pricesB. The price of goods sold for Taylor more closely approximates current replacement valuesC. The inventory because that Taylor and also Ashley room the sameCorrect Answer: B
Because Taylor provides LIFO, the much more recent prices will be the expenses in prices of items sold. The an ext recent expenses are the greater costs, as expenses have to be rising.
Practice inquiry 18Which that the complying with is true in periods of increasing prices?A. Working funding under FIFO will show up to be better than under LIFO.B. Cash operation under FIFO will be better than LIFO.C. Cash flows will be the exact same under FIFO and LIFO.Correct Answer: A
The perform under FIFO will be much higher than the perform under LIFO. If cash flows will certainly be reduced (due to the taxes differences), the effect on the inventory is commonly greater; hence the working funding under FIFO will appear to be much better even though cash operation under LIFO are better.
Practice inquiry 19Which the the complying with statements is (are) true under U.S. GAAP?I. If a LIFO inventory class is depleted in one period, that can constantly be replenished by an identical layer in the next periodII. In periods of increasing prices, expense of goods sold under LIFO will certainly be greater than under FIFOIII. The usage of LIFO rises inventory holding profits throughout periods of rising pricesIV. A firm may use LIFO inventory actions for taxation purposes and another cost method for financial reporting purposesCorrect Answer: II
When LIFO is provided in a period of climbing prices, the latest and greater costs will certainly go into price of products sold. Once FIFO is offered in a period of increasing prices, the older and also lower expenses will go into prices of goods sold.
IV is false. Under the �LIFO conformity rule,� the U.S. Taxation code calls for that service providers using the LIFO method for tax purposes must additionally use the LIFO an approach for financial reporting.
Practice inquiry 20Which that the complying with statements is true in a period of climbing prices?A. The usage of FIFO will result in a useful inventory turnoverB. The usage of FIFO will have tendency to understate incomeC. The use of FIFO will have tendency to understate the debt-to-equity ratioD. The use of FIFO will improve cash flowsCorrect Answer: C
The use of FIFO will generate a lower price of goods sold, because the earlier, lower expenses will be included in price of goods sold. The lower expense of products sold will result in a higher income. The higher income will be contained in stockholders" equity, i beg your pardon will reason the debt-to-equity ratio to be lower.
Practice concern 21Which of the complying with statements is true in an inflationary environment?A. Under FIFO, earnings will tend to it is in understatedB. Under LIFO, working funding may be distortedC. Under FIFO, cash flows will certainly be increasedD. The use of FIFO will reason debt-to-equity ratios to it is in overstatedCorrect Answer: B
When LIFO is used, inventory displayed under current assets will be very low, as it will be using older, lower costs. When cash flows will be higher under LIFO, the boost in cash operation is normally not enough to against the impact of the low inventory, and thus working funding will tend to be reduced under LIFO.
Practice inquiry 22When price levels have actually been raising throughout the period, a agency using the LIFO list valuation technique instead of the FIFO inventory valuation method would have:A. Higher equitiesB. Reduced net incomeC. Greater net incomeCorrect Answer: B
In a duration of rising prices, LIFO will certainly yield a reduced income since its cost of products sold is higher, because it uses newer, and also higher, costs.
Practice inquiry 23During a period of rising prices, which of the adhering to is lower using FIFO fairly than LIFO?A. Income before tax.B. Earnings tax.C. Expense of goods sold.D. Net income.Correct Answer: C
Practice concern 24Assume that prices room rising and inventories balances space increasing, which method will generate the greatest cash flow?A. Mean cost.B. LIFO.C. FIFO.Correct Answer: B
As long as the price level increases and inventory quantities carry out not decrease, a deferral of earnings tax occurs, thus generating greater cash operation (tax should be paid in cash).
Practice inquiry 25During a time of enhancing inventory and also rising prices, FIFO will an outcome in ______ than LIFO.A. Greater COGSB. Greater taxesC. Lower net incomeD. Lower working capitalCorrect Answer: B
Practice concern 26During a time of increasing inventory and rising prices, LIFO will an outcome in ______ 보다 FIFO.A. Higher inventory balanceB. Greater taxesC. Higher COGSD. Higher net incomeCorrect Answer: C
Practice inquiry 27An list write-down has actually a positive effect on:A. Liquidity ratios.B. Profit ratios.C. Task ratios.Correct Answer: C
Activity ratios such together inventory turnover will certainly be positively affected because the asset base (denominator) is reduced.
Practice question 28Diane Corporation had actually 400 devices of list on hand in ~ July 1, 2011, costing $20 each. Purchases and also sales of goods throughout the month the July were together follows:July 12, 2011 Sales 200 devices
Assume Diane Corporation does not preserve perpetual list records. According to a physics count, 400 devices were ~ above hand top top July 31, 2011.
The cost of finishing inventory using the FIFO cost method is:
A. $11,000B. $9,000C. $8,000Correct Answer: A
The price of perform is the ending inventory value on the balance sheet on July 31, 2011. Utilizing FIFO, the costs allocated to finishing inventory will certainly be the most recent costs. Therefore, if 400 units are remaining, the finishing inventory value will it is in 300
Practice concern 29Diane Corporation had actually 400 systems of inventory on hand at July 1, 2011, costing $20 each. Purchases and also sales the goods throughout the month that July were together follows:July 12, 2011 Sales 200 devices
Assume Diane Corporation walk not keep perpetual inventory records. Follow to a physical count, 400 devices were ~ above hand on July 31, 2011.
The cost of inventory in ~ July 31, 2011, utilizing the LIFO price method, is:
A. $11,000B. $8,000C. $9,500Correct Answer: B
Using LIFO, the prices allocated to ending inventory will certainly be the earliest costs. Therefore, if 400 units space remaining, the ending inventory value will be 400
Practice question 30If companies have actually identical inventoriable costs, however use various inventory flow assumptions when the price of items has no been constant, then the:A. Net income of the providers will it is in identical.B. Finishing inventory of the companies will be identical.C. Price of goods easily accessible for revenue of the companies will it is in identical.Correct Answer: C
The cost of goods easily accessible for sale will certainly be the same if beginning inventory and also purchases are the same, yet if different methods are used, cost of goods sold and net earnings will it is in different, as different methods give a different value for finishing inventory.
Practice question 31Which of the following flow presumptions is no acceptable under usually accepted accounting principles?A. FIFO/LIFO.B. Next-in, first-out.C. Typical cost.Correct Answer: B
Practice concern 32Which statement(s) is (are) true?I Under the FIFO technique of list valuation, the assignment of prices to merchandise sold is in the very same order in i m sorry the merchandise to be purchased.II. The FIFO method of list valuation is based upon an assumption that the many recent prices incurred have to be charged versus current-year revenues.III. The FIFO technique of perform valuation is based on the presumption that expenses should be charged against revenues in the very same order in i beg your pardon the expenses were incurred.IV. LIFO is considered the most conservative inventory pricing method.
A. I, II and IIIB. I, II and also IVC. I, III and also IVCorrect Answer: C
I. FIFO means "first-in, first-out"--the an initial items purchased space the very first items sold. Inventory prices are assigned to the merchandise sold in the very same order in i beg your pardon the purchases of merchandise to be made.II. Under FIFO, prices are fee in the stimulate in which lock occur, however the many recent inventory costs (purchases) are assigned to ending inventory. Inventory walk not come to be a "cost" till it is sold.III. FIFO method "first-in, first-out", in other words, the price of the an initial items purchased become the cost of the an initial items sold.IV. Through a LIFO pricing system the inventory is valued at the oldest costs (usually the lowest since of inflation) and the values of the current purchases (slightly higher costs) are assigned come the expense of products sold. With higher costs of items there will certainly be a reduced net income.
Practice inquiry 33Under which cost flow assumption is the ending inventory composed of the most recently purchase merchandise?A. FIFO.B. LIFO.C. Mean Cost.Correct Answer: A
Under the FIFO (First-In, First-Out) expense flow assumption, the inventory on hand is taken into consideration to be created of the most recent items purchased.
Practice question 34Which of the complying with statements concerned the LIFO method of list valuation is false?A. Regardless of the plenty of benefits of LIFO, that is provided by under U.S. Carriers than both FIFO and also weighted average.B. The LIFO conformity dominion is a tax ruling prohibiting the use of LIFO for tax functions unless that is likewise used for outside financial reporting purposes.C. Under LIFO, service providers can control earnings at the finish of one accounting period by purchasing added inventory.Correct Answer: A
LIFO is an ext commonly used than weighted mean for inventory valuation purposes.
Practice concern 35Every-Day apparel had a November 1 merchandise list balance that $45,000. That made purchases of $80,000 and recorded sales of $130,000, during November. Its approximated gross benefit on sales to be 25%. ~ above November 30, the save was damaged by fire. What was the worth of the merchandise list loss?A. $ 27,500B. $125,000C. $ 97,500Correct Answer: A
The expense of items sold is equal to sales much less the gross benefit on sales, or $97,500 ($130,000 X (1 -.25)). The shed inventory will be estimated as inventory accessible at expense less the expense of items sold.
Practice concern 36The goods available for sale, at sleeve prices, full $200,000. If the cost ratio because that the duration totals 60%, and also the net sales at sleeve for the duration total $120,000, what is the ending inventory at cost?A. $ 48,000B. $ 24,000C. $ 72,000Correct Answer: A
Reducing complete goods easily accessible for sale at retail ($200,000) by sales at retail ($120,000) pipeline a remainder (ending inventory in ~ retail) that $80,000. If the price of the finishing inventory is 60% of finishing inventory at retail value, the cost of the ending inventory at cost is $48,000 ($80,000 x 60%).
Practice question 37Czech Ltd. Shipped items to a client on December 30, 2010. Due to the fact that Czech supplied the shipping firm requested by the customer, the customer take it the danger of the products not being delivered by the shipping company. The customer received the goods on January 6, 2011. The offering price the the goods was $57,000. The revenue was taped by Czech on January 2, 2011. Czech had paid $42,000 for the goods and also used the periodic technique to account for its inventory. I beg your pardon of the complying with statements v respect come this transaction is true?A. Revenue for 2010 is understated by $42,000.B. Revenue for 2011 is overstated by $15,000.C. Profits for 2010 space understated through $57,000.Correct Answer: C
The revenue need to be videotaped in 2010 since the goods were shipped prior to the year end.
Practice question 38Greenbelt Processors had actually a beginning inventory that 798 systems valued at a cost of 34,895. That purchased 4,474 systems of brand-new inventory precious 195,402 during the year. A year-end audit revealed that it had 853 devices on hand.If Greenbelt uses the FIFO method, what was its COGS because that the year?
A. 193,000B. 193,042C. 193,027Correct Answer: B
Since Greenbelt has 853 systems on hand in ~ year-end, under FIFO they every belong come purchases made throughout the year.Unit price of purchases = 195,402 / 4,474 = 43.675Ending inventory = 853 x 43.675 = 37,255COGS = BI + purchases - EI = 34,895 + 195,402 - 37,255 = 193,042.
Practice question 39Greenbelt Processors had a start inventory of 798 systems valued in ~ a expense of 34,895. It purchased 4,474 systems of new inventory precious 195,402 throughout the year. A year-end audit revealed the it had 853 systems on hand.If Greenbelt provides the load average cost method, what to be its COGS because that the year?
A. 193,000B. 193,027C. 193,035Correct Answer: C
Under average expense method, we price all units consisting of those in beginning inventory and purchased throughout the year at an typical price.Average price = <34,895 + 195,402> / <798 + 4,474> = 43.683Ending inventory = 853 x 43.683 = 37,262COGS = BI + to buy - EI = 34,895 + 195,402 - 37,262 = 193,035.
Practice question 40Greenbelt Processors had actually a beginning inventory the 798 devices valued at a cost of 34,895. The purchased 4,474 units of new inventory worth 195,402 throughout the year. A year-end audit revealed the it had actually 853 units on hand.If the average unit price to be 43.65 in ~ the end of the year, what COGS would Greenbelt report?
A. 193,064B. 193,035C. 193,027Correct Answer: A
If the finishing price is 43.65, which is much less than all three unit prices calculated under FIFO, LIFO or Average cost Method, the conservative principle of "lower of expense or market" demands to be applied. At this price,Ending inventory = 853 x 43.65 = 37,233COGS = BI + purchases - EI = 34,895 + 195,402 - 37,233 = 193,064.
Practice question 41When compare FIFO with LIFO, i beg your pardon of these arguments is not correct (Assume climbing prices.)A. FIFO much more closely follows the actual physical flow of countless inventory items.B. The dollar amount report as expense of items sold under FIFO much more closely approximates current price of products sold.C. The disagreement amount reported as ending inventory under FIFO more closely approximates the current cost of inventory.Correct Answer: B
A is correct since the FIFO an approach more very closely follows the actual physical circulation of many inventory items. B is incorrect since LIFO, no FIFO, reports the more recent, higher-priced goods as cost of products sold. C is correct since ending inventory under FIFO is made up of the newer, higher-priced goods, i beg your pardon is a closer approximation of existing costs.
Practice concern 42Which of the adhering to statements is not true in regard come the LIFO inventory price flow assumption?A. The LIFO expense flow presumption does not normally reflect the usual physical flow of perform units.B. For balance paper purposes, the price of inventory will approximate the current replacement price under the LIFO assumption.C. If a agency uses LIFO for taxation purposes, that must likewise use LIFO for external financial reporting purposes.Correct Answer: B
Under LIFO, the list on the balance sheet will certainly consist of enlarge costs, usually from a vault period, and will not represent the latest costs.
Practice concern 43Given same circumstances, i m sorry inventory an approach is the finest to usage for tax purposes (assume prices are rising)?A. Mean cost.B. FIFO.C. LIFO.Correct Answer: C
LIFO reduces taxable income and thus reduces taxes.
Practice inquiry 44Date amount Per Unit total CostJan 1, beginning Inventory 100 $18.00 $ 1,800.00Mar 4, purchase 400 19.00 7,600.00May 8, acquisition 800 18.25 14,600.00Nov 3, purchase 500 20.40 10,200.00Merchandise obtainable 1,800 34,200.00Five hundreds units room unsold. Utilizing the median cost an approach under a regular inventory system, just how much is the price assigned to the finishing merchandise inventory?
A. $ 9,400B. $ 9,800C. $ 9,500Correct Answer: C
Using the average expense method, the ending inventory would certainly be calculation as: $34,200 / 1,800 = $19 every unit cost. 500 X $19 = $9,500.
Practice inquiry 45In periods of rising prices and stable or boosting inventory quantities, the impact of LIFO and FIFO ~ above income prior to taxes is:A. LIFO results in lower income.B. FIFO results in reduced income.C. The choice of LIFO vs. FIFO walk not influence income.Correct Answer: A
LIFO maintain (earlier) lower price inventory, thereby enhancing COGS, and also thereby diminish income. FIFO results in the opposite.
Practice question 46In a period of rising prices, numerous firms take on the routine LIFO technique of accounting for inventory cost for taxes purposes. When compared with regular FIFO or median cost:A. LIFO allocates older and therefore smaller sized inventory costs to expense of items sold.B. LIFO allocates the newest and also therefore the biggest inventory costs to price of goods sold.C. LIFO produces an inventory valuation on the balance sheet the is constantly closer to instead of cost.Correct Answer: B
The recent costs, which space the greatest costs, will be allocated to cost of goods sold. The greater cost of goods sold will reason income before taxes to it is in lower, and thus earnings taxes will certainly be lower.
Practice question 47Which the the complying with statements is true worrying the use of LIFO in a duration of climbing prices?A. The use of LIFO will bring about a useful working resources number and also inventory turnover.B. The debt-to-equity ratio will be higher than under FIFO.C. The use of LIFO will result in lower cash flows.Correct Answer: B
When FIFO is used, the expense of products sold is lower, earnings is higher, and also retained income is higher. This renders the equity higher; hence the debt-to-equity ratio under FIFO will be lower than under LIFO.
Practice concern 48Which the the adhering to statements concerning inventory valuation is INCORRECT?A. LIFO is remarkable for revenue statement functions whereas FIFO is premium for balance sheet purposes.B. In stimulate to adjust balance sheet worths for a firm using LIFO, one analyst would add LIFO reserve come the reported inventory value.C. During periods of increasing input prices, LIFO would certainly underestimate pistol profit.Correct Answer: C
LIFO reports appropriate income or profit as soon as prices room rising. FIFO would certainly overestimate it.
Practice question 49Comparing through FIFO, LIFO outcomes in (during periods of increasing prices)A. Higher COGS and greater inventory balance.B. Higher COGS and lower inventory balance.C. Reduced COGS and greater inventory balance.Correct Answer: B
Practice question 50Comparing v FIFO, LIFO outcomes in (during durations of climbing prices)A. Higher taxes and lower cash flows.B. Lower taxes and higher cash flows.C. Reduced taxes and also lower cash flows.Correct Answer: B
Practice inquiry 51When prices room rising, comparing with LIFO, FIFO outcomes inA. Lower working resources and greater cash flows.B. Higher working capital and greater cash flows.C. Greater working capital and lower cash flows.Correct Answer: C
Practice inquiry 52Comparing through LIFO, FIFO outcomes in ______ once prices are rising.A. Lower inventory balance and lower net income.B. Lower inventory balance and greater net income.C. Greater inventory balance and higher net income.Correct Answer: C
Practice inquiry 53Swimsuit Shop provides FIFO list method. During a time of rising prices and constant inventory level (in terms of quantity), Swimsuit Shop would experienceA. Greater taxes.B. Higher cash flows.C. Greater cost of products sold (COGS) and also lower net income.Correct Answer: A
The sequence is: reduced COGS --> greater net revenue --> higher taxes --> reduced cash flows.
Practice concern 54Which statement(s) is (are) FALSE?I. Under the LIFO technique of list valuation, the ending merchandise inventory would certainly be valued in ~ the acquisition price the the many recent purchases.II. During extended periods of climbing prices, the FIFO technique of list valuation will yield a higher cost of items sold and also a lower ending merchandise inventory, when contrasted to the LIFO method of perform valuation.III. The accounting principle the consistency prohibits any kind of changes in the technique of inventory valuation.IV. JIT method just in time and also is one inventory technique where the raw materials for manufacturing are to buy in smaller quantities after orders have actually been taken for the produced products.
A. I, II and also IIIB. I, II and IVC. II, III and also IVCorrect Answer: A
I. LIFO way "last-in, first-out"--the cost of the last items purchased room charged to the most recent sales. The goods inventory in ~ the end of the year is considered to it is in from the oldest purchases.II. The FIFO an approach will result in a lower price of products sold and also a higher ending merchandise inventory (valued at first-in costs).III. If consistency need to be maintained, legitimate transforms are allowed. However, the nature, justification, and effect the the readjust on net income must it is in disclosed (full-disclosure principle).IV. JIT inventory solution require trusted suppliers and also efficient handling and also shipping of materials.
Practice question 55If ending inventory is understated by $2,000 and also beginning perform is overstated by $3,000, the net income will it is inA. Understated by $5,000.B. Exaggeration by $1,000.C. Exaggeration by $5,000.Correct Answer: A
COGS = BI + acquisition - EI.If BI is higher, the COGS is higher.If EI is lower, the COGS is higher.Based top top the relationship, the COGS is overstated by $2,000 + $3,000.The net revenue is understated through $5,000.
Practice question 56If price of a product are falling the usage of LIFO fairly than FIFO will lead to:A. Greater working resources and greater net income.B. Greater working capital and also lower network income.C. Reduced working resources and higher net income.Correct Answer: A
COGS will be lower under LIFO in a period of falling price leading to higher net income and higher tax payments. Working funding will be greater since the higher inventory value will outweigh the lower cash balance early out to higher tax payments.
Practice inquiry 57An list write-down has actually a an unfavorable effect on:I. Liquidity ratios.II. Profitability ratios.III. Activity ratios.IV. Solvency ratios.
See more: How Many Ounces Is 200 Milligrams To Ounces, Convert 200 Milligrams To Ounces
A. I, II and also IIIB. I, II and IVC. Every one of themCorrect Answer: B
An inventory write-down will positively affect activity ratios such as inventory turnover due to the fact that the asset base (denominator) is reduced. However, all various other ratios will certainly be negatively impacted as both the profit and the transferring amount of inventory room reduced.