inventories(Reading 29)

Exercise Problems:

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

A. Tax liability

B. Inventory turnover

C. CFO

Ans: A

When prices are rising:

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 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.

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.

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.

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.

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

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.

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.

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

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.

9. A company incurs the followings costs related to its inventory during the year:

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

A. ￥175,000.

B. ￥177,000.

C. ￥185,000.

Ans: A.

The costs to include in inventories are all costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition.

10. Compared with using the FIFO method to account for inventory, during a period of rising prices, which of the following ratios is most likely higher for a company using LIFO?

A. Current ratio

B. Gross margin

C. Inventory turnover

Ans: C.

During a period of rising prices, ending inventory under LIFO will be lower than that of FIFO and cost of goods sold higher; therefore, inventory turnover (CGS/average inventory) will be higher.

Reference: question No. 1.

11. A company which prepares its financial statements using IFRS wrote down its inventory value by €20,000 in 2009. In 2010, prices increased and the same inventory was worth €30,000 more than its value at the end of 2009. Which of the following statements is most accurate? In 2010, the company’s cost of sales:

A. was unaffected.

B. decreased by €20,000.

C. decreased by €30,000.

Ans: B.

Under IFRS, inventory is reported on the balance sheet at the lower cost or net realizable value. Net realizable value is equal to the expected sales price less the estimated selling costs and completion costs. If net realizable value is less 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.

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 prepares its financial statements according to U.S. GAAP and uses a periodic inventory system had the following transactions during the year:

The cost of sales (in ‘000s) is closest to:

A. $3,850 using FIFO.

B. $4,080 using LIFO.

C. $5,890 using weighted average.

Ans: A.

13. A review of a company’s inventory records for the year indicates that the following costs were incurred:

Fixed production overhead:                          $500,000

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.

Ans: B.

The total capitalized costs include fixed production costs, the direct conversion costs of material and labor, storage costs required as part of production but not abnormal waste costs. $500,000 + 300,000 + 25,000 = $825,000.

14. In a period of rising prices, when compared to a company that uses weighted average cost for inventory, a company using FIFO will most likely report higher values for its:

A. return on sales.

B. debt-to-equity ratio.

C. inventory turnover.

Ans: A.

In periods of rising prices FIFO results in a higher inventory value and a lower cost of goods sold and therefore a higher net income. The higher net income increases return on sales.

B is incorrect. The higher reported net income also increases retained earnings, and therefore results in a lower debt-to-equity ratio not a 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 statements in accordance with IFRS is in the process of developing a more efficient production process for one of its primary products. The most appropriate accounting treatment for those costs incurred in the 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.

Ans: C.

Under IFRS research and development costs are expensed until certain criteria are met, including that technical feasibility has been established and the company intends to use it.

16. Due to global oversupply in the micro-chip industry a company wrote down its 2012 inventory by €4.0 million from €12.0 million. The following year, due to a change in competitive forces in the industry the market price of these chips rose sharply to 10% above their original 2012 value. If the 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.

Ans: B.

Although IFRS does require write-downs, it also allows revaluations, but not to exceed the original value, i.e., 12. The exception to this, where gains are allowed, is in producers of agricultural, forest and resource products.

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

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.

Ans: A.

18. Is the reversal of an inventory write-down permitted under U.S. GAAP (generally accepted accounting principles) and International Financial Reporting Standards (IFRS)?

A. No, under both

B. Yes, under both

C. Yes under IFRS but not under U.S. GAAP

Ans: C.

The reversal of an inventory write-down is permitted under IFRS but not under U.S. GAAP.

Under IFRS, inventory is reported on the balance sheet at the lower cost or net realizable value. Net realizable value is equal to the expected sales price less the estimated selling costs and completion costs. If net realizable value is less 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 statements in accordance with U.S. GAAP (generally accepted accounting principles). Its purchases and sales of inventory for its first two years of operations are listed below.

In its second year of operation, the company’s ending inventory is $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

Ans: C.

The company is accounting for its inventory using the weighted average cost method.

In the 2nd year of operations, under Weighted Average Cost:

Units available for sale include ending inventory from year 1 plus purchases for year 2:

7,000 + 100,000 = 107,000

Cost of Goods Available for Sale: 7,000 x $8.43 + 100,000 x $12.25 = $1,284,000

Unit Cost: $1,284,000/107,000 = $12.00

End Inventory = 107,000 –78,000 = 29,000 units. $12.00 x 19,000 = $348,003

20. An analyst gathers the following information about a company ($ millions):

If the company uses the FIFO inventory method instead of LIFO, the company’s 2012 gross profit margin is closest to:

A. 22.9%.

B. 29.8%.

C. 33.2%.

Ans: C.

21. A company uses the LIFO inventory method, but most of the other companies in the same industry use FIFO. Which of the following best describes one of the adjustments that would be made to the company’s financial statements to compare it with other companies in the industry? The 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.

Ans: A.

LIFO Reserve = FIFO Inventory – LIFO Inventory

Adding the ending balance in the LIFO reserve to the LIFO inventory would equal the ending balance for inventory on a FIFO basis.

22. A company using the LIFO inventory method reports a LIFO reserve at year-end of $85,000, which is $20,000 lower than the prior year. If the company had used FIFO instead of LIFO in that year, the company’s financial statements would have reported:

A. a lower cost of goods sold, but a higher inventory balance.

B. a higher cost of goods sold, but a lower inventory balance.

C. both a higher cost of goods sold and a higher inventory balance.

Ans: C.

The negative change in the LIFO reserve would increase the cost of goods sold under FIFO compared to LIFO.

FIFO COGS = LIFO COGS – Change in LIFO reserve.

The LIFO reserve has a positive balance so that FIFO inventory would be higher than LIFO inventory.

FIFO inventory = LIFO inventory + LIFO reserve.

23. The year-end balances in a company’s LIFO reserve are $56.8 million in the company’s financial statements for both 2007 and 2008. For 2008, the measure that will most likely be the same regardless of whether the company uses the LIFO or FIFO inventory method is the:

A. inventory turnover.

B. gross profit margin.

C. amount of working capital.

Ans: B.

The LIFO reserve did not change from 2007 to 2008. Without a change in the LIFO reserve, cost of goods sold would be the same under both methods. Sales are always the same for both; so gross profit margin would be the same in 2008.

A is incorrect. The FIFO inventory would be higher because the LIFO inventory and LIFO 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 the actual historical cost of the inventory sold with their physical flow if a company is using a perpetual inventory system?

A. FIFO.

B. LIFO.

C. specific identification.

Ans: C.

Specific identification matches the actual historical costs of the specific inventory items to their physical flow: the cost remain in inventory until the actual  identifiable inventory is sold.

25. An analyst gathered the following information about a company that uses the LIFO method:

If the company had used the FIFO method instead of LIFO, the company’s 2012 net income would most likely have been:

A.    $21,000lower

B.     $9,000 lower

C.     $21,000higher

Ans: C.

The LIFO reverse increased by $30,000 (=450,000-420,000). If an increase in the LIFO reserve occurs, LIFO COGS will be higher than FIFO by the amount of the increase.

FIFO COGS = LIFO COGS – Change in LIFO reserve

 Net income would be lower than FIFO by $30,000(1-0.30)=$21,000. After-tax FIFO net income would be $21,000 higher.

26. Greene Corporation uses the LIFO inventory method, but most of other companies in Greene’s industry use FIFO. Which of the following best describe one of the adjustments that would be made to Greene’s financial statements to compare that company with other companies in the industry? To adjust Greene’s inventory to the 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.

Ans:A.

Adding the ending balance in the LIFO reserve to the FIFO inventory would equal the ending balance for inventory on a FIFO basis.

(LIFO Reserve = FIFO Inventory – LIFO Inventory )

27. First-In Limited (FIL), which reports under IFRS, recognized revenue of $2.2 million during the most recent fiscal year on unit sales of 152. The company had 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 year (the purchases are listed in chronological order below). The per unit net realizable value (NRV) of the inventory was $9,300, while the replacement cost and NRV less the normal profit margin were $9,100.

Assuming that FIL uses the FIFO method for inventory costing, the amount of inventory that will be reported on the company’s balance sheet at fiscal year-end is closest to:

A. $354,900.

B. $362,700

C. $370,000.

Ans: B.

The first step in solving this question is to calculate the ending inventory under FIFO.

Ending inventory = beginning inventory + purchase – sales

                             =27+164-152

                             =39 units

FIFO inventory = (32 units x $9,600) + (7 units x $9,000)

                          = $370,200

Note that under IFRS, inventory is calculated at the lower of cost or net realizable value (NRV). In this problem, the NRV per unit is $9,300, so the total net realizable of the inventory is:

Net realizable value = NRV per unit x ending inventory

                                 = $9,300 x 39 units

                                 =$362,700

The net realizable value of $362,700 is less than the FIFO cost of $370,200, so the inventory will 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 useful ratio from a financial analysis perspective, rather than from an accounting perspective, assuming a rising price environment?

A. Calculating the current ratio by using the current assets determined with LIFO.

B. Determining the inventory turnover by using cost of goods sold prepared on a FIFO basis and average inventory prepared on a LIFO basis.

C. Determining the return on assets by using net income prepared on a LIFO basis and average total assets prepared on a FIFO basis.

Ans: C.

In a rising environment, the most useful ratio from a financial analysis perspective would be to calculate the return on assets by using the lower more conservative net income prepared on a LIFO basis and average assets (inventory) prepared on a FIFO basis (to include more current cost data in the inventory).

A is incorrect. Calculating the current ratio with current assets determined with FIFO, not LIFO, would be most useful to a financial analyst.

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 uses FIFO inventory method is provided below.

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.

Ans: C.

When using the FIFO inventory method the ending inventory, the cost of goods sold and the gross margin are the same under either the perpetual or periodic methods.

30. An analyst can most accurately identify a LIFO liquidation by observing a(n):

A. increase in gross margin.

B. decrease in the LIFO reserve.

C. change in inventory out of line with change in sales.

Ans: B.

The most appropriate way to identify a LIFO liquidation is by reviewing the inventory footnotes for a decrease in the LIFO reserve.

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 company using LIFO inventory method instead of FIFO will most likely report:

A. lower current assets and higher gross income.

B. higher current assets and lower gross income.

C. higher current assets and higher gross income.

Ans: C.

If prices were declining, using LIFO would match the lower (most recent) costs with current sales. Costs of goods sold would be lower with LIFO and gross profit (income) would be higher compared to using FIFO. Lower cost of goods sold means inventory balances, consisting of older higher priced items, would be higher using LIFO, increasing current assets relative to FIFO.

Reference: question 1.

32. An adjustment to operating income for the effects of a change in LIFO reserve will most likely be required if the change in the LIFO reserve is the result of:

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.

Ans: C.

A liquidation of LIFO inventory produces unsustainable profit margins because old costs are being matched with current revenues.

33. All else, will a company’s implementation of the accounting standard (SFAS 143) related to asset retirement obligations incurred because of environmental most likely:

A. increase return on assets but decrease net income.

B. decrease return on assets but increase net income.

C. decrease both return on assets and net income.

Ans: C.

Implementation of SFAS 143 requires that companies record an asset and related liability for costs involved in the remedy of environmental damage. The increase in assets will decrease return on assets and the increase in depreciation and accretion expense will reduce net income.

34. A company using LIFO reports the following:

·         COGS was $27,000.

·         Beginning inventory was $6,500, and ending inventory was $6,200.

·         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.

Ans: B.

COGS FIFO

= COGS LIFO – (ending LIFO reserve – beginning LIFO reserve)

=27,000-(1,400-1,200)=$26,800.

35. During period of rising prices:

A. LIFO COGS > Weighted Average COGS > FIFO COGS.

B. LIFO COGS > Weighted Average COGS < FIFO COGS.

C. LIFO COGS < Weighted Average COGS < FIFO COGS.

Ans: A.

During period of rising prices, the last units purchased are more expensive than the existing units. Under LIFO, the cost of the last units purchased is assigned to COGS. This higher COGS results in lower income, as compared to the FIFO method. As the name suggests, the weighted average method is based on 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 practices is most likely to decrease reported earnings in the current period?

A. Using the straight-line method of depreciation instead of an accelerated 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.

Ans: C.

LIFO will result in lower net income than FIFO in the current period, during a period of rising prices. The other choices will tend to increase current period earnings.

36. In period of rising prices and stable or increasing inventory quantities, compared with companies that use LIFO inventory accounting, companies that use the FIFO method will have:

A. higher COGS and lower taxes.

B. higher net income and higher taxes.

C. lower inventory balances and lower working capital.

Ans: B.

FIFO companies have higher net income and higher taxes.

References: question 1.

37. Bao Corporation, which reports under IFRS, wrote down its inventory of electronic parts last period from its original cost of € 28,000 to net realizable value of €25,000. This period, inventory at net realizable value has increased to € 30,000. Bao should revalue this inventory to:

A. €30,000 and report a gain of €5,000 on 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

Ans: B.

Under IFRS, inventory values are revalued upward only to the extent they were previously written down. In this case, that is from €25,000 back up to the original value of €28,000. The increase is reported as gain for the period and will increase COGS of units sold during the current period.

38. Assuming stable inventory quantities, in a period of:

A. rising prices, LIFO results in higher ending inventory and FIFO results in higher gross profit.

B. falling prices, LIFO results in higher gross profit and FIFO results in lower COGS.

C. rising prices, LIFO results in higher COGS and FIFO results in higher working capital.

Ans: C.

In a period of rising prices, LIFO results in higher COGS, lower inventory balances, and lower gross profit, as compared to FIFO. In a falling price environment, these effects are the opposite. Working capital (current assets minus current liabilities) is higher under FIFO in a rising price environment because inventories are higher.

Reference: Question 1.

39. A firm uses the FIFO cost flow assumption. Compared to gross profit with a periodic inventory system, the firm’s gross profit with a perpetual inventory system would be:

A. lower.

B. higher.

C. the same.

Ans: C.

For a firm using FIFO, gross profit is the same whether the firm uses a periodic or perpetual inventory system. For a firm using LIFO or average cost, gross profit can be different depending on the choice of inventory system.

40. Bao Inc. currently uses the FIFO method to account for inventory. Due to significant tax-loss carryforwards, the company has an effective tax rate of zero. Prices are rising and inventory quantities are stable. If the company were to use LIFO instead of FIFO:

A. net income would be lower, and cash flows 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.

Ans: B.

In the absence of taxes, there is no difference in cash flow between LIFO and FIFO. In addition, using LIFO would result in lower working capital (inventory is lower). Using LIFO would result in lower net income because of a lower gross margin (COGS is higher).

41. From the point of view of a financial analyst, when evaluating companies that use different inventory cost assumptions, in a period of:

A. stable prices, LIFO inventory is preferred to FIFO inventory.

B. decreasing prices, FIFO inventory is preferred to LIFO inventory.

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

Ans: B.

The most useful estimates of inventory and cost of sales are those that best approximate current cost. Whether prices are increasing or decreasing, FIFO provides a better estimate of inventory values, and LIFO produces a better estimate of cost of sales. If prices are table, there is no difference between LIFO and FIFO estimates of inventory or cost of sales.

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

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

Ans: A.

FIFO COGS:

LIFO ending inventory:

43. A company that reports under U.S.GAAP and changes its inventory cost assumption from weighted average cost to LIFO is required to apply this change in accounting principle:

A. retrospectively, and disclose the new cost flow method being used.

B. prospectively, and explain the reasons for the change in the financial statement disclosures.

C. retrospectively, and explain the reasons for the change in the financial statement disclosures.

Ans: B.

Under U.S.GAAP, a change to LIFO from another inventory cost method is an exception to the requirement of retrospective application of changes in an accounting principle. Instead of restating prior years’ data, the firm uses the carrying value of inventory at the time of the change as the firm LIFO layer. U.S.GAAP requires a company that is changing its inventory cost assumption to explain, in its financial statement disclosures, why the new method is preferable to the old method.

44. During a period of falling costs of manufacturing, which of the following inventory cost formulas would result in the greatest reported net income?

A. LIFO.

B. FIFO.

C. Average cost.

Ans: A.

With LIFO, more recent, lower costs would be used for COGS. A reduction is COGS will increase gross profit and net income, other things equal.

45. A company began the most recent reporting period with 145,670 units in inventory, which were acquired at a cost of $7.5- per unit. During the year, a total of 1,550,000 units were sold. Inventory purchases by quarter were:

Ending inventory value using the average cost method is closest to:

A. $2,064,200.

B. $2,338,700.

C. $2,598,600.

Ans: B.

The ending inventory of 267,895 units has an average cost value of $2,338,723, determined as follows: