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You are watching: In periods of rising prices, what will lifo produce?


There are two an easy issues of perform accounting:

Determine the cost of goods obtainable for sale: start Inventory + Purchases.Allocate the price of complete inventory expenses (cost that goods available for sale) between two components: COGS on the earnings statement and the finishing inventory on the balance sheet. Note that COGS = (Beginning list + Purchases) - ending Inventory.

There are two inventory systems:

Perpetual list system update inventory accounts after each purchase or sale. Inventory quantities are to update continuously. Once there is a sale, inventory is reduced and also COGS is calculated.Periodic inventory system documents inventory purchase or sale in "Purchases" account. "Inventory" account is to update on a routine basis, in ~ the finish of every accounting duration (e.g., monthly, quarterly). Price of items sold or expense of revenue is computed native the ending inventory figure.

In some cases, it"s possible to specifically identify which inventory items have actually been sold and also which remain. By the specific to know method, the actual expenses of the specific units marketed are transferred from inventory to the price of items sold. This an approach achieves the ideal matching of sales revenue and cost of products sold as soon as the individual devices in the inventory room unique. However, in most instances companies may be unable to determine specifically which items space sold and which items remain in finishing inventory.

The remaining three techniques are circulation assumptions, which need to be applied only to an inventory of homogeneous items. The expense flow presumption may or might not reflect the physical flow of inventory.

Weighted typical Cost

The average expense of all systems in the perform is computed and used in record the price of goods sold. This is the only an approach in which all units space assigned the exact same (average) per-unit cost.

Average cost = (beginning perform + purchases) / units accessible for sale.Ending inventory = Average expense x units of ending inventory.COGS = price of goods available for revenue - finishing inventory.

FIFO

FIFO is the presumption that the an initial units purchased space the first units sold. Hence inventory is assumed to consist that the most recently purchase units. FIFO assigns current prices to inventory yet older (and often lower) prices to the expense of products sold.

LIFO

LIFO is the presumption that the most recently got goods are sold first. This an approach matches sales revenue with reasonably current costs. In a period of inflation, LIFO usually results in lower reported profits and lower revenue taxes 보다 the other methods. However, the oldest purchase prices are assigned come inventory, i m sorry may result in inventory coming to be grossly understated in state of present replacement costs.

LIFO is not permitted under IFRS. In the U.S., however, LIFO is offered by about 30 percent the U.S. Companies because of potential earnings tax savings.

The end result under perpetual FIFO is the exact same as under regular FIFO. In various other words, the very first costs room the exact same whether you relocate the cost out that inventory with each revenue (perpetual) or even if it is you wait until the year is end (periodic). This is additionally true is the details identification an approach is used.

Using the LIFO/weighted average price methods the two equipment will generally result in different allocations to expense of sales and ending inventory.

Comparison of Inventory accountancy Methods

Inventory data is advantageous if it shows the current price of replacing the inventory. COGS data is beneficial if it mirrors the current expense of instead of the inventory items to continue operations.

During periods of secure prices, all four methods will certainly generate the same results for inventory, COGS and also earnings.

During durations of rising prices and stable or cultivation inventories, FIFO steps assets far better (the most beneficial inventory data), however LIFO measures revenue better.

Under LIFO, the expense of finishing inventory is based upon the earliest acquisition prices, and also thus is well below current instead of cost. For numerous firms utilizing LIFO, their price of inventory might be years old and virtually useless for analysis purposes. However, cost of items sold is based on the most recent acquisition prices, and thus closely reflects existing replacement cost. Together a result, LIFO offers a better measurement of current income and also future profitability.

Under FIFO, the price of ending inventory is based upon the many recent acquisition prices, and also thus closely reflects present replacement cost. However, costs of goods sold are based on the earliest purchase prices, and this is well below the present replacement cost. The get is in reality holding get or list profit. That is debatable even if it is it need to be taken into consideration income, or at least experts can to speak the underestimated COGS leader to inflated network income.

In an environment of declining inventory unit expenses and continuous or raising inventory amounts the the contrary is true.

The usefulness of list data reported using the average-cost technique lies in between LIFO and also FIFO.

Practice question 1What does the FIFO inventory an approach assume about the very first units purchased?

A. They room the first units sold.B. They space the units that remain in ending inventory.C. They are the just units used in computer average cost.Correct Answer: A

FIFO treats the an initial units purchased together though they room the very first unit sold.

Practice concern 2When calculating finishing inventory making use of the average cost method, i m sorry of the adhering to is CORRECT?

A. The numerator is the beginning inventory balance add to purchases.B. The denominator is the variety of units remaining.C. The denominator is the variety of units purchased.Correct Answer: A

The average expense is calculate by acquisition the beginning inventory balance to add purchases divided by the total variety of units in inventory, which is the number in the beginning 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 the the adhering to results from using the LIFO method of inventory cost flows during a duration of inflation?

A. Understated expense of products sold.B. Overvalued inventory.C. Right now valued expense of items sold.D. At this time valued inventory.Correct Answer: C

LIFO matches current prices with current revenues. During a duration of inflation, LIFO results in currently valued expense of products sold.

Practice question 5Which inventory an approach generally outcomes in expenses allocated to finishing inventory that will certainly approximate current costs?

A. LIFOB. FIFOC. Average price methodCorrect Answer: B

FIFO allocates the many recent expenses to inventory.

Practice concern 6Under U.S. GAAP, a firm that uses the LIFO an approach to compute taxable income must use the ______ method for financial 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 reporting purposes.

Practice question 7Under which price flow presumption is the finishing inventory written of the earliest purchased merchandise?

A. FIFOB. LIFOC. Average CostCorrect Answer: B

Under the LIFO (Last-In, First-Out) price flow assumption, inventory is marketed from the many recent purchases, leaving the faster purchased perform on hand.

Practice concern 8If inventory costs remain relatively consistent from period to period, i m sorry inventory method is the most suitable one in the allocation of price flow in between COGS and also inventory moving value?

I. Specific identification method.II. FIFO.III. Weighted median method.IV. LIFO.Correct Answer: every one of them

Given relatively continuous prices, the allocation of costs between COGS and also ending inventory would be very comparable under each of the four methods.

Practice question 9Which techniques are based on cost flow assumptions?

I. Certain identification.II. FIFO.III. LIFO.IV. Weighted average Cost.Correct Answer: II, III and IV

I is based on physical flow. The circulation of costs does not have to correspond with the physical flow of units. The prices can flow in different ways than the goods. In other words, if a firm supplies LIFO, it may sell the earliest (first) item to a customer, however can report the price of products sold of the price the the last purchase.

Practice question 10Which inventory valuation method is not allowed under IFRS?

A. LIFO.B. FIFO.C. Details Identification.Correct Answer: A

LIFO is permitted only under U.S. GAAP.
$7 every unitSecond revenue 20 units

What is the worth of the finishing inventory, utilizing a perpetual perform system and a FIFO price flow assumption?

A. $26B. $36C. $56Correct Answer: C

Only 8 units continue to be after the 2nd sale. ~ above a FIFO perpetual basis, the 8 systems will it is in assigned the most recent acquisition price the $7 ($7 x 8 = $56).
$13 per unit

If 83 units space sold, what is the worth of the finishing inventory under a regular inventory system and also a FIFO price flow assumption?

A. $219B. $905C. $177Correct Answer: A

The ending inventory (17 units) would be composed of the many recent purchase (newest layers) the 15 X $13 to add 2 X $12, or $195 + $24.

Practice question 13Which inventory cost flow presumption normally will certainly yield the highest cost of items sold during a duration of declining prices?

A. Weight averageB. FIFOC. LIFOCorrect Answer: B

The older, higher inventory purchases will be the prices that go into expense of products sold under FIFO.

Practice question 14Zealous Ltd. And also Eager Ltd. Are identical companies in every respect except that Zealous supplies the LIFO an approach for list costing while Eager uses FIFO costing. The companies operate in an market in which expenses have been raising over the past several years. Compared to Zealous, i beg your pardon of the following could be said around Eager?

A. Eager has a lower income per share.B. Eager has a greater cost of goods sold.C. Eager has actually a lower ending inventory.D. Passionate has higher total assets.Correct Answer: D

If prices space increasing, FIFO would provide greater ending inventory, due to the fact that the products on hand would be taped at the most recent acquisition prices.

Practice inquiry 15Which that the adhering to is an benefit of LIFO list valuation over FIFO throughout periods that falling price (assuming not all list is sold)?

A. Finishing inventory on the balance sheet is report at its existing replacement cost.B. Taxation savings associated with reduced reported earningsC. It an ext closely adheres come the equivalent principle.D. It much more closely parallels the physical circulation of products sold.Correct Answer: C

LIFO costing uses the most recent prices to compute price of goods sold. Assuming expenses are changing, these costs much more closely enhance a firm"s revenue, i beg your pardon is usually corresponding the tendency of expense changes.

Practice inquiry 16In a period of decreasing prices, which of the following statements would certainly be true?

A. LIFO would produce greater gross profit margin percentages than would typical costs.B. FIFO would produce greater gross benefit margin percentages than would LIFO.C. Average expenses would produce higher gross profit margin percentages than would LIFO.D. FIFO would certainly produce greater gross profit margin percentages than would mean costs.Correct Answer: A

If prices room declining, LIFO would provide lower expense of products sold, since lower costs would it is in allocated come the items sold.

Practice question 17Prices have been rising during the past couple of years. Companies Ashley and also Taylor room in the very same industry and also use the same accountancy methods except for list valuation. Ashley supplies FIFO, and also Taylor uses LIFO. I beg your pardon of the complying with statements is true?

A. The list on Taylor"s publications closely approximates current market pricesB. The price of goods sold because that Taylor much more closely approximates present replacement valuesC. The inventory because that Taylor and Ashley space the sameCorrect Answer: B

Because Taylor uses LIFO, the an ext recent expenses will it is in the prices in prices of items sold. The more recent costs are the higher costs, as prices have been rising.

Practice question 18Which the the following is true in periods of rising prices?

A. Working capital under FIFO will show up to be much better than under LIFO.B. Cash flows under FIFO will be far better than LIFO.C. Cash flows will be the exact same under FIFO and also LIFO.Correct Answer: A

The list under FIFO will be much greater than the inventory under LIFO. When cash flows will be reduced (due come the taxes differences), the impact on the list is generally greater; for this reason the working capital under FIFO will show up to be far better even despite cash flows under LIFO space better.

Practice inquiry 19Which that the complying with statements is (are) true under U.S. GAAP?

I. If a LIFO inventory great is depleted in one period, the can constantly be replenished by an similar layer in the following periodII. In durations of rising prices, price of goods sold under LIFO will certainly be higher than under FIFOIII. The usage of LIFO increases inventory hold profits during periods of climbing pricesIV. A firm may usage LIFO inventory steps for tax purposes and another cost method for financial report purposesCorrect Answer: II

When LIFO is supplied in a duration of climbing prices, the latest and higher costs will go into cost of products sold. Once FIFO is provided in a duration of increasing prices, the older and also lower costs will go into expenses of goods sold.

IV is false. Under the �LIFO conformity rule,� the U.S. Tax code calls for that carriers using the LIFO an approach for tax functions must additionally use the LIFO an approach for jae won reporting.

Practice inquiry 20Which of the adhering to statements is true in a duration of rising prices?

A. The usage of FIFO will bring about a useful inventory turnoverB. The use of FIFO will often tend to understate incomeC. The usage of FIFO will often tend to understate the debt-to-equity ratioD. The use of FIFO will enhance cash flowsCorrect Answer: C

The usage of FIFO will certainly generate a lower price of goods sold, since the earlier, lower prices will be contained in price of products sold. The lower expense of goods sold will result in a greater income. The higher income will certainly be consisted of in stockholders" equity, i beg your pardon will reason the debt-to-equity proportion to it is in lower.

Practice inquiry 21Which of the complying with statements is true in one inflationary environment?

A. Under FIFO, earnings will have tendency to be understatedB. Under LIFO, working resources may be distortedC. Under FIFO, cash flows will certainly be increasedD. The usage of FIFO will cause debt-to-equity ratios to it is in overstatedCorrect Answer: B

When LIFO is used, inventory displayed under present assets will be very low, as it will be making use of older, lower costs. While cash flows will certainly be higher under LIFO, the increase in cash flows is generally not sufficient to against the result of the low inventory, and thus working resources will tend to be lower under LIFO.

Practice inquiry 22When price levels have actually been increasing throughout the period, a firm using the LIFO perform valuation an approach instead that the FIFO inventory valuation method would have:

A. Higher equitiesB. Reduced net incomeC. Higher net incomeCorrect Answer: B

In a period of climbing prices, LIFO will yield a reduced income due to the fact that its cost of products sold is higher, because it provides newer, and also higher, costs.

Practice inquiry 23During a duration of increasing prices, i m sorry of the following is reduced using FIFO rather than LIFO?

A. Income prior to tax.B. Earnings tax.C. Price of items sold.D. Net income.Correct Answer: C

Practice concern 24Assume the prices space rising and inventories balances space increasing, which method will generate the highest cash flow?

A. Typical cost.B. LIFO.C. FIFO.Correct Answer: B

As long as the price level increases and also inventory quantities execute not decrease, a deferral of revenue tax occurs, hence generating higher cash operation (tax must be paid in cash).

Practice inquiry 25During a time of increasing inventory and also rising prices, FIFO will result in ______ than LIFO.

A. Higher COGSB. Greater taxesC. Lower net incomeD. Lower working capitalCorrect Answer: B

Practice concern 26During a time of raising inventory and also rising prices, LIFO will an outcome in ______ than FIFO.

A. Higher inventory balanceB. Higher taxesC. Greater COGSD. Greater net incomeCorrect Answer: C

Practice question 27An inventory write-down has actually a positive result on:

A. Liquidity ratios.B. Profit ratios.C. Activity ratios.Correct Answer: C

Activity ratios such together inventory turnover will certainly be positively influenced because the asset base (denominator) is reduced.

Practice question 28Diane Corporation had 400 units of list on hand at July 1, 2011, costing $20 each. Purchases and sales of goods during the month that July were together follows:

July 12, 2011 Sales 200 devices
$40

Assume Diane Corporation does not maintain perpetual perform records. Follow to a physical count, 400 units were top top hand ~ above July 31, 2011.

The price of ending inventory making use of the FIFO cost method is:

A. $11,000B. $9,000C. $8,000Correct Answer: A

The cost of inventory is the finishing inventory value on the balance sheet on July 31, 2011. Making use of FIFO, the costs allocated to ending inventory will be the most recent costs. Therefore, if 400 units space remaining, the ending inventory worth will it is in 300

Practice question 29Diane Corporation had 400 units of list on hand at July 1, 2011, costing $20 each. Purchases and sales that goods during the month the July were together follows:

July 12, 2011 Sales 200 systems
$40

Assume Diane Corporation walk not maintain perpetual list records. According to a physical count, 400 units were on hand ~ above July 31, 2011.

The price of inventory in ~ July 31, 2011, utilizing the LIFO cost method, is:

A. $11,000B. $8,000C. $9,500Correct Answer: B

Using LIFO, the expenses allocated to finishing inventory will certainly be the earliest costs. Therefore, if 400 units room remaining, the ending inventory value will be 400

Practice question 30If companies have actually identical inventoriable costs, however use various inventory flow presumptions when the price of goods has not been constant, climate the:

A. Net earnings of the suppliers will it is in identical.B. Finishing inventory that the providers will it is in identical.C. Cost of goods accessible for sale of the carriers will be identical.Correct Answer: C

The expense of goods available for sale will certainly be the exact same if start inventory and purchases are the same, but if different methods room used, price of products sold and net income will be different, as different methods offer a different value for finishing inventory.


Practice inquiry 31Which that the complying with flow assumptions is not acceptable under usually accepted audit principles?

A. FIFO/LIFO.B. Next-in, first-out.C. Median cost.Correct Answer: B


Practice question 32Which statement(s) is (are) true?

I Under the FIFO an approach of list valuation, the assignment of expenses to merchandise sold is in the same order in i beg your pardon the merchandise was purchased.II. The FIFO an approach of perform valuation is based upon an presumption that the many recent prices incurred should be charged against current-year revenues.III. The FIFO method of list valuation is based on the presumption that prices should it is in charged versus revenues in the exact same order in i m sorry the costs were incurred.IV. LIFO is thought about the most conservative perform pricing method.

A. I, II and IIIB. I, II and IVC. I, III and also IVCorrect Answer: C

I. FIFO way "first-in, first-out"--the an initial items purchased room the an initial items sold. Inventory costs are assigned to the merchandise sold in the very same order in i beg your pardon the to buy of merchandise to be made.II. Under FIFO, expenses are charged in the order in which they occur, but the most recent inventory expenses (purchases) are assigned to ending inventory. Inventory walk not end up being a "cost" till it is sold.III. FIFO means "first-in, first-out", in other words, the price of the very first items purchased come to be the cost of the an initial items sold.IV. Through a LIFO pricing mechanism the perform is valued in ~ the oldest expenses (usually the lowest due to the fact that of inflation) and also the values of the recent purchases (slightly higher costs) are assigned to the cost of products sold. With greater costs of goods there will be a lower net income.


Practice question 33Under which cost flow presumption is the ending inventory created of the many recently to buy merchandise?

A. FIFO.B. LIFO.C. Median Cost.Correct Answer: A

Under the FIFO (First-In, First-Out) cost flow assumption, the perform on hand is thought about to be written of the many recent items purchased.


Practice concern 34Which that the following statements pertained to the LIFO technique of list valuation is false?

A. Despite the numerous benefits the LIFO, that is supplied by under U.S. Suppliers than both FIFO and weighted average.B. The LIFO conformity dominance is a tax judgment prohibiting the use of LIFO for tax functions unless the is likewise used for external financial reporting purposes.C. Under LIFO, companies can regulate earnings in ~ the end of an accounting period by purchasing extr inventory.Correct Answer: A

LIFO is more commonly offered than weighted typical for inventory valuation purposes.


Practice question 35Every-Day clothes had a November 1 merchandise inventory balance the $45,000. That made purchase of $80,000 and also recorded sales the $130,000, throughout November. Its estimated gross profit on sales to be 25%. On November 30, the save was destroyed by fire. What to be the worth of the merchandise inventory loss?

A. $ 27,500B. $125,000C. $ 97,500Correct Answer: A

The expense of products sold is equal to sales much less the gross profit on sales, or $97,500 ($130,000 X (1 -.25)). The shed inventory will be estimated as inventory obtainable at expense less the price of products sold.


Practice question 36The goods obtainable for sale, at retail prices, full $200,000. If the expense ratio for the duration totals 60%, and the network sales at retail 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 obtainable for sale at retail ($200,000) by sales at retail ($120,000) leaves a remainder (ending inventory in ~ retail) the $80,000. If the price of the finishing inventory is 60% of ending inventory at sleeve value, the cost of the finishing inventory at expense is $48,000 ($80,000 x 60%).


Practice concern 37Czech Ltd. Shipped goods to a client on December 30, 2010. Since Czech provided the shipping agency requested through the customer, the customer took the threat of the items not being yielded by the shipping company. The customer obtained the goods on January 6, 2011. The offering price the the products was $57,000. The revenue was tape-recorded by Czech top top January 2, 2011. Czech had actually paid $42,000 for the goods and used the periodic an approach to account because that its inventory. I beg your pardon of the adhering to statements v respect to this transaction is true?

A. Earnings for 2010 is understated by $42,000.B. Revenue for 2011 is exaggeration by $15,000.C. Profits for 2010 space understated by $57,000.Correct Answer: C

The revenue should be recorded in 2010 since the goods were shipped prior to the year end.


Practice concern 38Greenbelt Processors had actually a beginning inventory of 798 devices valued at a price of 34,895. It purchased 4,474 units of new inventory precious 195,402 throughout the year. A year-end audit revealed that it had actually 853 units on hand.

If Greenbelt provides the FIFO method, what to be its COGS because that the year?

A. 193,000B. 193,042C. 193,027Correct Answer: B

Since Greenbelt has 853 systems on hand at year-end, under FIFO they every belong come purchases made during 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 beginning inventory that 798 systems valued at a cost of 34,895. That purchased 4,474 units of brand-new inventory precious 195,402 throughout the year. A year-end audit revealed that it had actually 853 devices on hand.

If Greenbelt supplies the load average cost method, what was its COGS because that the year?

A. 193,000B. 193,027C. 193,035Correct Answer: C

Under average price method, us price every units consisting of those in start inventory and also purchased during the year in ~ an average 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 concern 40Greenbelt Processors had actually a beginning inventory the 798 systems valued at a expense of 34,895. The purchased 4,474 devices of brand-new inventory worth 195,402 during the year. A year-end audit revealed that it had 853 units on hand.

If the median unit price was 43.65 in ~ the finish of the year, what COGS would Greenbelt report?

A. 193,064B. 193,035C. 193,027Correct Answer: A

If the finishing price is 43.65, i m sorry is less than all three unit price calculated under FIFO, LIFO or Average cost Method, the conservative rule of "lower of price or market" needs to it is in applied. In ~ this price,

Ending list = 853 x 43.65 = 37,233COGS = BI + purchase - EI = 34,895 + 195,402 - 37,233 = 193,064.

Practice question 41When to compare FIFO v LIFO, i m sorry of these arguments is incorrect (Assume rising prices.)

A. FIFO much more closely follows the really physical flow of numerous inventory items.B. The disagreement amount reported as cost of products sold under FIFO much more closely approximates current price of items sold.C. The disagreement amount reported as finishing inventory under FIFO much more closely almost right the current expense of inventory.Correct Answer: B

A is correct due to the fact that the FIFO technique more carefully follows the yes, really physical circulation of many inventory items. B is incorrect due to the fact that LIFO, no FIFO, reports the more recent, higher-priced items as expense of products sold. C is correct because ending inventory under FIFO is comprised of the newer, higher-priced goods, i beg your pardon is a closer approximation of current costs.


Practice concern 42Which of the adhering to statements is not true in regard come the LIFO inventory cost flow assumption?

A. The LIFO expense flow presumption does not generally reflect the usual physical flow of perform units.B. For balance paper purposes, the expense of inventory will approximate the present replacement price under the LIFO assumption.C. If a company uses LIFO for tax purposes, that must likewise use LIFO for outside financial reporting purposes.Correct Answer: B

Under LIFO, the list on the balance sheet will certainly consist of older costs, usually from a ahead period, and also will not represent the recent costs.


Practice question 43Given same circumstances, i beg your pardon inventory method is the ideal to usage for tax objectives (assume prices are rising)?

A. Typical cost.B. FIFO.C. LIFO.Correct Answer: C

LIFO reduces taxable income and thus reduce taxes.


Practice question 44Date quantity Per Unit total CostJan 1, start 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 34,200.00

Five hundreds units space unsold. Utilizing the mean cost an approach under a periodic inventory system, exactly how much is the expense assigned to the ending merchandise inventory?

A. $ 9,400B. $ 9,800C. $ 9,500Correct Answer: C

Using the average price method, the finishing inventory would certainly be calculation as: $34,200 / 1,800 = $19 per unit cost. 500 X $19 = $9,500.


Practice concern 45In durations of climbing prices and stable or boosting inventory quantities, the affect of LIFO and FIFO top top income before taxes is:

A. LIFO results in lower income.B. FIFO outcomes in reduced income.C. The an option of LIFO vs. FIFO walk not impact income.Correct Answer: A

LIFO maintain (earlier) lower price inventory, thereby enhancing COGS, and also thereby decreasing income. FIFO outcomes in the opposite.


Practice concern 46In a duration of increasing prices, countless firms take on the periodic LIFO an approach of accountancy for inventory cost for taxes purposes. When contrasted with routine FIFO or median cost:

A. LIFO allocates older and therefore smaller inventory costs to cost of goods sold.B. LIFO allocates the newest and also therefore the biggest inventory prices to price of products sold.C. LIFO produce an inventory valuation ~ above the balance sheet that is always closer to instead of cost.Correct Answer: B

The recent costs, which are the highest costs, will be allocated to cost of goods sold. The higher cost of goods sold will cause income prior to taxes to be lower, and also thus earnings taxes will be lower.


Practice concern 47Which the the adhering to statements is true concerning the use of LIFO in a duration of climbing prices?

A. The use of LIFO will lead to a valuable working capital number and also inventory turnover.B. The debt-to-equity proportion will be greater than under FIFO.C. The use of LIFO will result in lower cash flows.Correct Answer: B

When FIFO is used, the expense of goods sold is lower, earnings is higher, and also retained revenue is higher. This provides the equity higher; hence the debt-to-equity proportion under FIFO will be lower than under LIFO.


Practice inquiry 48Which that the adhering to statements worrying inventory valuation is INCORRECT?

A. LIFO is premium for revenue statement objectives whereas FIFO is exceptional for balance sheet purposes.B. In order to adjust balance sheet worths for a agency using LIFO, one analyst would add LIFO reserve to the report inventory value.C. During periods of climbing input prices, LIFO would underestimate pistol profit.Correct Answer: C

LIFO reports appropriate income or profit once prices room rising. FIFO would overestimate it.


Practice inquiry 49Comparing v FIFO, LIFO results in (during durations of increasing prices)

A. Greater COGS and greater inventory balance.B. Higher COGS and lower perform balance.C. Lower COGS and higher inventory balance.Correct Answer: B


Practice inquiry 50Comparing with FIFO, LIFO outcomes in (during periods of climbing prices)

A. Greater taxes and also lower cash flows.B. Lower taxes and greater cash flows.C. Reduced taxes and also lower cash flows.Correct Answer: B


Practice inquiry 51When prices space rising, comparing v LIFO, FIFO results in

A. Lower working capital and greater cash flows.B. Greater working funding and higher cash flows.C. Higher working capital and also lower cash flows.Correct Answer: C


Practice concern 52Comparing v LIFO, FIFO results in ______ when prices room rising.

A. Lower inventory balance and also lower network income.B. Reduced inventory balance and higher net income.C. Higher inventory balance and higher net income.Correct Answer: C


Practice concern 53Swimsuit Shop supplies FIFO perform method. Throughout a time of rising prices and consistent inventory level (in terms of quantity), Swimsuit Shop would suffer

A. Higher taxes.B. Higher cash flows.C. Higher cost of goods sold (COGS) and also lower network income.Correct Answer: A

The sequence is: reduced COGS --> greater net revenue --> higher taxes --> reduced cash flows.


Practice inquiry 54Which statement(s) is (are) FALSE?

I. Under the LIFO method of list valuation, the finishing merchandise inventory would certainly be valued at the purchase price of the many recent purchases.II. Throughout extended periods of climbing prices, the FIFO method of inventory valuation will yield a higher cost of goods sold and a lower finishing merchandise inventory, when compared to the LIFO technique of inventory valuation.III. The bookkeeping principle of consistency prohibits any kind of changes in the technique of list valuation.IV. JIT means just in time and also is one inventory method where the raw materials for production are to buy in smaller amounts after orders have actually been taken because that the manufactured products.

A. I, II and IIIB. I, II and also IVC. II, III and IVCorrect Answer: A

I. LIFO means "last-in, first-out"--the expense of the last items purchased are charged to the most recent sales. The merchandise inventory at the end of the year is considered to it is in from the earliest purchases.II. The FIFO method will an outcome in a lower price of products sold and a higher ending merchandise perform (valued at first-in costs).III. If consistency should be maintained, legitimate alters are allowed. However, the nature, justification, and effect that the adjust on net earnings must be disclosed (full-disclosure principle).IV. JIT inventory equipment require reliable suppliers and efficient handling and shipping of materials.


Practice concern 55If finishing inventory is understated through $2,000 and beginning list is exaggeration by $3,000, the net income will be

A. Understated by $5,000.B. Exaggeration by $1,000.C. Overstated 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 on 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 room falling the usage of LIFO quite than FIFO will certainly lead to:

A. Higher working resources and higher net income.B. Greater working capital and lower network income.C. Reduced working funding and higher net income.Correct Answer: A

COGS will be lower under LIFO in a duration of falling prices leading to greater net revenue and higher tax payments. Working funding will be higher since the greater inventory value will outweigh the lower cash balance due to greater tax payments.


Practice inquiry 57An inventory write-down has actually a an adverse effect on:

I. Liquidity ratios.II. Benefit ratios.III. Task ratios.IV. Solvency ratios.

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A. I, II and also IIIB. I, II and also IVC. All of themCorrect Answer: B

An inventory write-down will positively affect task ratios such as inventory turnover because the asset base (denominator) is reduced. However, all various other ratios will be negatively influenced as both the profit and the transferring amount of inventory are reduced.