Podcast
Questions and Answers
In a decreasing price environment, the first-in first-out (FIFO) inventory cost method results in:
In a decreasing price environment, the first-in first-out (FIFO) inventory cost method results in:
- lower cost of goods sold compared to last-in first-out.
- higher inventory compared to last-in first-out. (correct)
- lower gross profit compared to last-in first-out. (correct)
If prices are decreasing, the best estimates of inventory and cost of goods sold from an analyst's point of view are provided by:
If prices are decreasing, the best estimates of inventory and cost of goods sold from an analyst's point of view are provided by:
- FIFO inventory and FIFO cost of goods sold. (correct)
- FIFO inventory and LIFO cost of goods sold. (correct)
- LIFO inventory and FIFO cost of goods sold.
A U.S. GAAP reporting firm changes its inventory cost flow assumption from average cost to LIFO. The firm must apply this change:
A U.S. GAAP reporting firm changes its inventory cost flow assumption from average cost to LIFO. The firm must apply this change:
- retrospectively, because it is a change in accounting principle.
- prospectively, with the carrying value as the first LIFO layer. (correct)
- prospectively, with LIFO layers calculated from past purchases and sales.
Under which financial reporting standards is a firm required to discuss the circumstances when reversing an inventory writedown?
Under which financial reporting standards is a firm required to discuss the circumstances when reversing an inventory writedown?
In periods of rising prices and stable or increasing inventory quantities, using the LIFO method for inventory accounting compared to FIFO will result in:
In periods of rising prices and stable or increasing inventory quantities, using the LIFO method for inventory accounting compared to FIFO will result in:
Using the appropriate valuation method, what adjustment is necessary to accurately report Bledsoe's inventory at the end of 20x7, and will this adjustment affect Bledsoe's quick ratio? Adjustment _____ Quick ratio.
Using the appropriate valuation method, what adjustment is necessary to accurately report Bledsoe's inventory at the end of 20x7, and will this adjustment affect Bledsoe's quick ratio? Adjustment _____ Quick ratio.
Using the lower of cost or market principle under U.S. GAAP, if the market value of inventory falls below its historical cost, the minimum value at which the inventory can be reported in the financial statements is the:
Using the lower of cost or market principle under U.S. GAAP, if the market value of inventory falls below its historical cost, the minimum value at which the inventory can be reported in the financial statements is the:
A company purchased inventory on January 1, 20X2, for $600,000. On December 31, 20X2, the inventory had a net realizable value (NRV) of $550,000 and a replacement cost of $525,000. What would be the carrying value of the inventory on the company's December 31, 20X2, balance sheet using: lower of cost or NRV?: _____; lower of cost or market?: _____.
A company purchased inventory on January 1, 20X2, for $600,000. On December 31, 20X2, the inventory had a net realizable value (NRV) of $550,000 and a replacement cost of $525,000. What would be the carrying value of the inventory on the company's December 31, 20X2, balance sheet using: lower of cost or NRV?: _____; lower of cost or market?: _____.
During periods of rising prices and stable or growing inventories, the most informative inventory accounting method for income statement purposes is:
During periods of rising prices and stable or growing inventories, the most informative inventory accounting method for income statement purposes is:
If prices and inventory quantities are increasing, the last-in first-out (LIFO) inventory cost method results in:
If prices and inventory quantities are increasing, the last-in first-out (LIFO) inventory cost method results in:
If a firm pledges inventories as collateral for a loan, the firm must:
If a firm pledges inventories as collateral for a loan, the firm must:
Assuming beginning inventory levels are zero, inventory levels increase during the year and prices have been stable over time, COGS would be:
Assuming beginning inventory levels are zero, inventory levels increase during the year and prices have been stable over time, COGS would be:
In an inflationary environment, a company's:
In an inflationary environment, a company's:
The most likely effect of a write-down of inventory to net realizable on a firm's total asset turnover is:
The most likely effect of a write-down of inventory to net realizable on a firm's total asset turnover is:
A company that reports under U.S. GAAP and changes its inventory cost assumption from weighted average cost to last-in first-out is required to apply this change in accounting principle:
A company that reports under U.S. GAAP and changes its inventory cost assumption from weighted average cost to last-in first-out is required to apply this change in accounting principle:
If all else holds constant in periods of rising prices and inventory levels:
If all else holds constant in periods of rising prices and inventory levels:
Judah GmbH prepares its financial statements under IFRS. On December 31, 20X8, Judah has inventory of manufactured goods with a cost of €720,000. The estimated selling cost of that inventory is €50,000 and its market value is €740,000. By January 31, 20X9, none of the inventory has been sold but its market value has increased to €810,000. Which of the following entries is most likely permissible under IFRS?
Judah GmbH prepares its financial statements under IFRS. On December 31, 20X8, Judah has inventory of manufactured goods with a cost of €720,000. The estimated selling cost of that inventory is €50,000 and its market value is €740,000. By January 31, 20X9, none of the inventory has been sold but its market value has increased to €810,000. Which of the following entries is most likely permissible under IFRS?
During periods of decreasing prices, a firm using a periodic inventory system will report higher gross profit if its inventory cost assumption is:
During periods of decreasing prices, a firm using a periodic inventory system will report higher gross profit if its inventory cost assumption is:
The effect of an inventory writedown on a firm's return on assets (ROA) is most accurately described as:
The effect of an inventory writedown on a firm's return on assets (ROA) is most accurately described as:
Tim Rogers is senior equity analyst with White Capital LLP. Which of the following disclosures would most likely support his conclusion of above-average sales growth for Drako Toys Inc.?
Tim Rogers is senior equity analyst with White Capital LLP. Which of the following disclosures would most likely support his conclusion of above-average sales growth for Drako Toys Inc.?
Victor Electronics writes down its inventory from cost of $2 million to its net realizable value of $1 million. For the current period when NRV increased to $4 million, it would report an inventory value of:
Victor Electronics writes down its inventory from cost of $2 million to its net realizable value of $1 million. For the current period when NRV increased to $4 million, it would report an inventory value of:
A U.S. GAAP firm writes down inventory to net realizable value. In the period of the writedown, what is the most likely effect on cost of goods sold?
A U.S. GAAP firm writes down inventory to net realizable value. In the period of the writedown, what is the most likely effect on cost of goods sold?
In periods of decreasing prices, which of the following statements is most accurate? Compared to FIFO, LIFO results in:
In periods of decreasing prices, which of the following statements is most accurate? Compared to FIFO, LIFO results in:
A firm determines that inventory with a cost of €10 million has a net realizable value of €9 million and writes it down. One period later, the net realizable value increases to €11 million. Under IFRS, the carrying value of this inventory:
A firm determines that inventory with a cost of €10 million has a net realizable value of €9 million and writes it down. One period later, the net realizable value increases to €11 million. Under IFRS, the carrying value of this inventory:
The most likely effect of a write-down of inventory to net realizable value on a firm's quick ratio is:
The most likely effect of a write-down of inventory to net realizable value on a firm's quick ratio is:
Lincoln Corporation and Continental Incorporated are identical companies; Lincoln complies with U.S. Generally Accepted Accounting Principles and Continental with International Financial Reporting Standards. Assuming an inflationary environment and stable inventory quantities, which permissible cost flow assumption will minimize pre-tax financial income?
Lincoln Corporation and Continental Incorporated are identical companies; Lincoln complies with U.S. Generally Accepted Accounting Principles and Continental with International Financial Reporting Standards. Assuming an inflationary environment and stable inventory quantities, which permissible cost flow assumption will minimize pre-tax financial income?
Which of the following circumstances is most likely indicative of an increase in a company's future earnings?
Which of the following circumstances is most likely indicative of an increase in a company's future earnings?
Which of the following statements about inventory presentation and disclosures is most accurate?
Which of the following statements about inventory presentation and disclosures is most accurate?
Snow Blower Industries operates in an increasing price environment and uses FIFO method. Compared to the weighted average cost method, Snow Blower's use of the FIFO method will most likely decrease:
Snow Blower Industries operates in an increasing price environment and uses FIFO method. Compared to the weighted average cost method, Snow Blower's use of the FIFO method will most likely decrease:
Barber Inc., which uses LIFO inventory accounting under U.S. GAAP, sells DVD recorders. On October 14, it purchased a large number at a cost of $90 each. Due to lower than anticipated demand during the Christmas season, the selling price at December 31 is $80, with a replacement cost of $73. The normal profit margin is 5 percent of selling price and selling costs are $2 per recorder. What is the value of the recorders on December 31?
Barber Inc., which uses LIFO inventory accounting under U.S. GAAP, sells DVD recorders. On October 14, it purchased a large number at a cost of $90 each. Due to lower than anticipated demand during the Christmas season, the selling price at December 31 is $80, with a replacement cost of $73. The normal profit margin is 5 percent of selling price and selling costs are $2 per recorder. What is the value of the recorders on December 31?
During periods of declining prices, which inventory method would result in the highest net income?
During periods of declining prices, which inventory method would result in the highest net income?
During periods of rising prices, which of the following is most likely to occur?
During periods of rising prices, which of the following is most likely to occur?
If prices are increasing, the weighted average cost method most likely results in inventory values that are higher than the inventory values using:
If prices are increasing, the weighted average cost method most likely results in inventory values that are higher than the inventory values using:
Flashcards
FIFO in a Decreasing Market
FIFO in a Decreasing Market
FIFO results in lower gross profit compared to LIFO if prices are decreasing.
Best Estimates: Decreasing Prices
Best Estimates: Decreasing Prices
LIFO cost of goods sold and FIFO inventory.
Changing to LIFO
Changing to LIFO
Prospectively, using the carrying value as the first LIFO layer.
Inventory Writedown Reversals Disclosures
Inventory Writedown Reversals Disclosures
Signup and view all the flashcards
LIFO in Rising Market
LIFO in Rising Market
Signup and view all the flashcards
Inventory: Minimum Value
Inventory: Minimum Value
Signup and view all the flashcards
Pledged Inventories Disclosure
Pledged Inventories Disclosure
Signup and view all the flashcards
Stable Prices/Zero Inventory
Stable Prices/Zero Inventory
Signup and view all the flashcards
Informative Method for Income Statement
Informative Method for Income Statement
Signup and view all the flashcards
Increasing Prices: COGS
Increasing Prices: COGS
Signup and view all the flashcards
Inventory Write-Downs
Inventory Write-Downs
Signup and view all the flashcards
Assets using LIFO
Assets using LIFO
Signup and view all the flashcards
GAAP: Change to LIFO
GAAP: Change to LIFO
Signup and view all the flashcards
Inflation: Rising Prices
Inflation: Rising Prices
Signup and view all the flashcards
IFRS, value on December 31, 20X8 and January 31, 20X9
IFRS, value on December 31, 20X8 and January 31, 20X9
Signup and view all the flashcards
Periodic Inventory reports high profit
Periodic Inventory reports high profit
Signup and view all the flashcards
Inventory Write-Downs
Inventory Write-Downs
Signup and view all the flashcards
The Quick Ratio
The Quick Ratio
Signup and view all the flashcards
Declining Prices
Declining Prices
Signup and view all the flashcards
Increasing Prices
Increasing Prices
Signup and view all the flashcards
Study Notes
FIFO in Decreasing Price Environment
- FIFO assumes higher-cost, earlier purchases sold first when prices decrease.
- This assumption results in higher COGS, lower inventory, and lower gross profit compared to LIFO.
Inventory and COGS Estimates When Prices Decrease
- LIFO cost of goods sold and FIFO inventory provide the best estimates of current costs, regardless of price trends.
GAAP Change from Average Cost to LIFO
- Under U.S. GAAP, changing the inventory cost flow assumption to LIFO is applied prospectively.
- It is an exception to the retrospective application of changes in accounting principle.
- The carrying value of inventory at the change date is used as the first LIFO layer.
Reversing Inventory Writedowns
- Reversals of inventory writedowns are permitted only under IFRS.
- IFRS firms must disclose the circumstances when reversing an inventory writedown.
LIFO vs FIFO in Rising Prices
- In periods of rising prices and stable/increasing inventory, LIFO results in higher cost of sales, lower net income, lower inventory balances, lower working capital, and higher cash flows.
Bledsoe Corporation Inventory Valuation
- Inventories are valued at the lower of cost or net realizable value (NRV).
- $3,150,000 is the net realizable value, calculated as: $3,500,000 (selling price) - $300,000 (completion costs) - $50,000 (disposal costs).
- A $50,000 write-down is required as the original cost ($3,200,000) exceeds the NRV.
- Inventory write-downs do not impact the quick ratio since inventory is excluded from both the numerator and the denominator.
Lower of Cost or Market Principle Under GAAP
- Under U.S. GAAP, if the market value of inventory falls below historical cost, the minimum value is market price minus selling costs minus normal profit margin.
- When inventory is written down to market, the replacement cost of the inventory is its market value.
- The "market value" must fall between net realizable value (NRV) and NRV less normal profit margin.
- NRV is the market price less selling costs.
Inventory Carrying Value: Lower of Cost or NRV vs. Lower of Cost or Market
- A company purchased inventory on January 1, 20X2, for $600,000.
- On December 31, 20X2: NRV of $550,000, replacement cost of $525,000 (also NRV less the normal profit margin).
- Lower of cost or NRV balance sheet carrying value is $550,000.
- Lower of cost or market balance sheet carrying value is $525,000.
Inventory Accounting Methods for Income Statement
- LIFO is the most informative inventory accounting method for income statement purposes during rising prices and stable or growing inventories.
- It allocates the most recent purchase prices to COGS.
- LIFO provides a better measure of current income and future profitability.
LIFO in Increasing Prices and Inventory
- LIFO, if prices and inventory quantities are increasing, results in higher COGS, lower inventory value, and a lower gross profit compared to FIFO.
Pledged Inventory Disclosure
- The carrying value of pledged inventories must be disclosed under both IFRS and U.S. GAAP.
COGS with Stable Prices & Increasing Inventory
- If beginning inventory is zero, inventory levels increase during the year, and prices remain stable, COGS calculated under FIFO, LIFO, and average cost pricing would be the same.
Inflationary Environment
- In an inflationary environment, using LIFO results in lower assets due to the higher-priced items being charged to the income statement.
Inventory Write-Down Effect on Total Asset Turnover
- Asset turnover increases after an inventory write-down to net realizable value.
- This is due to a decrease in total assets, with no change to revenue.
GAAP Change from Weighted Average to LIFO
- A company reporting under U.S. GAAP that changes its inventory cost assumption from weighted average cost to LIFO applies the change prospectively.
- Also, the reasons for the change must be explained in the financial statement disclosures.
- The firm uses the carrying value of inventory at the time of the change as the first LIFO layer.
- The firm must also explain the reason why the new reporting method is preferable to the old one.
FIFO vs. LIFO in Rising Prices
- In periods of rising prices and inventory levels, FIFO firms have greater stockholder's equity because cheaper goods are assigned to COGS, leading to higher income and retained earnings.
Judah GmbH Inventory Valuation Under IFRS
- Judah GmbH has inventory costing €720,000, with a market value of €740,000 and an estimated selling cost of €50,000 on December 31, 20X8.
- By January 31, 20X9, the market value increased to €810,000, with selling costs remaining at €50,000.
- Inventory should be written down by €30,000 on December 31, 20X8.
- Then it should be written up by €30,000 on January 31, 20X9 because IFRS requires inventory to be valued at the lower of cost or net realizable value (NRV).
Higher Gross Profit During Decreasing Prices
- During periods of decreasing prices, a firm using a periodic inventory system will report higher gross profit if its inventory cost assumption is LIFO.
- LIFO results in lower COGS.
Inventory Writedown Effect on ROA
- Inventory writedowns decrease net income and total assets.
- Return on assets (ROA) is lower in the period of the writedown.
- ROA is higher in later periods due to lower COGS and higher net income.
Drako Toys Inventory Analysis
- An increase in raw materials and/or work-in-process inventory is likely an indication of an expected increase in demand, and therefore, a company's future growth.
Victor Electronics Inventory
- Under IFRS: Victor can reverse the writedown, but the gains are limited to the original amount.
- Under GAAP: Reversals are not permitted.
Inventory Writedown and Cost of Goods Sold
- Inventory writedowns are an increase in Cost of Goods Sold
- Because ending inventory = beginning inventory + purchases − cost of goods sold.
- A write-down to NRV decreases ending inventory, with no effect on beginning inventory or purchases
- For the inventory equation to hold, cost of goods sold must increase.
LIFO vs. FIFO in Decreasing Prices
- LIFO results in lower COGS, higher taxes, higher net income, higher inventory balances, higher working capital, and lower cash flows compared to FIFO in periods of decreasing prices.
IFRS Inventory Valuation
- Under IFRS, inventory can be revalued upward only to the extent that reverses the writedown (i.e., no higher than cost)
Inventory Writedown Effect on Quick Ratio
- The quick ratio is unaffected by inventory writedowns.
- This is because the quick ratio is current assets other than inventories divided by current liabilities, and inventory writedowns do not affect the numerator or the denominator.
Inflationary Environment and Cost Flow
- LIFO results in the lowest pre-tax financial income.
- FIFO results in the highest pre-tax financial income.
- Average cost falls in the middle.
Indicative of Increased Future Earnings
- Work-in-process inventory increasing faster than finished goods inventory is a likely indicator that a firm expects demand to increase.
Inventory Presentation and Disclosures
- IFRS firms must disclose their inventory cost flow method.
- IFRS firms must discuss the circumstances that led to the reversal after reversing inventory writedowns.
- Under U.S. GAAP, a change to LIFO is not applied retrospectively.
- The carrying value of inventory is considered the first LIFO layer.
FIFO Method
- Under FIFO, Snow Blower Industries will report a lower cost of goods sold.
- Net income is higher under FIFO in an increasing price environment.
Barber Inc. Recorder Valuation
- Market is equal to the replacement cost subject to it being within a specific range.
- The upper bound is net realizable value (NRV).
- The lower bound is net realizable value (NRV) less normal profit.
Highest Net Income
- In periods of declining prices, LIFO usage results in the highest net income because COGS is smaller.
Rising Cost Impact
- The most expensive units go to cost of sales and result in lower net income when using LIFO.
Weighted Average Cost
- In an increasing price environment, the weighted average cost method results in inventory values that are higher than the inventory values when using LIFO.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
