Reading 35: Analysis of Inventories

1-Sweet Milk Inc uses the last in, first out (LIFO) inventory method and had 5,000 units of e!innin! inventory on "anuary #, $00$, that was valued at %#0&00 a unit& 'he com(any (urchased 50,000 units at %#$ a unit and sold 5$,000 units at %#5 a unit& Sweet Milk is considerin! an additional (urchase of #0,000 units at %#) a unit& 'he com(any will make the (urchase at the end of *ecem er or in the early (art of year $00)& +hich statement a out the effect of the (urchase decision on net income is most accurate, A) -ost(onin! the (urchase until "anuary will increase income for $00$ y %#.,000& B) Makin! the (urchase in *ecem er will increase income y %#/,000 in year $00$& C) Income for year $00$ will not e affected no matter when the inventory is (urchased& D) -ost(onin! the (urchase until "anuary will decrease income for year $00$ y %#5,000&

2-0iven the followin! inventory data a out a firm1

2e!innin! inventory $0 units at %503unit -urchased #0 units at %.53unit -urchased )5 units at %553unit -urchased $0 units at %/53unit Sold /0 units at %403unit

+hat is the inventory value at the end of the period usin! LIFO, A) %#,555& B) %),.50& C) %#,$$5& D) %#,)55&

3-In $00., 'orrence 6o& had a e!innin! inventory of %#7,7$. and made (urchases of %#5,7$)& If the endin! inventory level was %#7,$0., what was the cost of !oods sold (6O0S) for year $00.,

A) %#5,7$)& B) %#/,/.)& C) %#5,$0)& D) %5$0&

4-+hich of the followin! is least likely (art of the asic inventory e8uation, A) 2e!innin! inventory 9 (urchases : endin! inventory 9 cost of !oods sold& B) -urchases ; endin! inventory 9 e!innin! inventory : cost of !oods sold& C) 2e!innin! inventory 9 (urchases ; cost of !oods sold : endin! inventory& D) 2e!innin! inventory ; endin! inventory ; cost of !oods sold : (urchases&

5-< com(any=s e!innin! inventory was overstated y %),000, now endin! inventory is understated y %$,000& If (urchases were (ro(erly re(orted, then earnin!s efore ta>es will e1 A) understated y %5,000& B) overstated y %5,000& C) understated y %#,000& D) overstated y %#,000&

6-'he Mountain 2ike Su((ly 6om(any had 500 units in its e!innin! inventory& ?ach of these units cost %5& *urin! the (eriod, Mountain 2ike Su((ly first (urchased .00 units at %/ each and then $00 units at %5 each& <t the end of the (eriod, Mountain 2ike Su((ly had /00 units& +hat is the cost of !oods sold and inventory for Mountain 2ike Su((ly if it uses FIFO inventory valuation, A) 6O0S %$,500 Inventory %),400

B) C) D) 105Purchases 20 units at $50 35 units at $40 85 units at $30

%$,500 %),$00 %),$00

%),#00 %),400 %),#00

Sales 15 units at $60 35 units at $45 85 units at $35

Assume beginning inventory was zero.

7-Inventory value at the en o! the "erio using the average #ost metho is$

A) $1%540. B) $1&&. C) $2%100. D) $4%680.

8-Inventory value at the en o! the "erio using 'I'( is$

A) $1%200. B) $1&5. C) $150. D) $6%000. 7@Inventory value at the end of the (eriod usin! LIFO is1

A) $1%200. B) $250. C) $2%100. D) $2%400.

10-<n analyst notes the followin! a out a com(any1

2e!innin! inventory was re(orted as %5,000& 6osts of !oods sold were re(orted as %4,000& ?ndin! inventory is %5,000 (the analyst has (hysically verified this amount)&

+hich of the followin! statements is most accurate, A) B) If the analyst discovered that e!innin! inventory was understated y %$,000, then earnin!s efore ta>es must have een overstated y %$,000& If the analyst discovered that e!innin! inventory was overstated y %#,000, then cost of !oods sold must have een understated y %#,000&

C) -urchases must have een %/,000& D) <ssumin! a ta> rate of )5A, the firm=s net income would e %500&

11-< firmBs financial statements reflect the followin! information1

2e!innin! inventory

%$,700,000

-urchase durin! the year %#,/00,000 ?ndin! inventory Sales ,,,, %),700,000

0ross Mar!in

0&.#

+hat was the firmBs endin! inventory for this (eriod, A) %$,577,000& B) %#,/77,000& C) %),#77,000& D) %$,#77,000&

12-< firmBs financial statements reflect the followin! information1

2e!innin! inventory

%),$00,000

-urchase durin! the year %#,500,000 ?ndin! inventory Sales 0ross (rofit mar!in %$,#00,000 %.,400,000 ,,,,

+hat was the firmBs !ross (rofit mar!in, A) 2.2). B) 0.58. C) 0.42. D) 1.)3.

13-*hi#h o! the !ollowing inventory a##ounting metho s must be use !or !inan#ial re"orting
"ur"oses i! a +.,. !irm uses last in% !irst out -.I'(/ !or ta0 "ur"oses1

A) 'I'(. B) Average #ost. C) 2he !irm may use any o! the above metho s. D) .I'(.

14--ischke Motors (rovided you with the followin! financials1

2e!innin! LIFO reserve %$,.4. 6ost of !oods sold (6O0S) usin! LIFO %),744 6O0S usin! FIFO %$,00.

+hat is the endin! LIFO reserve, A) %500& B) %.,./4& C) %$,.4.& D) %#,74.&

15-LIFO li8uidation may result when1 A) B) C) D)

(urchases are less than !oods sold& (urchases are more than !oods sold& (urchases are e8ual to the !oods sold& cost of !oods sold is less than the availa le inventory&

16-In case of a decline in LIFO reserve, to o tain a etter analysis an analyst should1

A) B) C) D)

adCust the income statement, only if such a decline is due to fallin! (rices& adCust the income statement, re!ardless of the reasons for the decline& not make any adCustments& adCust the income statement, only if such a decline is due to LIFO li8uidation&

17-In a (eriod of risin! (rices, LIFO li8uidation results in1 A) lower earnin!s& B) increase in inventory& C) hi!her earnin!s& D) increase in accounts receiva le&

18-'he best way to com(ute an inventory turnover ratio is to use1 A) last in, first out (LIFO) for cost of !oods sold (6O0S) and first in, first out (FIFO) for avera!e inventory&

B) first in, first out (FIFO) for oth cost of !oods sold (6O0S) and avera!e inventory& C) last in, first out (LIFO) for oth cost of !oods sold (6O0S) and avera!e inventory& D) first in, first out (FIFO) for cost of !oods sold (6O0S) and last in, first out (LIFO) for avera!e inventory&

19-+hen analyDin! (rofita ility ratios, which inventory accountin! method is (referred,

A) First in, first out (FIFO)& B) Last in, first out (LIFO)& C) +ei!hted avera!e& D) -rofita ility ratios are not affected y the inventory accountin! method used&

20-In !eneral, when analyDin! (rofita ility and costs, or when analyDin! asset and e8uity ratios, which of the followin! should e used, A) B) C) D) -rofita ility36ost Eatios FIFO FIFO LIFO LIFO <sset3?8uity Eatios LIFO FIFO FIFO LIFO

21-I! a #om"any using last in% !irst out -.I'(/ re"orts an inventory balan#e o! $22%000 an a .I'(
reserve o! $4%000% the estimate value !or the inventory on a !irst in% !irst out -'I'(/ basis woul be$

A) $13%000. B) $18%000. C) $24%000. D) $26%000.

22-2he year3en !inan#ial statements !or a !irm using last in !irst out -.I'(/ a#ounting show an
inventory level o! $5%000% #ost o! goo s sol -4(5,/ o! $16%000% an inventory "ur#hases o! $14%500. I! the .I'( reserve is $4%000 at year3en an was $1%500 at the beginning o! the year% what woul the 4(5, have been using 'I'( a##ounting1

A) $13%500.

B) $18%500. C) $11%000. D) $12%000.