Financial Reporting And Analysis - Financial Reporting And Analysis Section 2
- Option : A
- Explanation : In an environment of rising inventory unit costs, FIFO is most likely to report the highest amount of ending inventory.
- Option : B
- Explanation : With rising costs, if the weighted average cost method is used rather than FIFO, the ending inventory would be lower and cost of goods sold will be higher. This will lead to lower net income and retained earnings. Lower retained earnings implies lower equity. Since the level of debt is unchanged, the debt-to-equity ratio (Total debt ÷ Total shareholder’s equity) will increase.
- Option : A
- Explanation : In a declining price environment, the newest inventory is the lowestcost inventory. Therefore, using the FIFO method i.e. selling the older, expensive inventory first, will result in higher cost of sales and lower profit.
- Option : C
- Explanation : Under US GAAP, companies that use the LIFO method must disclose in their financial notes the amount of the LIFO reserve or the amount that would have been reported in inventory if the FIFO method had been used. This information can be used to adjust reported LIFO inventory and cost of goods sold balances to the FIFO method for comparison purposes.
- Option : A
- Explanation : The inventory is recorded at lower of the cost or the net realizable value. The net realizable value is the difference between estimated selling price and the costs incurred to bring the inventory into a saleable condition. Thus, the inventory is recorded at $34,000 - $6,000 = $28,000.
*/?>
*/?>
*/?>
*/?>