Financial Reporting And Analysis MCQ - Financial Reporting And Analysis Section 2

81 In an environment of rising inventory unit costs, which of the following methods is most likely to report the highest amount of ending inventory?

In an environment of rising inventory unit costs, FIFO is most likely to report the highest amount of ending inventory.

82 A company decides to change its inventory method from FIFO to the weighted average cost method. Assuming that the change happens during a period of rising inventory costs, which of the following will most likely increase as a result of this change?

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.

83 Company ABC operates in an environment of declining prices. Its reported profits will tend to be the lowest if it accounts for inventory using the:

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.

84 Analyst 1: Under US GAAP, companies that use the LIFO method must disclose in their financial notes the amount of LIFO reserve.
Analyst 2: LIFO reserve can be used to adjust reported LIFO inventory and cost of goods sold balances to the FIFO method for comparison purposes.

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.

85 Nathan Scott is an accountant at Dan Motors Limited. The company prepares its accounts in accordance with IFRS. The inventory cost at year end is 29, 000, while the estimated selling price is $34,000. If the costs necessary to make the inventory worthy of being sold are 6,000, the inventory recorded will be closest to:

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.