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Financial Reporting And Analysis - Financial Reporting And Analysis Section 2

Avatto > > CFA Level 1 > > PRACTICE QUESTIONS > > Financial Reporting And Analysis > > Financial Reporting And Analysis Section 2

96. Given below is the information of a company that uses the FIFO inventory method:
Opening inventory of 1000 units at $12/unit.
Purchase of 200 units at $12.8/unit
Sale of 600 units at $14/unit/brPurchase of 200 units at $13/unit
Sale of 600 units at $14/unit
If the company used a perpetual system versus a periodic inventory system, the gross margin would most likely be:

  • Option : C
  • Explanation : When using the FIFO inventory method the ending inventory, the cost of goods sold and the gross margin, are the same under either the perpetual or periodic methods. The use of a perpetual or periodic system makes a difference under weighted average, and LIFO.
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97. Which ratio is most likely higher for a company using LIFO method to account for inventory, during a period of rising prices, when compared against a company using FIFO method?

  • Option : C
  • Explanation : During a period of rising prices, ending inventory under LIFO will be lower than that of FIFO and cost of goods sold higher; therefore, inventory turnover (CGS/average inventory) will be higher.
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98. Amerco Inc. uses the LIFO method and Britco Ltd. uses the FIFO method. During periods of falling prices, compared to the cost of replacing of the inventory, the cost of goods sold reported by:

  • Option : A
  • Explanation : Britco uses FIFO which means that cost of goods sold reflects old prices. Given that prices are falling, old prices are higher than the current cost of replacing inventory.
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99. A company decides to change its inventory method from FIFO to the weighted average cost method. If the inventory prices are decreasing during this period, which of the following financial ratios will most likely decrease as a result of this change?

  • Option : A
  • Explanation : All else held constant, in a period of declining costs the ending inventory would be higher under weighted average and cost of goods sold (COGS) will be lower (compared to FIFO) resulting in higher net income and retained earnings. There will be no impact on the debt level, current or long-term. Therefore the debt-to-equity ratio (Total debt ÷ Total shareholder’s equity) will decrease due to the increase in retained earnings (and higher shareholders’ equity).
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100. A company recently purchased a warehouse property and related equipment for €20 million. The company incurred the following additional costs:
• €1.0 million for repairs to the building’s roof
• €0.3 million to modify the interior layout to meet their needs (moving walls and doors, inserting and removing partitions,  etc.)
• €0.2 million on an orientation and training session for employees to familiarize them with the facility The cost to be capitalized (in millions) for accounting purposes is closest to:

  • Option : B
  • Explanation : The capitalized amount = purchase price + costs that are involved in extending asset’s life or getting it ready to use = 20 + 1 + 0.3 = 21.3. Orientation and training costs are expensed during the period.
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Financial Reporting And Analysis Section 2