reading 35

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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 comanyurchased 50,000 units at %#$ a unit and sold 5$,000 units at %#5 a unit& Sweet Milk isconsiderin! an additional urchase of #0,000 units at %# a unit& 'he comany will makethe urchase at the end of *ecemer or in the early art of year $00& +hich statementaout the effect of the urchase decision on net income is most accurate

A) -ostonin! the urchase until "anuary will increase income for $00$ y %#.,000&

B) Makin! the urchase in *ecemer 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) -ostonin! the urchase until "anuary will decrease income for year $00$ y %#5,000&

2-iven the followin! inventory data aout 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 periodusin! LIFO

A) %#,55&

B) %,.50&

C) %#,$$5&

D) %#,5&

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(6OS) for year $00.

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A) %#5,7$&

B) %#/,/.&

C) %#5,$0&

D) %$0&

4-+hich of the followin! is least likelyart 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-< comany=s e!innin! inventory was overstated y %,000, now endin! inventory isunderstated y %$,000& If urchases were roerly reorted, then earnin!s efore ta>es wille1

A) understated y %5,000&

B) overstated y %5,000&

C) understated y %#,000&

D) overstated y %#,000&

6-'he Mountain 2ike Suly 6omany had 500 units in its e!innin! inventory& ?ach ofthese units cost %5& *urin! the eriod, Mountain 2ike Suly first urchased .00 units at%/ each and then $00 units at % each&

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B) %$,500 %,#00

C) %,$00 %,400

D) %,$00 %,#00

105-

Purchases Sales

20 units at $50 15 units at $60



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

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A) $1%200.

B) $250.

C) $2%100.

D) $2%400.

10-es must have een overstated y %$,000&

B)If the analyst discovered that e!innin! inventory was overstated y %#,000, then costof !oods sold must have een understated y %#,000&

C) -urchases must have een %/,000&

D) rate of 5A, the firm=s net income would e %00&

11-< firmBs financial statements reflect the followin! information1

2e!innin! inventory %$,700,000

-urchase durin! the year %#,/00,000

?ndin! inventory

Sales %,700,000

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ross Mar!in 0&.#

+hat was the firmBs endin! inventory for this eriod

A) %$,77,000&

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 %#,00,000

?ndin! inventory %$,#00,000

Sales %.,400,000

ross rofit mar!in

+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 methos must be use !or !inan#ial re"orting"ur"oses i! a +.,. !irm uses last in% !irst out -I'(/ !or ta "ur"oses

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A) 'I'(.

B) Average #ost.

C) he !irm may use any o! the above methos.

D) I'(.

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

2e!innin! LIFO reserve %$,.4.

6ost of !oods sold (6OS) usin! LIFO %,744

6OS usin! FIFO %$,00.

+hat is the endin! LIFO reserve

A) %500&

B) %.,./4&

C) %$,.4.&

D) %#,74.&

15-LIFO li8uidation may result when1

A) urchases are less than !oods sold&

B)urchases are more than !oods sold&

C)urchases are e8ual to the !oods sold&

D)cost of !oods sold is less than the availale inventory&

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

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A)adCust the income statement, only if such a decline is due to fallin! rices&

B)adCust the income statement, re!ardless of the reasons for the decline&

C)not make any adCustments&

D)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 receivale&

18-'he bestway to comute an inventory turnover ratio is to use1

A)last in, first out (LIFO) for cost of !oods sold (6OS) and first in, first out (FIFO) foravera!e inventory&

B) first in, first out (FIFO) for oth cost of !oods sold (6OS) and avera!e inventory&

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

D)first in, first out (FIFO) for cost of !oods sold (6OS) and last in, first out (LIFO) foravera!e inventory&

19-+hen analyDin! rofitaility ratios, which inventory accountin! method is referred

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A) First in, first out (FIFO)&

B) Last in, first out (LIFO)&

C) +ei!hted avera!e&

D) -rofitaility ratios are not affected y the inventory accountin! method used&

20-In !eneral, when analyDin! rofitaility and costs, or when analyDin! asset and e8uityratios, which of the followin! should e used

-rofitaility36ost Eatios

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B) $18%500.

C) $11%000.

D) $12%000.

reading 35

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