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Exam 8: Inventories: Measurement

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Question 1

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GG Inc. uses LIFO. GG disclosed that if FIFO had been used, inventory at the end of 2009 would have been $15 million higher than the difference between LIFO and FIFO at the end of 2008. Assuming GG has a 40% income tax rate:

A) Its reported cost of goods sold for 2009 would have been $9 million higher if it had used FIFO rather than LIFO for its financial statements.
B) Its reported cost of goods sold for 2009 would have been $15 million higher if it had used FIFO rather than LIFO for its financial statements.
C) Its reported net income for 2009 would have been $9 million higher if it had used FIFO rather than LIFO for its financial statements.
D) Its reported net income for 2009 would have been $15 million higher if it had used FIFO rather than LIFO for its financial statements.This is (1 tax rate) the pre-tax effect of $15 million.

E) A) and B)
F) A) and C)

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Question 2

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Briefly explain when there would be a tax benefit from electing LIFO rather than FIFO.

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In periods of rising costs, LIFO provides a tax benefit through the deferral of the payment of income taxes which increases current cash inflows. Over a company's life, LIFO and FIFO produce the same cumulative gross profit, but LIFO results in lower income in the earlier periods. This is similar to the advantage provided by accelerated methods of depreciation. The opposite effect will occur in periods of deflation. An increase in tax rates in the future may also reduce or eliminate the tax benefit of the tax deferral.

Question 3

Multiple Choice

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Ending inventory assuming LIFO in a periodic inventory system would be:

Required: Compute the ending inventory and cost of goods sold assuming Random Creations uses average cost and a periodic inventory system.

On January 1, 2008, RAY Co. adopted the dollar-value LIFO method for its one inventory pool. The pool's value on this date was $300 million. The 12/31/08 inventory valued at year-end costs were $385 million. The 12/31/08 inventory, using dollar-value LIFO was $355 million. Required: Calculate 2008 cost index for RAY's inventory.

What inventory balance should Badger report on its 12/31/09 balance sheet?

Meteor Co. purchased merchandise on March 4, 2009, at a price of $30,000, subject to credit terms of 2/10, n30. Meteor uses the net method for recording purchases and uses a periodic inventory system. Required: 1. Prepare the journal entry to record the purchase. 2. Prepare the journal entry to record the appropriate payment if the entire invoice is paid on March 11, 2009. 3. Prepare the journal entry to record the appropriate payment if the entire invoice is paid on April 2, 2009.

The following information is taken from the accounting records of Rapid Runner Inc. for the year 2009. Missing information has been left blank. Required: Compute the missing amounts. -

Thompson's 2009 gross profit ratio is:

The following information is taken from the accounting records of Madeline Inc. for the year 2009. Missing information has been left blank. Inventory is the only supply that Madeline purchases on credit. Required: Compute the missing amounts. -

Cost of goods sold is given by:

The inventory method that will always produce the same amount for cost of goods sold in a periodic inventory system as in a perpetual inventory system would be:

Ending inventory assuming LIFO in a perpetual inventory system would be:

HH Company uses LIFO. HH disclosed that if FIFO had been used, inventory at the end of 2009 would have been $20 million lower than the difference between LIFO and FIFO at the end of 2008. Assuming HH has a 30% income tax rate:

Net purchases are reduced for discounts taken whether the net method is used or the gross method is used.

The choice of cost flow assumption (FIFO, LIFO, or average) does not depend on the physical flow of the product.

In periods when costs are rising LIFO liquidations:

Required: Compute the ending inventory and cost of goods sold assuming Random Creations uses LIFO and a periodic inventory system.

Under the net method, purchase discounts lost are:

In a period when costs are falling and inventory quantities are stable, the lowest taxable income would be reported by using the inventory method of: