Flashcards in FAR 12 - Inventory 2 - FIFO/LIFO/LCM Deck (14):
A company decided to change its inventory valuation method from FIFO to LIFO in a period of rising prices. What was the result of the change on ending inventory and net income in the year of the change?
Ending inventory Net income
Increase, Decrease or No change?
Ending inventory would decrease because under LIFO, the latest items purchased (and therefore the most costly) are considered sold, leaving the earliest items purchased (and therefore the least costly) in inventory. This is opposite to the effect under FIFO.
The same is true for net income because now, under LIFO, cost of goods sold is increased relative to FIFO because the cost of the latest and most costly items are considered sold first.
Generally, which inventory costing method approximates most closely the current cost for each of the following?
Cost of goods sold Ending inventory
LIFO assumes the sale of the most recent purchases first and thus results in cost of goods sold that is the most current value. FIFO assumes the sale of the earliest purchases first (and beginning inventory before any purchases) and thus results in ending inventory that is the most current value. FIFO is sometimes called LISH: last in still here.
Drew Co. uses the average cost inventory method for internal reporting purposes and LIFO for financial statement and income tax reporting.
On December 31, 2005, the inventory was $375,000 using average cost and $320,000 using LIFO. The unadjusted credit balance in the LIFO Reserve account on December 31, 2005 was $35,000.
What adjusting entry should Drew record to adjust from average cost to LIFO on December 31, 2005?
Cost of goods sold $55,000 Inventory $55,000
Cost of goods sold $55,000 LIFO reserve $55,000
Cost of goods sold $20,000 Inventory $20,000
Cost of goods sold $20,000 LIFO reserve $20,000
Cost of goods sold $20,000 LIFO reserve $20,000
The ending difference between average cost and LIFO is $55,000 ($375,000 - $320,000). This is the required LIFO reserve account.
The balance before adjustment is $35,000. Thus, $20,000 must be added to the account. The conversion to LIFO, for reporting purposes, increases cost of goods sold because, under LIFO, ending inventory is lower. The entry in this answer alternative increases the cost of goods sold. The inventory account itself is not credited. Rather, the LIFO reserve account acts as a valuation account to reduce inventory to LIFO for balance sheet purposes.
T/F: Cost of goods sold under LIFO reflects more current values for inventory when prices have been in decline.
T/F: Liquidation is a reporting problem only for LIFO.
T/F: Cost of goods sold under LIFO generally will be less than under FIFO when prices have been in decline.
T/F: A LIFO liquidation occurs when the number of units in ending inventory exceeds the number in beginning inventory.
A. What happens when the number of units purchased or produced is less than the
number of units sold? Under LIFO, the computation of cost of goods sold for the
current period first uses all the purchases for the period. Then it works backward in
time and liquidates layers that were added in previous periods (latest layer added
first), until the total number of units sold for the period is costed. A LIFO
liquidation is that part of current period cost of goods sold represented by the cost
of goods acquired in prior years.
B. LIFO liquidations occur either from (1) poor planning, or (2) lack of supply.
Estimates of price-level changes for specific inventories are required for which of the following inventory methods?
A. Conventional retail.
B. Dollar-value LIFO.
C. Weighted average cost.
D. Average cost retail.
B. DV LIFO is based on price level indices. The ending inventory is determined at current cost, and then reduced to the price level existing at the base-year (the year LIFO was adopted). The ending inventory measured in base-year dollars is compared to beginning inventory measured in base-year dollars. The difference is the increase in inventory measured in base-year dollars. This difference is then raised to the current-year price level and added to beginning inventory DV LIFO, yielding ending inventory DV LIFO.
Thus, price-level changes are used throughout this method.
Price-level changes are used as a means of estimating the ending inventory. Individual item costs are not maintained or used in the valuation of inventory.
Walt Co. adopted the dollar-value LIFO inventory method as of January 1, 2005, when its inventory was valued at $500,000.
Walt's entire inventory constitutes a single pool. Using a relevant price index of 1.10, Walt determined that its December 31, 2005, inventory was $577,500 at current-year cost, and $525,000 at base-year cost.
What was Walt's dollar-value LIFO inventory on December 31, 2005?
Ending inventory at current cost
Ending inventory in base-year dollars $577,500/1.10
Less beginning inventory in base-year dollars
Equals increase in inventory in base-year dollars
Times current price level index
Equals increase in inventory at current prices
Plus beginning inventory, DV LIFO
Equals ending inventory, DV LIFO
In the year of adoption only, the beginning inventory under DV LIFO is the same as beginning inventory in base-year dollars. DV LIFO ending inventory is the sum of the base-year inventory plus layers measured in the prices of the year added.
T/F: When a liquidation occurs in DV LIFO, the earliest layer is assumed sold first.
T/F: When converting the change in inventory for the period in base-year dollars to the change in inventory in current-year dollars, the ratio of base index to current year index is used.
T/F: A firm using DV LIFO may use either an internal or external price index.
Under LCM, the replacement cost, net realizable value and the net realizable value less profit margin are three figures used to determine what?
The market value of inventory is determined by the middle of the 3 figures.
If the middle figure is less than cost, then the inventory is reported at market.