Financial Reporting, Financial Statement Analysis and Valuation
8th Edition
ISBN: 9781285190907
Author: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher: Cengage Learning
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Chapter 2, Problem 3QE
Trade-Offs among Acceptable Accounting Alternatives. Firms value inventory under a variety of assumptions, including two common methods: last-in first-out (LIFO) and first-in first-out (FIFO). Ignore taxes, assume that prices increase over time, and assume that a firm’s inventory balance is stable or grows over time. Which inventory method provides a
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Explain the purpose of the inventory turnover ratio?
Is it possible for a firm to have a high current ratio and still have difficulty paying its current bills? Why or why not?
Which of the following statements is true?
Select one:
a. The cost flow assumption used must match the physical flow of goods through the firm.
b. Firms that use LIFO for tax purposes must also use it for book purposes.
c. The Weighted Average Method can lead to phantom profits in periods of rising prices.
d. There is a big difference in CGS for the different methods when a firm has high inventory turnover.
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Inventory valuation methods are based on the systematic cash flow of adding and removing inventory costs. Each method has its advantages and disadvantages. When selecting an inventory method, management should select the method that best reflects operational needs.
Last in, first out (LIFO) and first in, first out (FIFO) are two of the inventory methods that we have discussed.
Assume that you are investing in a publicly traded company during a period of rising prices.
Would you prefer that the company use LIFO or FIFO for inventory valuation? Please support your response.
Chapter 2 Solutions
Financial Reporting, Financial Statement Analysis and Valuation
Ch. 2 - Prob. 1QECh. 2 - Asset Valuation and Income Recognition. Asset...Ch. 2 - Trade-Offs among Acceptable Accounting...Ch. 2 - Income Flows versus Cash Flows. The text states,...Ch. 2 - Prob. 5QECh. 2 - Prob. 6QECh. 2 - Prob. 7QECh. 2 - Prob. 8QECh. 2 - Computation of Income Tax Expense. A firms income...Ch. 2 - Computation of Income Tax Expense. A firms income...
Ch. 2 - Costs to Be Included in Historical Cost Valuation....Ch. 2 - Effect of Valuation Method for Nonmonetary Asset...Ch. 2 - Prob. 13PCCh. 2 - Prob. 14PCCh. 2 - Prob. 15PCCh. 2 - Deferred Tax Assets. Components of the deferred...Ch. 2 - Interpreting Income Tax Disclosures. The financial...Ch. 2 - Interpreting Income Tax Disclosures. Prepaid Legal...Ch. 2 - Interpreting Income Tax Disclosures. The financial...Ch. 2 - Analyzing Transactions. Using the analytical...Ch. 2 - Prob. 21PCCh. 2 - Starbucks The financial statements of Starbucks...Ch. 2 - Prob. 1BICCh. 2 - Prob. 1CICCh. 2 - Prob. 1DICCh. 2 - Prob. 1EICCh. 2 - Prob. 1FICCh. 2 - Starbucks The financial statements of Starbucks...
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Explain whether the following situations, taken independently, would be favorable or unfavorable: ( a ) increase ingross profit percentage, ( b ) decrease in inventory turnoverratio, ( c ) increase in earnings per share, ( d ) decrease indays to collect, and ( e ) increase in net profit margin.arrow_forwardThe management of Milque Corp. is considering the effects of various inventory-costing methods on its financial statements and its income tax expense. Assuming that the price the company pays for inventory is increasing, which method will: (a) provide the highest net income? Select the inventory-costing method that will provide the highest net income (b) provide the highest ending inventory? Select the inventory-costing method that will provide the highest ending inventory (c) result in the lowest income tax expense? Select the inventory-costing method that will result in the lowest income tax expense (d) result in the most stable earnings over a number of years? Select the inventory-costing method that will result in the most stable earnings over a number of yearsarrow_forwardWhich inventory valuation approach comes closest to having COGS represent the costs the firm most recently paid to acquire inventory? O Average cost O FIFO O Not enough information to answer O LIFOarrow_forward
- Which one of the following statements is true? a. Income manipulation is difficult under LIFO.b. Accounting principles do not require that the inventory cost flow approximate the physical flow of goods.c. Companies may use LIFO for tax purposes and FIFO in the financial statements.d. In periods of declining prices, LIFO will result in the payment of less income taxes.arrow_forwardWhich one of the following statements is true? a. Under conditions of rising prices, the LIFO method results in lower income than the FIFO method. b. In most cases, the LIFO method approximates the physical flow of items in inventory. c. The LIFO mthod produces a higher ending inventory value than the FIFO method. d. The FIFO method excludes holding gains from incomearrow_forwardWhich of the following regarding the lower of cost ormarket rule for inventory are true?(i) The lower of cost or market rule is an example of thehistorical cost principle.(ii) When the market value of inventory drops belowthe original cost of inventory shown in the financialrecords, net income is reduced.(iii) When the market value of inventory drops belowthe original cost of inventory shown in the financialrecords, total assets are reduced.a. (i) only c. (ii) and (iii)b. (ii) only d. All of the abovearrow_forward
- Which inventory method will result in lower net income in a period of rising prices? Which inventory method will result in lower net income in a period of falling prices?arrow_forwardDetailed answerarrow_forwardIf inventory prices are rising, which inventory costing method should produce the smallest payment for taxes?arrow_forward
- A high inventory turnover ratio provides evidence that a company is having problems with stockouts and disgruntled customers. Do you agree? Explain.arrow_forwardWhich of the following would increase risk? a. Raise the level of working capital b. Increase the amount of equity financing c. Increase the amount of short term borrowing d. Decrease the amount of inventory by formulating an effective inventory policyarrow_forwardThe management of Mastronardo Company is considering the effects of inventory-costing methods on its financial statements.Assuming that the price the company pays for inventory is increasing, which method will: a. Provide the highest gross profit? select a method FIFOLIFOAverage-cost b. Provide the highest ending inventory? select a method FIFOLIFOAverage-costarrow_forward
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