CFA study session 8: financial reporting and analysis

REFER TO PAGES 449-450 What is the value of ending inventory for the first quarter if the company uses a perpetual LIFO inventory valuation method? A. $14,500 B. $15,000 C. $16,000

A. $14,500

REFER TO PAGES 457-458 If Karp had used FIFO instead of LIFO, its reported net income for the year ended 31 December 2009 would have been higher by an amount closest to: A. $30 million. B. $38 million. C. $155 million.

A. $30 million.

ASSUME THE COMPANY USES A PERIODIC INVENTORY SYSTEM Carey Company adheres to US GAAP, whereas Jonathan Company adheres to IFRS. It is least likely that: A. Carey has reversed an inventory write-down. B. Jonathan has reversed an inventory write-down. C. Jonathan and Carey both use the FIFO inventory accounting method.

A. Carey has reversed an inventory write-down.

REFER TO PAGES 457-458 If Karp had used FIFO instead of LIFO, which of the following ratios computed as of 31 December 2009 would most likely have been lower? A. Cash ratio. B. Current ratio. C. Gross profit margin.

A. Cash ratio.

REFER TO PAGES 453-456 Annan's statement regarding the perpetual and periodic inventory systems is most significant when which of the following costing systems is used? A. LIFO. B. FIFO. C. Specific identification.

A. LIFO.

REFER TO PAGES 449-450 Which inventory accounting method results in the lowest inventory turnover ratio for the first quarter? A. Periodic LIFO B. Perpetual LIFO C. Perpetual FIFO

A. Periodic LIFO

ASSUME THE COMPANY USES A PERIODIC INVENTORY SYSTEM Zimt AG uses the FIFO method, and Nutmeg Inc. uses the LIFO method. Compared to the cost of replacing the inventory, during periods of rising prices, the cost of sales reported by: A. Zimt is too low. B. Nutmeg is too low. C. Nutmeg is too high.

A. Zimt is too low

LIFO reserve is most likely to increase when inventory unit: A. costs are increasing. B. costs are decreasing. C. levels are decreasing.

A. costs are increasing.

If inventory unit costs are increasing from period-to-period, a LIFO liquidation is most likely to result in an increase in: A. gross profit. B. LIFO reserve. C. inventory carrying amounts.

A. gross profit.

Fernando's Pasta purchased inventory and later wrote it down. The current net realizable value is higher than the value when written down. Fernando's inventory balance will most likely be: A. higher if it complies with IFRS. B. higher if it complies with US GAAP. C. the same under US GAAP and IFRS.

A. higher if it complies with IFRS.

REFER TO PAGES 459-460 Compared with its unadjusted debt-to-equity ratio, Mikko's debt-to-equity ratio as of 31 December 2009, after the adjustments suggested by Groff, is: A. lower. B. higher. C. the same.

A. lower.

ASSUME THE COMPANY USES A PERIODIC INVENTORY SYSTEM Zimt AG wrote down the value of its inventory in 2007 and reversed the write-down in 2008. Compared to the results the company would have reported if the write-down had never occurred, Zimt's reported 2008: A. profit was overstated. B. cash flow from operations was overstated. C. year-end inventory balance was overstated.

A. profit was overstated.

Carrying inventory at a value above its historical cost would most likely be permitted if: A. the inventory was held by a producer of agricultural products. B. financial statements were prepared using US GAAP. C. the change resulted from a reversal of a previous write-down.

A. the inventory was held by a producer of agricultural products.

REFER TO PAGES 457-458 If Karp had used FIFO instead of LIFO, Karp's retained earnings as of 31 December 2009 would have been higher by an amount closest to: A. $117 million. B. $124 million. C. $155 million.

B. $124 million.

REFER TO PAGES 457-458 If Karp had used FIFO instead of LIFO, the amount of cost of goods sold reported by Karp for the year ended 31 December 2009 would have been closest to: A. $2,056 million. B. $2,173 million. C. $2,249 million.

B. $2,173 million.

REFER TO PAGES 453-456 In Kern's comparative ratio analysis, the 2009 inventory turnover ratio for Century Chocolate is closest to: A. 5.07. B. 5.42. C. 5.55.

B. 5.42.

REFER TO PAGES 459-460 Crux's inventory turnover ratio computed as of 31 December 2009, after the adjustments suggested by Groff, is closest to: A. 5.67. B. 5.83. C. 6.13.

B. 5.83.

REFER TO PAGES 459-460 Rolby's net profit margin for the year ended 31 December 2009, after the adjustments suggested by Groff, is closest to: A. 6.01%. B. 6.20%. C. 6.28%.

B. 6.20%

REFER TO PAGES 453-456 Using the inventory record for purchased lemon drops shown in Exhibit 4, the cost of sales for 2009 will be closest to: A. CHF 3,550. B. CHF 4,550. C. CHF 4,850.

B. CHF 4,550.

In a period of declining inventory unit costs and constant or increasing inventory quantities, which inventory method is most likely to result in a higher debt-to-equity ratio? A. LIFO B. FIFO C. Weighted average cost

B. FIFO

Which of the following most likely signals that a manufacturing company expects demand for its product to increase? A. Finished goods inventory growth rate higher than the sales growth rate B. Higher unit volumes of work in progress and raw material inventories C. Substantially higher finished goods, with lower raw materials and work-in-process

B. Higher unit volumes of work in progress and raw material inventories

ASSUME THE COMPANY USES A PERIODIC INVENTORY SYSTEM Like many technology companies, TechnoTools operates in an environment of declining prices. Its reported profits will tend to be highest if it accounts for inventory using the: A. FIFO method. B. LIFO method. C. weighted average cost method.

B. LIFO method.

ASSUME THE COMPANY USES A PERIODIC INVENTORY SYSTEM Zimt AG uses the FIFO method, and Nutmeg Inc. uses the LIFO method. Compared to the cost of replacing the inventory, during periods of rising prices the ending inventory balance reported by: A. Zimt is too high. B. Nutmeg is too low. C. Nutmeg is too high.

B. Nutmeg is too low.

Company A adheres to US GAAP and Company B adheres to IFRS. Which of the following is most likely to be disclosed on the financial statements of both companies? A. Any material income resulting from the liquidation of LIFO inventory B. The amount of inventories recognized as an expense during the period C. The circumstances that led to the reversal of a write down of inventories

B. The amount of inventories recognized as an expense during the period

ASSUME THE COMPANY USES A PERIODIC INVENTORY SYSTEM Compared to using the FIFO method to account for inventory, during periods of rising prices, a company using the LIFO method is most likely to report higher: A. net income. B. cost of sales. C. income taxes.

B. cost of sales.

REFER TO PAGES 457-458 If Karp had used FIFO instead of LIFO, its debt to equity ratio computed as of 31 December 2009 would have: A. increased. B. decreased. C. remained unchanged.

B. decreased.

ASSUME THE COMPANY USES A PERIODIC INVENTORY SYSTEM Compared to a company that uses the FIFO method, during periods of rising prices a company that uses the LIFO method will most likely appear more: A. liquid. B. efficient. C. profitable.

B. efficient.

Compared with a company that uses the FIFO method, during a period of rising unit inventory costs, a company using the LIFO method will most likely appear more: A. liquid. B. efficient. C. profitable.

B. efficient.

ASSUME THE COMPANY USES A PERIODIC INVENTORY SYSTEM Compared to using the weighted average cost method to account for inventory, during a period in which prices are generally rising, the current ratio of a company using the FIFO method would most likely be: A. lower. B. higher. C. dependent upon the interaction with accounts payable.

B. higher.

During periods of rising inventory unit costs, a company using the FIFO method rather than the LIFO method will report a lower: A. current ratio. B. inventory turnover. C. gross profit margin.

B. inventory turnover.

REFER TO PAGES 453-456 The most accurate statement regarding Annan's reasoning for requiring Kern to select a competitor that reports under IFRS for comparative purposes is that under US GAAP: A. fair values are used to value inventory. B. the LIFO method is permitted to value inventory. C. the specific identification method is permitted to value inventory.

B. the LIFO method is permitted to value inventory.

Eric's Used Book Store prepares its financial statements in accordance with IFRS. Inventory was purchased for £1 million and later marked down to £550,000. One of the books, however, was later discovered to be a rare collectible item, and the inventory is now worth an estimated £3 million. The inventory is most likely reported on the balance sheet at: A. £550,000. B. £1,000,000. C. £3,000,000.

B. £1,000,000.

A company using the LIFO method reports the following in £: 2015 2014 Cost of goods sold 50,800 48,500 Ending inventories 10,550 10,000 LIFO reserve 4,320 2,600 Cost of goods sold for 2015 under the FIFO method is closest to: A. £48,530. B. £49,080. C. £52,520.

B. £49,080.

Mustard Seed PLC adheres to IFRS. It recently purchased inventory for €100 million and spent €5 million for storage prior to selling the goods. The amount it charged to inventory expense (€ millions) was closest to: A. €95. B. €100. C. €105.

B. €100.

ASSUME THE COMPANY USES A PERIODIC INVENTORY SYSTEM Cinnamon Corp. started business in 2007 and uses the weighted average cost method. During 2007, it purchased 45,000 units of inventory at €10 each and sold 40,000 units for €20 each. In 2008, it purchased another 50,000 units at €11 each and sold 45,000 units for €22 each. Its 2008 cost of sales (€ thousands) was closest to: A. €490. B. €491. C. €495.

B. €491.

REFER TO PAGES 457-458 If Karp had used FIFO instead of LIFO, the amount of inventory reported as of 31 December 2009 would have been closest to: A. $465 million. B. $658 million. C. $775 million.

C. $775 million.

REFER TO PAGES 453-456 What is the most likely justification for Century Chocolate's choice of inventory valuation method for its purchased finished goods? A. It is the preferred method under IFRS. B. It allocates the same per unit cost to both cost of sales and inventory. C. Ending inventory reflects the cost of goods purchased most recently.

C. Ending inventory reflects the cost of goods purchased most recently. (The carrying amount of inventories under FIFO will more closely reflect current replacement values because inventories are assumed to consist of the most recently purchased items.)

REFER TO PAGES 459-460 The best answer to Borghi's Question 1 is: A. Crux's. B. Rolby's. C. Mikko's.

C. Mikko's. (Mikko's gross margin ratio best reflects the current gross margin of the industry because Crux's LIFO reserve is decreasing. This could reflect a LIFO liquidation by Crux which would distort gross profit margin.)

REFER TO PAGES 453-456 If the trend noted in the ICCO report continues and Century Chocolate plans to maintain constant or increasing inventory quantities, the most likely impact on Century Chocolate's financial statements related to its raw materials inventory will be: A. a cost of sales that more closely reflects current replacement values. B. a higher allocation of the total cost of goods available for sale to cost of sales. C. a higher allocation of the total cost of goods available for sale to ending inventory.

C. a higher allocation of the total cost of goods available for sale to ending inventory.

A write down of the value of inventory to its net realizable value will have a positive effect on the: A. balance sheet. B. income statement. C. inventory turnover ratio.

C. inventory turnover ratio.

ASSUME THE COMPANY USES A PERIODIC INVENTORY SYSTEM Zimt AG wrote down the value of its inventory in 2007 and reversed the write-down in 2008. Compared to the ratios that would have been calculated if the write-down had never occurred, Zimt's reported 2007: A. current ratio was too high. B. gross margin was too high. C. inventory turnover was too high.

C. inventory turnover was too high.

REFER TO PAGES 453-456 The costs least likely to be included by the CFO as inventory are: A. storage costs for the chocolate liquor. B. excise taxes paid to the government of Brazil for the cacao beans. C. storage costs for chocolate and purchased finished goods awaiting shipment to customers.

C. storage costs for chocolate and purchased finished goods awaiting shipment to customers.

Inventory cost is least likely to include: A. production-related storage costs. B. costs incurred as a result of normal waste of materials. C. transportation costs of shipping inventory to customers.

C. transportation costs of shipping inventory to customers.

ASSUME THE COMPANY USES A PERIODIC INVENTORY SYSTEM Zimt AG started business in 2007 and uses the FIFO method. During 2007, it purchased 45,000 units of inventory at €10 each and sold 40,000 units for €20 each. In 2008, it purchased another 50,000 units at €11 each and sold 45,000 units for €22 each. Its 2008 ending inventory balance (€ thousands) was closest to: A. €105. B. €109. C. €110.

C. €110.