It represents the cumulative effect over time of ending inventory under LIFO vs. FIFO.
When adjusting COGS from LIFO to FIFO: COGSFIFO = COGSLIFO - Change in LIFO Reserve.
So far the discussions are based on the assumptions of rising prices and stable or growing inventory quantity. As a result, the LIFO reserve increases over time. However, LIFO reserves can decline for either of the two reasons listed below. In either case, the COGS will be smaller and the reported income will be higher relative to what they would have been if the LIFO reserve had not declined. However, the implications of a decline in the LIFO reserve on financial analysis vary depending on the reason of the decline.
The change in cost of goods sold would be $300,000 ($1,000,000 - $700,000). It would increase by $700,000 and decrease by $1,000,000. Therefore, the cost of goods sold under FIFO would be $11,700,000 ($12,000,000 - $300,000).
A. the difference between the inventory at LIFO and the inventory at FIFO
The LIFO reserve shown in the footnotes is the dollar amount difference between the inventory at LIFO and the inventory at FIFO. It can be used to restate the LIFO cost of goods sold to FIFO.
A. Unit purchases are less than unit sales.
In this situation, some beginning inventory is assumed to be sold, and consequently a LIFO layer is liquidated.
A. Add back the before-tax LIFO liquidation amount.
By subtracting the before-tax LIFO liquidation amount from the gross profit (which is a before-tax amount), the analyst can determine the portion of gross profit that is sustainable.
A. lower than profits reported under FIFO.
When purchases exceed sales, ending inventory will increase for the period. If LIFO is used, the recent prices, which are falling, will be included in cost of goods. Under FIFO, the result is the opposite: the newer, lower prices will be included in ending inventory. Thus, LIFO profits will be greater than FIFO profits.
A. increase, increase, increase
Assuming rising prices, liquidation of early LIFO layers will result in a charge to cost of goods sold of the older, lower-cost inventory items. Cost of goods sold will decrease, which will result in a higher net income and higher tax liability.
This is because LIFO inventories are valued at order and lower costs, and thus are less likely to be carried at values that are greater than their net realizable values.
I. LIFO reserves must be disclosed in a firm's annual report.
A. I and II
A. $200 higher.
If the cost of goods sold is higher if LIFO is used, then the income before taxes would be lower under LIFO, which means that the bonus will be $200 (.02 x $10,000) lower under LIFO.
A. Reduce the amortization period for the write off of goodwill.
This action results in a gain, and the current period net income increases (assuming prices are increasing). This would increase the manager's compensation for this period, and have little or no impact on compensation in future periods.
Beginning inventory: $900
Which of the following represents the correct LIFO-adjusted inventory turnover?
A. 6.0 times
The correct computation is $8,800 COGS + $200 LIFO liquidation/($ 900 Beginning inventory + $600 Beginning LIFO reserve + $850 Ending inventory + $650 Ending LIFO reserve)/2 = $ 9,000/$1,500 = 6.0 times.
I. Price increases in the cost of inventory
A. I and II
A decline in the LIFO reserve can occur for two reasons: (1) there is a liquidation of inventories: more sales are made than purchases, and (2) prices are falling during the period.
A. goods in inventory are damaged and have to be liquidated.
A LIFO liquidation is a decrease in the level of inventory from the beginning of the period to the end of the period. This will occur when there are more units of inventory sold than were purchased.
I. inventory price increases.
A. I only
The increased LIFO reserve should be used to adjust reported LIFO inventory and COGS.
I. higher tax payments
A. I and III
Higher profit margin, higher taxable income and higher tax payments. The reduction in inventory will generate more cash flow.
A. increased by the ending balance in its LIFO reserve.
LIFO Reserve = FIFO Inventory - LIFO Inventory Adding the ending balance in the LIFO reserve to the LIFO inventory would equal the ending balance for inventory on a FIFO basis.
A. a lower cost of goods sold, but a higher inventory balance.
The negative change in the LIFO reserve would increase the cost of goods sold under FIFO compared to LIFO. FIFO COGS = LIFO COGS - Change in LIFO reserve.
The LIFO reserve has a positive balance so that FIFO inventory would be higher than LIFO inventory. FIFO inventory = LIFO inventory + LIFO reserve.
A. inventory turnover.
The LIFO reserve did not change from 2015 to 2016. Without a change in the LIFO reserve, cost of goods sold would be the same under both methods. Sales are always the same for both; so gross profit margin would be the same in 2016. The FIFO inventory would be higher because the LIFO inventory and LIFO reserve are added to compute FIFO inventory. Because the inventory balances would be different under FIFO, inventory turnover, and net working capital would also be different under FIFO.