QUIZ: Analysis of Inventories

A company recently analyzed its inventory and found the following:

Original cost: $500
Estimated selling price: $530
Estimated selling costs: $50
Replacement cost: $490

According to US GAAP, using the lower of cost or market rule, what should be the carrying value of the inventory?

XYZ Corp. follows IFRS and had written down its inventory from $300 to $250 last year due to a decline in market value. This year, the market value of the inventory has increased to $320. What would be the carrying value of the inventory after the write-up?

A company’s inventory has a current market replacement cost of $1,200, original cost of $1,300, and an NRV of $1,180 with a normal profit margin of 10%. Under US GAAP, what should be the carrying value of the inventory?

A company that uses the LIFO inventory accounting method during a period of inflation is likely to experience:

If a company writes down its inventory to NRV, which of the following ratios would NOT be affected?

After a firm recognizes an inventory write-down, what can be expected in the subsequent periods concerning the impact on profitability if market conditions do not change?

In the context of inventory accounting during inflationary periods, a firm using LIFO would likely have:

A company that had previously written down its inventory to NRV under IFRS witnesses a market recovery but only up to 90% of the original inventory cost. What will be the impact on the company’s gross margin in the subsequent period?

During inflationary periods with stable or increasing inventory quantities, which of the following is true regarding LIFO compared to FIFO?

How is the gross margin affected when a company switches from LIFO to FIFO during a period of falling prices?

If a firm’s reported gross profit is lower due to the use of the LIFO method during rising prices, how would this affect the firm’s tax obligation?

A company recently transitioned from using the LIFO method to the FIFO method. During this period, there was an increasing price trend. Which of the following effects would most likely be observed in the company’s financial ratios?

Consider a scenario where a firm is consistently using the LIFO method. In the context of rising prices, which of the following statements regarding the firm’s financial ratios is true?

(1) The firm’s debt ratio will be lower compared to using FIFO.
(2) The firm’s inventory turnover will be lower compared to using FIFO.

In a situation where prices are continuously rising, which inventory accounting method will likely produce the highest debt-to-equity ratio?

Company X and Company Y are both in the retail industry. Company X uses FIFO while Company Y uses LIFO. During a period of stable prices, which of the following is likely true regarding their liquidity ratios?

Which of the following scenarios is most indicative of a LIFO liquidation event?

XYZ Ltd. noted an unusually high profit margin this year. Analysts suspect a LIFO liquidation. Which external event might have indirectly triggered this LIFO liquidation?

If an analyst wants to assess the impact of LIFO liquidation on a company’s profit margins, they should particularly focus on:

XYZ Corp has noticed that despite their sales growing faster than the industry average, their finished goods inventory has also been increasing at a rapid pace. This scenario indicates:

Which of the following can result from holding excessive inventory levels?

XYZ Corp., a retail firm, reported an increase in raw materials and work in progress inventory, but a decrease in finished goods inventory. This could suggest:

A company, during its annual audit, noticed significant discrepancies in its inventory counts. Further investigation revealed that inventory shrinkage was higher than usual due to theft. How would this revelation impact the company’s financial statements?