Financial Reporting And Analysis - Financial Reporting And Analysis Section 2
- Option : C
- Explanation : When using the FIFO inventory method the ending inventory, the cost of goods sold and the gross margin, are the same under either the perpetual or periodic methods. The use of a perpetual or periodic system makes a difference under weighted average, and LIFO.
- Option : C
- Explanation : During a period of rising prices, ending inventory under LIFO will be lower than that of FIFO and cost of goods sold higher; therefore, inventory turnover (CGS/average inventory) will be higher.
- Option : A
- Explanation : Britco uses FIFO which means that cost of goods sold reflects old prices. Given that prices are falling, old prices are higher than the current cost of replacing inventory.
- Option : A
- Explanation : All else held constant, in a period of declining costs the ending inventory would be higher under weighted average and cost of goods sold (COGS) will be lower (compared to FIFO) resulting in higher net income and retained earnings. There will be no impact on the debt level, current or long-term. Therefore the debt-to-equity ratio (Total debt ÷ Total shareholder’s equity) will decrease due to the increase in retained earnings (and higher shareholders’ equity).
- Option : B
- Explanation : The capitalized amount = purchase price + costs that are involved in extending asset’s life or getting it ready to use = 20 + 1 + 0.3 = 21.3. Orientation and training costs are expensed during the period.
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