Accounting 4356 Exam 2

Cash flow assessment plays a central role in analyzing:

-the credit risk of a company

-management’s effectiveness

-the future earnings potential of a company

-the firm’s investment potential

the credit risk of a company

A component that is valuation-relevant, but is not expected to persist into the future is a

-permanent earnings component

-transitory earnings component

-noise component

-quiet component

transitory earnings component

Income from continuing operations, excluding special or nonrecurring items, is generally regarded as

-permanent earnings

-transitory earnings

-value-irrelevant earnings

-abnormal earnings

permanent earnings

Income or loss from discontinued operations is regarded as

-permanent earnings

-transitory earnings

-value-irrelevant earnings

-abnormal earnings

transitory earnings

An adjustment to income due to a non-recurring item is regarded as

-permanent earnings

-transitory earnings

-value-irrelevant earnings

-abnormal earnings

transitory earnings

Reported earnings numbers often contain three distinctly components possibly subject to different earnings capitalization rates. Which of the following is not one of these components

-A permanent earnings component

-A transitory earnings component

-A restructured earnings component

-A value-irrelevant earnings component

A restructured earnings component

Which one of the following is an example of sustainable earnings

-Loss from debt retirement

-Expenditures for advertising

-Earnings from repeat customers

-Gain from corporate restructuring

Earnings from repeat customers

The interest rate on a revolving loan will usually

-be below the prime interest rate

-be equal to the prime interest rate

-remain fixed

-float

float

Short-term notes sold directly to investors by large, highly rated companies are called

-commercial paper

-secured notes

-bonds

-debentures

commercial paper

A bond that is considered unsecured is referred to as a

-debenture

-sinking fund bond

-senior bond

-callable bond

debenture

A qualitative assessment of the business, its customers and suppliers, and management’s character and capability is known as

-covenant waivers

-the diligence

-indenture evaluation

-a debenture

the diligence

The degree to which cash needs can be satisfied during periods of fiscal stress is known as

-credit availability

-credit worthiness

-working capital

-financial flexibility

financial flexibility

The two ways to implement the discounted cash flow valuation approach are

-CAPM and the weighted average cost of capital

-the free cash flow model and the flows to equity model

-the price/earnings model and the cash flows model

-the weighted cash flows model and the capital assets model

the free cash flow model and the flows to equity model

Financial statement forecasts are

-one of the required note disclosures found in each company’s annual report

-filed annually with the SEC by all public companies

-frequently used in determining management compensation

-essential ingredients of business valuation and credit risk analysis

essential ingredients of business valuation and credit risk analysis

Common value-relevant attributes for determining the value of a company include all the following except

-fair value of fixed assets

-balance sheet book values

-account earnings

-free cash flows

fair value of fixed assets

Which of the following statements is false regarding the flows to equity model

-the forecasted cash flow stream to be discounted is reduced by flows to preferred shareholders

-the flows are reduced by cash interest payments

-the flows are increased by debt repayments

-the flows calculation begins with free cash flow

the flows are increased by debt repayments

Consistent with FASB Concept Statement No. 8, accounting information should be useful to

-lenders

-other creditors

-investors

-all are stakeholders for whom the information should be useful

all are stakeholders for whom the information should be useful

Loan provisions that are specifically designed to restrict dividend payments ot shareholders are called

-debt covenants

-debt obligations

-stock covenants

-stock agreements

debt covenants

A borrower that violated one or more loan covenants but makes all interest and principal payments timely

-is in payment default

-is in trigger default

-is in technical default

-is not in default

is in technical default

When one party to a business relationship can make decisions that benefit him or her but harm another other party in the relationship

-a lawsuit is automatically filed

-a contract arises

-a conflict of interest arises

-a contingent liability arises

a conflict of interest arises

Potential conflicts of interest permeate

-few business relationships

-only relationships between investors and mangers

-only relationships between borrowers and lenders

-many business relationships

many business relationships

A covenant that specifies a required minimum level of net worth and working capital is a/an

-compliance covenant

-financial covenant

-implicit covenant

-negative covenant

financial covenant

Affirmative covenants generally would not include which of the following stipulations

-the lender has the right to inspect business assets and business contracts

-limits on the borrower’s total indebtedness

-the borrower must maintain insurance on business properties

-specific financial covenants and reporting requirements

limits on the borrower’s total indebtedness

Many loan agreements have financial covenants that rely on

-floating GAAP

-fixed GAAP

-flexible GAAP

-regulatory accounting procedures (RAP)

floating GAAP

Debt covenants benefit

-lenders

-borrowers

-both lenders and borrowers

-neither borrowers nor lenders, but are required by the SEC as a condition of issuing debt securities

both lenders and borrowers

The section of a loan agreement that describes circumstances in which the creditor obtain additional rights is called the

-events of compliance section

-certificate of compliance section

-events of termination section

-events of default section

events of default section

The failure of a company to pay other debts, such as payables or other loans, when due is called

-routine default

-non-default

-cross default

-compliance default

cross default

Which statement below best describes a technical default

-the borrower violates one or more loan covenants but has made all interest and principal payments

-the borrower has not violated any covenants but has missed both an interest and principal payment

-the borrower violates one or more loan covenants but has made all principal payments

-the borrower violates one or more loan covenants but has made all interest payments

the borrower violates one or more loan covenants but has made all interest and principal payments

According to the SEC, any breach of a loan covenant that existed at the balance sheet date that has not subsequently been cured should

-be recorded as an adjustment to the financial statements

-be disclosed in the notes to the financial statements

-be disclosed in the audit report

-not be disclosed

be disclosed in the notes to the financial statements

When a debt covenant is violated, the related debt must be classified as current if it is

-probable that the borrower will not be able to cure the default within the next twelve months

-probable that the borrower will not be able to cure the default within the next fifteen months

-probable that the borrower will be able to cure the default in the next twelve months

-probable that the borrower will be able to cure the default in the next fifteen months

probable that the borrower will not be able to cure the default within the next twelve months

When a borrower is unable to make a scheduled interest payment, the type of default that occurs is a 

-technical default

-covenant default

-payment default

-transitory default

payment default

Information about a company’s executive compensation practices can be found in a companies

-annual report

-form 10-K

-proxy statement

-form 10-Q

proxy statement

Managers believe it is important to meet earnings benchmarks. When a number of executives were asked-within the parameters of GAAP-which choices your company might make to hit an earnings target, the most popular choice was to

-decrease discretionary spending

-alter accrual assumptions (such as allowance)

-postpone taking an accounting change

-draw down on reserves previously set aside

decrease discretionary spending

Compensation plans should

-not link incentive plans to financial performance

-not be based on long-term business goals

-align shareholders’ incentives with the objectives of managers

-align managers’ incentives with the objectives of shareholders

align managers’ incentives with the objectives of shareholders

A compensation committee should be comprised of

-the CEO and the CFO of the company

-the CEO of the company and the outside attorney

-members of the Board of Directors who are also officers of the company

-members of the Board of Directors who are outside (non-management) directors

members of the Board of Directors who are outside (non-management) directors

Banks that fail to comply with regulations, including the failure to maintain an adequate capital adequacy ratio, face

-higher costs

-lower costs

-mergers and expansion of services

-incarceration of officers

mergers and expansion of services

In the banking industry, the ratio of investor capital/gross assets, as defined by RAP, is the

-capital asset ratio

-capital adequacy ratio

-gross asset ratio

-indirect capital ratio

capital adequacy ratio

A bank’s estimated bad debt expense associated with its loan receivables is the

-loan loss provision

-loan charge-offs

-allowance for loans

-accumulated loan loss

loan loss provision

IRS regulations govern the

-computation of net income for GAAP

-computation of net income for tax purposes

-computation of gross profit for GAAP

-computation of net income for the SEC

computation of net income for tax purposes

Consistent with IRS revenue code 162(m), companies were able to deduct non-performance- based compensation for a single executive to the extent that it does not exceed $1 million. Under the new Tax Cuts and Jobs Act, this limit has been

-increased to $5 million

-increased to $10 million

-decreased to $500,000

-eliminated

eliminated

Consistent with the Tax Cut and Jobs Act, which companies are subject to restriction on the deductibility of non-performance compensation

-only private companies

-only public companies

-companies with market capitalization in excess of $75 million

-all companies that sold registered securities in a public offering

all companies that sold registered securities in a public offering

With respect to executive compensation, the Dodd-Frank Act requires that shareholders

-vote on executive compensation at least once every three years

-vote on executive compensation every fiscal period

-determine the annual executive compensation package for key executives

-not discuss any aspects of executive compensation with non-shareholders

vote on executive compensation at least once every three years

The two basic incentive compensation plans are referred to as “plan within a plan” and

-top-down plan

-bottom-up plan

-plan outside plan

-limited plan

top-down plan

A company must disclose the median pay of employees and the CEO pay ratio consistent with the

-Dodd-Frank Act

-Sarbanes-Oxley Act

-SEC Act of 1933

-SEC Act of 1934

Dodd-Frank Act

Net realizable value of receivables is gross receivables minus

-provision for credit losses and sales returns

-provision for credit losses and estimated returns and allowances

-estimated provision for credit losses and estimated returns and allowances

-proven credit losses and estimated returns and allowances

estimated provision for credit losses and estimated returns and allowances

If sales terms, customer creditworthiness, and accounting methods remain constant, the percentage change in sales and the percentage change in accounts receivable

-should be about equal

-should drift farther apart

-will be zero

-none of these answer choices are correct

should be about equal

The allowance for credit losses account is

-added to gross accounts receivable

-added to net accounts receivable

-subtracted from gross accounts receivable

-subtracted from net account receivable

subtracted from gross accounts receivable

When a specific account receivable is written off, the entry

-increases net income

-decreases net income

-can either decrease or increase net income

-has no effect on net income

has no effect on net income

Management must periodically assess the reasonableness of the allowance for credit losses if it uses the

-direct write-off method

-percent of sales method only

-percent of gross receivables method only

-percent of sales or the percent of gross receivables method

percent of sales or the percent of gross receivables method

The allowance for credit losses account is classified as

-a contra-asset account

-a contra-revenue account

-a contra-expense account

-a contra-equity account

a contra-asset account

Smith Company is a manufacturer of medical devices and has an excellent quality control department, thus defective product returns are rare. In 20X1, Smith reported sales of $276,344,000. The company did, however, have two return in 20X1 related to the wrong product model being shipped. Smith’s 20X1 journal entry to record a $37,500 return from a customer (Foxtrot Medical) would be

-DR sales returns and allowances for $37,500 CR accounts receivable-Foxtrot Medical $37,500

-DR sales returns and allowances $37,500 CR sales $37,500

-DR sales $37,500 CR accounts receivable-Foxtrot Medical $37,500

-DR sales returns expenses $37,500 CR accounts receivable-Foxtrot Medical $37,500

DR sales returns and allowances for $37,500 CR accounts receivable-Foxtrot Medical $37,500

An analyst notes that ABC Inc’s allowance for credit losses as a percentage of year-end accounts receivable has changed. Which of the following would not be a plausible explanation for the change

-ABC’s management expects a default rate on outstanding receivables different than prior years

-ABC’s management is using the allowance for credit losses to “manage” earnings

-the company ages its receivables and the distribution of accounts receivable over the various age categories is different than prior years

-the company has stopped making sales on credit

the company has stopped making sales on credit

Research evidence suggests that

-companies increase their allowance for credit losses when earnings are otherwise low and then decrease the provision when earnings are high

-companies reduce their allowance for credit losses when earnings are otherwise low and then increase the provision when earnings are high

-companies reduce their allowance for credit losses when earnings are otherwise high and then increase the provision when earnings are low

-companies increase their allowance for credit losses when earnings are otherwise high and then decrease the provision when earnings are low

companies increase their allowance for credit losses when earnings are otherwise low and then decrease the provision when earnings are high

XYZ Co.’s 20X2 ratio of allowance for credit losses to gross receivables has declined from the ratio at the end of 20X1. To help evaluate whether the reduction in XYZ’s ratio is reasonable, an analyst should do all of the following except

-compare the ratio to other firms in XYZ’s industry

-look for additional discussion in XYZ’s annual report

-contact the SEC for more information

-listen to the company’s earnings briefing for the analysts

contact the SEC for more information

Which one of the following explanations for the growth of accounts receivable outstripping the growth of sales represents a red ag

-the firm adopts new credit terms that lengthen the payment terms to the industry average

-the firm adopts an aggressive revenue recognition policy

-the firm develops an attractive credit policy for first time buyers

-the firm changes its timing of revenue recognition to a more conservative approach

the firm adopts an aggressive revenue recognition policy

Which one of the following is an example of an aggressive revenue recognition policy

-a firm recognizes revenue at time of collection

-a firm recognizes revenue at the expiration of the sales returns period

-a firm with a liberal sales return policy recognizes revenue at shipment

-a firm with a liberal sales return policy recognizes revenue at shipment with a corresponding allowance for returns and allowances

a firm with a liberal sales return policy recognizes revenue at shipment

When a note receivable has a stated interest rate that is lower than the prevailing rate for similar loans, it is recorded at

-present value based on the stated interest rate

-present value based on the prevailing rate of interest

-maturity value

-net realizable value

present value based on the prevailing rate of interest

Non-interest bearing notes are initially recorded at

-historical cost

-maturity value because they bear no interest

-present value, based on the prevailing interest for loans of this type

-future value, based on the prevailing interest for loans of this type

present value, based on the prevailing interest for loans of this type

Accounting for long-term credit sales transactions utilizing notes receivable 

-ignores interest unless an interest rate is specified in the note

-makes it difficult to assess the degree to which a company’s overall earnings are due to profitable credit sales versus profitable customer financing

-achieves a clear separation between income from credit sales and interest earned

-is controversial because it necessitates use of an assumed interest rate

achieves a clear separation between income from credit sales and interest earned

The sale of receivables to a third party is called

-factoring

-collateralizing

-discounting

-securization

factoring

When a loan collateralized by receivables

-the bank makes the loan without recourse

-the bank has recourse against the accounts receivable customers

-a company receives cash and is not responsible for repaying the loan

-a company receives cash and is responsible for repaying the loan

a company receives cash and is responsible for repaying the loan

Frank Ritter, Inc. enters into an arrangement with Hisker Enterprise whereby Hisker will assume $100,000 of Ritter’s receivables for a 6% fee. These receivables have a related allowance for credit losses of $3500. Assuming the transaction was a factoring arrangement without recourse, which one of the following entries will Ritter make

-DR cash $100,000 CR accounts receivables $100,000

-DR cash $94,000 DR loss on sale of receivables 6000 CR accounts receivable $100,000

-DR cash $94,000 DR allowance for credit losses 3500 DR loss on sale of receivables 2500 CR accounts receivable $100,000

-DR cash $94,000 DR loss on sale of receivables 6000 CR due to Hisker Enterprises $100,000

DR cash $94,000 DR allowance for credit losses 3500 DR loss on sale of receivables 2500 CR accounts receivable $100,000

Frank Ritter, Inc. enters into an arrangement with Hisker Enterprises whereby Hisker will assume $100,000 of Ritter’s receivables for a 6% fee. These receivables have a related allowance for credit losses of $3500. Assuming the transaction was a collateralized loan, which one of the following entries will Ritter make to record this transaction

-DR cash $94,000 DR prepaid interest 6000 CR accounts receivable $100,000

-DR cash $94,000 DR interest expense 6000 CR loan payable - Hisker Enterprises $100,000

-DR cash $94,000 DR prepaid interest 6000 CR loan payable - Hisker Enterprises $100,000

-DR cash $94,000 CR loan payable - Hisker $94,000

DR cash $94,000 DR interest expense 6000 CR loan payable - Hisker Enterprises $100,000

If a note receivable from a customer is discounted at a bank with recourse and the customer defaults on final payment, the seller

-has no obligation to the bank

-must repay the full amount of the note plus interest to the bank

-must refund the proceeds of the discounting to the bank

-must repay the principal only to the bank

must repay the full amount of the note plus interest to the bank

Per authoritative accounting literature, the determination of whether a transfer of receivables is a sale or collateralized borrowing hinges on whether the

-transfer was with or without recourse

-transferor collects payments directly from the customer

-transferor surrenders control over the receivable

-custom ultimately defaults 

transferor surrenders control over the receivable

Regan, Inc. implemented a program to improve the collection of its receivables. Over the past two years, the company has collected 88% of its receivables, up from 80%. A review of the company’s financial statements would be expected to show

-a reduction in the percentage of the allowance for credit losses to receivables

-an increase in the percentage of the allowance for credit losses to receivables

-no difference in the percentage of the allowance for credit losses to receivables

-none of these answer choices are correct

a reduction in the percentage of the allowance for credit losses to receivables

Which of the following is not a reason a company might accelerate cash collections

-The company may have an immediate need for cash but be short of it

-Current GAAP allows “off-balance sheet” treatment of factored receivables and collateralized borrowings, thus enabling management to “window dress” the company’s financial position

-there may be an imbalance between the credit terms of the company’s suppliers and the time required to collect customer receivables

-competitive conditions require credit sale, but the company is unwilling to bear the cost of processing and collecting receivables

Current GAAP allows “off-balance sheet” treatment of factored receivables and collateralized borrowings, thus enabling management to “window dress” the company’s financial position

Which of the following is false regarding uncollectible accounts

-most companies establish credit policies by weighing the expected cost of credit sales against the expected benefit of increased sales

-accrual accounting requires that some estimate of uncollectible receivables be offset against current period sales

-companies are generally not able to adopt stringent credit standards to keep credit losses at a minimum

-to manage credit losses, companies often choose a profit-maximizing balance which makes uncollectible accounts unavoidable

companies are generally not able to adopt stringent credit standards to keep credit losses at a minimum

Regarding accounts receivable and an allowance for credit losses account, which of the following statements is false

-net realizable value equals the sales price of an item less reasonable further costs to both make the item ready to sell and to sell it

-an aging of accounts receivable is a determination of how long each receivable has been on the books

-the net realizable value of accounts receivable is decreased when a credit loss is written off

-receivables that result from transactions other than trade receivables, if material, are to be separately disclosed on the balance sheet

the net realizable value of accounts receivable is decreased when a credit loss is written off

Which of the following statements is true regarding sales returns and allowances

-ignoring estimated future returns and allowances has a minimal impact on reported earnings when the amount of actual returns and allowances is not material and does not vary greatly from year-to-year

-the sales returns and allowances account is a contra-asset account

-when sales returns occur, they should be debited to the sales account

-estimated sales returns and allowances are often material in relation to accounts receivable

ignoring estimated future returns and allowances has a minimal impact on reported earnings when the amount of actual returns and allowances is not material and does not vary greatly from year-to-year

Which of the following statements is false regarding accounts receivable reporting

-growth in accounts receivable could exceed sales growth because a firm allows its customers more time to pay

-many irregularities in receivables recognition can be discovered by tracking the relationship between changes in sales and changes in receivables

-when a company adopts an aggressive revenue recognition policy, it can lead to significant journal entries of sales returns in later periods

-when a firm’s sales growth exceed its growth in receivables, it could be an indication of aggressive revenue recognition policies

when a firm’s sales growth exceed its growth in receivables, it could be an indication of aggressive revenue recognition policies

Which of the following statements is false regarding interest on receivables

-interest must be imputed when the stated rate its lower the prevailing borrowing rate at the time of the transaction

-interest must be accounted for on all long-term notes receivable whether the interest rate is stated or not

-interest must be imputed when the stated rate is higher than the prevailing borrowing rate at the time of the transaction

-for long-term credit sales transactions using notes receivable, interest income should be recorded over the term of the note using the prevailing borrowing rate at the time of the transaction

interest must be imputed when the stated rate is higher than the prevailing borrowing rate at the time of the transaction

Which of the following statements is false regarding factoring receivables

-when a company factors its receivables with recourse, it cannot be required to make a payment to the factor if a customer’s account proves to be uncollectible

-when a company accepts credit cards, it is engaging in a form of factoring

-factoring can be done either with or without recourse

-when a company sells its accounts receivable to a factor with recourse, a recourse obligation that is recorded would be a credit entry on its books

when a company factors its receivables with recourse, it cannot be required to make a payment to the factor if a customer’s account proves to be uncollectible

Accounts receivables initially are recognized at

-the present value of the related future cash flows

-amortized cost

-net realizable value

-the future value

amortized cost

Prior to 2020 and consistent with the “incurred loss model,” public companies recognized credit losses, when they were

-realized

-probable

-certain

-confirmed by a third party

probable

Consistent with ASC topic 326, expected credit losses are recognized as

-a reduction of the related revenue

-an addition to cost of goods sold

-an aggregated expense

-a separately reported loss

an aggregated expense

Bloom Inc. estimated credit losses of $25,000 and $32,500, associated with accounts receivables and notes receivables, respectively. The two credit losses should be reported

-separately by category

-in aggregate for both categories

-when the specific creditors refuse to pay

-as off-sets to the related revenue

separately by category

Mannheim Company assesses the net realizable value of accounts receivable using an aging method, Consistent with ASC Topic 326, Mannheim should base its aging of accounts receivables percentages on

-historical credit losses

-forecasted credit losses

-realized credit losses

-industry-specific historical credit losses

historical credit losses

Information about credit quality, amortization cost by credit quality indicator for the prior five years and in the aggregate, and the methodology for estimating credit losses must be disclosed for

-all receivables reported at amortized cost

-only receivables expected to be collected within one year

-only receivables expected to be collected over a period exceeding one year

-only interest-bearing notes

all receivables reported at amortized cost

Which of the following must be disclosed for all categories of receivables

-future expected receivables

-financing options available for major customers

-use of notes receivables to attract new clients

-changes in risk factors, policies, or methodologies

changes in risk factors, policies, or methodologies

Donau Inc. performs services with a normal contract price of $265,000 for a new customer. The customer signs a non-interest bearing note of $300,000. The differences between the normal contract price and the face amount of the note is considered

-a sale discount

-a credit allowance

-imputed interest

-additional service revenue

imputed interest

A periodic system of inventory

-reduces record keeping

-increases record keeping

-increases the cost of maintaining inventory

-eliminates the need for a physical count

reduces record keeping

The use of perpetual inventory systems is preferred where a

-large number of expensive inventory units exist

-small number of expensive inventory units exist

-large number of inexpensive inventory units exist

-small number of inexpensive inventory units exist

small number of expensive inventory units exist

A perpetual inventory system

-usually maintains inventory records only in terms of physical units on hand

-uses a purchases account to record additions to inventory

-eliminates the need to periodically take a physical inventory count

-keeps a running record of the amount inventory on hand

keeps a running record of the amount inventory on hand

Goods held on consignment are included in the inventory valuation of

-the consignor

-the consignee

-both the consignor and the consignee

-neither the consignor nor the consignee

the consignor

Manufacturing costs are not considered to be closely associated with production are called

-period costs

-product costs

-absorption costs

-variable costs

period costs

The carrying cost of inventory should include all the following costs except

-purchase costs

-sales taxes and transportation costs paid by the purchaser

-general administrative costs associated with the purchase of inventory

-insurance and storage costs

The inventory accounts of a manufacturer would include all the following accounts except

-raw materials inventory

-work-in-process inventory

-finished goods inventory

-sold goods awaiting shipment inventory

sold goods awaiting shipment inventory

Which of the following statements regarding inventory accounting is false

-the tax advantage of LIFO is that it provides a lower net income than FIFO during periods of rising prices and decreasing inventory quantities

-managers can avoid the negative tax implications of LIFO liquidations by purchasing enough inventory before year-end to bring inventory up to the level at the start of the year

-the size of the difference between cost of goods sold under FIFO and cost of goods sold under replacement cost depends on the amount of change in input cost as well as the inventory turnover

-To avoid providing an incentive for managers to engage in intentional LIFO liquidations, bonus contracts should subtract out any profits from LIFO liquidations

the tax advantage of LIFO is that it provides a lower net income than FIFO during periods of rising prices and decreasing inventory quantities

When a company uses absorption costing

-only fixed costs are inventoried

-only variable costs are inventoried

-all production costs are inventoried

-fixed costs are expenses as incurred

all production costs are inventoried

Examples of variable costs include all the following except

-raw materials costs

-the plant manager’s salary

-direct labor costs

-electricity used in running production machinery

the plant manager’s salary

Analysts must recognize that the use of the specific identification method to value inventory has a serious deficiency because it

-allows manipulation of net income

-allows manipulation of period costs

-allows manipulation of selling expenses

-allows manipulation of administrative expenses

allows manipulation of net income

Financial analysts recognize that the deficiency of the FIFO cost flow assumption is the failure to

-match current costs with current revenues

-match current costs with oldest revenues

-match oldest costs with current revenues

-match oldest costs with oldest revenues

match current costs with current revenues

The input cost changes that occur after the purchase of inventory items in a current cost accounting system are recognized as

-realized gains and losses

-unrealized holding gains and losses

-extraordinary gains and losses

-cost of goods sold

unrealized holding gains and losses

The Wheat Company has used the LIFO method for inventory valuation since the start of business 15 years ago. The current year ending inventory is $375,000. If the FIFO method of inventory had been used, the inventory would be $450,000. If Wheat Company had used the FIFO inventory method, pre-tax income would have been:

$75,000 higher over the 15-year period.

$75,000 lower over the 15-year period.

$75,000 higher in the current year.

$75,000 lower in the current year.

$75,000 higher over the 15-year period

The LIFO reserve disclosure is required because LIFO inventory costs are

-higher than FIFO inventory costs

-lower than FIFO inventory costs

-equal to FIFO inventory costs

-usually of no consequence

lower than FIFO inventory costs

The conversion of a LIFO inventory to approximate the inventory at FIFO is accomplished through application of which one of the following formulations

-FIFO inventory = LIFO inventory X LIFO reserve

-FIFO inventory = LIFO inventory / LIFO reserve

-FIFO inventory= LIFO inventory - LIFO reserve

-FIFO inventory= LIFO inventory + LIFO reserve

FIFO inventory = LIFO inventory + LIFO reserve

The formula to convert the cost of goods sold LIFO to an estimate of the cost of goods sold FIFO is

Cost of goods sold LIFO + increase in LIFO reserve = cost of goods sold FIFO

Cost of goods sold LIFO - increase in LIFO reserve = cost of goods sold FIFO

Cost of goods sold LIFO - decrease in LIFO reserve = cost of goods sold FIFO

Cost of goods sold LIFO + beginning LIFO reserve = cost of goods sold FIFO

Cost of goods sold LIFO - increase in LIFO reserve = cost of goods sold FIFO

The Xano Company reported merchandise inventory at LIFO of $450,000 on the year-end financial statements. The company also reported a LIFO reserve of $34,000. An estimated of the inventory balance if the inventory had been reported using the FIFO assumption is

$382,000

$416,000

$461,000

$484,000

$484,000

The Skone Corporation reported a LIFO reserve of $25,000 at the end of the year. The beginning LIFO reserve was $20,000. The cost of goods sold was $197,500 under LIFO/ the cost of goods sold under FIFO should be

$192,500

$197,500

$202,500

$222,500

$202,500