Vol. 3 The LIFO Method and LIFO Reserve

Question 1

Under LIFO, a publicly traded company may be more valuable during periods of increasing inventory costs because …

Answer 1

LIFO results in higher cash flows due to lower income taxes as the value of a company is based upon the present value of its future cash flows

Question 2

Under LIFO, a private company may benefit during increasing inventory costs because …

Answer 2

the potential income tax savings are greater.

Question 3

Income statement consequences of using LIFO in inflationary environment

Answer 3

higher cost of sales,
lower gross profit,
lower operating profit,
lower income tax expense
lower net income

Question 4

Balance sheet consequences of using LIFO in inflationary environment

Answer 4

lower ending inventory,
lower working capital,
lower total assets,
lower retained earnings
and lower shareholders’ equity

Question 5

Balance sheet secondary consequences of using LIFO in inflation enivornment

Answer 5

higher debt-to-equity ratios
lower profitability ratios

Question 6

LIFO is unlikely to be used in what type of environment

Answer 6

deflationary environment where purchase prices or production costs are decreasing

Question 7

For companies using the LIFO method, US GAAP requires disclosure in _________ or on __________, of the amount of the LIFO reserve

Answer 7

Notes to the Financial Statements; Balance Sheet

Question 8

[Describe]
LIFO reserve

Answer 8

The difference between the reported LIFO inventory carrying amount and the inventory amount that would have been reported if the FIFO method had been used
FIFO inventory - LIFO inventory

Question 9

[inventory]
To compare companies using LIFO with companies with those not using LIFO, one must …

Answer 9

Add the disclosed LIFO reserve to the inventory balance that is reported on the balance sheet.
OR
LIFO reported inventory balance + the LIFO reserve = FIFO reported inventory